Month: May 2016

In a disappointingly similar tone to the warnings, threats, and promises sent to Congress in 2008 when demanding the banks get their bailout (or else), Treasury Secretary Jack lew has released a letter he sent to Congress warning that if Puerto Rico’s situation is not “fixed” in an “orderly” manner “quickly” then the nation will face “cascading defaults.”

• *LEW: PUERTO RICO NEEDS ORDERLY RESTRUCTURING TO ADDRESS DEBTS
• *LEW WARNS OF `CASCADING DEFAULTS’ WITHOUT PUERTO RICO DEBT FIX
• *LEW SAYS CONGRESS MUST WORK QUICKLY ON PUERTO RICO LEGISLATION

As Bloomberg reports,

“With no orderly restructuring framework to address its debts, Puerto Rico will face a series of cascading defaults,” while litigation already under way will intensify and potentially take years to resolve, U.S. Treasury Secretary Jacob J. Lew says in letter to Congress.

 

“Unless Congress passes legislation that includes appropriate restructuring and oversight tools, a taxpayer-funded bailout may become the only legislative course available to address an escalating crisis”

 

Legislation must initially allow for voluntary negotiations in timely and fair fashion, offer responsible process especially for 330,000 citizens who depend on pension benefits; labor and federal land transfer issues should also be addressed

 

“Congress must work quickly to resolve the few outstanding issues on the proposed legislation to help Puerto Rico”

Treasury posts Lew letter on website…

Dear Mr. Speaker:

I am writing to follow up on my January letter regarding Puerto Rico’s debt crisis and to provide information on the mounting costs of congressional inaction.  More than six months ago, the Administration introduced a comprehensive legislative plan to resolve this crisis.  In my January letter, I noted that absent timely congressional action Puerto Rico’s fiscal, economic, and humanitarian situation would continue to deteriorate.

Since then, constructive, bipartisan discussions have taken place, and a bill has been introduced, but Congress has yet to produce a workable legislative response. Meanwhile, the crisis in Puerto Rico has deepened.  In an effort to protect government deposits at Puerto Rico’s Government Development Bank (GDB), the Governor has declared a state of emergency and invoked the temporary debt moratorium powers recently provided to him by the Puerto Rico legislature. Yesterday, the Governor announced that the GDB would be unable to make a $400 million principal payment due today on its $3.8 billion of debt.  While a portion of bondholders are negotiating a restructuring of this debt, any such deal would require the participation of all GDB creditors and thus effectively would be conditioned on federal legislation providing a restructuring authority.

Today’s expected default is only the latest in a series that began last summer.  Since last August, the Public Finance Corporation has failed to make debt service payments on its $1.1 billion of outstanding debt.  In December, the Governor invoked his constitutional “clawback” authority to transfer funds allocated to one set of bondholders in order to pay another.  This “clawback” in turn resulted in the default of $1.9 billion of rum tax bonds and likely has put Puerto Rico on a path to defaulting on another $5.1 billion of highway and hotel tax bonds over subsequent months.

More bond payments, some very large, are coming due soon.  On July 1, Puerto Rico will face nearly $2 billion worth of payments, including almost $800 million of General Obligation debt.  Puerto Rico does not anticipate having sufficient funds to meet these and other obligations, leaving it with the impossible choice of paying its creditors or providing essential government services.  Going forward, Puerto Rico’s $70 billion of debt is unsustainable by any measure.  It simply cannot afford to pay its debt.  And, with a shrinking economy because of people leaving Puerto Rico, further reductions in government spending will be difficult to implement.  Government expenditures, net of debt service, already have been reduced to the lowest level since 2005.

With no orderly restructuring framework to address its debts, Puerto Rico will face a series of cascading defaults.  Litigation—which is already underway—will only intensify.  This wave of litigation will be contentious and protracted, both among competing creditors and against Puerto Rico, and it could take many years to resolve.

This is not just a matter of financial liabilities and litigation.  As I underscored in my January letter, the human costs for the 3.5 million Americans in Puerto Rico are real.  And they are escalating daily.  Hospitals continue to lay off workers, ration medication, reduce services, and close floors.  Moreover, despite the intensifying threat from the Zika virus, financial constraints have made it extremely difficult to counteract.  Unsealed septic tanks, abandoned homes, cemeteries, and piles of old tires, where mosquito larvae grow, for example, must all be treated, but the government is struggling to pay for the work to be done.

