Saturday, 13 February 2016

Weekend Update 13/02/2016 – The War on Cash.

"Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money." 

Daniel Webster

The War on Cash (and serfs.)

How: Start by withdrawing the large banknotes and work your way down to the smaller ones. Be sure to use plenty of scare stories of mobsters and terrorists as cover. Under no circumstances let the public know that it’s central bankster mismanagement of the Great Nixonian Error of fiat money, communist money, that set off the casino capitalism, that went bust in 2007-2009.

"All previous attempts to base money solely on intangibles such as credit or government edict or fiat have ended in inflationary panic and disaster."

Donald Hoppe

ECB may finally deal a deathblow to the €500 bill

Published: Feb 11, 2016 2:41 p.m. ET
Is the end nearing for the 500-euro note, beloved of gangsters, money launderers and tax evaders?

The likelihood that the valuable bill could soon be struck out of the euro family may be rising after Benoît Coeuré, a member of the European Central Bank’s executive board, told French daily Le Parisien that arguments for keeping the €500 bill are becoming “less and less convincing.”

“We are actively considering the question and will take a decision shortly,” he said in the interview. “The competent authorities increasingly suspect that they are being used for illegal purposes, an argument that we can no longer ignore given the importance of the fight against money laundering and terrorist financing.”

The issue of big notes has been discussed for years, and some bankers and economists have called for a ban on the €500 note (worth about $567) in the name of fighting organized crime and terrorism.

It moved back into the spotlight after Peter Sands, a senior fellow at the Harvard Kennedy School, published a paper on the topic earlier this month. The former chief executive of British bank Standard Chartered PLC argued that ditching notes of that caliber would make it harder for terrorists, money launderers, traffickers and tax cheats to move large sums of money around without detection.

A Colombian woman arriving at Bogotá’s airport was caught last year after having swallowed 64 latex-covered capsules, each containing five $100 bills, according to the Financial Times. And authorities at London’s Heathrow airport caught a smuggler two years ago who had 40 €500 notes in her underwear and intended to fly to Turkey to meet an ISIS sympathizer, the paper said.

“It’s not often that you come across a policy proposal that is simultaneously easy-to-implement, has a powerful positive impact, and very limited downside. Eliminating high denomination notes is one such idea,” Sands said in the paper.

He also called for the abolishment of the U.S. $100 bill.

Some countries have taken such steps. Canada retired its $1,000 note back in 2000 because it was believed to mainly be used in criminal transactions, while Singapore withdrew its $10,000 note in 2014 to combat financial crime.

However, the ECB until now has largely defended its issuance of the €500 notes. In 2012, ECB boss Mario Draghi described the high-denomination euro bank notes as fulfilling “an important role as a store of value and are a last resort for storing assets both within the euro area and abroad.”

The €500 note is the second-highest currency denomination within G-10 countries, just after the 1,000 Swiss franc bill (worth about $1,029). And some eurozone countries cherish cash. According to a Europol report from last year, the Central Bank of Luxembourg issued notes equivalent to 194% of GDP in 2013, sharply higher than the 16% recorded in Germany and 4% in France.

“Cash remains criminals’ instrument of choice to facilitate money laundering, in spite of the rapidly changing face of criminality and the rise of cybercrime,” Europol said. “Although not all use of cash is criminal, all criminals use cash at some stage in the money laundering process,” it added.

Why: Because the banks never really recovered from the system crash of 2007-2009, and with a new recession arriving the banks are going bust again. The Great Nixonian Error of fiat money is coming to its central bankster mismanaged end, and they think that negative interest rates will drive the public into holding cash and precious metals. Central banksters can’t let the serfs have cash.

"Increasingly, the wealth of the modern world has come to be represented by financial assets rather than real assets, and this to me is a very unhealthy situation, because financial assets are inherently unstable. Financial assets (currencies, bonds, mortgages, stocks, bank credit, etc.) can be quickly and violently reduced in value, or destroyed completely by either inflation or deflation."

Donald J. Hoppe

Here's what coco bonds are and why investors are freaking out about them

Feb. 11, 2016, 9:11 AM
After a rally on Wednesday, banking stocks are falling hard again Thursday.

Deutsche Bank is down over 3% in Frankfurt, Credit Suisse is down over 6% in Switzerland, and in London HSBC is down over 4%, Lloyds is down over 4%, Barclays is down over 5%, and Royal Bank of Scotland is down over 4%.

