Saturday, January 31, 2015

IMF Press Briefing on World Outlook

On January 20th the IMF had a press briefing on its 2015 World Outlook. You can read the full briefing here. An interesting note is that the briefing was held in Beijing. The reason stated was to acknowledge "the growing importance of China and this part of the world". The 2010 IMF reforms giving China more voting power are not passed so the IMF probably wants to do all it can to show China they are respected. Later this year we can expect the IMF will add the Yuan into the SDR currency basket.

Below are a couple of Q&A's from the press briefing which mostly centered on the impact of much lower oil prices on the global economy. After that we will add a few comments.
MR. BLANCHARD: Thank you Christoph. Good morning to all of you. Let me give you the basic theme of this update. The global economy is going through strong and complex cross currents. On the one hand, major economies are benefitting from the decline in the price of oil. But on the other, in many parts of the world, lower long-run prospects adversely affect demand, adversely affect investment, and resulting - to continue with the current analogy - in a very strong undertow.
The upshot for the global economy is that while we expect growth in 2015 to be stronger than in 2014, we have revised our forecast for 2015 down a bit. So, you get this mixed message - growth is better this year than last year; we expect growth to be better this year than last year, but not quite as good as we hoped for. More specifically, our forecast for global growth in 2015 is 3.5 percent, which is 0.2 percent more than in 2014 but is 0.3 percent less than the forecast we had for WEO this year as of last October. For 2016, we forecast 3.7 percent growth. Again, a further increase in growth; but again, here we have revised down our forecast relative to where we were in October 2014.
. . . .
QUESTIONER: .. a quick comment about the Switzerland, the franc, last week please. As you know, it caused financial volatility. How could the Switzerland central bank play a better role in communicating to the market?
MR. BLANCHARD: So, let me make a number of remarks about what happened last week to the Swiss franc and the implications that I see. I think I see two things. The first one is that it reminds us of the strength of capital flows, inflows/outflows, and in particular what we call safe haven flows, which is that when investors become more risk averse, you get very large movements and countries can be nearly overwhelmed with the inflows or the outflows. This was clearly what was happening to Switzerland. So I think we are in a world in which these are going to happen, and the way to handle this is through probably by letting exchange rates adjust. But clearly in the case of Switzerland, they had decided that the appreciation which came from the inflows was getting too strong and they had put, what we call a floor, which is they basically had decided to peg.
So I think the second lesson is that when you peg, it’s difficult to exit from a peg in a clean way. They have been accused of having done this unexpectedly but they had no choice. If you announce you’re going to do it, you’ll get the speculation, the purchase of the currency before you actually are ready to move. So, there had to be an unexpected component to it. It clearly created some turmoil, and it is an example of some of the things which can happen in the coming year. We have focused very much on the exit from unconditional monetary policy in the US. I tend to think that it might be smooth, but events like what happened last week may well happen in one form or another throughout the coming years.
. . . .
MR. ROSENBERG: I’ll take one online question. The question is whether further stimulus from the ECB through quantitative easing will help the European economy.
MR. BLANCHARD: I think that the effect of quantitative easing have to a large extent already happened. The investors have known for a while that this was likely to come, and this has already led to a flattening of the Euro curve in the eurozone indicating the anticipation of QE and is probably behind much of the depreciation of the Euro. So in a way, QE has already worked.
Now for it to actually work, it has to be that when the ECB announces it, it corresponds to the expectations of investors, more or less. The risk is that it’s too small and the investors will be disappointed, and some of what happened will be reversed. My expectation is that the ECB will do something more or less consistent with what investors have anticipated. Therefore, the effects we have seen will continue. But in a way, the effects have already happened.
 . . . .
QUESTIONER: I wanted to know if the recent volatility in the markets will push back the Fed to raise their hikes in the long term? Because you were talking about mid-year. Do you see that being pushed back?
MR. BLANCHARD: I cannot speak for the Fed. But my sense is that if anything, volatility in the markets, say due to what happened in Switzerland, suggests that predictability of monetary policy is of the essence. So if anything, I suspect this will lead the Fed to be extremely clear about what its intentions are and not change the date that they have in mind, unless events force them to.
My added comments:
A big takeaway I see in this briefing is how the IMF does not see all the problems in the world as unmanageable. In this Q&A session there is question after question about various big potential problems. The IMF response mostly goes like this:
"Yes, that is a potential problem. But it's not anything unexpected. There are always risks, but the problem should be manageable."
Of course we wouldn't expect the IMF to say "the world is heading for a huge financial crisis that no one can solve". What the IMF has been doing over the past year is issuing warnings about risks that can lead to a new financial crisis and urging central banks to act in a coordinated way to avoid a crisis. They continually urge central banks to be clear in communicating to the markets and to not surprise them.
However, when the Swiss National Bank found that impossible to do, all that advice was completely disregarded. In this briefing the IMF says that was OK this time and that the SNB "had no choice." We need to keep that in mind in terms of relying on what central banks say they are going to do. Some who relied on what the SNB had said were financially destroyed.

