November 27th, 2015 Alex Jurshevski
Overnight the Chinese Stock Market dropped almost 6%…….without warning.
I recently gave a speech in Toronto where I used the following sequence of pictures to illustrate our assessment of the developed economies.
The pictures are from Seffner, Florida where in late 2013, a cover collapse sinkhole opened up without warning underneath a man’s house and swallowed him alive.
Despite the best efforts of several teams of rescuers, his body was never recovered. In the aftermath of the tragedy, the subdivision was condemned as unsafe for human habitation, the remaining houses were leveled, the reclaimed housing lots were backfilled and sodded with new lawns, and the entire neighborhood area was secured with chain link fencing.
From a distance everything looked safe after this remediation activity had concluded. That is, until a much larger sinkhole opened up in the exact same spot just a few months ago.
Low interest rates have helped finance governments’ debt and lower funding costs, as well as preventing otherwise non-viable companies from having to declare bankruptcy. However, we can now see that this policy of “financial repression” has come at a substantial cost for both households and long-term investors such as insurance companies and pension funds; as well as the economy as whole.
Despite years of unprecedented stimulus:
- There is no meaningful growth in the major economies
- Credit losses have not been remediated, they have been papered over and remain on the books
- Banks have bulked up instead of declining in size as announced after the GFC
- Derivatives risk is much larger not lower
- Sovereign debt loads have bloated since the GFC. Still, there has been no meaningful extension of the duration of public debt liabilities. Sovereigns and corporates are carrying unprecedented levels of re-financing risk in order to economize on debt servicing costs and thus be able to finance day-to-day expenditures.
- Other unintended consequences of financial repression include potential asset bubbles, crowding out long-term investors in otherwise functioning private markets, increasing economic inequality, creating the potential of higher inflation over the longterm, distorting private capital markets and encouraging speculation and mal-investment
Moreover, the prolonged period of virtually zero interest rates has imposed a new set of risks and challenges for the markets and the major economies because it has encouraged debt accumulation instead of the needed de-leveraging. This means there has been NO EXIT from the Crisis Phase.
Similar to a sinkhole, the policy response since 2008 has been slowly eroding the foundations of economic stability and future growth. Besides the impact on long-term investors’ portfolio income, the consequence for capital market intermediation is of great concern because artificially low or negative yields “crowd out” the diversification of funding sources to the real economy, thus representing a risk for financial stability and economic growth potential at large.
By lowering yields and distorting private market signals, financial repression also supplies a disincentive for governments to tackle pressing public policy challenges (pensions, structural spending problems, infrastructure investment) and thus advance the structural reform agenda.
Not in the least this state of affairs has allowed Zombie Corporations and Zombie Governments to continue to issue LARGE VOLUMES of debt to investors.
What will these obligations be worth in the event of financial disruption?
When the Crash comes, it will be sudden and extremely destructive.
October 26th, 2015 Alex Jurshevski
The expression, the “Big Lie” was first coined by Adolf Hitler in his 1925 book Mein Kampf when he wrote about the use of a lie “so colossal” that “no one would believe that someone could have the impudence to distort the truth so infamously”.
Since early 2010 when the Fed raised the discount rate to 0.75%; markets have been on edge waiting for the next shoe to drop – a hike in the Fed Funds rate leading to a normalization of rate structures. Over this period US policy makers have been working overtime on conditioning the markets and the public to believe that the economy had achieved “escape velocity” and that a sustainable recovery was on the way that would assist in repairing the financial damage that had been visited on the US economy by the Global Financial Crash (GFC) of 2008-09
Thus the past five years since have featured repeated – and wrong – predictions by the mainstream media and punditry on imminent tightening moves by the Fed. In the last several weeks we have been treated to an endless cacophony of tightening talk from the Doyenne of Monetary Policy, Janet Yellen, who has again said she expects the central bank to raise rates this year. However, this time the backdrop to her pronouncement was a reduction in market estimates of the probability of Fed tightening by year end to less than 40% from 60% earlier in September, 2015“
There are three fundamental reasons why a meaningful Fed tightening leading to a normalization of capital market conditions is not to be expected anytime soon:
(1) The European and Chinese economies are flat on their backs and in need of stimulus, not tightening. A tightening of US policy would exacerbate the disconnects between the economic cycles of these large economic areas, detract from policy coordination (such as it is) and contribute to heightened geopolitical tensions. The Europeans are in fact desperately exploring new ways to loosen policy without further upsetting supply demand conditions in the bond markets there.
(2) Since the crash the authorities everywhere have been leaning on the banks to exercise forbearance in respect of their marginal borrowers. In the case of the US and Canada this behavior has produced the lowest incidence of corporate bankruptcies in modern economic history. As a consequence many firms have been kept on “life support” by financial sponsors unwilling to risk collecting what is owed them through a court sponsored process. This consequential “zombie” borrower problem has been allowed to grow to such a point that any normalization of rates, however slight, risks a massive outbreak of bankruptcies. Recent weakness in key sectors, most notably commodities, resources and oil has infected the balance sheets of companies operating in those sectors with the same virus.
“We can’t overstate how low overall defaults are. The 2010-2014 cohort is the lowest 5 year period for high yield (HY) defaults in modern history” Deutsche Bank 4/2015.
(3) The US Economy is not in great shape at all and therefore the question of tightening is really a debate of form over substance. Without being too cynical, we submit that the explicit aim of Monetary Policy since 2008 has been to use financial asset inflation as a fig leaf to cover for continuing sub-par real economic growth. In the case of the US we can prove this point with just 3 simple charts showing recent behavior of Retail Sales, Capacity Utilization and Industrial Production, and Labor Force Participation.
Recently the last five years of survey data for US capacity utilization figures and industrial production were revised down (Originally published data is the Grey Line. Revised data is the Red line). It is now obvious that the US economy has not yet regained the ground lost in the GFC.