It means bank stocks have reverted to the trend of the year so far: falling.

This week's latest sell-off has been driven by a scare over so-called coco bonds that were issued after the 2008 financial crisis by banks and haven't been thought of too much since.

Here's a handy explainer as to what's actually going on.

What are coco bonds?

Coco bonds are a type of debt with strings attached. The coco in the name is short for "contingent convertible," which means in some circumstances the debt converts into equity — rather than the bank owing you money, you suddenly own a little bit of the bank.

The contingent part of the bonds depends on how much cash the banks have. If a bank's capital falls below a certain level the switch is flipped and the bonds turn into shares. Because of this risk, coco bonds carry a higher yield than normal bank bonds.

Coco bonds were cooked up after the financial crisis as a way to prevent banks from needing any more state bailouts. If banks were getting into trouble and running low on cash, the bonds would convert, solving two problems — the bank's debt burden lessens and its capital buffers are boosted.

Lloyds is the biggest coco-bond issuer in the UK, with $14.5 billion (£10.7 billion) of the paper issued from 2009 to 2015, according to Moody's.

Why are people worried?

Put simply, investors are worried they won't get their money back.

There are growing fears that banks like Deutsche Bank and Santander won't be able to meet coupon payments — interest on the debt.

The Independent writes:
A recent move by the European Central Bank to publish an obscure test of bank risk, known as the Srep ratio, has driven the recent upset in the market. The results have stoked fears in the minds of credit analysts about whether recent market shocks — ranging from low oil prices to the slowdown in China — could inadvertently cause banks to breach rules which would prompt regulators to stop them paying Coco coupons.

These same capital breaches could also turn the coco bonds into equity, which is falling in price and not something fixed-income investors want.

As a result of these growing fears the price of coco bonds has plummeted in recent weeks. Meanwhile the price of credit-default swaps — a sort of insurance that pays out if banks don't pay up on the bonds — has jumped.

Banks, meanwhile, have been defending their balance sheets and insisting everything is OK. Deutsche Bank's CEO, John Cryan, says the lender is "absolutely rock solid," while Credit Suisse's boss, Tidjane Thiam, has also been talking up his bank's balance sheet.

We’ll end with ominous signs of rising systemic distress again, and the central banksters pushing on a string, out of ammo, road and talent. A cashless society it has to be, in those crooks mind. Stay long fully paid up physical gold and silver, held outside of failing banks and dodgy MF Global’s. I have every confidence in our snake bit central banksters to quickly mess up even a cashless financial system, with an eventual return to a metallic monetary system at some point in the century ahead. Protect your children and grandchildren.

"Our balance sheet is not weakened at all."

Bear Stearns CEO Alan Schwartz, March 13, 2008. Bust March 17, 2008.

Midnight In The Garden Of Fallen Angels—-Mind The BBBs

by Genevieve LeFranc • February 11, 2016

---- Of late, investors have been witnessing more than their fair share of angels being cast out of the Investment Grade (IG) firmament to the bond market’s answer to the netherworld, that is, a high yield, or ‘junk’ credit rating.

More than any single factor, the size of the market should place IG on investors’ radar screens. Deutsche Bank tallies the size of the outstanding market ended January at $5.3 trillion, more than double 2007’s $2.4 trillion. The bulk of the growth, meanwhile, has come from the lowest-rated segment of the market, or BBB on Standard & Poor’s scale. Once the threshold to BB-rated and below is crossed, a given IG bond is branded a fallen angel.

BBB-rated IG debt issuance has skyrocketed, ending January at $2.2 trillion, up from $802 billion in 2007. Tellingly, the pristine end of the scale, bonds rated AA, has actually shrunk to $511 billion from $526 billion over the same period.

The very composition of the IG market has undergone tremendous change since the last time the credit cycle turned, which by all appearances it is doing now. The riskier tilt within the IG universe should raise a red flag for investors who should not accept calming historical comparisons to prior cycles at face value.

Set aside macroeconomic indicators for a moment. Based purely on the amount of extra compensation investors were receiving for owning IG bonds, the Federal Reserve knew it was playing with fire by hiking rates in December. In market parlance, this premium is called the spread, or the difference between a corporate bond and a comparable risk-free Treasury.

