Friday, October 17, 2014

International Debt and Financial Crises

"The latest issue of the IMF’s World Economic Outlook has a chapter on global imbalances that discusses the evolution of net foreign assets (also known as the net international investment position) in debtor and creditor nations. The authors warn that increases in the foreign holdings of domestic liabilities can raise the probability of different types of financial crises, including banking, currency, sovereign debt and sudden stops. A closer inspection of the evidence that has been presented elsewhere suggests that it is foreign-held debt that poses a risk.

The role of international debt in increasing the risk of crises was pointed out by Rodrik and Velasco (working paper 1999), who showed that short-term bank debt contributed to the occurrence of capital flow crises in the period of 1988-98. More recently, Joyce (2011) (working paper here) looked at systemic bank crises in a sample of emerging markets, and found that an increase in foreign debt liabilities contributed to an increase in the incidence of these crises, while FDI and portfolio equity liabilities had the opposite effect. Ahrend and Goujard (2014)(working paper here) confirmed that increases in debt liabilities increase the occurrence of systemic banking crises. Catão and Milesi-Ferretti (2014) (working paper here) found that an increase in net foreign assets lowered the probability of external crises. Moreover, they also reported that this effect was due to net debt. FDI had the opposite effect, i.e., an increase in FDI liabilities lowered the risk of a crisis. Al-Saffar, Ridinger and Whitaker (2013) have looked at external balance sheet positions during the global financial crisis and reported that gross external debt contributed to declines in GDP.

There are also studies that compare the effect of equity and debt flows. Levchenko and Mauro (2007), for example, investigated the behavior of several types of flows, and found that FDI was stable during periods of “sudden stops,” while portfolio equity played a limited role in propagating the crisis. Portfolio debt, on the other hand, and bank flows were more likely to be reversed. Similarly, Furceri, Guichard and Rusticelli (2012) (working paper here) found that large capital inflows driven by debt increase the probability of banking, currency and balance-of-payment crises, while inflows that are driven by FDI or portfolio equity have a negligible effect.

Why are debt liabilities more risky for countries than equity? Debt is contractual: the holder of the debt expects to be paid regardless of economic conditions. Equity holders, on the other hand, know that their payout is tied to the profitability of the firm that issues the debt. Moreover, during a crisis there are valuation effects on external balance sheets. The value of equity falls, which raises the net foreign asset position of those countries that are net issuers of equity, while lowering it for those that hold equity. In addition, debt may be denominated in a foreign currency to attract foreign investors worried about depreciation. A currency depreciation during a crisis raises the value of the debt on the balance sheet of the issuing country.

These results have consequences for the use of capital controls and the sequence of decontrol. Emerging markets should be careful when issuing debt. However, the evidence to date of trends in the international capital markets shows a rise in the use of debt by these countries.Emerging market governments, for example, issued $69 billion in bonds in the first quarter. In addition, the BIS has drawn attention to the issuance of debt securities by corporations in emerging markets.

The IMF has warned of a slowdown in the emerging market countries, with the Fund’s economists forecasting GDP growth rates below the pre-crisis rates.  Speculation about the impact of changes in the Federal Reserve’s quantitative easing policies has contributed to concerns about these countries. If a slowdown does materialize, the debt that was issued by these countries may become a burden that requires outside intervention."


