Friday, July 3, 2015

Why Big Banks like TiSA

LEAKED: How the Biggest Banks Are Conspiring to Rip Up Financial Regulations around the World

by IWB · July 3, 2015

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

It’s almost impossible to keep anything secret these days – not even the core text of a hyper-secret trade deal, the Trade in Services Agreement (TiSA), which has spent the last two years taking shape behind the hermetically sealed doors of highly secure locations around the world.

According to the agreement’s provisional text, the document is supposed to remain confidential and concealed from public view for at least five years after being signed! But now, thanks to WikiLeaks, it has seeped to the surface.

The Really, Really Good Friends of Services

TiSA is arguably the most important – yet least well-known – of the new generation of global trade agreements. According to WikiLeaks, it “is the largest component of the United States’ strategic ‘trade’ treaty triumvirate,” which also includes the Trans Pacific Partnership (TPP) and the TransAtlantic Trade and Investment Pact (TTIP).

“Together, the three treaties form not only a new legal order shaped for transnational corporations, but a new economic ‘grand enclosure,’ which excludes China and all other BRICS countries” declared WikiLeaks publisher Julian Assange in a press statement. If allowed to take universal effect, this new enclosure system will impose on all our governments a rigid framework of international corporate law designed to exclusively protect the interests of corporations, relieving them of financial risk, and social and environmental responsibility.

Thanks to an innocuous-sounding provision called the Investor-State Dispute Settlement, every investment they make will effectively be backstopped by our governments (and by extension, you and me); it will be too-big-to-fail writ on an unimaginable scale.

Yet it is a system that is almost universally supported by our political leaders. In the case of TiSA, it involves more countries than TTIP and TPP combined: The United States and all 28 members of the European Union, Australia, Canada, Chile, Colombia, Costa Rica, Hong Kong, Iceland, Israel, Japan, Liechtenstein, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, South Korea, Switzerland, Taiwan and Turkey.

Together, these 52 nations form the charmingly named “Really Good Friends of Services” group, which represents almost 70% of all trade in services worldwide.

As WOLF STREET previously reported, one explicit goal of the TiSA negotiations is to overcome the exceptions in GATS that protect certain non-tariff trade barriers such as data protection. For example, the draft Financial Services Annex of TiSA, published by Wikileaks in June 2014, would allow financial institutions, such as banks, to transfer data freely, including personal data, from one country to another – in direct contravention of EU data protection laws.

But that is just the tip of the iceberg. According to the treaty’s Annex on Financial Services, we now know that TiSA would effectively strip signatory governments of all remaining ability to regulate the financial industry in the interest of depositors, small-time investors, or the public at large.

1. TiSA will restrict the ability of governments to limit systemic financial risks. TiSA’s sweeping market access rules conflict with commonsense financial regulations that apply equally to foreign and domestic firms. One of those rules means that any governments that seeks to place limits on the trading of derivative contracts — the largely unregulated weapons of mass financial destruction that helped trigger the 2007-08 Global Financial Crisis — could be dragged in front of corporate arbitration panels and forced to pay millions or billions in damages.

2. TiSA will force governments to “predict” all regulations that could at some point fall foul of TiSA. The leaked TISA text even prohibits policies that are “formally identical” for domestic and foreign firms if they inadvertently “modif[y] the conditions of competition” in favor of domestic firms:

For example, many governments require all banks to maintain a minimum amount of capital to guard against bank collapse. Even if the same minimum is required of domestic and foreign-owned banks alike, it could be construed as disproportionately impacting foreign-owned banks… This common financial protection could thus be challenged under TISA for “modifying the conditions of competition” in favor of domestic banks, despite governments’ prerogative to ensure the stability of foreign-owned banks operating in their territory.

3. TiSA will indefinitely bar new financial regulations that do not conform to deregulatory rules. Signatory governments will essentially agree not to apply new financial policy measures which in any way contradict the agreement’s emphasis on deregulatory measures.

4. TiSA will prohibit national governments from using capital controls to prevent or mitigate financial crises. As we are seeing in Greece right now, capital controls are terrible. But for a government facing the complete breakdown of the financial system, they serve as a last resort for restoring some semblance of order. Even the IMF, which urged countries to abandon capital controls in the Washington Consensus years of the 1990s, recently endorsed capital controls as a means of maintaining the stability of the financial system. But if TiSA is signed, the signatory governments will be prohibited from using them:

The leaked texts prohibit restrictions on financial inflows – used to prevent rapid currency appreciation, asset bubbles and other macroeconomic problems – and financial outflows, used to prevent sudden capital flight in times of crisis.

5. TiSA will require acceptance of financial products not yet invented. Despite the pivotal role that new, complex financial products played in the Financial Crisis, TISA would require governments to allow all new financial products and services, including ones not yet invented, to be sold within their territories.

6. TiSA will provide opportunities for financial firms to delay financial regulations. If signed, TISA will require governments to address financial firms’ criticism of a regulatory proposal when publishing a final version of the regulation. Even then, governments would be obliged to wait a “reasonable time” before allowing the new regulation to take effect. In the United States, such requirements have produced delays sometimes lasting years in the enactment of urgently needed financial and other safeguards. If the same process is applied across the globe, it would make it almost impossible for government to constrain the activities of the world’s largest banks.

What that would likely mean is that when (not if) a new global financial crisis takes place in the not-too-distant future, the banks will once again be on hand to lead efforts to clean up and rebuild with taxpayer money the very sector that they themselves have destroyed. Lather, rinse, repeat. Only this time, on an even grander scale. By Don Quijones, Raging Bull-Shit.

Global banking behemoth HSBC is not having a good 2015. Now, is it just in dire financial straits? Read…  Does HSBC Know Something Other Banks Don’t?



Global Geopolitics

A Geopolitical Looking Glass into the Real World Around You


IMF admits: we failed to realise the damage austerity would do to Greece

Posted by aurelius77 on July 3, 2015

The International Monetary Fund admitted it had failed to realise the damage austerity would do to Greece as the Washington-based organisation catalogued mistakes made during the bailout of the stricken eurozone country.

In an assessment of the rescue conducted jointly with the European Central Bank (ECB) and the European commission, the IMF said it had been forced to override its normal rules for providing financial assistance in order to put money into Greece.

Fund officials had severe doubts about whether Greece’s debt would be sustainable even after the first bailout was provided in May 2010 and only agreed to the plan because of fears of contagion.

While it succeeded in keeping Greece in the eurozone, the report admitted the bailout included notable failures.

“Market confidence was not restored, the banking system lost 30% of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment.”

In Athens, officials reacted with barely disguised glee to the report, saying it confirmed that the price exacted for the €110bn (£93bn) emergency package was too high for a country beset by massive debts, tax evasion and a large black economy.”

Under the weight of such measures – applied across the board and hitting the poorest hardest – the economy, they said, was always bound to dive into an economic death spiral.

“For too long they [troika officials] refused to accept that the programme was simply off-target by hiding behind our failure to implement structural reforms,” said one insider. “Now that reforms are being applied they’ve had to accept the bitter truth.”

The IMF said: “The Fund approved an exceptionally large loan to Greece under an stand-by agreement in May 2010 despite having considerable misgivings about Greece’s debt sustainability. The decision required the Fund to depart from its established rules on exceptional access. However, Greece came late to the Fund and the time available to negotiate the programme was short.”

Full article: IMF admits: we failed to realise the damage austerity would do to Greece (GAEB)

“On War footing” in Greece

Global Geopolitics

A Geopolitical Looking Glass into the Real World Around You


Greece crisis: Country on ‘war footing’ as banks days away from collapse

Posted by aurelius77 on July 3, 2015

The Greek finance minister has said the country is on ‘war footing’ as money runs so low at the banks that they would collapse within hours were they to open again on Tuesday.

“We are on a war footing in this country,” Yanis Varoufakis said.

“We are reliably informed that the cash reserves of the banks are down to €500 million,” said Constantine Michalos, head of the Hellenic Chambers of Commerce. Anybody who thinks they are going to open again on Tuesday is day-dreaming. The cash would not last an hour,” he said.

Meanwhile the limit on cash withdrawals from ATM machines has been reduced from €60 to €50. The official line is that €20 are running out, however some reports have said this is a sign of financial contagion. Petrol stations and small businesses have also reportedly stopped accepting credit cards.

Full article: Greece crisis: Country on ‘war footing’ as banks days away from collapse (The Telegraph)

As China goes, so goes . . .

Guess What Happened The Last Time The Chinese Stock Market Crashed Like This?