Congress must work quickly to resolve the few outstanding issues on the proposed legislation to help Puerto Rico.  For example, the legislation must provide a functional and seamless debt restructuring process that initially allows for voluntary negotiations while ensuring a timely and fair resolution.  The bill also must balance important policy priorities more evenly, most significantly by offering a responsible process to ensure the retirement security of the 330,000 citizens in Puerto Rico who depend on their pension benefits.  Other troubling labor and federal land transfer provisions also should be addressed.  Small changes in text would address these issues in a fair and acceptable way.

In the coming days, it is important to keep in mind that further inaction only gives those seeking to deter Congress from passing a bill more time to continue making inaccurate and misleading claims about the legislation.  Absent enactment of a workable framework for restructuring Puerto Rico’s debts, bondholders will experience a lengthy, disorderly, and chaotic unwinding, with non-payment for many a real possibility.  The people of Puerto Rico will be forced to endure additional suffering.  And, unless Congress passes legislation that includes appropriate restructuring and oversight tools, a taxpayer?funded bailout may become the only legislative course available to address an escalating crisis. 

We appreciate you and those Members of Congress who have been working across the aisle to help put Puerto Rico on a sustainable path forward.  The Administration remains committed to working collaboratively with you and your colleagues to complete action on this critical legislation as soon as possible.

Sincerely,

Jacob J. Lew

*  *  *

NOTE: the letter has since been removed from the Treasury site.

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Any moment now we expect Paul Krugman to come out with an op-ed suggesting that not just Time magazine, but Charlie Munger is the latest to join ZH payroll following what were some surprising comments by Warren Buffett’s right hand man earlier today on CNBC when he said that “the U.S. is looking more like Japan given the prolonged low-interest-rate environment.”

The one phrase which Krugman will surely have something to say about was the following: “I strongly suspect it was massively stupid for our government to rely so heavily on printing money and so lightly on fiscal stimulus and infrastructure,” Munger told CNBC’s “Squawk Box.”

Munger also blasted Japan’s decision to become the latest nation to implement negative interest rates: “It surprised all the economists of the world.”

But before we accuse Charlie Munger of transitioning into a full blown Austrian, his policy recommendation left something to be desired: “I think we would’ve been way better off if we’d used fiscal stimulus because … this [low interest rate] approach runs out of fire power.” Of course, “fiscal policy” is merely a more polite way to say take on more debt, which ultimately goes back to the fundamental problem: there is just far too much debt in the world, and the main reason why the Fed and other central banks have been forced to unveil unorthodox monetary policy is to keep interest rates as low as possible or else risk an out of control explosion in not just debt but servicing costs.

* * *

Meanwhile, in other, somewhat tangential news, none other than Warren Buffett went on an epic tirade over the weekend bashing Wall Street. According to the WSJ, just before lunch at the Berkshire Hathaway Inc. annual meeting on Saturday, Warren Buffett unloaded what he called a “sermon” about hedge funds and investment consultants, arguing that they are usually a “huge minus” for anyone who follows their advice.

The Berkshire chairman has long argued that most investors are better off sticking their money in a low-fee S&P 500 index fund instead of trying to beat the market by employing professional stockpickers. He used the annual meeting to update the tens of thousands in attendance – and others watching via a webcast – -about his multi-year bet with hedge fund Protege Partners. The bet, initiated by the New York fund back in 2006, was that over a decade, the cumulative returns of five fund-of-funds picked by Protege would outperform a Vanguard S&P 500 index fund, even when including fees.

 

Mr. Buffett showed a chart comparing the cumulative returns of the two since 2008. As of the end of 2015, the S&P 500 index fund had a cumulative return of 65.7%, outdoing the hedge fund teams’s 21.9% return. The S&P has outperformed in six of the eight individual years of the bet too.

 

The chart was preamble to the real point Mr. Buffett wanted to make: that passive investors can do better than “hyperactive” investments handled by consultants and managers who charge high fees.

“It seems so elementary, but I will guarantee you that no endowment fund, no public pension fund, no extremely rich person” wants to believe it, he said. “They just can’t believe that because they have billions of dollars to invest that they can’t go out and hire somebody who will do better than average. I hear from them all the time.” He was just getting started.

“Supposedly sophisticated people, generally richer people, hire consultants, and no consultant in the world is going to tell you ‘just buy an S&P index fund and sit for the next 50 years.’ You don’t get to be a consultant that way. And you certainly don’t get an annual fee that way. So the consultant has every motivation in the world to tell you, ‘this year I think we should concentrate more on international stocks,’ or ‘this manager is particularly good on the short side,’ and so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end and participating in the American business without cost. And then those consultant, after they get their fees, they in turn recommend to you other people who charge fees, which… cumulatively eat up capital like crazy.”