Why Nations (And Organizations) Fail: Self-Serving Elites

"Submitted by Charles Hugh-Smith of OfTwoMinds blog,
For those who doubt that America is ruled by a narrow elite: three charts.
The book Why Nations Fail: The Origins of Power, Prosperity, and Poverty neatly summarizes why nations fail in a few lines:
(A nation) is poor precisely because it has been ruled by a narrow elite that has organized society for their own benefit at the expense of the vast mass of people. Political power has been narrowly concentrated, and has been used to create great wealth for those who possess it.
Sound like any countries you know? Perhaps we should flip this question around and ask: how many nations don't fit this profile?
I submit that this dynamic of failure--the concentrated power and wealth of self-serving elites-- is scale-invariant, meaning that it is equally true of communities, towns, cities, states, nations and empires alike: all fail when they're run for the benefit of a narrow elite.
There is a bitter irony in the ease with which American pundits discern this dynamic in developing-world kleptocracies while ignoring the same dynamic in America. One would imagine it would be easier to see the elites-inevitably-cause-failure in one's home country, but the pundits by and large are members of the Clerisy Upper Caste, well-paid functionaries, apparatchiks, lackeys, factotums, toadies, sycophants and apologists for the very elites that are leading America down the path of systemic failure as the ontological consequence of their self-serving consolidation of wealth and power.
For those who doubt that America is ruled by a narrow elite: I don't have charts for standard-issue third-world kleptocracies, but I doubt the concentration of wealth and political power is much more extreme than in America:
In a simulacrum democracy where the highest bidders control the state, who do you think can readily buy political power?
And the policies of the elites have really spread the prosperity around in the past few years (sarcasm-off):
What's truly interesting about the authors' exhaustive survey of the inevitability of failure in elite-dominated nations is how cities dominated by narrow elites fail, states controlled by narrow elites fail, and indeed, any organization that serves the interests of a few at the expense of the many fails for the same reasons."


9 Ominous Signals Coming From The Financial Markets That We Have Not Seen In Years

"The following are 9 ominous signals coming from the financial markets that we have not seen in years...
#1 By the time the markets closed on Monday, we had witnessed the biggest three day decline for U.S. stocks since 2011.
#2 On Monday, the S&P 500 moved below its 200 day moving average for the first time in about two years.  The last time this happened after such an extended streak of success, the S&P 500 ended up declining by a total of 22 percent.
#3 This week the put-call ratio actually moved higher than it was at any point during the collapse of Lehman Brothers in 2008.  This is an indication that there is a tremendous amount of fear on Wall Street right now.
#4 Everybody is watching the VIX at the moment.  According to the Economic Policy Journal, the VIX has now risen to the highest level that it has been since the heart of the European debt crisis.  This is another indicator that there is extraordinary fear on Wall Street...
US stock market volatility has jumped to the highest since the eurozone debt crisis, according to a closely watched index, the the CBOE Vix index of implied US share price volatility.
It jumped to 24.6 late on Monday and is up again this morning. On Thursday, it was as low as 15.
That's a very strong move, but things have been much worse. At height of the recent financial crisis – the Vix index peaked at 80.1 in November 2008.
Could we get there again? Yeah.
#5 The price of oil is crashing.  This also happened in 2008 just before the financial crisis erupted.  At this point, the price of oil is now the lowest that it has been in more than two years.
#6 As Chris Kimble has pointed out, the chart for the Dow has formed a "Doji Star topping pattern".  We also saw this happen in 2007.  Could this be an indication that we are on the verge of another stock market crash similar to what happened in 2008?..."

Legend Warns The World Is Now Facing Enormous Dangers

"Today a legendary value investor warned King World News that the world is now facing enormous dangers.  Below is what the legendary investor, Jean-Marie Eveillard, who oversees more than $85 billion, had to say about the tremendous danger the world faces in his powerful interview.

Eveillard:  “Things had been very quiet and bullish in the global markets for quite some time.  Then all of the sudden the markets recently tanked hard and fast.  But there are all sorts of problems beyond the geopolitical ussues in the Ukraine and the Middle East.  We now have this Ebola crisis to contend with....

“But the main problem is there is just too much debt.  The developed world is choking on debt.  When Western central planners intervened and took absolutely unprecedented steps in 2008 - 2009 in order to save the day, it did not allow for a cleansing of the financial system.  In other words, there are zombie companies that exist today because interest rates are almost nothing.