US Labor Force Participation Lowest in over 35 years
The authorities are wagering that as long as disappointing economic numbers can be explained away by “climate change” variables or other crackpot theories, and financial markets continue to be propped up by artificially low interest rates, then the US just might be able to work its way out of some of these problems even if growth is very weak.
Our readers may recall that we called the major economies to be in a Depression way back in December 2014. Not much has changed. Today, in the US, one-half of the working age population is on some form of public assistance.
Therefore, the odds on this bet paying off in favor of the policymakers who placed it are very long indeed, and as our blogs and public commentaries have demonstrated over the past five years: , there has been no resolution of the issues that led to the GFC, in fact there is now more fragility, more debt, more leverage and more derivatives risk and less resolve to agree on and apply the needed solutions.
This will not end well.
August 12th, 2015 Alex Jurshevski
“Let China sleep, for when she wakes, she will shake the world.”
Napoleon Bonaparte 1803
When Napoleon issued his famous quote early in the nineteenth century, China’s sovereignty was under attack from imperialist interests and its internal politics were wracked by strife and discord. It was in no condition to fend off rapacious foreigners from many different lands; and two ruinous Opium Wars fomented by Western Powers lay ahead.
It would be over one hundred years before stable government returned to China. The proverbial “Mandate of Heaven” was outside of anyone’s grasp, the people were restless, and anarchy dominated the scene. The final Imperial Dynasty, the Qing, expired with a whimper amid an internal rebellion just after the turn of the 20th Century
For those who have not studied Chinese history, the “Mandate of Heaven” is an ancient Chinese philosophical concept, which originated during the Zhou Dynasty (1046-256 BC). The Mandate determines whether a particular Emperor of China is sufficiently virtuous enough to rule.
There are four constituents of the Mandate:
1) Heaven grants the Emperor the right to rule,
2) Since there is only one Heaven, there can only be one Emperor at any given time
3) The Emperor’s virtue determines his right to rule, and,
4) No one dynasty has a permanent right to rule.
If the Emperor does not fulfill his obligations to the people and country, then he loses the Mandate and thus the right to be Emperor. Suffice it to say that once the Mandate had been lost at various times through history, the ensuing transfers of power have not typically been achieved by counting mail-in ballots.
Since 1949, the Communist Party has held sway in China. A small succession of totalitarian leaders has propelled China’s people and economy into the 21st century. Cities have been modernized, Mass transportation systems and highways have been constructed, a new middle class of income earners is on the rise, Chinese companies are spanning the globe in search of growth opportunities, China’s achievements were showcased in the 2008 Olympics and it is assuming a larger role in international affairs with the establishment of the BRICS Bank, recent trade negotiations and the imminent admission by the IMF of the Chinese currency into the SDR (Special Drawing Rights) Basket. Not yet mentioned but of supreme importance is the requirement in recent years that the Chinese economy accommodate in the region of 20 million new entrants to the Labor Force every year in order to stabilize domestic Labor Market conditions. This too has so far been achieved.
China has thus skilfully transformed financial surpluses that are the result of attaining the economic growth and other targets that are embedded into its Five Year Plans into a vastly extended reach and influence in the world and hugely improved standards of living for its population.
These developments have not been merely a “nice to have”. They have been essential to China’s continued progress and maintenance of the Mandate of Heaven by the Party and the General Secretary. Maintaining the myth of predictable and sure Central Government control over the economy has been a central plank of the Chinese Communist Party’s playbook for 70 years
What is also clear however, is that the recent debacle with the Chinese stock market has underlined just how seriously the leadership and Party view the need to maintain economic growth and to what lengths they are will to go in order to keep themselves in power. This is why since this past June the Chinese regime has launched a myriad of desperate support measures in a vain attempt to keep Chinese stock prices on a stable to upward path. These initiatives include:
Surprise interest rate cuts
Lowering of the reserves banks need to keep when they lend to companies
Incentives for pension funds to invest in equities
A relaxation of margin financing rules
Direct central bank support for SOE’s to invest in the stock market
Establishment and funding of a central fund to invest in equities
Restrictions on selling stocks
Forced Postponement of IPOs
Return of investor’s capital by Stock market companies
Large SOE’s including China Development Bank and Ex-Im Bank announcing that they will only buy, and not sell, equities
Snap “investigations” of share “dumping”
Surprise currency devaluationa
Despite these heroic efforts the the Party and its Leadership have not yet stemmed the rout. Some respected commentators are calling for another 20-30% downside.
Therefore far from being infallible and remaining worthy of the Mandate of Heaven, the Chinese regime appears to have lost control over key economic variables. Stock prices are continuing to shrink despite the heavy intervention, the currency is going down and economic growth has faltered. What this might exactly mean for the ability of the Labor Market to continue absorbing new entrants is not yet quite clear but the early prognosis is not good. The credibility of the Leadership is in question.
Quo Pei's creations reflect the gauche opulence of his native Chinese clientele
The backdrop to all of this has been decades of decadence and corruption by the Party faithful. While a tendency towards kleptocracy is common to all Communist political structures, in recent years this behavior has gone into over-drive in China. Mr Xi’s appeal to the elites to limit their business entertaining to “Three plates and bowl of soup” at the outset of his regime change was at best a half-hearted attempt to modify greedy behavior by Party apparatchiks and their minions. Now these same folks are scrambling to leave the country with their bags of swag.
Does the stock market melt-down reflect the wrath of God or does it represent the reaction of an ignorant and mis-guided investor class to a grotesque mis-pricing ?
Is this the long awaited awakening of the sleeping Giant?
Either way, the world looks set to tremble.