Buffett said he’s had a hard time convincing people of this case. “I’ve talked to huge pension funds, and I’ve taken them through the math, and when I leave, they go out and hire a bunch of consultants and pay them a lot of money,” he said, earning a laugh from the crowd. “It’s just unbelievable. “And the consultants always change their recommendations a little bit from year to year. They can’t change them 100% because then it would look like they didn’t know what they were doing the year before. So they tweak them from year to year and they come in and they have lots of charts and PowerPoint presentations and they recommend people who are in turn going to charge a lot of money and they say, ‘well you can only get the best talent by paying 2-and-20,’ or something of the sort, and the flow of money from the ‘hyperactive’ to what I call the ‘helpers’ is dramatic.”

A passive investor whose money is in an S&P 500 index fund “absolutely gets the record of American industry,” he said. “For the population as a whole, American business has done wonderfully. And the net result of hiring professional management is a huge minus.”

As the WSJ adds, Buffett has long had a testy relationship with Wall Street, and he’s positioned himself for decades as an outsider to the world of New York finance. In addition to repeatedly attacking the fees charged by hedge funds and investment professionals, he’s criticized the tactics of activist shareholders, the danger of derivatives and the heavy use of debt by private-equity firms.

To be sure, the antipathy has run in the opposite direction as well. Over the years many on Wall Street believe the Berkshire chairman to be a hypocrite, hiding behind the image of a folksy, benevolent investor while pursuing some of the tactics that are the targets of his attacks. Others have rightfully and repeatedly accused the Oracle of Omaha of perpetuating his wealth while standing for nothing more than crony capitalism.

That did not stop Buffett from continuing his rant.

“There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities,” he said. “There are a few people out there that are going to have an outstanding investment record. But very few of them. And the people you pay to help identify them don’t know how to identify them. They do know how to sell you.”

As so many hedge funds have found out the hard way, at least under the global central bank put regime, Buffett’s assessment has so far proven correct but perhaps not for the reasons he thinks: after all when central bankers themselves have become Chief Risk Officers of the global equity markets, where even a 5% dip is immediately countered with relentless activist rhetoric by the money printers if not even further monetary action (there has been nearly 700 central banks easing decisions since the financial crisis, not to mention over $13 trillion in liquidity injections) who needs to hedge?

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Submitted by Howard Kunstler via Kunstler.com,

In this decade of maximum peril, a prankish God delivers two maximally detested candidates to lead the faltering nation as events run ahead of all the convenient narratives. For instance: the idea that Republican “insiders” can block Trump’s path to the nomination. The insiders may be phantoms after all. For instance, the loathsome Koch brothers have already made their move onto Hillary’s side of the game-board. Trump won’t miss their campaign contributions for a New York minute (while Hillary might find a way to stuff the cash into some Cayman Islands lock-box of the Clinton Foundation).

Events played right into Trump’s smallish hands last week when protesters outside a Donald rally in Costa Mesa, CA, waved Mexican flags and placards calling for the reestablishment of Aztlán del Norte. Kind of proves his point about illegal immigration, don’t it? Trump also supposedly blundered in saying that Hillary had only “the women’s card” left to play in her donkey trot to the election. I’m not so sure he’s wrong about that — though the indignometer needle danced through the red-line after he said it.

Has it come to this? The women’s party against the men’s party? What kind of idiot psychodrama is this country acting out? Mom and dad mud-wrestling in an election year hog-wallow? A Reality TV show writ large from sea to shining sea? Are there no better ways of understanding the difficulties we face?

Lately Hillary has been boasting of her ability to bring Wall Street to heel, theoretically after Wall Street installs her in the White House. Voters (especially women) might want to pay attention to Hillary’s lavish praise for President Obama’s handling of the banking turpitudes still unresolved seven years after the crack-up of 2008. What did the Dodd-Frank Act (signed by “O” in 2010) accomplish except to provide more lucrative work-arounds, by Too-Complex-To-Comprehend legalese, for Too-Big-To-Fail banks. It was written by bank lobbyists and lawyers and was about 2,270 pages longer than the old Glass Steagall Act that Bill Clinton vaporized in 1999. Do you suppose that Bill and Hill might have talked about the repeal of Glass Steagall back then? Do you wonder what she thought about it at the time… being a lawyer and all?