By Michael Snyder, on July 2nd, 2015

Question Button - Public DomainThe second largest stock market in the entire world is collapsing right in front of our eyes.  Since hitting a peak in June, the most important Chinese stock market index has plummeted by well over 20 percent, and more than 3 trillion dollars of “paper wealth” has been wiped out.  Of course the Shanghai Composite Index is still way above the level it was sitting at exactly one year ago, but what is so disturbing about this current crash is that it is so similar to what we witnessed just prior to the great financial crisis of 2008 in the United States.  From October 2006 to October 2007, the Shanghai Composite Index more than tripled in value.  It was the greatest stock market surge in Chinese history.  But after hitting a peak, it began to fall dramatically.  From October 2007 to October 2008, the Shanghai Composite Index absolutely crashed.  In the end, more than two-thirds of all wealth in the market was completely wiped out.  You can see all of this on a chart that you can find right here.  What makes this so important to U.S. investors is the fact that Chinese stocks started crashing well before U.S. stocks started crashing during the last financial crisis, and now it is happening again.  Is this yet another sign that a U.S. stock market crash is imminent?

Over the past several months, I have been trying to hammer home the comparisons between what we are experiencing right now and the lead up to the U.S. financial crisis in the second half of 2008.  Today, I want to share with you an excerpt from a New York Times article that was published in April 2008.  At that time, the Chinese stock market crash was already well underway, but U.S. stocks were still in great shape…

The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.

Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.

This sounds almost exactly like what is happening in China right now.  First we witnessed a ridiculous Chinese stock market bubble form, and now we are watching a nightmarish sell off take place.  This next excerpt is from a Reuters article that was just published…

Shanghai’s benchmark share index crashed below 4,000 points for the first time since April – a key support level that analysts said had been seen as a line in the sand that Beijing had to defend, below which more conservative investors would start ejecting from their leveraged positions, widening the rout.

Chinese markets, which had risen as much as 110 percent from November to a peak in June, have collapsed at an incredibly rapid pace in since June 12, losing more than 20 percent in jaw-dropping volatility as money surges in and out of the market.

That drop has wiped out nearly $3 trillion in market capitalization, more than the GDP of Brazil.

Did you catch that last part?

The amount of wealth that has been wiped out during this Chinese stock market crash is already greater than the entire yearly GDP of Brazil.

To me, that is absolutely incredible.

And now that the global financial system is more interconnected than ever, what goes on over in China has a greater impact on the rest of the globe than ever before.  Today, China has the largest economy on the planet on a purchasing power basis, and the Chinese stock market “is the second largest in the world in terms of market capitalization”

Just as in 1929, flighty retail investors make up the bulk of China’s stock market and, just as in 1929 in the U.S., they have heavily margined their accounts. The Financial Times puts the number of retail investors in the Chinese stock market at 80 to 90 percent of the total market. Retail investors, unlike sophisticated institutional investors, are prone to panic selling, which explains the wild intraday swings in the Shanghai Composite over the past week.

Last night, the Shanghai Composite broke a key technical support level, closing below 4,000 at 3,912.77. The index is now down 24 percent since it peaked earlier this month and has wiped out more than $2.4 trillion in value. China’s stock market is the second largest in the world in terms of market capitalization, with the U.S. ranking number one.

Making world markets even more worried about the situation in China, its regulators are showing a similar brand of leadership as Mario Draghi. After previously pledging to trim back risky margin lending, they have now done a complete flip flop and are permitting individual brokerage firms to avoid selling out accounts that miss margin calls by setting their own guidelines on the amount of collateral needed.

I know that a lot of Americans don’t really care about what happens over in Asia, but when the second largest stock market in the entire world crashes, it is a very big deal.

The great financial crisis of 2015 has now begun, and it is just going to get much, much worse.  On Thursday, Ron Paul declared that “the day of reckoning is at hand“, and I agree with him.

So what comes next?

The following is what Phoenix Capital Research is anticipating…

By the time it’s all over, I expect:

1)   Numerous emerging market countries to default and most emerging market stocks to lose 50% of their value.

2)   The Euro to break below parity before the Eurozone is broken up (eventually some new version of the Euro to be introduced and remain below parity with the US Dollar).

3)   Japan to have defaulted and very likely enter hyperinflation.

4)   US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P 500.

5)   Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.

I tend to agree with most of that. I don’t agree that the euro is going to go away, but I do agree that the eurozone is going to break up and be reconstituted in a new form eventually.  And yes, we are going to see tremendous inflation all over the world down the road, but I wouldn’t say that it is imminent in Japan or anywhere else.  But overall, I think that is a pretty good list.

EU’s Future—Maybe

The EU's Future in the Wake of the Greek Crisis

Arthur Goldhammer

July 2, 2015

This weekend may mark a turning point for Greece's debt crisis, but Europe's problems don't stop there. 

AP Photo/Daniel Ochoa de Olza

A man sells Greek and European Union flags during a rally organized by supporters of the YES vote for the upcoming referendum in front of the Greek Parliament in Athens, Tuesday, June 30, 2015. 

The endgame in the Greek crisis remains murky at this hour despite Alexis Tsipras’s apparent capitulation to the demands of Greece’s creditors: the so-called Troika or “Institutions” consisting of the International Monetary Fund (IMF), the European Commission (EC), and the European Central Bank (ECB). With surprise developments occurring daily if not hourly, it is difficult to stand back from what has transpired to date in order to assess the implications for the future of the European Union and the Eurozone. Still, the exercise is worth attempting. A number of depressing conclusions emerge.

No matter how the saga ends—whether in “Grexit” (Greek abandonment of the euro) and the self-imposed austerity that must inevitably follow, or in an agreement with the creditors to accept austerity on their terms, or in some intermediate and almost unimaginable limbo in which Greece remains in the Eurozone but without external financial support, which Tsipras’s alter ego seems to be calling for with his recommendation of a ‘no’ vote in Sunday’s referendum—the course of the negotiations, recounted here (in French and considerable detail) by the excellent Greek political scientist Gerassimos Moschonas, has demonstrated a remarkable combination of intransigence, incompetence, and insensitivity on both sides.

The Troika bears the lion’s share of responsibility for the bitter deadlock. It has clung tenaciously to the doctrine of “expansionary contraction” promoted by economist Alberto Alesina, despite research by the IMF itself suggesting that it seldom works. It has resisted the judgment of numerous economists, including former IMF head Dominique Strauss-Kahn, that too much of the burden of adjustment was imposed on Greece and too little on the creditor countries that profited from excessive lending and whose banks were bailed out in 2010 at the behest of Strauss-Kahn himself. It has pretended that Greece will some day pay back its debt, when this is merely a political fiction aimed at reassuring voters in creditor countries that they will not eventually have to pay what Greece can’t. As Daniel Davies puts it: “Everyone knows [Greece’s debt] is going to be restructured at some politically convenient time in the future; it simply can’t be paid back, and so it simply won’t be.” Finally, the Troika has attempted to micromanage the Greek economy from afar, placing too much emphasis on slashing salaries and benefits while paying too little attention to measures that would promote growth.

The Troika has compounded this economic obtuseness with a remarkable display of political insensitivity. To be sure, the Greek people elected the Syriza government in January with a contradictory mandate: voters told their government to remain in the Eurozone but to mount an all-out assault on the austerity policies imposed by institutions with the power to force Greece out. Yet at the first sign that Greek Prime Minister Alexis Tsipras was prepared to make the hard compromises necessary in any tough negotiation, German Finance Minister Wolfgang’s Schäuble oozed contempt: “The Greek government will certainly have difficulty explaining this to its voters.”

Obliging one’s adversary to commit political suicide by betraying all his electoral promises is not likely to elicit a productive response or blaze a path to agreement.

Germans should remember their history. The hyperinflation they often invoke as justification for their aversion to debt stemmed from a similar failure of magnanimity on the part of the more powerful parties in the negotiations over reparations after World War I. Small gestures of generosity on the part of “the Institutions” might have gone a long way to alleviate the mutual distrust that has poisoned these talks. Instead, the Troika chose to insist on further pension cuts on top of those already approved by previous Greek governments, refusing to spare even pensioners at the bottom end of the scale. IMF Chief Economist Oliver Blanchard observes, rightly, that pensions account for 16 percent of Greek GDP, implying that the Troika had no choice but to go where the money is, but the appearance of vindictiveness and indifference to the suffering of tens of thousands of people remained. Obliging one’s adversary to commit political suicide by betraying all his electoral promises is not likely to elicit a productive response or blaze a path to agreement.

On the Greek side, according to Euklides Tsakalotos, who replaced Finance Minister Yanis Varoufakis as head of the negotiating team, the intention was “deliberately to create uncertainty.” Previous governments, he insisted, had been too eager to declare that they would never abandon the euro, thus hamstringing their negotiators from the start. But if the Troika lacked magnanimity, Syriza lacked agility and finesse in pursuing this strategy of deliberate ambiguity, making concessions with one hand and provocative gestures with the other.

It was not just small cosmetic matters, such as the chilly reception accorded to Eurogroup Chief Jeroen Dijsselbloem when he flew to Athens immediately after the election. Greece entered the negotiations as the weaker party. Its best course would therefore have been to try to exploit differences within the Troika. Moschonas points to the desire of Jean-Claude Juncker, the new president of the Commission, to increase his own autonomy and therefore to part company with other players. Following the breakdown of negotiations, Michel Sapin, the French finance minister, has made numerous public statements at odds with those coming from Schäuble and German Chancellor Angela Merkel. Although it is difficult for anyone not privy to the details of the talks to know for sure, these expressions of disagreement suggest a less monolithic Troika than one finds in some accounts—differences that a more adroit Greek side might have exploited. In fairness, they may well have tried such an approach and failed. In any event, it became evident that hostility to Greece within the Eurogroup increased rather than diminished as the talks progressed.

