A recurring oil market theme in the past few months has been the speculation that despite its jawboning that it is ready and willing to boost crude production, Iran has had a hard time getting both the funding and the required infrastructure to substantially boost its production to recapture its supply levels last seen before the recent US sanctions. That however appears to be changing fast.
Recall all those tankers we have profiled before on anchor next to the Iran shore?
They have finally started to move.
According to Bloomberg, tankers carrying about 28.8 million barrels of crude, or more than 2 million a day, left the Persian Gulf country’s ports in the first 14 days of April, according to tanker-tracking data. That compares with a rate of about 1.45 million barrels a day in March. As a result, Iran’s crude shipments have soared by more than 600,000 barrels a day this month, adding to the pressure facing producer nations as they prepare to meet in Doha to discuss freezing output to prop up oil prices.
Putting that number in context, 600,000 barrels a day is precisely how much US oil production has declined by since peaking late last year as a result of the collapse in oil prices and the mothballing of various rigs.
Where is all this fresh oil headed? According to Bloomberg, most of these tens of millions in fresh barrels of oil are headed to China which will be the biggest recipient of Iranian crude loaded so far this month, while flows to Japan are resuming after halting in March, the tracking data show.
To be sure Iran is taking advantage of supply disruptions at other OPEC exposrters: Nigeria and Iraq saw a combined decline of 90,000 barrels a day, according to the International Energy Agency.
As Bloomberg notes, and as the IEA stated earlier today, the long-overdue surge in Iran volumes confirm that the much anticipated rebalancing of the oil market will have to come from countries outside OPEC – read US shale – provided that crude prices don’t rise too far, said Ole Hansen, head of commodity strategy at Saxo Bank A/S. If Iran “can keep up sales of that magnitude during the coming months when supply disruptions from northern Iraq and Nigeria begin to fade, we may have to look a bit further out for that rebalancing,” he said.
Of course, there is another problem: what if it is not just a supply problem. What if it is demand, and what if all those skeptics who are warning about a global slowdown are right and the market remains drastically oversupplied (according to Saudi Arabia to the tune of 2-3mm bbl/day, and keep in minda the Saudis have another 2mmb/d in spare capacity that can be turned on rather quickly)?
Just yesterday OPEC cut its estimates for demand growth in 2016 by 50,000 barrels a day because of a slowdown in Latin America, projecting worldwide growth of 1.2 million barrels a day. Other factors for the drop in demand: weakness in Brazil’s economy, the removal of fuel subsidies in the Middle East and milder winter temperatures in the northern hemisphere could prompt further cutbacks.
Because if Iran can singlehandedly offset the entire US production decline to date with what modest capacity it has, just how will the oil market “rebalancing” which every has pegged for the second half of 2016 actually take place? And more improtantly, what happens when the contango finally flattens and that 100+ million in oil stored offshore has to be brought onshore.
Paralleling the increasingly draconian policies marking a worldwide descent into fascism, are massive protests — born in the Arab Spring, but arguably an angrier, more potent extension of the Occupy movement — indicative of an unprecedented tipping point.
We, the people of this planet, now stand together, gazing over the precipice whose murky depths of State repression demand we ask one imperative question: have we finally had enough?
“[W]e have lost the way,” Charlie Chaplin implores us to consider in his renowned and timeless monologue from The Great Dictator, because “Greed has poisoned men’s souls — has barricaded the world with hate; has goose-stepped us into misery and bloodshed.”
And now, 76 years after Chaplin cautioned us to scrutinize our collective humanity, that avarice — evidenced in imperialism championed by the U.S. government — has ossified a lazy apathy in the populace, of seeming impenetrable resolve. Until now.
Though sparks of revolution have sporadically ignited people’s movements countless times before, our present tipping point most likely began with the self-immolation of a young fruit cart vendor in Tunisia in 2011. So incensed by an unjust law and a policewoman’s disrespectful public slap as she attempted to confiscate his only means of supporting a large family, Mohamed Bouazizi set himself on fire in front of a government building — and set off the tremendous wave of protests for democracy and human rights, which came to be monikered the Arab Spring.