May 25th, 2015 Alex Jurshevski
Readers of this blog know that from the very beginning of the Sovereign debt crisis Recovery Partners has been a skeptic regarding the strategies and contrivances that have been employed to keep the various zombie borrowers afloat by the Troika (recently rebranded as IFKAT – i.e. Institutions Formerly Known As “the Troika”). Last week we were treated to a spat between the IMF and the EU (read Germany) over the conditions Greece needs to comply with in order for it to receive a €7.2 billion tranche of financing that had been earmarked to pay government salaries, pensions and, guess who else? Yes, the good old IMF
According to an unnamed Greek official: “The result is that the institutions have red lines everywhere: pension, labour (IMF), and primary surplus (EC). Against this background there cannot be a compromise. The responsibility belongs exclusively to the institutions and their weakness in coordinating”. Furthermore the same official said that the IMF also wants the Greek debt load to be made bearable through a further haircut of the amount presently owed by Greece. The “Bad Cop” European Commission is against such debt relief, the official said. The Greek official also added that the IMF was being insistent on certain pension and labour reforms that Athens opposes, while the European Commission was taking a more relaxed view in this area. Further complicating the whole mess were the conflicting stances of the EU versus the IMF on the question of targets for the primary budget surplus which also now place the two creditors at loggerheads.
Amidst all of the confusion and to cloud the issue even further, fissures within the Government Party Syriza appeared in bold relief yesterday when the Central Committee of the Party put to a vote the question of whether to continue the negotiations at all. In that exercise 90 Syriza Party members voted “Yea” as opposed to a not insubstantial minority vote of 70 “Nays”.
Against that backdrop, an op-ed piece penned by Finance Minister Varoufakis appeared in newspapers and on the web today suggesting that Greece’s creditors and have it all wrong when they say that Greece isn’t fully committed to reform and not serious in its intentions to resolve the mess in a mutually agreeable way.
Without naming names, while this suggests that some of the folks involved in this process must clearly be divorced from reality, it is also the case that a failure to acknowledge objective facts has been a hallmark of the Greek association with the Euro-zone from the very beginning.
Both before and after the announcement of the first set of bailout arrangements about five years ago, Recovery Partners met with IMF officials and others in Washington to discuss the proposed arrangements on several occasions.
Alex Jurshevski Goes to Washington
As those who know us are aware, we have from the beginning of this debacle questioned how a debt “restructuring” that involved plying the debtor with more loans against the background of forced “austerity” policies could ever hope to resolve itself successfully. If the plan were ever to have worked, it would have been a world first.
The bottom line, in our opinion, is that this effort was stillborn from the outset.
Compounding the problem is that it appears the not one of the parties to this debacle has properly conceived of a “Plan B”, or if they have, until now they have not been willing to share their proposed fail-safe arrangements with the other folks at the table.
Another way of saying what we describe the current predicament to be, is to observe that each of the Principals has now been backed into a corner. And if those parties are now unwilling to take a hard look at changing their adopted negotiating frameworks, their methodologies, and their objectives; then the odds of this situation now coming to an orderly resolution have become almost non-existent.
March 23rd, 2015 Alex Jurshevski
(*…..and the fine print says: “Just send $500 and your bank account details to the following email address: email@example.com so that we can process your claim.”)
How many of us can say that we’ve never been lured in this manner?
Fraud: An act whereby an individual or group of individuals by deceit, falsehood or other fraudulent means, defrauds the public or any person or business, of any property, money, valuable security, or service. Fraud includes such acts committed against a business by employees or others. Direct theft where no deceit is involved is not considered fraud.
March 2015 marks the tenth anniversary of Fraud Prevention Month in Canada With its theme, “Fraud: Recognize it. Report it. Stop it,”. According to these organisations this year’s campaign will focus on the importance of recognizing, preventing and reporting fraud. Also note that the Financial Consumer Agency of Canada (FCAC) is joining the Competition Bureau and a number of other organizations to raise awareness about fraud and the growing presence of online scams.
And now Canadians can join the conversation and share their fraud experiences on Twitter using the #2G2BT hashtag, and throughout the month, Canadians can also follow @FCACan on Twitter for FCAC’s Tweet of the Day—a series of tips on how to protect against fraud.
FCAC will also begin its advertising campaign on Consumer’s rights and responsibilities; this campaign will include tip clips on various financial topics, including fraud.
This year’s campaign is quite timely, coming as it does on the heels of revelations by the RCMP that allege the top leaders of the Ontario Provincial Police Force’s union set up a network of schemes involving secretly owned companies and offshore investments intended to defraud union members who had invested in the pension plan.
Acting union president Doug Lewis confirmed through a union spokesman recently that the OPPA board voted to dismiss chief administrative officer Karl Walsh, but the spokesman would not provide further details.
Stealing pension money?
Clearly there is no honor among thieves.
With the advent and proliferation of the Internet and related enabling technologies the number of different types of fraud has virtually exploded in the last 20 years making it very difficult for potential victims and the law enforcement authorities to keep up with the criminals.
The schemes include:
- Advance fee schemes
- Asset misappropriation
- Banking and Online account scams including Worthless deposits
- Bogus Prescription Drugs
- Chain letters and pyramid schemes
- Counterfeit money
- Charity and Not-for-Profit Scams
- Dating and Romance Scams
- Fake Accident Ploys
- False billing
- Financial misrepresentation:
- Fraudulent Anti-aging Products
- Fraudulent use of cheques:
- Fraudulent use of credit cards and bank/debit cards
- Funeral and Cemetery Scams
- Health-Care and Medical Insurance Scams
- Insurance claim fraud
- Identity Theft scams
- Investment Scams
- Job and Employment Scams
- Lottery and Game scams
- Mobile phone Scams
- Money Transfer Scams
- Mortgage fraud
- Online scams
- Personalised Scams
- Return fraud:
- Telemarketing Scams…….
