Saturday, 20 August 2016

Weekend Update 20/08/2016 – When China Sneezes.

The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.

John Kenneth Galbraith

This weekend, meet Asia’s Brazil, except no beaches, no tropics, no Mardi Gras, no money, just debt and commodities. When China sneezes Mongolia gets pneumonia. When the great commodity super-cycle ended all the way back in 2011, China started sneezing and the Great Chinese Wobble began, which still continues today. In quick succession Mongolia caught a fever, a cold, flu, which has now developed into pneumonia.

But the worst is still to come, Mongolia is talking to the IMF, best known for a succession of dodg French leaders, and for wrecking the people of Greece to “protect” continental Europe’s insolvent banks. If past IMF performance is anything to go on, Mongolians face a future bleaker than Greece, for the Great Chinese Ponzi Scheme that underpinned the great commodity super-cycle, that brought about Mongolian prosperity, is never coming back.  Ultimately, yet another unintended consequence of the Great Nixonian Error of fiat money, communist money, that’s plundered all of the planet except Antarctica.

Eventually innovation and invention will bring the world out of its fiat money, Ponzi scheme slump, as graphene and cheap solar power transform the 21st century lifestyle. But that’s still more mid next decade than this, the trick is to somehow survive getting from here to there.

The Land of Genghis Khan Is Having an Epic Economic Meltdown

August 18, 2016 — 4:01 PM BST
Back in 2008, Mongolia honored its revered national hero Genghis Khan with an enormous, stainless steel statue on the bank of the Tuul River about a half-hour’s drive outside of the capital of Ulaanbaatar. The 13th century conqueror’s name graces the capital’s international airport and his image is also plastered on the tugrik, the local currency. 

Right now, Khans aren’t getting much respect. 

The government, having burned through much of its foreign currency reserves, faces a crushing debt burden and is having trouble meeting its civil service payroll. On Thursday, the central bank hiked its benchmark interest rate by a remarkable 4.5 percentage points to 15 percent to prop up the tugrik, the world’s worst performing currency in August.

Mongolia, a mineral-rich and landlocked $12 billion economy bordering Russia and China, is staring at a full-blown balance of payments crisis. It’s caused barely a ripple in global financial markets, but the nation’s economic meltdown offers instructive lessons to far bigger resource-reliant economies like Brazil, Venezuela, Russia and Saudi Arabia.

This is an economy that gives new meaning to what economists call the resource curse. An overabundance of natural resources can result in lopsided economic growth, government waste and boom-bust cycles that can leave a country’s finances in tatters.

“Mongolia should be much richer than it is," said Lutz Roehmeyer, a money manager at Landesbank Berlin Investment who helps oversee about $12 billion of investments including local-currency Mongolian debt. "There is nowhere else in the world where it is so easy to dig up resources without any problems and sell the commodities to China with such low transportation costs."

During the commodity super-cycle that peaked in 2011, Mongolia had an epic run. In an International Monetary Fund working paper published last year, the country’s mineral wealth -- including coal, copper and gold -- was valued at between $1 trillion to $3 trillion.

Stoked by a booming Chinese economy and brisk foreign direct investment flows, Mongolia was one of the fastest-growing economies in the decade that ended in 2015. Its economy clocked in with an average real GDP growth rate of 8 percent, while per capita income surged to about $4,000.

It all went bad when China’s growth throttled back from double-digit levels in 2011, just as a coalition government led by Altankhuyag Norov went on a debt-fueled spending binge.

In 2012, Mongolia was living large in the global debt markets. The country sold $1.5 billion in sovereign debt, known as Chinggis Bonds (the Mongolian rendering of Genghis), that year to largely finance road projects across the country. When the boom went bust, the country’s path to its current crisis was set.

In June elections, the Mongolian People’s Party unseated the Democratic Party in a landslide election win, returning to office the party that ruled the former Soviet bloc satellite unopposed during the nation’s Communist Era. In his acceptance speech, the country’s new prime minister Erdenebat Jargaltulga didn’t mince words about the task ahead. "The focus will be on urgent stabilization of the economy, plus fiscal discipline."

Then came the collapse of the currency this month.

The nation’s finance minister, Choijilsuren Battogtokh, used a national television address to declare an economic crisis. Local media have carried reports of overcrowded hospitals and kindergartens as officials say they cannot afford to finish existing projects. Foreign exchange reserves tumbled to $1.3 billion at the end of June , a 23 percent decline from a year earlier.

Steep salary cuts of up to 60 percent are being forced on some staff on the state payroll. Money that’s already allocated to buy office furniture is being recalled.

The central bank was forced to hike interest rates to defend the tugrik after lowering them in May. Yields on 10-year government notes have jumped more than 2 percentage points since they were issued in 2012 and now trade above 7 percent. Soaring borrowing costs have fueled speculation the government may need aid from the International Monetary Fund, whose officials arrived in Ulaanbaatar for talks this week.

----Investors were then rattled when the finance minister unveiled forecasts showing that the country’s ratio of government debt to gross domestic product will reach 78 percent this year. This would take the country’s debt-to-GDP ratio close to that of Ukraine, which had to restructure its dollar debt last year and still has an 18 percent probability of default, according to a Bloomberg measure.

The prime minister has promised to push through an action plan that centers around spending cuts, debt reduction and attracting foreign investment. While the government said it wants to avoid a default, the risk is becoming a source of concern.

The government is scheduled to repay about $650 million of its sovereign foreign-currency bonds in 2018 and another $1.5 billion in in 2021 and 2022, according to data compiled by Bloomberg.

In total, Mongolia has about $5 billion in general government debt, according to the finance minister.
"It seems unlikely that the country will be able to avert the need to restructure its debts or seek a bailout from the IMF,” said Renata Lagierska, a senior associate at a Alaco, a London-based business intelligence consultancy.