Occupy followed shortly afterward in a moment many believed with certainty would force an unparalleled shift toward freedom. But the government, keen to maintain its maniacal chokehold of control, also knew this — and infiltrated the movement to impart divisive infighting and confusion to effectively quash the threat.
But optimism, kindled by both protests — all sardonic arguments to the contrary aside — kept the vision for a more harmonious, just world burning in hearts and minds everywhere. Waiting.
Now, as the world’s so-called leaders, bereft of laudable intent, disseminate pawns and weapons of the war machine to geostrategically favorable locations — to fight the terrorist group it birthed through war on the concept of terrorism — it has become clear the end of empire’s brutal reign draws near. Though perhaps the greater bulk of people in the United States, under propaganda’s intoxicating spell, remain convinced the battle must be fought against the self-described Islamic State, more and more of us understand the imperialism-fueled root cause must, instead, be dismantled.
If the hardened cynicism Chaplin referred to elicits only doubt — doubt about that end, but also of the potential to maneuver that end in the people’s favor — consider the following, albeit brief and by no means complete, summary of currently-unfolding events.
Crushing austerity and economic collapse in Greece led to an uprising for change last year, as the people categorically rejected further hardship imposed by international creditors stemming from a debt crisis. A stunning reversal by the government of their line in the sand further destabilized the nation, which also continues to contend with an influx of refugees from Syria and the Middle East. In January, a farmer from Crete announced a telling, if perhaps extreme, warning which handily summarizes growing sentiment around Europe and the world.
Anti-austerity protests in Greece. Image credit: Philly boy92
“It’s war,” Dimitris Vergos declared in the Guardian. “If they [politicians] go on pushing us to the edge, if they want to dehumanise us further, we will come to Athens and burn them all.”
Economic austerity measures fanned flames of outrage — already established with an authoritarian constriction of rights in Europe following the attacks in Paris and Brussels — which have compelled France’s blossoming Nuit Debout (Up All Night) movement into massive protests echoing those similar events in Greece. Nuit Debout called for international solidarity to stand against power, stating in part:
“This movement was not born and will not die in Paris. From the Arab Spring to the 15M Movement, from Tahrir Square to Gezi Park, Republic square and the plenty of other places occupied tonight in France are depicting the same angers, the same hopes and the same conviction: the need for a new society, where Democracy, Dignity and Liberty would not be hollow shells.”
Indeed, the thwarting and exploitation of human rights around the world led one human rights group to issue a startlingly broad, global warning to civilians.
“Your rights are in jeopardy: they are being treated with utter contempt by many governments around the world,” Salil Shetty, Secretary General of Amnesty International, implored. “Millions of people are suffering at the hands of states and armed groups, while governments are shamelessly painting the protection of human rights as a threat to security, law and order or national ‘values’ […]
“The misguided reaction of many governments to national security threats has been the crushing of civil society, the right to privacy and the right to free speech; and outright attempts to make human rights dirty words, packaging them in opposition to national security, law and order and ‘national values.’ Governments have even broken their own laws in this way.”
Perhaps attempting to head off global revolution, the recent supposed leak of the Panama Papers has now been intimated to be a clandestine operation by the CIA. The agency has been accused of playing a role, and might have deemed the leak necessary to prevent the people’s usurpation of power — a paltry quelling so imperative, the agency could have felt it acceptable to allow “collateral damage” in the downfall of various world leaders and CIA-associated organizations.
As repercussions from the leak rang out worldwide, Americans remained fixated on the glorious conflagration that is the shit show dominating the 2016 presidential election. Bernie Sanders’s and Donald Trump’s challenges to the establishment political paradigm reinforce growing calls for an end to the Democrat-Republican duopoly’s vise grip on American politics. Mounting blatant instances of election fraud and realizations brought by the two parties’ employment of superdelegates to install establishment leaders — no matter the people’s feelings on the matter — have, perhaps, finally laid bare that elections are but an illusion used to deceive the masses into believing they have a say in who rules the nation.