The economist James Galbraith, who possesses far better information about the negotiations than I do, wrote yesterday that Europe’s “sheltered” leaders have failed to figure Tsipras out. That may be, but Tsipras certainly hasn’t made their task easy. On June 30 he submitted a letter to the Troika accepting, with certain amendments, the “staff level agreement” he had rejected just days before. Not only did he accept it, he went out of his way to say that “our amendments are concrete and they fully respect the robustness and credibility of the design of the overall program” (emphasis added). But the next day a very different Alexis Tsipras went on TV and bitterly denounced “the creditors’ blackmail,” describing his adversaries as “extreme conservative forces” and calling for a ‘no’ vote on Sunday’s referendum, whose purpose is ostensibly to accept or reject the “overall program” he had seemingly approved the day before. Such mercurial changes of tone and substance may be a deliberate feature of his negotiating style, intended to maximize the uncertainty whose tactical value Tsakalotos stressed, but they are hardly of a nature to inspire confidence in a situation where trust that the government will follow through on its commitments is the central issue.

What does this acrimonious history reveal about the current state of the EU? First, it has become increasingly apparent that a monetary union without a more robust political union will be hard put to avoid further clashes between the ill-defined central authorities in this confederation without a constitution, and member states uncertain of where the limits of their sovereignty lie. The Troika is not a formal institution. It is an ad hoc committee, torn by invisible internal force fields, which conceals underlying interests more than it represents them. Hence it gathers about itself accusations of the darkest conspiracies. It is alleged that its true mission is to promote neoliberal hegemony, to snuff out democratic expression, to prevent the emergence of leftist parties in Europe, or to destroy any country that steps out of line in order to keep a tight leash on the rest. Such allegations are made as if they required no substantiating evidence, and they cannot be refuted because the Troika’s essential business is to engage in the kinds of discussions that in a properly functioning polity would properly remain private. It is a technocratic rather than a democratic institution, but in certain ambiguous ways it is answerable to heads of state, to the European Parliament, and to the European Council. It is a hybrid beast, a disquieting chimera. This needs to be changed.

The current negotiations have also called attention to the unsavory politics of resentment created by European enlargement. Following the collapse of the Soviet Union, a number of former Eastern bloc states entered the EU. Many of these new member countries are poorer than the original core states and, indeed, poorer than Greece. A major obstacle to flexibility in handling the Greek debt has been the resistance of these relatively poor new members to anything they construe as special treatment of Greece. Yes, they say, there is suffering in Greece, but our pensioners live on even less. Hence there is a refusal of compassion and a revival of the very national jealousies and animosities that the EU was meant to contain. This must be combated.

Finally, the IMF has no business in Europe. It was Wolfgang Schäuble who pressed this point forcefully when the subject was first broached, but Chancellor Merkel insisted on the need for an institution with the staff and expertise necessary to oversee a distressed economy and to specify and enforce conditions on financial support. She got more than she bargained for. The IMF, and especially its European Department director Poul Thomsen, have proved to be the most rigid of the creditors. Europe is wealthy enough to repair its own house, if only it can muster the political will and social solidarity to do so, and it should not allow itself to be distracted by the interests of developing nations on the IMF board, whose resistance to special treatment for Greece is even stiffer than the resistance from within the EU.

The European Union is at present being sorely tested on several fronts. Its response to the refugee crisis has been so dismaying in its lack of solidarity and compassion that Italian Prime Minister Matteo Renzi told his colleagues at an EU summit that “if this is your idea of Europe, you can keep it.” Terror attacks in Paris and Copenhagen and an ISIS-style beheading in a suburb of Lyon have stirred anti-Muslim sentiment across the continent. Xenophobic parties stand high in the polls in several countries. In France the extreme right Front National has made the EU a target of predilection, taking the plight of Greece as an object lesson. What is being done to Greece, Marine Le Pen tells her acolytes, is also being done to you. She claims she will restore full sovereignty over France’s economy.

But French voters are no more eager than Greek voters to leave the EU. They just want a different EU, an EU more responsive to human needs and less preoccupied with accounting spreadsheets. Hence the failure of “the Institutions” to find a more creative response to the comprehensible and legitimate demand for something other than “expansionary austerity” poses a threat to the entire European project and its increasingly elusive promise of “ever closer union.”

Thursday, July 2, 2015

Little Puerto Rico Huge Threat

Why The Puerto Rico Debt Crisis Is Such A Huge Threat To The U.S. Financial System

By Michael Snyder, on July 1st, 2015

Puerto Rico Map On A Globe - Photo by TUBSThe debt crisis in Puerto Rico could potentially cost financial institutions in the United States tens of billions of dollars in losses.  This week, Puerto Rico Governor Alejandro Garcia Padilla publicly announced that Puerto Rico’s  73 billion dollar debt is “not payable,” and a special adviser that was recently appointed to help straighten out the island’s finances said that it is “insolvent” and will totally run out of cash very shortly.  At this point, Puerto Rico’s debt is approximately 15 times larger than the per capita median debt of the 50 U.S. states.  Yes, the Greek debt crisis is larger, as Greece currently owes about $350 billion to the rest of the planet.  But only about $14 billion of that total is owed to U.S. financial institutions.  But with Puerto Rico, things are very different.  Just about the entire 73 billion dollar debt is owed to U.S. financial institutions, and this could potentially cause massive problems for some extremely leveraged Wall Street firms.

There is a reason why Puerto Rico is called “America’s Greece”.  In Puerto Rico today, more than 40 percent of the population is living in poverty, the unemployment rate is over 12 percent, and the economy of the small island nation has continually been in recession since 2006.

Yet all this time Puerto Rico has continued to pile up even more debt.  Finally, it has gotten to the point where all of this debt is simply unpayable

Steven Rhodes, the retired U.S. bankruptcy judge who oversaw Detroit’s historic bankruptcy and has now been retained by Puerto Rico to help solve its problems, gave a blunt assessment on Monday.

Puerto Rico “urgently needs our help,” Rhodes said. “It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer,” he added.

This is why I hammer on the danger of U.S. government debt so often.  As we see with the examples of Greece and Puerto Rico, eventually a day of reckoning always arrives.  And when the day of reckoning arrives, power shifts into the hands of those that you owe the money too.

It would be hard to understate just how severe the debt crisis in Puerto Rico has become.  Former IMF economist Anne Krueger has gone so far as to say that it is “really dire”

The situation is dire, and I mean really dire,” said former IMF economist Anne Krueger, co-author of the report commissioned by the U.S. territory, which recommended debt restructuring, tax hikes and spending cuts. “The needed measures may face political resistance but failure to address the issues would affect even more the people of Puerto Rico.”

So who is going to get left holding the bag?

As I mentioned at the top of this article, major U.S. financial institutions are very heavily exposed.  Income from Puerto Rican bonds is exempt from state and federal taxation, and so that made them very attractive to many U.S. investors.  According to USA Today, there are 180 mutual funds that have “at least 5% of their portfolios in Puerto Rican bonds”…

The inability of the U.S. territory to repay its debt, combined with the financial crisis in Greece, would have far-reaching implications for financial markets and unsuspecting American investors. Morningstar, an investment research firm based in Chicago, estimated in 2013 that 180 mutual funds in the United States and elsewhere have at least 5% of their portfolios in Puerto Rican bonds.

It is important to keep in mind that many of these financial institutions are very highly leveraged.  So just a “couple of percentage points” could mean the different between life and death for some of these firms.

And unlike what is happening with Greece, the private financial institutions that hold Puerto Rican bonds are not likely to be very eager to “negotiate”.  In fact, the largest holder of Puerto Rican debt has already stated that it is very much against any kind of restructuring

U.S. fund manager OppenheimerFunds, the largest holder of Puerto Rico debt among U.S. municipal bond funds, warned the island it stands ready to defend the terms of bonds it holds, a day after the governor said he wanted to restructure debt and postpone bond payments.

What Oppenheimer is essentially saying is that it does not plan to give Puerto Rico any slack at all.  Here is more from the article that I just quoted above

OppenheimerFunds, with about $4.5 billion exposure to Puerto Rico according to Morningstar, said it believed the island could repay bondholders while providing essential services to citizens and growing the economy. It said it stood ready “to defend the previously agreed to terms in each and every bond indenture.”

“We are disheartened that Governor Padilla, in a public forum, has called for negotiations with other creditors, representing and including the millions of individual Americans that hold Puerto Rico municipal bonds,” a spokesman for Oppenheimer said in a statement.

But Puerto Rico simply does not have the money to meet all of their debt obligations.

So somebody is not going to get paid at some point.

When that happens, those that insure Puerto Rican bonds are also going to take tremendous losses.  The following comes from a recent piece by Stephen Flood

Now, bondholders are at risk as are the funds which hold Puerto Rican bonds and, more importantly, those who insure them in the derivatives market.