The list above is far from comprehensive and complete……..because there are new ways to separate honest people from their hard earned dollars being invented all the time.……..and with an aging population and new technologies being introduced that many senior citizens are unfamiliar with, it is no surprise that a key demographic targeted by fraudsters is the seniors’ age bracket. To borrow a phrase from the inimitable bank robber, Willie Sutton, seniors are targeted because “That is where the money is”. On top of the money angle, it is also a known fact that as people age they tend to become more credulous and are therefore more easily taken in by the sharks.
According to a recent AARP study in the United States, the average age of the typical mark is around 69. And, according to a 2010 survey by the Investor Protection Trust, a financial-education organization one in every five Americans age 65 or older has been abused financially,
With that being the case one would expect a large volume of fraud related prosecutions being pursued by law enforcement authorities.
Unfortunately that is not the situation at all.
Along with rape, fraud is probably one of the most under-reported crimes today. Victims are in many cases ashamed to come forward. And when they an elderly victim does report the crime, they often make poor witnesses. Con artists know the effects of age on memory, and they are counting on elderly victims not being able to supply enough detailed information to investigators. In addition, the victims’ realization that they have been swindled may take weeks—or more likely, months—after contact with the fraudster. This extended time frame makes it even more difficult to remember details from the events. Finally, elderly victims may not report crimes, because they are concerned that relatives may think that the victims no longer have the mental capacity to take care of their own financial affairs. This fear of losing their independence is what prevents them from acting in their own best interests.
However, the same study that was referenced above showed that it’s not always strangers who perpetrate these crimes. Over 90% of all reported financial abuse of the aged is committed by an older person’s own family members, most often their adult children, followed by grandchildren, nieces and nephews, and others.
Whether family or stranger the other fact is that it is very difficult to prove fraud in most situations. This makes police and other law enforcement agencies typically reluctant to take on suspected fraudsters unless:
- There is a clear documented evidence trail
- There are reliable witnesses that can speak to the evidence
- The amount of the fraud is large and justifies the use of public money to prosecute the suspected criminals (Typically the Feds will not look at any case where the amount of criminal proceeds is less than $100,000)
Similar to the findings for incidences of fraud by age group, Industry-based research for Canada also shows that fraud, like many crimes, is under-reported by businesses as well as individuals. Recent surveys, particularly for businesses in the retail and insurance industries lend support to this contention. While it was the case for 4% of banking establishments, nearly half of retail and insurance establishments (regardless of whether or not they had experienced fraud in the previous 12-month fiscal period), said that in general, they never or only rarely notify law enforcement in cases of fraud. Therefore, official police-reported statistics likely under-estimate criminal frauds against these types of businesses.
There may be a variety of reasons businesses choose not to report fraud to police. For example, they may fear jeopardizing their reputation; they may feel that reporting fraud will require too many resources relative to the size of the loss; or they may accept the occasional fraud as simply part of doing business. As well, businesses may deal with fraud through other means, such as relying on internal or private investigators to investigate fraud, or reporting fraud to authorities other than law enforcement (These agencies include, PhoneBusters, Better Business Bureau, Competition Bureau, Investigative Services of the Insurance Bureau of Canada, FINTRAC (Financial Transactions and Reports Analysis Centre of Canada), and the Royal Canadian Mounted Police’s RECOL (Reporting Economic Crime On-Line)).
Recovery Partners typically encounters several frauds each year in the normal course of its business dealings with distressed and under-performing companies.
If you suspect illicit activities are affecting your business or just want an opinion on whether or not your business is sufficiently “fraud-proof” please do not hesitate to give us a call.
January 29th, 2015 Alex Jurshevski
“We owe a rooster to Asclepius. Please, don’t forget to pay the debt.”
Socrates on his deathbed speaking to Crito (Asclepius was the Greek god for curing illness)
The quote above is reportedly a record of Socrates’ last words before dying and are generally interpreted to mean that death is a cure and a means to freedom.
(Does this finally signal the “end of the EU as we know it”?)
The Greeks have a new Government which has wasted no time in moving to fulfil its election pledge to roll back the painful Austerity Programs that have crippled the Greek economy.
During the election period, the new Prime Minister, Alexis Tsirpas stood accused of being a dilettante, a narcissist and an economic lightweight by his political rivals. In fact last week, the deputy premier and socialist leader, Evangelos Venizelos, likened him to Harry Potter for making promises that could only exist in the realm of fantasy.
To disagree, we would first argue argue (and the Greek electorate apparently sides with us on this) that a “Harry Potter” is exactly what Greece needs at the present time in order to counter the unholy and immoral alliance between the Voldemort-like Troika and the professional traders that have been feeding off of this situation like a nest of Death Eaters for over five years. It now appears that the party is over for this cast of reprobates. Secondly, as far as “fantasy” is concerned, it was only through some sort of insane suspension of disbelief that any rational financial manager could have regarded the Greek bailout structure and strategy as announced to have had even a sliver of a chance of succeeding.
To illustrate how predictable the collapse of the current set of bailout arrangements was one needs only look at this BNN interview segment filmed around the time of the Toronto G8 meetings in 2010. This was when the Austerity debate commenced in Europe and when we were asked if austerity policies were workable, Recovery Partners demonstrated that the record shows (1) that these policies have a very high abandonment and failure rate and (2) that therefore we did not view the probability of these policies providing a reliable path leading out of the mess as being very high. (One of the statistics we quoted was that to that point in time there had only been two examples of Austerity policies actually showing positive results out of the more that 140 previous attempts.) Two short months later we were again interviewed as the crisis continued on the boil. In that segment we cautioned that the “Extend and Pretend” policies as were being proposed would only drag out the process, add to the financial exposure, increase the risk of new problems in Europe and elsewhere and solve nothing.