Accordingly, that epiphany sparked ongoing protest in Washington, D.C., calling for nothing less than a drastic overhaul of the entire corrupt system, which targets moneyed influence of not only elections, but government, itself. Democracy Spring marched to Washington to stage a peaceful, nonviolent sit-in at the Capitol building — where protesters agreed to be, and thus were, arrested simply for speaking truth to plutocratic power. While the corporate media napped, hundreds were hauled away in cuffs on the first day of the sit-in — and hundreds more the following day.
It’s arguable the U.S. has finally taken to heart Nuit Debout’s statement, which ends:
“This movement is yours too. It has no limit, no border and it belongs to all of those who wish to be part of it. We are thousands, but we can be millions.”
Outrage, desperation, ire, utter frustration — on an unprecedented, global scale. Will we be millions?
“You, the people, have the power! The power to create machines; the power to create happiness. You, the people, have the power to make this life free and beautiful; to make this life a wonderful adventure. Then, in the name of democracy, let us use that power. Let us all unite!
“Let us fight for a new world — a decent world — that will give men a chance to work; that will give youth a future, and old age a security. By the promise of these things, brutes have risen to power. But they lie! They do not fulfill that promise — they never will!”
Will we finally — finally — heed the warnings Chaplin suggested we should over three-quarters of a century ago?
Gazing into the abyss of worsening future authoritarian control, will we turn and walk away, ignoring our differences for the sake of our mutual betterment around the planet — or will we scoff, succumb, and tumble over the edge in our complacency?
Banks have been lobbying intensively against Brexit. Among those leading the charge is Goldman Sachs. For three years, the bank’s executives have publicly warned about the downsides of leaving the EU… and now we know why (hint – it's not concern for the common man).
As The Wall Street Journal reports,about a decade ago, Goldman launched project “Armada,” a plan for a hulking European headquarters on the site of an old telephone exchange in London.
Unbundling this kind of structure will be expensive and time-consuming, lawyers and bankers say. Goldman is mapping out which jobs might be hit by a loss of this passport, or the right to sell services across the EU, while scoping out European countries where it has existing banking licenses and infrastructure that could quickly be scaled up, according to a person familiar with the matter. Goldman also has a banking license in Germany, for instance.
In the event that this passport was lost, derivative and currency trading with EU counterparts would likely be hit hard. A large portion of euro currency and securities trading takes place through London, outside the eurozone. In the event of Brexit, EU authorities may well press for the trading of euro securities to be cleared within the trading bloc, bankers say.
Today, Goldman services Middle Eastern and African customers in London too. Some 90% of its 6,000 staff based in Europe are in London. Europe, the Middle East and Africa accounted for 27% of Goldman’s $33.8 billion of net revenue in 2015.
But faced with the prospect of spending billions of dollars to rejig their operations, banks have been lobbying intensively against Brexit.
Among those leading the charge is Goldman Sachs. For three years, the bank’s executives have publicly warned about the downsides of leaving the EU.
The bank has donated around $700,000 to a group which is lobbying against Brexit, according to a person familiar with the matter. Its executives have signed warning letters to major British newspapers. An EU flag currently flutters above its London headquarters. Last fall the bank organized events on the sidelines of opposition Labour and governing Conservative party conferences to debate the role of the U.K. in Europe.
During the annual meeting of the World Economic Forum in January in Switzerland, Gary Cohn, president of Goldman Sachs, reiterated a well-rehearsed warning. “It is imperative for the U.K. to keep the financial-services industry in the U.K.,” he said, adding, “I don’t know what would replace that industry.”
The advocacy by U.S. banks has antagonized those, often at smaller brokers or hedge funds, who say the U.K. financial sector would be less heavily regulated outside the EU and thrive.
“Why would the Americans be interested in what is good for the U.K.?” said Howard Shore, executive chairman of Shore Capital Group PLC, an investment group.
“They are interested in what is good for their bank.”
Shocking!! So next time you read a research piece proclaiming the catastrophe Brexit would be, consider the above… because fo rnmow it's all about the "undecided"
It has been a while since we had an update from JPM’s “quant guru” Marko Kolanovic on key market support and resistance levels from the perspective of option gamma and key systematic strategies including CTAs, risk parity and volatility targeting, so we were looking forward to reading his latest report which came out earlier today. In it he reviews the latest flows and concludes that the suppressed realized vol regime we have enjoyed for the past two months may be about to shift, perhaps as soon as the coming Friday’s option expiration.