Dave Kranzler, from Investment Research Dynamics has warned that there are signs that the Puerto Rico situation may not remain a local crisis for much longer.

He points out that share prices of MBIA, the bond insurers, have been plummeting. MBIA are valued at $3.9 billion whereas their exposure to Puerto Rican debt is around $4.5 billion. Kranzler reckons their exposure could even be multiples of that figure. A default could wipe them out.

He also points out that the firm’s largest shareholders are Warburg Pincus, the firm to which Timothy Geithner went after his stint as Treasury Secretary, when he helped paper over the chasms opening up in the financial system.

Did you notice the word “derivatives” in that quote?

Hmmm – who has been writing endless articles warning about the danger of derivatives for years?

Who has been warning that “this gigantic time bomb is going to go off and absolutely cripple the entire global financial system“?

When Puerto Rico defaults, bond insurers are going to be expected to step up and make huge debt service payments to investors.

But this just might bankrupt some of these big bond insurers.  In fact, we have already started to see the stock prices of some of these bond insurers begin to plummet.  The following comes from the Wall Street Journal

Bond insurers MBIA Inc. and Ambac Financial Group Inc. are down again Tuesday as concerns over Puerto Rico’s ability to repay its debt multiply.

Investors fear that both firms face the potential for steep losses on their promises to backstop billions of Puerto Rico’s $72 billion of debt.

MBIA’s stock closed down 23% Monday, and fell more than 10% before rebounding Tuesday. By late afternoon, the stock was down 6%. Ambac’s stock fell 12% Monday and was off 14% Tuesday.

Of course Puerto Rico is just the tip of the iceberg of the coming debt crisis in the western hemisphere, just like Greece is just the tip of the iceberg of the coming debt crisis in Europe.

So stay tuned, because the second half of 2015 has now begun, and the remainder of this calendar year promises to be extremely “interesting”.

How Crisis Plays Out

Here’s How This New Crisis Will Play Out

by IWB · July 2, 2015

by Phoenix Capital Research

As I noted yesterday, the Fuse on the Global Debt Bomb has been lit. We are now officially in the Crisis to which the 2008 Meltdown was just the warm up.

The process will take time to unfold. The Tech Bubble, arguably the single biggest stock market bubble of all time, was both obvious to investors AND isolated to a single asset class: stocks. In spite of this, it took two years for stocks to finally bottom.

tech bubble.jpg

In contrast, the current Crisis that we are facing involves bonds… the bedrock of the financial system.

Every asset class in the world trades based on the pricing of bonds. So the fact that bonds are in a bubble (arguably the biggest bubble in financial history), means that EVERY asset class is in a bubble.

And what a bubble it is.

All told, globally there are $100 trillion in bonds in existence today.

A little over a third of this is in the US. About half comes from developed nations outside of the US. And finally, emerging markets make up the remaining 14%.

Over $100 trillion…the size of the bond bubble alone should be enough to give pause.

However, when you consider that these bonds are pledged as collateral for other securities (usually over-the-counter derivatives) the full impact of the bond bubble explodes higher to $555 TRILLION.

To put this into perspective, the Credit Default Swap  (CDS) market that nearly took down the financial system in 2008 was only a tenth of this ($50-$60 trillion).

What does all of this mean?

The $100 trillion bond bubble will implode. As it does, the financial system will begin to deleverage as debt is defaulted on or restructured (reducing the amount of US Dollars in the system, pushing the US Dollar higher).

By the time it’s all over, I expect:

1)   Numerous emerging market countries to default and most emerging market stocks to lose 50% of their value.

2)   The Euro to break below parity before the Eurozone is broken up (eventually some new version of the Euro to be introduced and remain below parity with the US Dollar).

3)   Japan to have defaulted and very likely enter hyperinflation.

4)   US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P 500.

5)   Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.

This process has already begun in Europe. It will be spreading elsewhere in the months to come. Smart investors are preparing now BEFORE it hits so they are in a position to profit from it, instead of getting slaughtered

Best Regards

Graham Summers

Phoenix Capital Research


The Great Destroyer

Global Geopolitics

A Geopolitical Looking Glass into the Real World Around You


Troika – The Great Destroyer

Posted by aurelius77 on July 2, 2015

You cannot achieve peace by means of oppression. It was often a common practice to kill the family of one’s political opponent for the offspring would rise to avenge their father’s murder The Troika are now afraid to compromise and place all the blame upon Greece. They truly despise the new government in Greece for they fear any conciliation will result in encouraging more left-wing political government who stand-up against austerity. They have the same goal as the US did in Russia – oppress the people to force they to overthrow their government. This made Putin stronger. The Troika run the same risk in Greece. Their plane to overthrow the Greek government may haunt them in the years ahead.

There is simply no resolution to the Euro Crisis for what info we are getting from behind the curtain shows a dangerous attitude akin to we do not negotiate with terrorists. The Troika views yielding to any opposition will lead to the demise of their Euro dream. This economic design is just unsupportable and we are going to see and very serious crack in the political system of Europe over the next four years.

Full article: Troika – The Great Destroyer (Armstrong Economics)

Wednesday, July 1, 2015

TVIX--first wave up in

When TVIX hit 10.50 yesterday that was the end of first wave up from bottom.  The drop to around 9.50 was wave a and the rise back to 10 was wave b.  This morning drop to around 8.58 is wave c, which is where wave iv of prior wave started.  All textbook stuff.  With VIX above 2 std deviations, we needed a big slide--we got it this morning.  Sell this morning's open.  GL 

Visit to see more great charts.

Just one of hundreds of special interest subsidies

Contra News and Views

Exim Bank Bites The Dust Today——Good Riddance To A Crony Capitalist Heist

by Forbes • June 30, 2015

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By Doug Bandow at Forbes

The Export-Import Bank dies tonight when its charter expires. After 81 years, what is commonly known as Boeing’s Bank is headed toward Washington’s trash bin.

When Congress returns it could revive Ex-Im, which primarily subsidizes big business exports. But a proper burial for what Barack Obama once called “corporate welfare” would save Americans money, reduce economic injustice, and promote economic growth.

The Bank was established in 1934 to promote trade with the Soviet Union, ExIm now is one of a score of federal agencies tasked with encouraging exports. The agency exists to borrow at government rates to provide credit at less than market rates for select exporters, mostly corporate behemoths.

ExIm claims to be friendly to small business, but cherchez the money: it goes to Big Business. According to Veronique de Rugy of the Mercatus Center, between 2007 and 2013 the Bank subsidized $66.7 billion in sales by Boeing. ExIm also underwrote $8.3 billion for General Electric, $5.2 billion for Bechtel, $4.9 billion for Caterpillar and its subsidiary Solar Turbine, $3.2 billion for CBI Americas, $3.0 for Exxon Mobil, $2.1 billion for Applied Materials, $2.0 billion for Westinghouse, and $1.4 billion for Noble Drilling. During that period Boeing enjoyed 35 percent, GE 4.4 percent, and Bechtel 2.7 percent of the Bank’s largesse.

In 2012, noted Timothy Carney of the Washington Examiner, the aircraft maker accounted for 83 percent of all loan guarantees. The following year just five firms collected 93 percent of the loan guarantees. Also in 2013 the top ten ExIm beneficiaries accounted for two-thirds of the Bank’s total activities: Boeing, General Electric, Bechtel, Applied Materials, Caterpillar, Space Systems/Loral, Komatsu America, Case New Holland, Ford, and Sikorsky Aircraft. Other frequent beneficiaries include Dow Chemical, John Deere, and Lockheed Martin.

Giants of the financial world, such as Citibank and JP Morgan Chase, also do well by the Bank. Loren Thompson of the Lexington Institute thought he was arguing in favor of ExIm when he observed: “Private lenders often don’t like the risk profile of countries seeking export assistance” and “want the kind of protections available to lenders who finance the exports of other countries.” Of course they do. But the U.S. government’s role is not to protect profit-making private firms from risks at home or abroad.

The Bank denies providing subsidies since it charges fees and interest and claims to make a “profit”—more than $1.6 billion since 2008. But if ExIm operated like a normal commercial bank there would be no need for it. Anyway, economists Jason Delisle and Christopher Papagianis explained that the Bank’s “profits are almost surely an accounting illusion” because “the government’s official accounting rules effectively force budget analysts to understate the cost of loan programs like those managed by the Ex-Im Bank.” Most important, there is no calculation for market risk. Including that would provide “a more comprehensive measure of federal costs” concluded the Congressional Budget Office.

Alas, politicians understandably hate accurate assessments of costs. Delisle and Papagianis estimate counting everything would make ExIm’s actual expense more than $200 million a year. CBO comes to a similar conclusion, figuring real losses over the coming decade likely to exceed $2 billion. However, this might be on the low side. Federal Reserve economist John H. Boyd also looked at the “opportunity cost, a payment to taxpayers for investing their funds in this agency rather than somewhere else.” He estimated that the Bank’s real cost averaged around $200 million annually in the late 1970s and rose to between $521 million and $653 million by 1980.