……And here we are four years later with nothing solved and in the case of Greece a debt mountain roughly twice as big as it was BEFORE the Troika appeared on the scene to “solve” the problem.
Hence it is not surprising that the mandate Prime Minister Tsirpas has gained on the back of his pledge to roll back the austerity programs that have plunged Greece and her people into a hellish economic decline is most certainly rattling nerves up and down the length and breadth of “Festung Europa” (Fortress Europe) .
With acknowledgement to Terry Mosher (Aislin) for his unforgettable 1976 Cartoon
As well, what we have been saying for the past four years is that the policies of Austerity and Financial Repression would combine to increase the probability of a more severe Crash or sequence of Crashes occurring in the not too distant future. Our view here was based in part on the fact that far from de-risking the debt profile of the most profligate borrowing countries – the so-called PIIGS – what this debt management strategy mandated was that the debt of these countries be increased to accommodate so-called “bailout packages”. In the case of the Greeks, this saw their debt load climb to 175% of GDP.
[How this might reconcile or became logically explainable in the context of the upper limit of Debt to GDP of 60% that was mandated by the European Stability Pact for EU member nations was ignored. The latter legal provision has since been conveniently forgotten and the average Debt to GDP ratio across the entire Eurozone today stands at almost 100%.]
In order to make the whole financial concoction mathematically sustainable from a financing standpoint (at least in the very short term) Euro bond interest rates were forced down by manipulating repo markets, over-trading the central banks’ books and bending securities lending regulations and laws.
Everyone knows of course that historically creditors have borne the burden of bad lending decisions and that a “restructuring” typically involves bringing the debt burden into line with a borrowers’ debt servicing capacity. Not so here. Since 2008 Powerful Creditor interests have exerted pressure with such effect that the entire structure of the bailouts for Greece and others contravened and violated almost every covenant and principle of sovereign debt restructuring that had been accumulated and been passed into a workable “manual” for dealing with these difficulties since the 1950’s. This was done in order to arrive at an extremely creditor friendly (to say the least) set of solutions that, in the case of Greece, saw the entire burden of the restructuring hung around the necks of the Greek taxpayers.
Now that the structure is all-too predictably at risk of completely falling apart we have some of the same characters or their shills in the Mainstream Media proposing that the Greek National assets be assigned to creditors in exchange for haircuts on the outstanding Greek Bailout Bonds.
Why on Earth, we ask, should the Greeks agree to exchange their sovereign assets for paper that was worthless on the day it was issued? In the normal course the issuance of the additional Greek Euro bonds that brought the total indebtedness up to 175% would never have been undertaken:
- We have already noted that the bailout package is in contravention of key provisions of the European Stability Pact
- Note that no Credit Risk underwriter would have regarded a Sovereign Debt-to-GDP ratio much above 80% as being at all sustainable from a ratings standpoint.
- Note that Sovereign debt is normally unsecured Debt carrying no pledge of or claim or lien on, real assets
- Note that in the entire history of Sovereign Debt Settlement following the collapse of the Treaty of Versailles that no Sovereign has ever had such a humiliating and unworkable resolution structure imposed on it.
- Note that it is only due to massive manipulation of interest rate markets (to the detriment of European Savers and those living on fixed incomes) that European interest rates have been artificially suppressed in order to allow for the pretense of sustainability of this set of policies
- The problem could have been nipped in the bud for a fraction of what this eventually will cost. (see comments about 5 paragraphs down from the graph)
It is now almost six years after the GFC , and far from being in a sustainable recovery following massive doses of stimulus and record low interest rates, the economies of the West appear more closely to be in a Depression. Similar to the Greek debacle, this epic fail also seems directly traceable to the manipulations and distortions caused by misguided Central Bank policies……. and these policies too appear to have been largely inspired and forced on the rest of us by the same Creditor Interests that gave us the Debt Crisis, the Bailouts and Financial Repression…….
PS: In the “Here’s our first bit of advice for Finance Minister Yanis Varoufakis Department” we say the following: Mr Minister, you should quickly move to severely restrict or outlaw “unauthorized” trading in the shares and bonds of Greek Banks and Financial Institutions. This is an essential precaution.
PSS: In the “You Cannot Make this up Department” Credit Ratings Agency S&P yesterday put Greece on Creditwatch for a possible downgrade
December 14th, 2014 Alex Jurshevski
Sometimes the passage of time sees little change in many things. Take the developed world economies for example. The cartoon below, (with acknowledgement to Tom Toles at the Washington Post) dates back four years and lampoons the fact that by 2010, a full two years on from the Global Financial Crisis (GFC), policymakers and central bankers had to that point failed to engineer a durable recovery despite numerous pronouncements, reassurances and prognostications from a variety of them declaring the recovery to be just around the corner.
And here we are four years later still waiting for a real recovery. If nothing else this point leads to two inescapable observations:
First, it appears the honor and deference that these high priests of finance are accorded stems less from a proven track record of verifiable success than to a rigged scorecard based on self-referential credentials. We submit that it is their pedigree and record of climbing the greasy pole in a civil service bureaucracy that is presently mistakenly taken as evidence of competency and success in managing the economy, rather than for what it really is, their political sensibilities and survival instincts combined with a good dose of luck.
Secondly, there has been persistent failure by these nabobs to generate the recovery that they have been touting despite the vast amounts of public funds that have been thrown at the problem through QE and otherwise. To date, the $9 Trillion of additional debt that the Obama administration has piled on to the US Balance sheet means that it has so far outspent ALL of the previous versions of itself dating back to George Washington. However this orgy of “stimulus” has not produced one identifiable shred of evidence that a durable recovery is in train or in fact, any durable evidence that this money was wisely spent at all.
Despite this, we are still being told by the various governments, their agencies and shills in the mainstream media that the US recovery is firmly on track and that moreover, the sliding price of oil will somehow produce a further “growth dividend“ in the near term.