From JPM’s Marko Kolanovic
S&P 500 Cycles of Systematic Leverage
S&P 500 index options hedging usually adds to market volatility given the convexity of put options held long by clients. However, due to the market rally and clients’ option activity, these dynamics changed in March. The imbalance of options (gamma) turned significantly towards calls (over the past month, the average gamma imbalance was ~$12bn towards calls), causing hedging flows to suppress S&P 500 realized volatility. The collapse in realized volatility invited inflows from Vol Targeting and Risk Parity funds. Hedging of call options (usually sold by clients) and rolling of put options higher (usually held long by clients) also caused equity outflows of ~$50-$100bn. These outflows to some extent countered the inflows from other systematic strategies such as CTAs and Risk Parity. This was a likely reason why the market could not break out despite price momentum briefly turning positive last week.
As options are rolled this week, and following option expiry on Friday, most of the call gamma imbalance will roll off (~$10bn). This could add to market realized volatility (the market will be able to move ‘more freely’). The gamma imbalance tilts towards put options significantly around ~2000 level and could result in market acceleration on the downside if we reach those levels.
Volatility Targeting strategies have been increasing equity exposure on account of low realized volatility (Figure 3). The equity exposure of these funds is now above November levels (and only slightly below July levels). Should there be an increase of realized volatility (which we think is likely), these funds will sell some of their equity exposure (depending on the magnitude of a potential volatility increase, these funds could sell ~$30-$60bn of equities). Equity leverage of Risk Parity funds peaked in early April (surpassing even July and November levels), but has come down over the past 2 weeks (Figure 4). Equity exposure of these funds is moderately high (~70th percentile). Should there be an increase in asset volatility and correlations, these funds could sell ~$30-40bn of equities.
CTA funds closed ~$100bn of equity shorts in February, and have since maintained only slightly long equity exposure. While equity momentum turned briefly positive ~2 weeks ago, this did not trigger a broad CTA re-levering to the levels we saw in July (Figure 5). More sustained CTA inflows would materialize if the market could rise above ~2100 (totaling ~$80-$100bn), and more significant outflows would materialize below ~2025 (up to ~$100-$120bn). Finally, equity exposure of Equity Long-Short hedge funds, as well as Hedge Funds overall (HFRXGL) is also relatively high, in the ~80th percentile.
Given the above-average level of equity exposure of systematic strategies (as well as hedge funds), and artificially low levels of realized volatility, we think that the risk for the market from these flows is skewed to the downside.
If you don’t think the current central bank driven economic and financial bubble is going to end badly, recall a crucial historical fact. To wit, the worldwide race of central banks to the zero bound and NIRP and their $10 trillion bond-buying spree during the last seven years was the brain child of Ben S Bernanke.
He’s the one who falsely insisted that Great Depression 2.0 was just around the corner in September 2008. Along with Goldman’s plenipotentiary at the US Treasury, Hank Paulson, it was Bernanke who stampeded the entirety of Washington into tossing out the window the whole rule book of sound money, fiscal rectitude and free market discipline.
In fact, there was no extraordinary crisis. The Lehman failure essentially triggered a self-contained leverage and liquidity bust in the canyons of Wall Street, and it would have burned out there had the Fed allowed money market interest rates to do their work. That is, to rise sufficiently to force into liquidation the gambling houses like Lehman, Goldman and Morgan Stanley that had loaded their balance sheets with trillions of illiquid or long-duration assets and funded them with cheap overnight money.
There would have been no significant spillover effect. The notions that the financial system was imploding into a black hole and that ATMs would have gone dark and money market funds failed are complete urban legends. They were concocted by Wall Street to panic Washington into massive intervention to save their stocks and partnership shares.
The same is true of the claim that corporate payrolls would have been missed for want of revolving credit availability and that the entirety of AIG had to be bailed out to the tune of $185 billion in order to protect insurance and annuity holders.