If the financial markets get ugly again—witness the ongoing global shock waves from le affaire Greece—taxpayers could get hit with a big default bill. Total outstanding credit is $110 billion, yet the agency’s own inspector general warned that Bank practices create the risk of “severe portfolio losses.”

The agency is supposed to create jobs by throwing cheap money at purchasers of American products. However, if business subsidies are the way to prosperity, why stop with exporters? More business handouts generally would mean more deals and jobs. Underwriting domestic producers would have the added advantage of keeping all the economic benefits at home. The higher the subsidy, the more jobs would be created. If government paid the entire bill, the benefits should be infinite.

Well, no.
First, the Bank backs only about two percent of U.S. exports. That’s not enough to redress the trade deficit, which Thompson cited as an argument for ExIm. The Bank simply doesn’t matter much in an $18 trillion economy.

Moreover, there is plenty of private money available for trade deals. A Goldman Sachs analysis last year predicted that the impact of a Bank closure “would be fairly limited given the robust financing environment at present.” Even Boeing CFO Kostya Zolotusky went off-message two years ago when he indicated his confidence that buyers would find “alternative funding sources” if the Bank closed. No doubt foreign buyers prefer that Uncle Sam bankroll American companies, but the U.S. was a major exporter before the Bank was created and will remain so long after the Bank is gone.

Indeed, subsidies do not correlate with exports. Overall commercial flows largely reflect macroeconomic factors and international competitiveness. My Cato Institute colleague Sallie James found that since 2000 “Germany and the United States, historically two of the smallest users of export credit programs, had the highest export growth in absolute terms out of the rich countries.” Reforming capital gains and corporate tax rates, and rationalizing regulation would do more to aid exporters. So would dropping economic sanctions which Washington uses so prolifically but often ineffectively against a host of nations.

Second, no one knows which deals are sealed only with ExIm funding. A host of factors affect any purchase decision, starting with price and quality. One study of aircraft sales, heavily subsidized by what has been called “Boeing’s Bank,” rated financing as only eighth out of twelve factors. Often purchasers would have bought anyway, but everyone in the process has an incentive to claim that ExIm assistance was vital.

Years ago Congress barred the Bank from participating in sales involving China’s environmentally-destructive Three Gorges Dam. ExIm President Martin Kamarck told corporate America not to worry: “This decision does not in any way limit or impede U.S. companies from doing business in the Three Gorges project on private terms and with financing from other sources. Already, several U.S. companies have sold between $60 million and $100 million worth of equipment and services to this project without ExIm Bank support.”

Third, even when a deal is sealed with federal backing, all that we know is that the buyer chose a subsidized American product over one or more alternatives—including unsubsidized American products. The Bank does not aid against foreign competition but against all competition, including other U.S. concerns. In that case the jobs gained by one company might be lost by another. Years ago CBO acknowledged that subsidies increased jobs in favored industries but only “at the expense of non-subsidized industries.”

Fourth, the Bank underwrites foreign companies which compete against U.S. concerns. ExIm isn’t supposed to make deals causing “substantial injury” to American companies, but the Bank polices itself. The most obvious problem comes from subsidies for direct rivals of U.S. concerns, almost always the case with Boeing aircraft sales, for instance.American miners objected to agency backing for an Australian iron mine. U.S. financial institutions which concentrate on international transactions, such as American International Group and DC Factoring, also compete with ExIm and private financial firms backed by the Bank.

That’s not all, however. Many U.S. companies effectively pay to subsidize a few exporters. My Cato Institute colleague Dan Ikenson estimated that the agency’s activities were equivalent to an annual tax of $2.8 billion on U.S. competitors of both domestic exporters and foreign consumers. He explained: “for nearly every ExIm financing authorization that might advance the fortunes of a single U.S. company, there is at least one U.S. industry—and often dozens or scores of industries—whose firms are adversely impacted because supply is being diverted, market power is being shifted, and the cost of capital is being lowered for their foreign competition.”

Fifth, if government subsidies really create jobs and wealth, it would be better to keep the money at home, underwriting American rather than foreign buyers. Then U.S. citizens would benefit on both sides of the commercial equation. As AEI economist Michael Strain testified on Capitol Hill, “even if the Congress chooses to offer financing to selected sectors to support employment, exports would not be high on the list of firms or industries to target.” Economists would recommend different beneficiaries.

Sixth, as Nobel Laureate Milton Friedman once observed, there ain’t no such thing as a free lunch. The government can’t create wealth ex nihilo. Unless the money being lent was a gift—perhaps from some oil-rich sheikh—it had to come from other Americans. If those resources didn’t go to ExIm’s lucky clients, they would have gone to someone else. Thus, the unsubsidized someone else produces and sells fewer goods and services, and creates fewer jobs. Moreover, explained de Rugy, “capital market distortions have ripple effects. Subsidized projects attract more private capital while other worthy projects are overlooked. The subsidized get richer while the unsubsidized get poorer—or go out of business.”

Moreover, increasing purchases of exporters’ products increases their demand for goods and services, raising the price to other American firms. Shifting resources to export firms also reduces domestic production, raising prices in those industries. As Strain testified, this puts companies in unsubsidized industries at a disadvantage.

The Bank’s most important flaw is that it redirects rather than creates economic activity. This is common sense as well as basic economics. For instance, the World Bank’s Heywood Fleisig and Catharine Hill warned that devoting scarce financial resources to export promotion cuts “domestic investment, consumption, or government expenditure.” Such subsidies only increase export-related employment “at the expense of employment elsewhere.” No one knows the exact trade-off, which likely varies depending on economic conditions. Years ago University of Arizona economist Herbert Kaufman figured that $1 billion in federal loan guarantees eliminated between $736 million and $1.32 billion in private financial activity.

Government economists have made the same point. Shayerah Ilias with the Congressional Research Service concluded that export subsidies perform “poorly as a jobs creation mechanism” because they don’t raise employment levels, but instead merely alter “the composition of employment among the various sectors of the economy.” The Government Accounting Office’s JayEtta Hecker similarly testified that “government export finance assistance programs may largely shift production among sectors within the economy rather than raise the overall level of employment in the economy.” Thus, ExIm claims of jobs created “may not represent net job gains.”

Is there any other argument for ExIm? The expansion of global capital markets puts the lie to the contention that there is a “market failure” in providing export financing. The mere fact someone somewhere said no to a deal is not a “market failure.” Most international commerce is privately financed. The Bank’s foreign clients are mostly prosperous participants in the global marketplace with many other potential sources of funds.

The best argument for ExIm is that there are 59 foreign credit subsidy agencies like the Bank, though most are smaller. But “everyone else does it” never is a good reason to do something stupid. Foreign subsidies play only a small role in global commerce. As noted earlier, just two percent of export transactions are backed by the Bank. Of those, between 2002 and 2010 ExIm tagged less than 40 percent as necessary to “meet competition.” That number certainly is too high, since the seller and Bank both want to justify more subsidized-credit. Against any lost business from foreign subsidies must be balanced the lost business of companies harmed by ExIm’s activities.

Proving that Samuel Johnson was correct when he said patriotism was the last refuge of the scoundrel, a gaggle of former national security officials called the Bank a “critical element” of U.S. security. The Senate’s advocates of constant war, John McCain and Lindsey Graham, also back ExIm as a tool of American foreign policy. Retired Gen. James Jones warned that killing the Bank would result in “a less stable and secure world.” David Petraeus, one-time military commander and CIA director, and Michael O’Hanlon of the Brookings Institution, contended that the Bank strengthens America’s declining manufacturing base, which is critical for the nation’s international position. Conservative blogger and radio commentator Hugh Hewitt called the Bank “Soft power at its best.”

But the interests of particular exporters are not the same as of all Americans. The U.S. economy, not a federal agency, is real soft power. And the economy is not strengthened by allowing politicians to redirect resources for political reasons. Ikenson warned Congress that ExIm penalizes newer, more dynamic firms in a process that “undermines the strength of the U.S. economy, which is crucial to reaching U.S. security and foreign policy goals going forward.”

Thompson complained that even with the Bank the U.S. was losing ground economically to China, yet last year, noted Carney, the biggest recipient of ExIm largesse wasChina, America’s most important geopolitical competitor! Russia, with whom the U.S. is involved in a bitter confrontation over Ukraine, was number five. Some of the foreign firms benefited have exported arms and nuclear technology, contrary to U.S. policy. The Bank even subsidies the foreign export agencies used to justify the agency’s existence. Explained Carney: “The largest foreign companies and banks all get subsidies from U.S. ExIm, and China’s ExIm gets direct subsidies from U.S. ExIm.” If Washington believes it has a geopolitical reason to underwrite a foreign government, it should do so directly, through Defense, State, or U.S. AID, rather than pretend the deal is a commercial transaction.