Nothing could be further from the truth.
The plunge in oil prices is nothing more than confirmation that the policy response dating back to 2007/08 has completely failed and that the economies of North America, Europe and Japan are in a Depression. [A recession is defined as two or more quarters of negative growth. The most recent recession began in December 2007 and ended in June 2009. A Depression, on the other hand, is defined as a period of “unusually weak growth”. There is no finite time dimension for a Depression except that it is generally agreed to be longer than a recession]
No better corroboration of our assertion that the falling price of oil is sign of continuing economic weakness rather than something to cheer about, comes from the IEA (International Energy Agency) which has said that the weakness in oil markets is in part due to lower demand. In fact, the IEA, has warned of a “new chapter” for oil markets, which “could affect the social stability of some countries”.
Nonetheless, partisan apologists for the various government policymakers will quickly point to GDP growth numbers for certain European countries and both Canada and the US that seem to indicate that conditions in those economies have returned, or are returning, to normal. The official growth statistics show for example that Canada and the US have been growing in the 2-3% range for the past few years. They might also point out that in a Depression it is usual to see bread lines and witness large scale jobs riots and other forms of social dislocation, and that these scenes are not playing out.
To this we say: “Ignore the headlines. The truth lies in the fine print.”
The fact is that overt evidence of extreme hardship is being masked by vastly expanded entitlement programs, financial repression and other man-made phenomena. Recently, this blog has pointed out the shrinkage in the labor force as providing evidence that the North American economy is on anything but a stable growth track – for example, in the US there are now two million LESS employed workers than before the GFC.
This blog has also pointed out in the past that there are today vast numbers of businesses that survive only because, aided by the solvent of ultra-low interest rates, bankers have been induced by governments to turn a blind eye to obvious signs of illiquidity, insolvency and bankruptcy among their clients. Recovery Partners calculates that thousands of businesses in Canada and elsewhere are functionally bankrupt. This lowers job prospects and penalises well-run enterprises resulting in anemic growth.
Other evidence supporting our assertion includes the large numbers of unemployed or underemployed youth who are moving back to their parents’ homes or sleeping on friends’ sofas. It also appears that among this demographic there is a very disturbing trend towards growing numbers of such unfortunates who are now suffering from forms of depression and other mental illnesses. And at the same time that these needs for psychotherapy are increasing we find that state sector medical insurance schemes are turning away people in need and putting mental patients out onto the street in order to reduce pressures on government budgets – all in the name of optics.
In part, due to the lack of opportunities those folks whose unemployment benefits have run out are increasingly applying for, and qualifying for, disability benefits. In fact, the safety valve of disability has now resulted in double the number of recipients of this form of welfare relative to twenty years ago. In the US the numbers show that for some states the ratio of disability recipients to other members of the labor force runs as high as one in ten. Moreover we also understand that today more than 43 million Americans are in default or in arrears on their medical debt. [Note: defaulted medical debts are the #1 cause of personal bankruptcy in the US].
Finally, the use of food banks is skyrocketing – even among people with full time jobs, but who cannot make ends meet.
The bottom line is that a proper examination and statistically sound restatement of the growth numbers for Europe and North America derived by corroborating this and other anecdotal evidence with hard statistics would very likely show that real growth in those economies has not kept up with population growth at all. Obviously this means that the pie has shrunk and the central planners and world improvers in those places have made a mess of things.
Hence our view that we are in a Depression.
When the GFC occurred, and shortly thereafter, as the shape of the policy response to this disruption began to emerge, Recovery Partners was clear in stating that QE and similar policies could never jump start a recovery and that the financial repression that was mandated by the authorities to “support” the QE effort would retard growth and distort market signals thereby introducing additional, and larger, risks to the economy. So far it looks like we were correct in making that call.
No obvious exit from this malaise is in sight particularly given the fact that the same cast of characters that got us into this mess in the first place is still in charge of policy.
The only thing that stands ahead of us is the reckoning that must surely follow.
Happy Holidays and All the Best for 2015.
May 5th, 2014 Alex Jurshevski
“By its very nature, a government decree that “it be” cannot create anything that has not been created before. Only the naive inflationists could believe that government can create anything; its orders cannot even evict anything from the world of reality, but they can evict from the world of the permissible. Government cannot make man richer, but it can make man poorer.”
Ludwig von Mises, A Critique of Interventionism (1929)
Long suffering fans of the Toronto Maple Leafs are used to disappointment. For the past 47 years, year in and year out, the fans’ early season cup hopes burn oh so brightly; only to give way to disappointment, despair and finally dejection as the NHL season finally draws to close and the Leafs find themselves yet again out of play-off contention entirely or dispatched to the golf course after an early round loss.
And so it seems is the case in the last half decade with the academics, media cheerleaders and other shills for the G7+ (G7 plus China) Finance Ministry and central bank intelligentsia who have to date been eagerly predicting that their funny money policies and market manipulations would combine to produce a robust recovery from the 2008 recession funk.
Early last week, the mainstream media blared variously “Better Times ahead for Canada, US”; and “Recovery Gathering Steam” and similar tripe only to be once again disappointed by week’s end with the release of the US Non-Farm Payroll report. It must be said that the media did try to put as good a spin on the numbers as possible. In fact, the report of a gain of 288K jobs for the month of April and a drop in the unemployment rate to 6.3% on the surface did seem indicative of a strongly recovering economy south of the border; coming on the heels as it did, of average monthly increases of around 195K in non-farm payrolls over the past year.
Unfortunately, “the large print giveth and the small print taketh away”.