So they stabilized matters in the very short-term, but the world will eventually pay one hell of a price for that intervention.  We have just seen early warning signs or the beginning stages of what can happen when things reverse to the downside.  What I am saying is that they have compromised the long-term stability of the entire global financial system.  This is why you see the VIX suddenly spike and you see panic set in very quickly.

Also, there was a piece that was produced by a number of economists that said, ‘Deleveraging, what deleveraging?’  There has not been any deleveraging.  The private sector has delevered a little bit, but meanwhile the public sector is even more leveraged than it used to be.  So, yes, there will be one hell to pay for their actions.

And the West is not alone.  There has been an even bigger credit boom in China.  So there is too much debt everywhere.  When I was recently traveling to France, somebody told me that since 1974 the federal budget in France has been in deficit every single year -- even during the good economic years.  This is madness.

And complicating matters even further for the markets is the fact that hedge funds are borrowing money at near zero and leveraging this money into global markets and creating all sorts of distortions.  Then there is the margin call.  This is when the  liquidation starts.  They have to sell in order to meet the margin call.

All of this creates an atmosphere of crony capitalism.  Milton Friedman used to say that ‘The free enterprise system is a system of gains and losses.  And for the system to function properly, the losses are as important as the gains.’  Today if a large bank or some other major entity makes a big bet and wins, they pocket the winnings.  But if they lose, that’s too bad.  Today anybody who loses runs to the government and says, ‘Bail me out.’”


Four Reasons the Bernanke-Yellen Asset-Price Inflation May Be Nearing Its End

"Once interest rates begin to rise — and rise they must, whether as a result of Fed policy or not — the end of the asset price inflation will be at hand. The result will be another financial crisis and accompanying recession..."


Tuesday, October 14, 2014

The World Is Now Rolling Over Into A Frightening Deflation

"On the heels of the beginning of another week of trading in global markets, today one of the brightest minds in the financial world warned King World News that the world is now rolling over into a hard deflation..."


Monday, October 13, 2014

China Acquired 2000 Tonnes of Gold In 2013, Almost Double World Gold Council Estimates

"I have some suspicions about where the gold bullion that is leaving the Western funds and ETFs is going.

Gold is moving steadily from West to East. When the reckoning comes, it may be terrific.

SGE Chairman: 2013 Chinese Gold Demand Was 2000 tonnes

By Koos Jansen
Published: 10-10-2014 18:23

This is the final blow for the ones who still couldn’t comprehend, after all evidence presented, the amount of Chinese non-government gold demand in 2013.   At the LBMA forum in Singapore June 25, 2014, one of the keynote speakers was chairman of the Shanghai Gold Exchange (SGE) Xu Luode. In his speech he made a few very candid statements about Chinese consumer gold demandthat according to Xu reached 2,000 tonnes in 2013In contrast to the Word Gold Council (WGC) that states Chinese gold demand was 1,066 tonnes in 2013. Xu's speech has now finally been translated andpublished in the LBMA magazine The Alchemist #75.
Xu's statements once again confirm what I have been writing for months. SGE withdrawals equal Chinese wholesale demand:
import + mine + scrap = total supply = SGE withdrawals = wholesale demand"


Shocking Event To Change Entire Global Financial Architecture

"Nigel’s speech resonated very well with the Swiss audience. The Swiss are very independent and have already rejected EU membership. At this meeting, the Swiss Gold Initiative was also discussed. Farage was a commodity broker in the City in London before he went into politics. He was not in Switzerland to discuss the Gold Initiative but we know from his KWN appearances that he favors sound money and gold. And this Gold referendum is also indirectly a vote on not allowing the ECB to influence Swiss monetary policy since the Swiss Franc is pegged to the Euro.

So on November 30, 2014 the Swiss People have the opportunity to determine not just the fate of their own financial system but also to be the catalyst for the return to sound money in the Western World.