Nor does the Bank promote Third World development. In the energy field, for instance, Americans have subsidized Brazil’s Petrobras, Mexico’s Pemex, and even Russia’s Gazprom. Alas, explained James: “When the Bank finances public-sector borrowers, it delays privatization and other free-market reforms that would aid economic development.” De Rugy noted that ExIm also has inflated the debts of half of the countries listed as Heavily Indebted Poor Countries by the World Bank and IMF.

Finally, export subsidies have a more basic, debilitating political effect: encouraging more companies to engage in what economists call “rent-seeking,” using government to extract rather than create wealth. Complained Chris Rufer, founder of The Morning Star Co.: “I have observed too many of my fellow business leaders blatantly work with the government to increase their profits at taxpayer expense.” The Chamber of Commerce and National Association of Manufacturers launched major lobbying campaigns for what can rightly be described as corporate welfare. The U.S. has sacrificed its republican roots for spoiled corporatist fruit.

Should the U.S. help American exporters? Absolutely. Encourage free trade. Roll back economic sanctions. Adopt responsible budget policies. Lower and simplify the corporate income tax. Cut regulations on business. Stop subsidizing the defense of prosperous trade competitors. But don’t turn the U.S. Treasury into a source of corporate welfare.

ExIm’s closure is a very rare victory for the good guys in Washington. Crony capitalism is running rampant in America, undermining confidence in a market economy. As usual, the capitalists are proving to be the greatest enemies of capitalism, with many businesses trekking to Washington seeking handouts. Although the Bank’s Lazarus-like return can’t be ruled out, tomorrow Boeing and the rest of America’s corporate elite will enjoy one less special privilege at everyone else’s expense. One down. Hundreds more special interest subsidies to go.

Source: Export-Import Bank Closes: Kill Subsidies To Cut Federal Liabilities, Promote Economic Fairness

Tuesday, June 30, 2015

When Bankers and Politician Screw up

What happens when politicians and central bankers screw up?

Just listen to Kleanthis Tsironis, the owner of a butcher shop in Athens. He's been running his business for 51 years and has 27 employees.

But as he recently told the Associated Press, profits have dropped 70% in the wake of the financial crisis and:

“I have no cash to pay for meat supplies for next week because of the capital controls. Sooner or later, probably in this month, I'll have to let 10 people go. The people are buying with cash, not credit cards, and the problem is the customers don't have cash."

"I'm very afraid that I will go to prison for debts. I'm 65 and I can't pay the bills."

Greek Default Inevitable

Global Geopolitics

A Geopolitical Looking Glass into the Real World Around You


Greek debt default is now inevitable, government officials say prepare now for systemic collapse

Posted by aurelius77 on June 30, 2015

(NaturalNews) We have been tracking and reporting on the worsening economic situation in Greece now for more than a year, and it appears as though our earlier predictions – that the broke Mediterranean nation would eventually default on bailout loans it received in 2012, under different leadership – will happen.

Reuters reported Monday that Greece will not pay a 1.6 billion-euro installment it owes on its loan that is due June 30, according to a Greek government official who confirmed the default yesterday, further highlighting the overall severity of the country’s financial crisis.

The warning did not come as a surprise to some, as Greek officials have said repeatedly in the weeks running up to the June 30 deadline that the country would not have the money to make its payment to the International Monetary Fund. Greece’s socialist prime minister, Alexis Tsipras, had been in negotiations with creditors, but banking cartels and related media claim that he has not entertained or offered realistic options for paying the country’s debts.

Tsipras sought release of €7.2 billion in bailout funds that have been frozen while the two sides talked, but EU and IMF officials balked.

Greeks expected to approve referendum

The Greek financial drama is having an effect worldwide. Stock markets from around the world fell on news that a default was likely; the Dow Jones fell some 300 points Monday as gold and U.S. Treasuries strengthened on investors’ moves to safety.

Further, the WSJ reported:

Over the weekend, Greek Prime Minister Alexis Tsipras shocked European policy makers by announcing the country will hold a referendum on whether to accept the terms of Greece’s creditors to unlock desperately needed financial aid.

That vote occurs July 5, five days after an official default.

Tsipras, who promised to return “dignity” to the Greek people while rejecting budget cuts called for by creditors, appealed for citizens to remain “calm” over the weekend. But the markets were anything but, as reported by Bloomberg News:

The Euro Stoxx 50 Index fell 3.3 percent at 12:10 p.m. in Athens. Greek 10-year notes plunged by the most since at least 1998, driving the yield to 14.6 percent, the highest since December 2012. German bunds rose the most since 2011, sending the 10-year yield to 0.77 percent.


Full article: Greek debt default is now inevitable, government officials say prepare now for systemic collapse (Natural News)

Puerto Rico Insolvent

Markets | Tue Jun 30, 2015 11:17am EDT

Puerto Rico governor calls for bankruptcy; adviser says island 'insolvent'

NEW YORK Puerto Rico's governor on Monday called for the commonwealth to be allowed to restructure its debts under U.S. bankruptcy code, while a newly appointed adviser to the U.S. territory said it is "insolvent" and will soon run out of cash.

Governor Alejandro Garcia Padilla, in a televised address, said sacrifice must be shared by bondholders, as he called for Washington to allow a bankruptcy debt restructuring.

The Caribbean island is struggling to relieve a $73 billion debt burden. It came to a crunch point on Monday - ironically at the same time as did debt-laden Greece - after a dire report on its stability by former International Monetary Fund economists was released ahead of key deadlines on Wednesday to repay debt.

Steven Rhodes, the retired U.S. bankruptcy judge who oversaw Detroit's historic bankruptcy and has now been retained by Puerto Rico to help solve its problems, gave a blunt assessment on Monday.

Puerto Rico "urgently needs our help," Rhodes said. "It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer," he added.

Puerto Rico's bonds skidded on Monday as investors sought greater compensation amid the heightened risk.

Puerto Rico is not eligible for debt restructuring under the U.S. bankruptcy code because it is not a municipality.

Rhodes said the island's future hinges on gaining eligibility for debt restructuring, while stressing that bankruptcy would not be a "bailout."

Garcia Padilla called for Washington to grant the U.S. territory the ability to file for bankruptcy in a televised address, as he said that his goal is to come up with a negotiated moratorium with bondholders to postpone debt payments for a number of years.

Related Coverage

"Puerto Rico needs a complete restructuring and development plan, comprehensive and inclusive, that takes care of the immense problem we face today, not on a short but on a long-term and definitive basis," Garcia Padilla said. "The alternative would be ... halting of payments with all the negative consequences that this implies."

Garcia Padilla said the next step must be to get creditors to agree to more favorable payment terms. He is establishing a working group to examine restructuring public debt, with a deadline to have a plan by Aug. 30. The legislature is required to approve the plan.

Garcia Padilla also said that citizens may face cuts in services as the government reduces spending.

"The situation is dire, and I mean really dire," said former IMF economist Anne Krueger, co-author of the report commissioned by the U.S. territory, which recommended debt restructuring, tax hikes and spending cuts. "The needed measures may face political resistance but failure to address the issues would affect even more the people of Puerto Rico."

Citizens of Puerto Rico could face tough measures such as fewer teachers, higher property taxes and suspension of the minimum wage, if Puerto Rico follows the report's recommendations of debt restructuring and austerity measures. Garcia Padilla said he would not support cuts to the minimum wage.

The report, made available late Sunday, said Puerto Rico's fiscal problems are much worse than assumed and that the island needs to restructure its debts because tax rises and spending cuts alone would not be enough of a fix.

Bondholders, even those who own government debt that is generally regarded as sacrosanct, would have to take a hit under the report's recommendations. The report recommended a debt restructure via a voluntary exchange of existing bonds for new ones with a longer or lower debt service profile.

In praise of Tsipras

Stockman's Corner

Good On You, Alexis Tsipras (Part 1)

by David Stockman • June 29, 2015

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Late Friday night a solid blow was struck for sound money, free markets and limited government by a most unlikely force. Namely, the hard core statist and crypto-Marxist prime minister of Greece, Alexis Tsipras. He has now set in motion a cascade of disruption that will shake the corrupt status quo to its very foundations.

And just in the nick of time, too. After 15 years of rampant money printing, falsification of financial market prices and usurpation of democratic rule, his antagonists—–the ECB, the EU superstate and the IMF—-have become a terminal threat to the very survival of the kind of liberal society of which these values are part and parcel.

In fact, the Keynesian central banking and the Brussels and IMF style bailout regime—which has become nearly universal—-eventually fosters a form of soft-core economic totalitarianism. That’s because the former first destroys honest financial markets by falsifying the price of debt. So doing, Keynesian central bankers enable governments to issue far more debt than their taxpayers and national economies can shoulder; and, at the same time, force investors and savers to desperately chase yield in a marketplace where the so-called risk free interest rate has been pegged at ridiculously low levels.

That means, in turn, that banks, bond funds and fast money traders alike take on increasing levels of unacknowledged and uncompensated risk, and that the natural checks and balances of honest financial markets are stymied and disabled. Short sellers are soon destroyed because the purpose of Keynesian central banking is to drive the price of securities to artificially high and unnatural levels. At the same time, hedge fund gamblers are able to engage in highly leveraged carry trades based on state subsidized (free) overnight money, and to purchase downside market risk insurance (“puts”) for a pittance.