Up next, Brexit so far so good, and this from the Remainiac, doomster loony left Guardian newspaper, only out left-ed and out-doomed, by the communists, Trotskyists, new world order, global warming fantasists at the Anti-American, Anti-British, Anti-Christian, Anti-Israel, British Broadcasting Clinton propaganda Corporation. Whether GB booms or busts largely depends on what happens next in America, the EU, China and Japan. But that is true whether John Bull stayed in or left the dying EUSSR.

'You just never know. That unpredictability is the great thing about life. You change. The world changes. You live in a country where we are still blessed with enormous opportunity. Leave yourself open to the world of possibility. You have the ambition, you have the smarts and you have the toughness. So, turn the page on your biography - you have just started a new chapter in your lives.'

Lloyd Blankfein CEO of Goldman Sachs, aka Mr. Goldman Sachs, unintentionally backs Brexit in a US speech to graduates, June 2016.

Boom or gloom? The economic verdict on Brexit - so far

A week of economic data for jobs, spending and the housing market has given the first firm evidence of the impact of the Brexit vote
Friday 19 August 2016

There were warnings of recession before the EU referendum and more such gloomy forecasts have followed the vote to leave. But after a week of official economic data – including inflation and unemployment – gave a clearer impact of the immediate consequences of a leave vote, what do the numbers tell us?

Employment is up, shoppers kept spending and a weaker pound has boosted UK tourism. At the same time, inflation has picked up, house prices have wobbled and businesses say they are nervous about hiring and investing.

Here is what we know so far:

----It is early days and monthly jobs data can be volatile, but fears that a Brexit vote would trigger widespread job losses were not realised in July. Official figures this week showed that the number of people claiming jobseeker’s allowance actually fell in the month following the referendum, the first such drop since February. The data also showed the employment rate was at a record high in the run-up to the vote, standing at 74.5% for the three months to June.

-----Inflation rose to the highest level in 20 months in July but at 0.6% remained relatively low and well below a Bank of England target for 2%.

Economists are warning of steeper prices rises in the coming months as the full impact of the weaker pound following the Brexit vote is felt. The drop in the UK currency makes imports more expensive and retailers and manufacturers will probably pass on those higher costs to end consumers. The Bank of England predicts inflation will stand at 2.4% in two years’ time

----Hot on the heels of the solid jobs numbers this week, came news of a bounce in high street sales. Warm weather trumped Brexit fears, it seemed, as shoppers splashed out on sandals and summer tops.

Official figures showed retail sales volumes rose by 1.4% in July after a 0.9% drop in June. That was much stronger than the 0.2% increase predicted by economists in a Reuters poll but echoed industry reports of solid growth in consumer spending last month. There was also a boost to sales from tourists coming over to snap up luxury goods like watches, made cheaper by the weak pound.

----Analysts had predicted a drop in house prices following the Brexit vote. So far the early signs have been mixed but nothing points to dramatic falls.

Lender Halifax said house prices fell 1% in July. But on a less volatile three-month basis they continued to grow. Figures from its rival Nationwide showed prices rising 0.5% in July. But the building society warned that any impact from the vote might not be fully evident in July’s figures.

The only function of economic forecasting is to make astrology look respectable.

John Kenneth Galbraith

We close as usual with a weekend update from Jason in California. The insane unstable world of negative interest rates. Will The Fed's talking chair have anything to say on the subject  next Friday in her speech to the Jackson Hole Junketeers?

As Value of Negative-Yield Bonds Globally Grows By $300 Billion in One Week to Exceed 13 Trillion, Principles of Both International and Personal Finance Face Challenge to Fundamentals

N. Jason Jencka August 19th, 2016 2:00 am ET
Negative interest rates have fully transitioned from a theoretical construct with limited application to a reality than envelops nearly 25% global debt. Negative yields have continued to spread from the sovereign debt of nations such as Japan and Switzerland to include a growing subset of corporate debts. For perspective, the $13.4 trillion in negative-yield bonds is roughly equivalent to 70% of the present cumulative U.S. national debt which stands at just under $ 19.5 trillion. The $ 300 billion increase over the past week matches the GDP of South Africa. Given that this data is current as of August 12th; these figures are likely understated relative to the real-time figures as of this writing.  The pace and scale of (arguably ultimately futile) attempts to stimulate consumption globally is remarkable but it is inevitable that global central banks will run out monetary ammunition with consequences yet to unfold.

The historically unprecedented monetary  environment in global finance has definitively filtered down to the American retail banking customer in the form of Certificate of Deposit (CD) account rates that hover in the range of .3 to .8% APY. Once the present CPI inflation rate that has been within a few tenths of 1% thus far in 2016 is factored in, real rates of return on 1 to 5 year CDs ranges from negative .5 % to zero. As a result, savers have had viable choice other than to add fuel to the overheated equities market. The S&P 500 12-month trailing P/E ratio presently exceeds 25, well above the historical average that lies near 17, which suggests that current equity valuations are not sustainable.  The ultimate fallout from this confluence of factors in terms of long-term returns and the degree of broad-based pain felt from an eventual but inevitable correction remains unknown but one old saying is particularly poignant.  “Something’s gotta give.”

Robin Wigglesworth and Eric Platt The Financial Times:

N. Jason Jencka is presently studying Finance and Economics at Sierra Nevada College, located near the shores of Lake Tahoe on the border of California and Nevada.His interests include the interplay between world markets and the global political sphere, with a focus on developments of both sides of the Atlantic in North America and Europe.In his leisure time he enjoys connecting with those people that have an interesting story to tell and a genuine desire to make an impact in the world.


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