This week attention is fixed on the Indiana primary where Devil Bat Ted Cruz desperately makes his last stand against the Trump juggernaut. It seems that former House Speaker John Boehner actually succeeded in driving a wooden stake through Cruz’s hypothetical heart by casually remarking that he was “the most miserable sonofabitch I ever worked with.” Kind of hard to explain that one away, though Ted tried by sending out his new attack dog Carly Fiorina and claiming that he never worked with the Speaker of the House — a risible claim for a national legislator in the same party.

All of this would be amusing if the USA wasn’t sliding into the twilight of what many people call “modernity” – which is code for the techno-industrial hyper-complexity we’ve been enjoying lately as a species. We have yet to comprehend the diminishing returns of heaping more complexity on what is already too complex. Exhibit A for most of the common folk must be the Affordable Care Act (also signed by “O” in 2010). Whereas the shrewd stylings of Dodd-Frank surely mystify the public, most full-functioning adults understand what it means when their health insurance premiums go up by 20 percent and the new deductible makes it unthinkable to even consider going to the emergency room.

The sad truth may be that rackets of this kind are unreformable, and that we can’t begin to do things differently until they collapse. It should be obvious, for instance, that American health care needs to move in the opposite direction from where it has been going — from giantism, as epitomized by colossal merged mega-hospital corporations, back to some kind of local clinic care in which doctors and their subalterns are not burdened by an oppressive matrix of Charge-Master grift. There may be less razzle-dazzle technology in that future model, but much more hands-on care, plus an end to the kind of financial pillage that bankrupts households for relatively routine illnesses (the $90,000 appendectomy).

Likewise in virtually all other areas of American life, the real trend as yet un-discussed in this election campaign, will be unwinding and downscaling of the onerous, toxic hyper-complexity of the age now passing and finding our way to a workable re-set of what used to be known as political-economy.

In the meantime: a clown show.

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Earlier today we reported that in what many are convinced is just another self-gratifying publicity stunt, Australian entrepreneur Craig Wright “outed” himself as bitcoin’s mysterious creator “Satoshi Nakamoto” by unleashing a major PR campaign and revealing his “identity” to three media organizations – the BBC, the Economist and GQ.

As Verge writes, after meeting with Wright, Bitcoin core developer Gavin Andresen stated unequivocally, “I believe Craig Steven Wright is the person who invented Bitcoin.”  But while established bitcoin figures were quick to agree with Wright’s claims, many remain deeply unconvinced, believing Wright has come forward to drum up interest in a new supercomputer venture. Others are even more skeptical, and are convinced that after digging through Wright’s claims, that “Satoshi” is anyone but the Australian.

As a reminder, this is not the first time Wright has made headlines in relation to bitcoin. In December, the Australian businessman was put forward as a possible founder of Bitcoin by Wired and Gizmodo. After the news broke, Bitcoin fans discovered a string of apparent fabrications from Wright’s past, and Wright was brought up on charges by Australian tax authorities on uncertain grounds.

Among the things that are perplexing is Wright’s sudden desire to “claim fame” for being Satoshi: why keep quiet for so many years then suddenly appears out of the blue. Then again, “even skeptics have to admit, Wright is the strongest candidate we’ve ever had. He claims to be Satoshi Nakamoto — and some of the biggest names in Bitcoin believe him.”

However, as the Verge adds, “what’s missing is the math. Wright’s demonstration showed both reporters and Andresen a signature produced by a unique private key believed to belong to Satoshi Nakamoto. But that signature seems to have be pulled from a public message signed by Nakamoto in 2009, as researcher Patrick McKenzie showed on Github. The message failed to verify when McKenzie attempted to test it, a result of changes made to the OpenSSL protocol in the last seven years.”

That was, more or less, all of his “evidence.”

Other proof has turned out to be difficult to come by. Wright says the early Satoshi-linked bitcoin are all owned by a trust, so he can’t prove his identity by spending them. Andresen claims to have witnessed more definitive cryptographic proof that Wright holds the keys, but without anything to verify, all the public has is his word.

It gets worse:

Beyond the technical details, the takeaway is simple: Wright doesn’t have any math to back up his claim. Even worse, he pretended to have something he didn’t, and seems to have fooled an awful lot of people along the way. As a result, many observers are still demanding proof, particularly now that Wright seems eager to establish himself as Bitcoin’s mythical inventor. “Wright needs to sign something new, today, to prove he holds the crypto keys,” said Bloq’s Jeff Garzik, a central developer in the Bitcoin world.