Eventually bond and stock “markets” become central bank enabled casinos—-riven with mispriced securities, dangerous carry trades, massive unearned windfall profits and endemic instability. When an unexpected shock or “black swan” event threatens to shatter confidence and trigger a sell-off of these drastically over-priced securities, the bailout state swings into action indiscriminately propping up the gamblers.

That’s what the Fed and TARP did in behalf of Morgan Stanley and Goldman back in September 2008. And it’s what the troika did in behalf of the French, German, Dutch, Italian and other European banks, which were stuffed with unpayable Greek and PIIGS debt, beginning in 2010.

Needless to say, repeated and predictable bailouts create enormous moral hazard and extirpate all remnants of financial discipline in financial markets and legislative chambers alike. Since 2010, the Greeks have done little more than pretend to restructure their state finances and private economy, and the Italians, Portuguese, Spanish and Irish have done virtually nothing at all. The modest uptick in the reported GDP of the latter two hopeless debt serfs are just unsustainable rounding errors—–flattered by the phony speculative boom in their debt securities that was temporarily fueled by Draghi’s money printing ukase that is presently in drastic retreat.

So this Monday morning push has come to shove; Angela Merkel and her posse of politicians and policy apparatchiks were not able to kick the can one more time after all.

Instead, the troika’s authoritarian bailout regime has stimulated political revolt throughout the continent. Tsipras’ defiance is only the leading indicator and initial actualization–the match that is lighting the fire of revolt..

But what it means is that there is now doubt, confusion and fear in the gambling halls. The punters who have grown rich on the one-way trades enabled by the money printing central banks and their fiscal bailout adjutants are being suddenly struck by the realization that the game might not be rigged after all.

So let the price discovery begin. In the days ahead, we will catalogue the desperate efforts of the regime to reassert its authority and control and to stabilize the suddenly turbulent casino.

In riding the central bank bubbles to unconscionable riches the big axes in the casino have falsely claimed to be doing “gods work”.

As they are now being forced to liquidate these inflated assets, they actually are.

Last fall one of the most detestable members of the regime, Jean-Claude Juncker, arrogantly issued the following boast.

I say to all those who bet against Greece and against Europe: You lost and Greece won. You lost and Europe won.”

This morning that smug proclamation is in complete tatters. Good on you, Alexis Tsipras.

What happens to Germany now?

Global Geopolitics

A Geopolitical Looking Glass into the Real World Around You


Germany Could Lose €80 Billion if Greece Goes Bankrupt

Posted by aurelius77 on June 30, 2015

Are you starting to see who has the most to lose in the Eurozone crisis? If so, you see why Greece might not go. If Greek can’t pay, the German banks cannot survive. Germany is also exposed to $72 trillion in derivatives whereas the nation’s GDP is roughly $2.7 trillion, to put it in perspective. The stakes are high and Greece might have the upper hand after all.

Head of Bundestag Committee on European Union Affairs predicts that Germany could lose billions of euros if Greece goes bankrupt.

Athens may not be able to return €80 billion of economic aid that it received from Germany in case of bankruptcy, Deutsche Welle wrote.

This was stated by the head of the Bundestag Committee on European Union Affairs, Gunther Krichbaum, during an interview with Leipziger Volkszeitung, due to be published on June 29.

…Greece has been holding talks with its international creditors on the settlement of the country’s multi-billion dollar debt, as the current bailout program expires on Tuesday. The latest round of talks ended Saturday with no agreement.

Full article: Germany Could Lose €80 Billion if Greece Goes Bankrupt (Sputnik News)

16 Facts About The Tremendous Financial Devastation That We Are Seeing All Over The World

16 Facts About The Tremendous Financial Devastation That We Are Seeing All Over The World

Hussman: Durable Returns, Transient Returns

John Hussman, Hussman Funds

Durable Returns, Transient Returns

Jun. 29, 2015 1:46 PM ET  

Over the course of three speculative bubbles in the past 15 years, I’ve often made the distinction between “durable” investment returns and transient ones. At any point in time, the cumulative long-term return of the stock market equals the gain that investors can reasonably assume will be durable (in that it is unlikely to be surrendered in the future), plus whatever market gain investors should assume will be entirely wiped out over the course of the present or future market cycles. As it turns out, those two components can be identified with surprising accuracy.

We can understand the distinction between durable gains and transient gains by inspecting market history and asking this question: was the prevailing level of the stock market (or its cumulative total return) observed again at a later date? We define that level as “durable” only if it was not observed again in the future. By contrast, a market gain that is subsequently wiped out over the completion of the market cycle is clearly transient in hindsight.

Can investors identify the difference before the fact?

The chart below shows the S&P 500 Index (blue line) along with the “durable” portion of market gains in data since 1940 (red line). In cycles prior to the half-cycle advance since 2009, the level of the S&P 500 is identified as durable if the market never traded lower at any point in the future. The green line shows the estimated historical valuation norm of the S&P 500 on the basis of MarketCap/GVA (nonfinancial market capitalization / corporate gross value added). The values from 1940 to 1947 are imputed based on the average relationship between GVA and nominal GDP. For a reminder of how strongly this measure is related to actual subsequent market returns, see When You Look Back On This Moment In History.

Notice that the red line of durable S&P 500 market levels is almost invariably below the green line representing historical valuation norms. This demonstrates one of the central lessons of value-conscious investing: durable market gains are associated with market advances toward historically normal valuations, while transient market gains are associated with market advances that move beyond historically normal valuations. Because of that historical regularity, the “durable” threshold after 2009 is shown at the present valuation norm, and is unlikely to exceed that level, which is roughly half of the current level of the S&P 500.

(click to enlarge)

[Geek's Note - For any given valuation metric X with historical norm Xn, the corresponding valuation norm for the S&P 500 at any point in time is simply the current S&P 500 level * Xn/X]

I should mention that if the S&P 500 was to decline below its 2009 trough, the long red line extending from 1996 to 2009 would have to be redrawn. Such a loss would imply significant undervaluation, while a retreat to current valuation norms (somewhere in the 940-1030 range on the S&P 500, based on the most historically reliable metrics) would represent an ordinary, run-of-the-mill outcome for the completion of the current market cycle given present valuations. We certainly don’t rely on a 50% market loss, but we should absolutely allow for it.

In this context, it should not be terribly surprising that the 2000-2002 market decline wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to May 1996, or that the 2007-2009 decline wiped out the entire total return of the S&P 500 – in excess of Treasury bill returns – all the way back to June 1995. Those losses were already baked in the cake. Of course, a decline below historically normal valuation can restrain market returns for a much longer period. The fact that the 1982 low for the S&P 500 was within 10% of the 1966 high was the result of a move from secular overvaluation to secular undervaluation over that 18-year period, even though the level of overvaluation in 1966 was nowhere near present levels.

Investors don’t seem to appreciate what they’ve actually done as a result of the yield-seeking speculation encouraged by the Federal Reserve in recent years. As detailed more fully in prior comments (see, for example, All Their Eggs in Janet’s Basket) investors have priced equities for zero returns over the coming decade, with the likelihood that by the end of the present market cycle, every bit of total return, every zig and zag of the market since 2000, will be wiped away for naught. Why? Because even the 4.1% annual total return in the S&P 500 since the 2000 market peak has been achieved only by driving market valuation to what is now the second-highest extreme in history, eclipsing every historical record except that 2000 peak, and beyond those of 1929, 1937, 1966, 1973, and 2007.

How much of a market loss is needed to wipe away 15 years of 4.1% annual total returns? About 45%; less than the market lost in either of the 2000-2002 or 2007-2009 plunges, and not even enough to bring current market levels to historically reliable valuation norms (certainly not below those norms, as most prior market cycles have done). The expectation of such a loss is not some worst-case scenario. In the context of more than a century of market history, it is the run-of-the-mill expectation for the completion of the current market cycle.

When speculation is reasonable

Emphatically, I am not suggesting that one should seek to be invested in stocks only when the potential return of the market itself is expected to be durable. Rather, one should recognize the environment that is operating at any given moment. When expected market returns are likely to be durable, the ability to exit is not particularly important provided a sufficiently long investment horizon. When expected returns are likely to be transitory, one should realize that one is speculating, and the ability to exit can be valuable or even critical.

If there is one lesson to draw both from our successes prior to the recent half-cycle, and from the awkward transition from our pre-2009 methods to our present methods of classifying market return/risk profiles (see A Better Lesson Than “This Time is Different” for a full narrative), it is this. The near-term outcome of speculative, overvalued markets is conditional on investor preferences toward risk-seeking or risk-aversion, and those preferences can be largely inferred from observable market internals and credit spreads. The difference between an overvalued market that becomes more overvalued, and an overvalued market that crashes, has little to do with the level of valuation and everything to do with investor risk preferences. Yet long-term investment outcomes remain chiefly defined by those valuations.