In fact, the entire problem of the collateral call on AIG’s bogus CDS insurance was contained at the holding company. The latter could have been liquidated with less than $60 billion of losses distributed among the world’s 20 largest banks. These were mostly state-backed European behemoths—-like Deutsche Bank and BNP Paribas—-that between them had balance sheet footings of $20 trillion. The loss would have amounted to a couple of quarters net income and a big dent in year-end bonuses for top executives. Nothing more.
The most important point, however, is that there was never any danger of a run on main street banks by retail customers. To be sure, there would have been a temporary disruption in the real economy owing to the necessary curtailment of unsustainable activities related to the housing bubble and due to a downshift of household consumption that reflected unsustainable borrowing.
But as I demonstrated in detail in the Great Deformation, the necessary liquidation of excessive inventories and labor that had built-up during the housing boom had exhausted itself by September 2009. That was long before there was even a remote hint that Bernanke’s wild money pumping had caused households and business to increase their borrowing levels.
Stated differently, the US economy was already at peak debt, meaning that the credit channel of monetary policy transmission was broken and done. The modest recovery that did occur thereafter was due to the natural regeneration capabilities of capitalism and the restoration of economic and financial balance in the main street economy.
The recovery did not depend on Wall Street. Bernanke and his merry band of money printers had virtually nothing to do with the restart of jobs growth and GDP expansion after June 2009.
But far be it for the Fed and the gaggle of Washington politicians to realize, let alone admit, that they actually caused the housing and credit bubble, but had nothing to do with the modest recovery that ensued after it burst.
Bernanke has actually made a career out of claiming just the opposite. Namely, that he alone had the insight and acumen to diagnose the purported onrushing depression and the “courage” to, well, run the printing presses white hot in order to stop it in its tracks.
The fact is, Bernanke has been a charlatan and intellectual lightweight all along – going back to his alleged scholarship on the Great Depression. He was no such thing. He simply zeroxed Milton Friedman’s mistaken theory that the Fed failed to go on a bond-buying spree during 1930-1932 and that this supposed error turned the post-1929 contraction into a deep, sustained depression.
No it didn’t. The 1930s depression was the consequence of 15 years of wild credit expansion—-first during the “Great War” to fund the massive expansion of US food and arms production and then during the Roaring Twenties to finance the greatest capital spending binge in history prior to that time. The depression was not a consequence of too little money printing during 1930-1932, but too much speculative borrowing and investment by business and households after the Fed discovered its capacity to print money during the war and the decade thereafter.
In any event, behold Bernanke’s latest contribution to the history of monetary crankery. The very idea that the Fed would set up a “loan account” that our already incurably profligate Washington politicians could tap at will is so nutty as to be virtually impossible to paraphrase. So let the man’s words do the dirty work:
Ask Congress to create, by statute, a special Treasury account at the Fed, and to give the Fed (specifically, the Federal Open Market Committee) the sole authority to “fill” the account, perhaps up to some prespecified limit. At almost all times, the account would be empty; the Fed would use its authority to add funds to the account only when the FOMC assessed that an MFFP of specified size was needed to achieve the Fed’s employment and inflation goals.
Should the Fed act, under this proposal, the next step would be for the Congress and the Administration—through the usual, but possibly expedited, legislative process—to determine how to spend the funds (for example, on a tax rebate or on public works)……Importantly, the Congress and Administration would have the option to leave the funds unspent. If the funds were not used within a specified time, the Fed would be empowered to withdraw them.
Let’s see. Does he think the boys and girls of Capitol Hill would ever not spend 100% of their allowance?
More importantly, does the man really think that you can get something for nothing? That real wealth can be created not through the sweat of labor, or entrepreneurial invention and managerial innovation or the sacrifice of current consumption in favor of savings and future returns, but simply through hitting the “send” button on the Fed’s electronic printing presses?
The rest of Bernanke’s post is too imbecilic to even quote or reprint, but the gist of it is that the US economy is wanting for some non-existent ether called “aggregate demand”. And that this ether is something the Fed can easily create by handing an open-ended spending account to politicians, and one that would never have to be repaid or even serviced with interest!