What most of the pundits failed to recognize and report to the folks on Main Street is that the drops in the unemployment rate have been an artifact of a collapsing Labor Force. The US participation rate is now the lowest it has been since 1978. Other worrying signs provided by last week’s releases showed an anemic 0.1 real growth rate for the first quarter of 2014, implying a continuation of weak productivity trends south of the border. This problem is also well entrenched in the Canadian economy – to an even greater extent. Also weak growth in average US wages was reported which flew in the face of the strong average monthly employment trend. This indicates that most of the job gains are occurring in low wage sectors signalling that we should not be expecting too much of a bounce in US consumption trends particularly in the durables and higher-priced goods sectors. Again, bad news for Canada.
Some observers argue that the drop in participation rates is nothing more than “a mid-cycle correction” as the US gears up for what they are calling “the second leg of the post-Lehman expansion”. What these folks are ignoring is that, at over 60 months, the very weak “non-recovery” we have had is already long in the tooth as measured against the average 58 month duration of previous post-World War II recoveries.
This is the part where we talk about the Roach Motel once again…….
A big part of the announced aim of QE was to entice economic agents (i.e you, me and the local pension fund) away from holding cash and into risk assets. This grossly misguided policy has now produced misleading signals in key asset markets for over 5 years. An entire generation of traders and market participants has been reared on nothing but misinformation and centrally-planned manipulation of stock, bond and real estate markets. As a consequence of these deliberate policies, the major economies of the world are plodding along at stall speed, while stock and real estate valuations are more geared to rather more lofty valuation benchmarks than they are to the soggy reality.
In fact, the chart below courtesy of Advisor Perspectives shows that US markets are red-lining and are now more vulnerable to a big dump due to these mis-alignments than they were just prior to he 2000 Tech Wreck or the 2008 Crash.
In this context the question we have to ask ourselves is: “just how resilient can these major economies be in the face of a fresh downturn?” This question comes into sharper focus when we consider the following: the fact that most rate structures are anchored at or near zero; the fact that major Central Bank Balance sheets have become grotesquely swollen with term assets; the fact that there are elevated levels of unemployment and under-employment plaguing Europe and other economies; the fact that there is a huge asset bubble in China; the fact that levels of public market debt in the major economies are now averaging over 100% of GDP; and finally, the fact that many countries, and most importantly the US, have not adequately addressed their structural deficit problems.
We think that everyone is going to find out…..
January 9th, 2014 Alex Jurshevski
“I can call spirits from the vasty deep.”
“Why, so can I, or so can any man; but will they come when you do call for them?”
King Henry the Fourth, Act 3 Scene 1; Shakespeare
Central Banking operations typically feature ongoing efforts to mask and obfuscate what the central bank may be up to (in reality) at any given point in time. In this respect they are not that different from your typical trader. With the assistance of various hangers-on and their friendly propagandists in the mainstream media, the Fed appears to have successfully implanted a number of memes into the psyche of the investing public and market participants. These truisms include the proposition that the taper can be pulled off with no ill effect (as evidenced by last month’s muted market reaction to the announcement of a reduction of $10 Billion per month of asset purchases).
In this context Fed officials must be feeling pretty smug so soon after the events last spring when Bernanke’s botched attempt to introduce markets to the idea that the QE Kool-Aid taps might be turned off, caused them to recoil and the Fed to hit the chicken switch in response to this initial frisson.
Since that time US Central bankers and their toadies in the media seem to have also successfully convinced markets that the massive money printing does not carry with it inflation risks, that interest rates can continue to remain artificially depressed without creating dangerous distortions affecting relative prices and market behavior, and that the Fed can steer the economy with precision and predictability.
The capper in this spectacle is the successful confirmation of Janet Yellen, until now the Chief Aider and Abetter of Bernanke – Money Printer Extraordinaire – as the next Chair of the Fed. She has never worked outside the Fed or Academia.
Our take on this is that the magical edifice upon which the current Ivory-Tower cabal in charge of policy at the Fed stands and is drawing its authority and power from, is in fact becoming unstable.
No better evidence of this observation is given by the confirmation vote for Yellen herself.
Yellen was confirmed by the smallest margin of any incoming Fed Chair in the 100 year history of the institution – 56 votes for, to 26 against.
To be sure, if the nomination rules had not been adulterated by Senate Democrats manoeuvering in collusion with the Obama Administration in advance of the confirmation proceedings, Yellen’s candidacy for Chair would have never even been put to a vote. In all previous confirmation hearings, a minimum of 60 supporters in the Senate was necessary for a formal vote of this kind to be held to its conclusion.
In addition, the reality is that Yellen (or anyone else) would never have gotten the job without a commitment on her part to continue to toe the party line and maintain the thrust of policy intact. Expect no material policy changes and therefore no end to QE as long as she is the incumbent Fed Chair. This was the price of her ascendance to the pulpit.
Therefore we reiterate what we have said in the past:
– QE operations are doing nothing nor can they do anything material to help the real economy. Since we made those claims, the Fed’s own economists have corroborated our contention. Many other prominent market commentators now also understand this and are beginning to speak up. The real reasons why QE is being implemented have never been disclosed by the Fed to the Market;
– QE operations and similarly aggressive policies in other countries have depleted the ability of policymakers to respond with similar force in the event of a new set of Black Swans, ie “they have shot their bolt”;
– Government finances are in much worse shape that at the time of the last crisis and it is hard to see how the same fiscal patches that were used between 2008 and 2010 could ever be applied again. See immediately above;
– Government and Corporate debt portfolios (particularly among the many zombies) are extremely vulnerable to an interest rate shock;
– Nothing has been done to remediate zombie bank and zombie corporate balance sheets and other structural economic problems. No durable solutions have been pursued or applied since the last crisis. In fact the SIFI** problem may now even more intractable as formerly large institutions have gotten even larger and more complex with the blessing of the US authorities. Beyond the US, these observations extend in various measures to Canada, Europe, the UK, Central Europe, Japan and China;
– The imposition of QE, ZIRP and the abandonment of tried-and-tested regulatory frameworks (the Prompt Corrective Action Law, Mark-to-Market Accounting, aggressive enforcement of fraud crimes and violations of SEC Rule 10B5-1 etc); in favor of new and untested regulatory regimes (e.g. Dodd Frank, the ESM, the new Banking regulatory framework in Europe) are heightening the probability of other Black Swan events befalling the markets
Of course, here we have not mentioned another by-product of ZIRP and QE: the existence and persistence of the chronically money-losing corporation and the ability of investment bankers to foist shares associated with such entities onto professional investors. For example, more than two thirds of US hi-tech IPOs in 2013 were companies that have never made a cent. The question is : how can irrational speculation not be a result of the funny money policy? We thought that we had left this behavior behind back in 2000.