Gold Initiative

They will do this in a referendum on the “Gold Initiative” which has three demands:
  1. 1.Returning the gold held abroad (in Canada and the UK) to Switzerland 
  2. 2.The Swiss National Bank must hold 20% of their assets in physical gold 
  3. 3.No further gold sales. 

So why it this referendum so important? Because Switzerland has for hundreds of years been a bastion of sound monetary policy and low inflation. But this has gradually changed in the last 100 years since the creation of the Fed in the US..."


This Will Send Massive Shock Waves Through The Gold Market

"“I believe the bottom is in with regards to gold.  It also looks like gold is turning around very, very tentatively.  This is taking place as the U.S. stock market appears to be rolling over.  As money exits the stock market it will look for safe havens and that should include the gold market.

We are now heading into the holiday season in India and that should also help to put a floor under the gold market.  Gold has made a very large base over a lengthy period of time.  We also know that at current prices most of the producers can’t make any money.  These companies have already been high-grading their deposits so they can stay in business and you can only do that for so long.  The chorus of bearish calls on the gold market is also an indication to me that gold is about to head higher.

Eric, I would also like to add that I am a staunch support of the Swiss Gold Initiative.  This initiative will cause the repatriation of Switzerland’s gold.  This will also cause a 20 percent gold backing of the Swiss franc as well as halting any future Swiss gold sales.  This vote is coming up in the Swiss referendum on November 30.  The entire adult population of Switzerland will be voting on this historic Swiss Gold Initiative.

This is an incredibly important event for Switzerland and for the world.  It also has the potential to send major shock waves through the gold market because if it passes Switzerland will have to acquire over 1,500 tons of physical gold.  I strongly believe it will be incredibly difficult to find that much physical gold anywhere near current prices.

The key here is that if this passes, it is law.  They can’t do a runaround like they can in other Western countries.  Meaning, when the Swiss citizens pass this historic initiative it becomes law and it can’t be circumvented.  As we approach the date of that vote, it has become very evident that the Swiss National Bank is getting extremely vocal in terms of opposing the Swiss Gold Initiative.  The Swiss National Bank claims the Swiss franc should not be shackled to the price of gold..."


First Trickle Through the Dam

"The United Kingdom has announced that it will be the first government outside of China to issue bonds denominated in the Chinese currency, the Renminbi. Forbes reports that the bond sale will be tiny. For the UK it represents another attempt to become the eminent world financial center. For the US it represent another small blow to the status of the Dollar and US financial markets. The US Dollar has already lost its near monopoly position as a reserve currency and medium of international trade. The competitive position of the Chinese Renminbi continues to improve in small ways. The question is whether this will be a multiple decade competition between the Dollar and the Renminbi, or whether the “dam will break” like it did in WWI when the eminent currency status changed from the British Pound to the US Dollar..."


China Overtakes US

"The IMF announced that the GDP of China has now exceeded the GDP of the USA. In this interview I explain some of the “back story” on this topic and also alert listeners of the implications of the current world currency war and looming economic crisis..."


Friday, October 10, 2014

As Fracking Enters A Bear Market, A Question Emerges: Is The Shale Boom Built On A Sea Of Lies?

"One of, if not the biggest contributors to the improving US trade deficit and thus GDP (not to mention labor market in select states) over the past several years, has been the shale revolution taking place on US soil, which has led to unthinkable: the US is now the biggest producer of oil in the world, surpassing Saudi Arabia and Russia. Which is great today, but what about tomorrow?
It is here that problems emerge according to Bloomberg's snapshot of the shale industry. In "We're Sitting on 10 Billion Barrels of Oil! OK, Two", the authors look at the two-tiers of reporting when it comes to deposits that America's fracking corporations allegedly sit on, and find something unpleasant:
Lee Tillman, chief executive officer of Marathon Oil Corp., told investors last month that the company was potentially sitting on the equivalent of 4.3 billion barrels in its U.S. shale acreage. That number was 5.5 times higher than the proved reserves Marathon reported to federal regulators.