It puts you in mind of the medieval theologians who endlessly debated as to the number of angels which could fit on the head of a pin. The trouble is, there is not such thing as angels.
Nor is there any such thing as economic growth or wealth that can be conjured by politicians spending Bernanke’s utterly counterfeit money.
Crude clubbed into and through the NYMEX close…ahead of tonight’s China GDP
And as JPMorgan’s trading desk notes, March brought the heaviest net covering seen by the Prime Brokerage in several years. Activity was skewed towards single names but ETF activity also was strong. All sectors experienced net covering, with Energy and Consumer, Cyclicals in the lead.
And the huge squeeze of the last 2 days has ended today…
With VIX and USDJPY used to desperately keep S&P green
Still plenty of time left in the day yet for a late-day buying panic.
Following yesterday’s bankruptcy of Peabody Energy and today’s Chapter 11 filing of XXI Energy, defaults among American junk bonds just topped $14 billion in April, the highest monthly volume in two years according to Fitch calculations, and that is only for the first two weeks.
April’s surge in bankruptcy filings is not unexpected: according to JPM’s default tracker, the number of bankruptcies was on a tear in both the month of March and the first quarter.
In the past month alone seven companies defaulted totaling $16.4bn, including $12.3bn in high-yield bonds and $4.1bn in leveraged loans. This marked the third highest monthly volume since the last default cycle, trailing only April 2014’s $39.5bn (TXU) and December 2014’s $18.3bn (CZR). With two weeks left in the month, April may well surpass March.
For context, during the last default cycle in 2008/2009, monthly default volume exceeded the March total only six times. By comparison, nine companies defaulted in February totaling $9.7bn (upwardly revised as UCI International totaling $400mn in bonds was added), which followed five defaults totaling $5.25bn in January and five defaults totaling a 2015-high $8.2bn in December. Default activity has clearly picked up over the last several months, with March marking the fifth consecutive month of greater than $5bn in default volume and the seventh $5bn month from the past ten. Further evidencing the recent pickup in activity, an average of $6.8bn has defaulted per month over the last eight months, compared with a $2.1bn average over the prior seven months and a modest $1.6bn monthly average from 2010 through 2014 (excluding TXU and CZR).
In the first quarter of 2016, already 21 companies have defaulted with debt totaling $31.4bn ($24.1bn in bonds and $7.2bn in loans), making 1Q16 the fifth highest quarterly default total on record. Notably, the four largest quarterly default volumes were $76.6bn in 1Q09, $55.0bn in 2Q09, $40.2bn in 2Q14 (with TXU), and $37.9bn in 4Q09.
For context, there were only eight defaults totaling $4.8bn in 1Q15. And as a reminder, 37 companies defaulted in 2015 with debt totaling $37.7bn ($23.6bn in bonds and $14.1bn in loans). In addition, while not incorporated into our main default statistics, distressed exchange activity continues to play an increased role in the default environment. Year to date, there have been five distressed actions totaling $1.1bn. For context, there were 25 distressed exchanges totaling $16.6bn in 2015, compared with only eight distressed exchanges totaling $3.0bn during all of 2014.
This is what a new default cycle looks like.
Going back to April, Fitch writes that this month’s default rate for coal companies is expected to come close to 70% while the oil and gas exploration and production sector is anticipated to reach 23% and metals and mining will climb to almost 20%.
Quoted by Bloomberg, Eric Rosenthal, Fitch’s senior director of leveraged finance, said that “the second quarter will not see a reprieve in defaults.”
Which is a problem for both energy companies desperate to issue more debt, and for banks who remain on the hook for secured loans and uncommitted revolvers.
According to Fitch, despite a recent rally in oil, 57% of exploration and production companies with ratings of B- or lower are still struggling to sell their debt in the secondary market, with bids falling below 50 cents. The problem is unlikely to be alleviated while prices remain below break-even production costs. This means that for the sake of at least the existing equityholders of shale companies, the Doha meeting better not disappoint.