As such, the lukewarm confirmation vote in favor of Yellen may be the proverbial canary in the coal mine as far as the remaining half-life of the current Fed policy stance is concerned. [Perhaps this voting result also indicates that there is a modicum of higher intelligence resident inside the Beltway after all.]
Unfortunately this fleeting flash of what alcoholics call “a moment of clarity”, may be a matter of “too little too late”
In the last several decades the Fed Chair has always been tested shortly after assuming the mantle of office.
Given the risks that have heretofore remained unmitigated, the failure to address the real issues, and the unwillingness to change course on policy; we may not have to wait too much longer long before we see Yellen no longer “Standing Tall” as the World’s Most Powerful Banker, as she is currently being portrayed. In this context, and assuming that the disintegration of support for the Fed’s unconventional and over-reaching policy formulation accelerates, we should expect her stature to revert to the mean and more closely resemble an Oompa-loompa scurrying about, vainly trying to fit a queen-size rubber sheet onto a king-size bed as one corner and then the next keeps popping off.
Watch this space.
* “Painting the screens” (or painting the tape) is an activity that professional traders engage in that features the provision of misleading or inaccurate information to the general market and to specific counterparties through sales chatter; published information, and the intentionally misleading and manipulative posting of market bids and or offers on trading monitors and systems with the intention of enticing gullible market participants to engage in a transaction or series of transactions that are guaranteed to have them lose money on the deal to the pro or allow the pro to get rid of unwanted exposures. P.S. It is illegal.
** SIFI: Stategically Important Financial Institution
August 29th, 2013 Alex Jurshevski
This just in from our Correspondent in the Nation’s Capital, David Hidson:
The current Democratic administration in Washington seems determined to embark on their next ill-advised intervention in a brutal civil war in the Middle East.
After two and a half years of fighting, over 100,000 deaths, a quarter of a million injured and nearly 2 million refugees, suddenly the tragic deaths of 300 people, apparently from sarin nerve agent, has produced a storm of “moral indignation” requiring that the Western nations launch a military attack on the Assad regime.
Whether or not the Assad regime carried out the attack, or al-Quaeda or some other group of rebels, is still in doubt. That said, the “moral indignation” is just a shimmering pile of moralistic humbug that lacks valid substance.
Back in the Cold War days, chemical weapons were classed as Weapons of Mass Destruction (WMDs) mainly because any country attacked with them could respond with another WMD, possibly nuclear. Chemical weapons were labelled the “poor man’s nuclear bomb” because they can be highly effective against unprotected populations, either military or civilian.
Chemical weapons were used extensively in the Iran-Iraq war in the 1980s by both sides and inflicted tens of thousands of casualties. The rest of the world did in fact “stand idly by” then because, quite simply, that was all that could be done.
Any military operation must have a clear objective in strategy and a detailed tactical plan for achieving that objective. The military requires solid decision making from the political leadership and an assurance of continued support during military action. Ask any military man or woman.
President Obama can supply none of these things. He is a feckless leader who has consistently shown his lack of understanding of the military and political situation. He has made threats that he has had no intention of following up on (“red lines”) and has supported, in Egypt most recently, the Muslim Brotherhood, which is devoted to establishing an Islamic tyranny. He has failed at each opportunity to even merely protest the persecution of Christians by Muslims in the Middle East and, if one recalls his now infamous Cairo University speech, he has demonstrated an appalling ignorance of history.
Leadership flows from force, power and strength, never from weakness. And “leading from behind” tells the rest of the world that weakness leads America.
Obama and his Administration have thus rendered American foreign policy in this part of the world nugatory.
Poking a stick in the eye of one contender in a fight between two warring thugs and then running away after a day or two, which is what this Administration appears to be gearing up for, will impress no-one, except of course, the President, who seems endlessly impressed with himself. Unfortunately we have no doubt that his sycophantic supporters in the liberal media will grovel in faux admiration.
To address just a few of the risks in this dangerous game: suppose that this attack does not deter the use of chemical weapons? What then? What if Hezbollah decides to attack Israel in revenge? What if some other baddies decide to give the Americans a bloody nose on home ground? What if Putin decides to test Obama’s mettle in some devious way using proxy assets – cyberattack on Corporate America anyone? The obvious conclusion is that these interventionist schemes proposed by Team Obama all carry with them the risk of extremely serious unintended consequences
Before appearing to backpedal yesterday, Prime Minister Cameron in Britain said recently that the response should be “legal and proportionate”, or words to that effect. Here again, we see a total lack of understanding of the mind-set of the people they are up against. They are fanatics who are willing to fight and die. Unless you are prepared to do all that is required and use overwhelming force to crush your opponent, your opponent will win.
Military force should never be used unless there is an absolute commitment to follow through to achieve a defined objective coupled with a credible exit strategy. This is not a board game of “Risk” or “Diplomacy”, the lives of our military are at stake; and it goes without saying that telling the enemy when you will go home before the shooting has even started is the height of foolishness.
America and the world deserve a better leadership than this.