Such discrepancies are rife in the U.S. shale industry. Drillers use bigger forecasts to sell the hydraulic fracturing boom to investors and to persuade lawmakers to lift the 39-year-old ban on crude exports. Sixty-two of 73 U.S. shale drillers reported one estimate in mandatory filings with the Securities and Exchange Commission while citing higher potential figures to the public, according to data compiled by Bloomberg. Pioneer Natural Resources (PXD) Co.’s estimate was 13 times higher. Goodrich Petroleum Corp.’s was 19 times. For Rice Energy Inc., it was almost 27-fold..."

"Financial markets are artificially priced. In the bond market, there is nothing normal about a three year German Bund yielding a “minus” 10 basis points. Similarly, UK Gilts and U.S. Treasurys have in recent years never experienced such low yields and therefore high prices. The same comparison can be applied to stocks. While profits in many cases are at record highs, the discounting of future profit streams by an artificially low interest rate results in corresponding high P/E ratios. Real estate cap rates, which help to price homes and commercial shopping centers, are affected in the same way. While monetary policy with its Quantitative Easing and forward guidance for low future interest rates have salvaged a semblance of growth and job gains – especially in the U.S. – they have brought prosperity forward in the financial markets. If yields can’t go much lower, then bond market capital gains are limited. The same logic applies in other asset categories. We have had our Biblical seven years of fat. We must look forward, almost by mathematical necessity, to seven figurative years of leaner: Bonds – 3% to 4% at best, stocks – 5% to 6% on the outside..."


Art Cashin - Stock Plunge May Become Cascade Of Panic Selling

"Today 50-year veteran Art Cashin warned King World News that today’s 335 point plunge in the Dow may turn into a “cascade” of panic selling.  Below is what Cashin, who is Director of Floor Operations at UBS ($650 billion under management), had to say in this powerful interview..."


Thursday, October 9, 2014

Greyerz - We Are Seeing Massive Gold Demand In The East

"Today a 42-year market veteran told King World News that right now there is massive demand for gold from Swiss refiners and the demand is coming from the East.  Below is what Egon von Greyerz, who is founder of Matterhorn Asset Management out of Switzerland, had to say in this extraordinary interview.

Eric King:  “Egon, what are you seeing in the physical side of the market right now?”

Greyerz:  “Eric, it’s very interesting because in the West there is relatively little demand for precious metals right now.  But if you then turn to the East, they are buying everything they can from the refiners here in Switzerland....

“So the physical market in the East is extremely strong.  And the West is totally missing the boat and ignoring this market.  This is the trend we’ve seen in the last couple of years. 

We’ve seen most of the physical gold go from West to East and in the end there will be very little left in the vaults of (Western) central banks and in the vaults of the bullion banks.  It (virtually all of the gold) will be in the East."


Sunday, October 5, 2014

Jim WIllie: Saudi's are on the verge of joining Russia in non-dollar oil sales

"Last week, Russia announced an game changing shift for energy in which they are now allowing the sale of oil and natural gas to be done in both Roubles and Yuan, bypassing the dollar and cracking the 40 year old petro-dollar system. And on Aug. 31, Dr. Jim Willie reported during an interview with TFMetals Report that this break away from U.S. hegemony over the purchasing of oil is not being limited to just Russia, but that the foundational country of petro-dollar origin, Saudi Arabia, is in talks with the Eurasian energy giant to join them in a partnership that will also disconnect the Arab Kingdom from the dollar, and open energy sales within the OPEC nations to be done in Roubles, Yuan, and perhaps even the Euro.
While speaking with Craig 'Turd' Ferguson of the TFMetal Report, Dr. Jim Willie also pointed out that while Russia was not fully ready to use the Rouble as a primary currency for a large portion of their oil sales, the inclusion of the Yuan by Gazprom will allow multitudes of nations to bypass the dollar, and allow them to purchase oil directly from Russia without having to be enslaved to SWIFT and the financial mechanisms of the reserve currency that the U.S. has used not only for profit, but as a financial weapon.
Jim Willie: So what happened with Russia? They did in May the holy grail energy deal between themselves and China, and this is a long term, 20-30 year agreement. As well, back in May, April, and March I said watch Russia accept Yuan as a temporary device for energy sales.
Russia isn't fully ready to do just Rouble sales. In Europe I think they are going to do Euro and Rouble sales, and with China they are gong to do exclusively Yuan sales.
So watch the Saudi's... watch OPEC... watch the deals that Russia starts to integrate with the Person Gulf nations.
And kiss goodbye this petro-dollar. - TFMetals Report, Aug. 31..."