In effect, durable long-term market returns obey valuations, while transitory market returns obey the risk preferences of investors (which we infer from observable market internals and other risk-sensitive measures like credit spreads). It may be reasonable to speculate in an overvalued market, provided one is highly attentive to market internals and other factors. But when investors don’t recognize which environment they are operating in, they miss opportunities to exit hypervalued markets even after market internals have deteriorated and investors have shifted toward risk-aversion, as we warned they had done in October 2000, and July 2007, and as they have today.

Examine the data above, and in the accompanying links, and choose the narrative you believe. One is fiction – that stocks will rise endlessly on a glorious path forged by unicorns from the sparkling dust of Janet Yellen’s golden slippers, and that I’m an evil permabear sitting in a stone and glass fortress built into the side of a volcano, stroking a hairless cat. The other is nonfiction – that the current advance is the third financial bubble in 15 years, that the most historically reliable valuation measures are now at the second most extreme point in a century of history, that my valuation concerns in the prior two bubbles – as well as my optimism at the troughs – were all wildly vindicated by the completion of those cycles, and that despite my stumble in the recent cycle that inadvertently resulted from my insistence on stress-testing our methods against Depression-era data, a century of market history suggests that every bit of the stock market’s total return since 2000 has been transient, and stands to be wiped out.

The only thing that has truly been “different” about the half-cycle since 2009 is that QE disrupted the prior historical tendency for overvalued, overbought, overbullish conditions to devolve more immediately into market losses. Yet even since 2009, as in market cycles throughout history, the market has experienced significant average losses in conditions that have joined extreme valuations with deterioration in market internals (see The Ingredients of a Market Crash). That is the situation we currently observe. Despite extreme valuations, our concerns would become much less pointed if market internals and credit spreads were to become favorable on our measures.

The Roseanne Roseannadanna market

Much of the investment world seems to view present conditions as a “Goldilocks market” where economic growth is positive enough to avoid recession, but not fast enough to provoke the Federal Reserve to hike interest rates. Even if these views on economic growth and Federal Reserve policy are correct, it hardly follows that stock prices will advance. S&P 500 returns are only weakly correlated with year-over-year GDP growth and have near-zero correlation with year-over-year changes in earnings. Likewise, the stance of the Federal Reserve has much less power to distinguish investment outcomes than investors seem to believe, which they might realize even by remembering that the Fed was easing aggressively and persistently throughout the 2000-2002 and 2007-2009 market collapses.

In contrast, we find profound differences in market outcomes across history depending on the combined status of valuations, market internals, and broader measures of market action (which include, for example, overvalued, overbought, overbullish syndromes). Some of these combinations, from most to least favorable, are:

1) Favorable valuations that are newly joined by a shift to favorable market internals;

2) Unfavorable valuations, coupled with favorable market internals, and without overvalued, overbought, overbullish features – which is an environment where speculation is reasonable;

3) Favorable valuations but without favorable market internals – where we observe positive average market returns but higher variability than in any other classification;

4) Unfavorable valuations, favorable market internals, but the emergence of overvalued, overbought overbullish features – which typically results in what I call “unpleasant skew”: a tendency toward persistent, marginal new highs, punctuated by “air pockets” that can wipe out weeks or months of progress in a handful of sessions, though the risk of a deeper crash becomes significant only after market internals also deteriorate;

5) Unfavorable valuations and unfavorable market internals, coming off of a recent period of overvalued, overbought, overbullish conditions – which represents the most severe return/risk profile we identify, and captures the bulk of historical market crashes.

The problem with obscene valuations and unfavorable market internals, coming off of an extended period of overvalued, overbought, overbullish conditions is that this environment couples low risk premiums with upward pressure on those risk premiums, which is the formula for a market collapse. If one reviews prior historical instances where market conditions were similar, the main question was generally not whether significant losses would unfold.

The main question also wasn’t when significant losses would unfold: once market internals had deteriorated, the most reliable answer was “maybe immediately, probably shortly, and maybe after some churning.” Whether the plunge began rather immediately – as in 1929 and 1987 – or after several months of sideways distribution – as in 2000 and 2007 and perhaps today – it was nearly impossible to narrow the time frame, at least on any measure we’ve tested across history. Moreover, instances where severe losses did not emerge were typically instances where market internals improved enough to shift the return/risk profile to a different and more favorable classification. Accordingly, we remain highly defensive here, but the immediacy of our concerns would be reduced if market internals and credit spreads were to improve.

So the question is typically not “whether,” and the question of “when” is unpredictable in the short run and forgotten in the sheer scope of what happens over the completion of the cycle. There is always a question of what investors will focus on as the catalyst for market losses, yet even the “what” is largely irrelevant, and is typically identified after the fact anyway. After the 1987 crash, investors blamed an unfavorable trade balance report as the reason behind the crash. The trade balance really had nothing to do with it, except for being the most unfavorable economic report that could be found in the vicinity of the crash.

Significant news items tend to concentrate selling decisions that contribute to abrupt losses, but those losses are already inevitable once valuations become extreme. In the current cycle, the catalyst might be European bank leverage (which is the main reason Greece is a concern), credit concerns related to covenant lite junk debt, economic weakness, investor concern about monetary shifts, or possibly by wholly unanticipated events. But the “catalyst” will merely affect the timing of the losses.

This is not a Goldilocks market. No, this is a Roseanne Roseannadanna market (Gilda Radner’s character from Saturday Night Live). Though investors seem to believe that catalysts for a market plunge should be known ahead of time, they’re likely to learn in hindsight that the specific catalyst didn’t matter. History teaches that once obscene valuation is coupled with overvalued, overbought, overbullish extremes, and is then joined by deterioration in market internals, the outcome is already baked in the cake. Afterward, investors discover “Well Jane, it just goes to show you… It’s always something. If it’s not one thing, it’s another.”

Understand that now. Once extreme valuations have been established, further market gains have always been transient. Once market internals deteriorate, it’s a signal that investors have shifted from risk-seeking to risk-aversion. At that point, there is no specific event that must be known in advance. One need only have an appreciation for the inevitable swing of the pendulum from extreme euphoria to extreme fear that has characterized the financial markets for centuries. The “catalyst” is rarely appreciated as a catalyst until after severe market losses have already occurred, and in many cases, that catalyst is simply an event that concentrated selling plans that were already being contemplated. If it’s not one thing, it’s another. But it’s always something.

The message here is not “sell everything.” The message is to understand where we are in the market cycle from the standpoint of a century of reliable evidence, and to act in a way that meets your investment objectives. Align your portfolio with careful consideration for your tolerance for losses over the market cycle; with your willingness to miss out on interim market gains should they emerge; with the horizon over which you will actually need to spend from your investments; with the extent that you believe that history is actually informative for making investment decisions; with the extent to which alternative investment outlooks are supported by evidence, ideally spanning numerous market cycles.

Henny Youngman used to tell a story about a guy who hears a little voice in his head singing “Go to Las Vegas.” So the guy immediately turns his car around and heads for Las Vegas. The voice sings “Go to the roulette table.” The guy goes to the roulette table. The voice sings “Put $10,000 down on red.” The guy puts $10,000 down on red.

He loses. The voice says, “Hey, how ‘bout that?”

I shared that story with readers in mid-2007 as the market approached its peak before the global financial crisis, noting:

“Investors are hearing a thousand little voices here telling them to ‘ride the bull,’ that stocks have a ‘floor’ under them, and that valuations are cheap. Whatever risks investors choose to take, they would do well to recognize that if those risks go terribly wrong, most of those little voices will be passive observers with nothing to say but ‘Hey, how ‘bout that.’”

“There are clearly points where the market has speculative merit on the basis of broad market action and favorable internals, even if valuations don't provide much investment merit. But there are also points where investment merit is clearly absent and speculative trends become strikingly overextended. Then the only reason for speculating is that investors are speculating. On average, those periods turn out badly.”

The foregoing comments represent the general investment analysis and economic views of the Advisor, and are provided solely for the purpose of information, instruction and discourse. Please see periodic remarks on the Fund Notes and Commentary page for discussion relating specifically to the Hussman Funds and the investment positions of the Funds.

--- Prospectuses for the Hussman Strategic Growth Fund, the Hussman Strategic Total Return Fund, the Hussman Strategic International Fund, and the Hussman Strategic Dividend Value Fund, as well as Fund reports and other information, are available by clicking "The Funds" menu button from any page of this website.

Estimates of prospective return and risk for equities, bonds, and other financial markets are forward-looking statements based the analysis and reasonable beliefs of Hussman Strategic Advisors. They are not a guarantee of future performance, and are not indicative of the prospective returns of any of the Hussman Funds. Actual returns may differ substantially from the estimates provided. Estimates of prospective long-term returns for the S&P 500 reflect our standard valuation methodology, focusing on the relationship between current market prices and earnings, dividends and other fundamentals, adjusted for variability over the economic cycle (see for example Investment, Speculation, Valuation, and Tinker Bell, The Likely Range of Market Returns in the Coming Decade and Valuing the S&P 500 Using Forward Operating Earnings).