As for oil production, as we noted earlier, while company balance sheets may restructure, that does not mean that they will actually reduce oil production. Quite the contrary.
The Bank of Japan and the ECB are assisting me in teaching the world’s savers, banking clients and corporations about the benefits of blockchain-based finance for the masses. How? Today, the Wall Street Journal published “Negative Rates: How One Swiss Bank Learned to Live in a Subzero World“:
Alternative Bank Schweiz AG late last year became Switzerland’s first bank to comprehensively pass along negative rates to all of its customers. Violating an almost religious precept in the financial world, ABS informed its clients that they would have to pay a charge of at least 0.125% to maintain their accounts at the bank starting in 2016.
This is the first time that I know of that a retail commercial bank is charging its customers to borrow their money. Wait, it gets better…
In the first two full months after ABS’s October negative-rate announcement, 1,797 clients had left the bank, but 1,830 new accounts had been opened—for a net gain of 33. Fresher data for January and February, the most recent available, showed that ABS was still net positive on accounts, with its gain expanded to 59.
That’s right, thus far the bank has had a slight net gain in depositors – or people that are willing to pay a bank to lend the bank their hard earned cash.Now this banks caters to a decided lower than national average clientele (I’m assuming this because it is located in a economically disadvantaged area), but I’m quite sure the banks clientele can count. This is exactly how it went down…
At ABS, total account balances fell by 4%, or 54 million Swiss francs ($56.5 million), between last October’s negative-rate announcement and February, as clients shifted money from cash holdings at the bank into investments. However, overall assets under management remained steady, ABS said.
This implies that the savers were forced out of their savings accounts due to being charged to put their money there, thus ran to investment accounts where they summarily lost their money anyway. You know 100% plus 4% should equal 104%, but came out to flat ~100%.
The stated purpose of NIRP is to drive down the desirability of keeping funds in safe(r) investments, with the hope of forcing them into riskier investments (ex. stocks) and into the consumer economy (ex. forcing people to spend their savings on stuff). Of course, if you aren’t comfortable spending your savings on stuff, chances are you are not going to do it. This 4th grade revelation seems to be lost on many central bankers.
The WSJ says the big boys in Switzerland, such as UBS Group AG, are also charging negative rates on to large clients.
WSJ further reports:
Mr. Rohner said ABS had a spirited internal debate about its decision. He and his management team considered whether or not passing on negative rates was fair to clients, and if it might spur a flood of complaints. Yet, the significant amount of deposits held at ABS (and, in turn, parked by ABS at the central bank), relative to its loans and investments, meant that not making the move could have wiped out profits.
Martin Janssen, a professor emeritus of finance at the University of Zurich, thinks it’s a matter of time until more banks—with a less clearly defined ideology and client base than ABS—have to start following suit. “If the negative interest rates persist for two or three years, many banks will go that way,” he said.
How asinine can negative rates get? Well, we don’t know yet, but the progress thus far is rather promising, no?
AALBORG, Denmark— Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner. Instead of paying interest on the loan he got a decade ago to buy a house in this northern Denmark city, his bank paid him the equivalent of $38 in interest for the quarter. As of Dec. 31, his mortgage rate, excluding fees, stood at negative 0.0562%.
German regulators are so concerned about the impact of negative interest rates on the country’s life insurers that they have said they can only be sure the sector is safe through 2018. Even today, half the industry would be short of capital without the help of special measures. …The German life industry is particularly badly affected by very low or negative interest rates because companies have historically offered what now look like high levels of guaranteed returns over very long periods. Some insurers need to earn a continuing investment yield of more than 5% to meet guarantees to their policyholders, a report from Germany’s central bank found in 2014. In a world where 10-year German government bonds yield less than one-quarter of 1%, that looks very hard to achieve.
Falling interest rates also increase the size of the liabilities on insurers’ balance sheets, which can reduce their capital if assets don’t increase in valuation enough to match.
Large European insurers such as Allianz,AXA,Assicurazioni Generali SpA and Munich Re all have big German life businesses, but regulatory concerns are more immediately focused on smaller insurers mainly unknown outside of the country. German life insurers earned gross written premiums of €89.9 billion ($102 billion) in 2014, according to the most recent statistics from German financial regulator BaFin.