Cornell professor Emin Gun Sirer, who specializes in cryptocurrency, was far less tactful and even accused Wright of an attempt to mislead.”We have yet to see proper cryptographic proof,” Sirer said in a statement. “What we’ve seen looks like a deliberate attempt to mislead.”

There is currently no publicly available cryptographic proof that anyone in particular is Bitcoin’s creator.

— Bitcoin Core Project (@bitcoincoreorg) May 2, 2016

In short, the claims don’t add up. So what may be the real story here?

In addition to merely trying to trump up publicity to help his tangential business ventures, Wright could simply be a puppet in the escalating feud between the two proposed version of Bitcoin. As the Verge reminds us, even before the Wright news, the system was in bad shape, with transactions taking as long as 43 minutes to work through an overstuffed network. Efforts to fix those issues have split the community in two, as Core and Classic developers move forward with two different versions of the Bitcoin software.

Verge’s conclusion is that not only is Weight not “the” Satoshi, but that his appearance may simply serve to push the agenda of Bitcoin core developed Gavin Andresen.

Finding the One True Satoshi could be the perfect way to resolve that split and unite the two factions — but instead, Wright seems to have only deepened the divide. The Economist reports that Wright favors Andresen’s version of Bitcoin, furthering the political implications of this morning’s news.

The bottom line, “if Wright wants to convince the community, he’s picked a bad way to do it. So far, his case has been all authority and no math.“

Meanwhile, the search for the real Satoshi will continue.

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Goldman Sachs is looking for a new pool of cash to plunder, and this time the firm is setting its sights slightly "lower" than normal. As revenues continue to plummet, Goldman is now looking to generate a new revenue stream with clients that are "mass affluent", or have less than the estimated $50 million average account size their current clients have.

As Reuters reports, the firm is creating a strategy that will involve partnering with small brokerages and wealth management firms to lend money to their clients. The strategy is set to enable the vampire squid to do more traditional lending, as well as margin lending to a larger much less wealthy client base. Goldman has tripled loans to its own private wealth clients according to Reuters, having $45 billion in loan receivables at the end of 2015.

The new strategy comes just after the Fed approved Goldman's purchase of deposits from GE Capital Bank, further increasing its banking operations.

"We'll want people who previously didn't know where we were." Blankfein said last year, speaking of customers unfamiliar with the firm.

We suspect those clients who previously didn't know the vampire squid will be very well acquainted with them in short order.

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Exceprted from One River Asset Management's Eric Peters,

“We have created new tools to determine whether an economy may be pursuing foreign exchange policies that could give it an unfair competitive advantage against the United States,” announced the Treasury, late Friday.

 

“China, Japan, Germany, and Korea will be closely monitored as a result of a material current account surplus combined with a significant bilateral trade surplus with the United States."

 

"Taiwan will be monitored as a result of its material current account surplus and its persistent, one-sided intervention in foreign exchange markets,” continued the Treasury, bending to the stiff winds of political change sweeping the nation.

The 2016 election has laid bare the deep insecurity of America’s ageing working-class, their resentment toward foreigners, competition, change.

While America’s youth clamor for fairness, a future free from crushing student debt, the oppression of a government owned by and run for big business, the US Treasury is responding, warning our trading partners against artificially weakening their currencies, stealing our growth, depressing our wages, destroying our jobs.

But by singling out the countries with the world’s largest current account surpluses, they’re also demanding they spend their national savings, unleashing fiscal stimulus.

Japan’s central bank chief surprised markets, holding stimulus measures unchanged, announcing they, “Want to take more time to assess the impact of negative interest rates.” The Yen soared 3.6%, the Nikkei sank 5.2%, struggling to adjust to the possibility of a new reality; a less trade-friendly world, pressed up against the political limits of extraordinary monetary policy.

Of course, America is Earth’s greatest currency manipulator, and as long as we retain the power that comes from minting the world’s reserve currency, we always will be. Naturally, no one likes a hypocrite, particularly one barking orders, making threats.

Which is why this new chapter in the great monetary experiment will be so fascinating. Unpredictable, volatile.

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Following last week’s shocking 1.75mm barrel build at Cushing, Genscape just reported an estimated 821k build which has stunned market participants apparently, sending WTI tumbling back to a $44 handle. Will this be the summer of 2015 oil re-run?

A 2nd week in a row of builds at Cushing..

Has sent cerude sliding…

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