For some unfathomable reason, the Fed saw fit to begin the current rate hiking campaign with spreads at double the average level that prevailed at the onset of the past three hiking campaigns. In Morgan Stanley’s estimation, IG spreads were at two percentage points on December 16th, twice the average of one percentage point at the inception of the rate hiking cycles of February 1994, June 1999 and June 2004.

In other words, investors were demanding twice the level of protection they had previously required and were all but shouting, “Danger Ahead!” And yet the Fed pulled the trigger. It’s more than a matter of kowtowing to a bond market hissy fit. The Fed’s own in-house research warned against making a rash move in a paper that was published last April.

Former Fed governor Jeremy Stein of Harvard along with two Fed staffers, David Lopez-Salido and Egon Zakrajsek concluded the following in the seminal Credit-Market Sentiment and the Business Cycle:

“When our sentiment proxies indicate that credit risk is aggressively priced, this tends to be followed by a subsequent widening of credit spreads, and the timing of this widening is, in turn, closely tied to the onset of a contraction in economic activity.”

The authors then go on to slam the nail into the coffin: “Unlike much of the current literature on the role of financial frictions in macroeconomics, this paper suggests that time-variation in expected returns to credit market investors can be an important driver of economic fluctuations.”

Now, all of that may have read like gobbledygook to you if your eyes haven’t already glazed over. But it’s imperative to grasp the translation. Credit was as “aggressively priced” as it has ever been – recall that the average yield in the junk bond market hit 4.9 percent in June of 2014. Those are the same kinds of yields that investment grade sported just a few years earlier.

The “contraction in economic activity” is otherwise known as a recession. As for the timing, the paper pegged the “onset” of recession to be about two years after yields hit their lows and thus prices their highs. That puts us at about now for said “onset.”

But don’t lose sight of the biggest point the paper makes, that “credit market investors can be an important DRIVER of economic fluctuations.” In other words, uncontrolled feeding frenzies in the bond market can actually cause recessions.

Pardon the all caps and bolding but these are serious indictments of quantitative easing gone wild – and they come from inside the very institution that encouraged the unleashing of animal spirits in the first place.

Query Corporate America’s balance sheet centurions, a.k.a. Chief Financial Officers, and they’ll report that the debt was simply too cheap to not binge and binge alike.

The ultimate consequences, according to Morgan Stanley’s (MS) recent initiation of coverage of the IG market, remain to be seen. On the plus side, leveraged buyout activity peaked out at $186 billion in this cycle, a fraction of 2007’s $434 billion peak. On the flipside, though, is the debt-financed stock buyback orgy, the merger and acquisition spree and weak earnings to say nothing of the idiosyncratic bond market body blow, the meltdown in the energy sector.

The Shipping Industry Is Suffering From China’s Trade Slowdown

So many boats, so little cargo as Chinese exports and imports drop.

February 11, 2016 — 8:32 PM GMT
When business slows and owners of ships and offshore oil rigs need a place to store their unneeded vessels, Saravanan Krishna suddenly becomes one of the industry’s most popular executives. Krishna is the operation director of International Shipcare, a Malaysian company that mothballs ships and rigs, and these days he’s busy taking calls from beleaguered operators with excess capacity. There are 102 vessels laid up at the company’s berths off the Malaysian island of Labuan, more than double the number a year ago. More are on the way. “There’s a huge demand,” he says. “People are calling us not to lay up one ship but 15 or 20.”

Shipbuilders, container lines, and port operators feasted on China’s rise and the global resources boom. Now they’re among the biggest victims of the country’s slowdown and the worldwide decline in demand for oil rigs and other gear amid the oil price plunge. China’s exports fell 1.8 percent in 2015, while its imports tumbled 13.2 percent. The Baltic Dry Index, which measures the cost of shipping coal, iron ore, grain, and other non-oil commodities, has fallen 76 percent since August and is now at a record low. Shipping rates for Asia-originated routes have dropped, too, and traffic at some of the region’s major ports is falling. In Singapore, the world’s second-largest port, container traffic fell 8.7 percent in 2015, the first decline in six years. Volumes at the port of Hong Kong, the fourth-busiest, slid 9.5 percent last year. Beyond Asia, the giant port of Rotterdam in the Netherlands recorded a dip in containerized traffic for the year.

In central banking as in diplomacy, style, conservative tailoring, and an easy association with the affluent count greatly and results far much less.

J. K. Galbraith.

Finally for those with time on their hands this weekend.

No comments:

Post a Comment