Munich Re, whose unit Ergo Leben is Germany’s seventh-largest life insurer with €3 billion in gross written premiums, is watching monetary policy “with great concern,” said CEO Nikolaus von Bomhard.
“What is dangerous is that the return on many investments is no longer reflective of the underlying risk involved,” Mr. von Bomhard told The Wall Street Journal. “Many investors feel forced into taking higher risks.”
Exactly! This is what I have coined “Return-free Risk”!
Some policyholders are already losing out on money they should be getting, according to an association representing customers, because of the regulator’s efforts to bolster the companies’ balance sheets and survival prospects.
So, what does this have to do with Veritaseum and blockchain-based finance? In the comment section of one of the articles that I wrote yesterday, someone asked me what the difference was between Ethereum and Bitcoin, and which was better. The differences are myriad, but in a nutshell:
Ethereum is more programmable (with a built-in full turing programming language), theoretically more scalable and smaller confirmation times.
Bitcoin is proven more secure, less programmable (but still fully programmable with its non-turing scripting language – this is lost on most) and has longer times.
Bitcoin has a significant lead in its demand side network effect. This is also significantly lost on most.
Most people ask which is better. At such an early stage in each platform’s development life cycle, it’s really too early to tell. They take different approaches to a problem most didn’t even know they had. I’d like to note that while Veritaseum is currently built on the Bitcoin blockchain, it is actually blockchain agnostic. We’re not in the business of picking winners on the tech side. While this is an oversimplification, there are two points that are always lost in the debate. Points which the SNB and ECB will likely bring to light as they bring their financial systems towards the brink in their search for this mystical inflationary demand sans the demand – the Purple Unicorn!
Bitcoin is the most ubiquitous, secure and time tested blockchain-based network in existence, and by a wide margin. That means it is already spread far and wide and has remained 100% hack-proof for 7 years.
Bitcoin is quite programmable, and advanced smart contracts can be made through the right systems, cue in Veritaseum
and number three… Hold your booty hairs… Bitcoin is currently more price stable than the Brazilian real, gold, and from a cost perspective approaches parity to the yen and the euro.
See below…
Now, on a gross basis, the euro is ever so slightly more stable than bitcoin. Alas, if you keep your euro in a bank (ex. a Swiss bank) that actually charges you a negative rate 0.125% and a bank account fee of at least that, we’re talking very close to parity to two of the deepest and most liquid currencies (USD is #1) on the planet.
What does this mean? It means BTC is gaining utility as a store of value, while maintaining three of its core attributes:
Zero trust transactions
Programmability
It’s very own, built-in, very low cost, transmission network
So, when you create applications out of bitcoin, you don’t even need to include a money or currency component. It’s already there. As a matter of fact, that money and currency component is getting more and more stable over time (reference the downward sloping chart) as the competing fiat currencies are getting less and less stable over time, reference:
So, why isn’t everybody moving to the bitcoin blockchain platform? I truly believe they don’t know what it’s capable of. Keep in mind that the biggest banks in the world have come together to collaborate on this technology – reference:
What do all of these examples of Wall Street’s use of the tech have in common? For one, they are all still highly centralized yet attempt to use the peer-to-peer attributes of the bitcoin blockchain tech. Secondly, despite having a lot of capital and fanfare in the media, they are relatively late to the party. Veritaseum cleared its first swap through the blockchain in 2013, and has patent applications on the tech filed years before these announcements were made.
Hey, I’ve even done swaps directly on ZeroHedge in the past..
Most importantly, the very need and existence of the entities doing the tests using blockchain technology is called into question by the mere fact that the blockchain technology actually works. If you can successfully use P2P technology to make your back-end infrastructure work more smoothly to charge your clients for services, why should your clients utilize you instead of the P2P technology directly?
Therein lies the rub. The currency is now becoming stable (expect some bumps in the road, though). The infrastructure is being proved, and the platform is truly programmable.
Anyone interested in knowing more should contact me directly (reggie AT veritaseum.com. We have a lot to talk about.