China will use gold and gold pricing to force global currency reset

"Gold inventories on the Comex
Gold inventories on the ComexCourtesy of
"On Sept. 30, statistician and economist Dr. Jim Willie was a guest on the Caravan to Midnight radio show to talk about current financial, economic, and geo-political events. During his three hour interview, Dr. Willie stated that one of the purposes behind China's creation of the new Shanghai gold exchange is to eventually take over global price controls for the monetary metal away from the Comex, and then force a global currency reset by raising the price of gold to its true or actual value.
The way this will come about in the near future according to Dr. Willie, is that China will re-price gold to near or above twice the current price, which will have a devastating effect on derivatives and ongoing use of the Comex futures market to suppress gold prices, and protect the dollar. And based upon supply details for the Comex over the past two years, America's primary gold exchange no longer settles their contracts through the delivery of physical gold, but instead settles in cash payments or through the hedging of gold using derivatives. Subsequently, once this failure to deliver takes place, then China, through the Shanghai gold exchange, will become the default market for price discovery, and at that point will re-adjust gold to its true value, instantly causing massive chaos in the fiat currency markets and leaving the world little alternative but to implement a complete currency reset..."


Britain fully preparing for the Yuan to be the next global reserve currency

"Since the United States currently controls the de facto global reserve currency for now because of its agreements with the Middle East to have oil sales done only in dollars, it is very interesting to see a Western bank suddenly rush to become the first nation to facilitate the portability of another major currency that is quickly accelerating in strength to both threaten, and perhaps overtake the dollar in recognized international trade. And on Sept. 12, the British Chancellor of the Exchequer announced that they were going to be the first nation outside of China to issue a bond denominated in Yuan, and open the door for other nations, especially those within the EU, to break away from dollar hegemony and start the Chinese currency on the path of one day usurping the dollar as the primary global reserve currency.
And with Russia already in the process of selling its oil to nations in both the Rouble and the Yuan, the foundation of the petro-dollar may soon be eradicated as well, leaving the U.S. without a reason to remain the caretaker of the staple for international trade..."


End of dollar? Russia and China in works to create new SWIFT system

"On Sept. 10, First Deputy Prime Minister Igor Shuvalov of Russia announced that Russia and China are in the works to create an alternative replacement to the long-standing SWIFT system, and end for good the dollar as the sole reserve currency in the global financial system.
The SWIFT system was created in 1973 in Brussels, Belgium to coincide with the Petrodollar agreement made between Henry Kissinger and the House of Saud (OPEC) that same year. It established the central focal point for all oil sales to be done using the American currency, and was the asset replacement for the dollar and reserve currency forged after President Richard Nixon took the dollar off the gold standard in 1971.
The Petrodollar system has been in place for nearly 43 years, but has been under serious pressure from Eastern economies after the Federal Reserve began inflationary programs through the monetizing of debt. Additionally, the U.S. has used the dollar and the SWIFT system as an economic weapon, as seen several times in the past where they cut off nations from access to dollar swaps under the guise of economic sanctions..."


Saturday, October 4, 2014

What Do Treasury Yields Say About Job Expectations, Inflation Expectations, and the Recovery?


The bond market does not think much of an ongoing recovery or future price inflation 

prospects, and neither do I."