Chinese Currency Marches on Towards Worldwide Useage & Other News

Things may be stalled on reforms at the IMF, but China just keeps marching along on its path to global acceptance for the Yuan/Renminbi. This BRICSPOST article notes that the Yuan is steadily climbing as a global payment currency. It has now passed the Canadian dollar and the Australian dollar. The Chinese are clearly working hard to get the Yuan on the same level of acceptance as the Euro, Pound, and the US dollar.

"The value of cross-border deals settled in the Chinese currency, yuan, more than doubled in 2014, shows new data from SWIFT showed Wednesday. China’s policy makers are seeking to boost the currency’s convertibility and global use."

"The yuan reached a record high share of 2.17 per cent in global payments by value in 2014.The U.S. dollar, euro and British pound remain the top three world payment currencies.The yuan surpassed the euro in 2013 to become the second-most used currency in global trade finance."
“It is a great testimony to the internationalisation of the RMB and confirms its transition from an ‘emerging’ to a ‘business as usual’ payment currency,” Wim Raymaekers, head of banking markets at SWIFT, said in the statement on Wednesday."
. . . .
"Last week, Zurich joined a growing list of international hotspots like Sydney, Seoul, Paris, Luxembourg, London, Frankfurt, Singapore and Hong Kong which are already global centres for trading the yuan."
My added comments:  If you read this blog you already know why China is working so hard. They want the Yuan/Renminbi added to the SDR basket of currencies at the IMF later this year. If that doesn't happen, we need to watch how the BRICS and China especially react to that. Failure to get more voting power at the IMF and continuing to exclude the Yuan will be a double hit to China. The Chinese are very patient, but at some point patience runs out.
Other news: It's been a busy week with a lot of news out. Below are links to other news stories that relate to what we follow here:

US GDP comes in at 2.4% for 2014

Russia to start up alternative to Visa and Mastercard by May 2015

CNBC: Why so many are hiding cash

Corporate 'Tax Holiday' Proposal gains momentum

Russia surprises with interest rate cut

Fed's Bullard warns of asset bubble risk

Cyber attacks - growing in frequency

The confrontation in Greece is just getting started. The situation in the Ukraine is very bad and not looking likely to improve soon. The US stock market is showing signs of weakness and many expect first quarter earnings to be hurt by the very strong US dollar.

Nothing is really changed so far this year. We continue to have a surreal atmosphere where the US economy has elements of improvement even while there are still signs of stress and volatility. Europe, Japan, and Russia are really struggling. China is seeing growth, but it too is slowing down. All the risks of asset bubbles, currency wars, and derivatives are still out there, but the extent of the risks is mostly unknown. It just means we have a lot to keep track of and monitor this year.

Friday, January 30, 2015

Does a Grexit turn into a Greek Tragedy?

It looks like Greece will once again become a pawn on the international chess board as BRICS/Russia and the EU/US keep moving pieces around. The elections in Greece are over and the market reaction was mostly a yawn. But the action is really just starting up. Will we get a Grexit that turns into a Greek tragedy? 

First the facts

The election of the anti-austerity party in Greece sets up some drama this spring. The party was elected by promising voters that it would stand up to the EU/ECB/IMF combine. This has led to a lot of speculation by some that Greece might threaten to leave the EU and abandon the Euro as its currency (the so called Grexit). 

Others take the view that the newly elected leadership in Greece will have to roll back some of the promises made during the election campaign when faced with the reality of the impact of losing the aid package currently keeping the nation afloat. They suggest that reality might lead to a Greek tragedy if it did exit the EU and the Euro.

As usual, there are big and powerful players lurking in the background looking to use Greece to gain advantage in the bigger global chess match now underway. The EU/US want to keep Greece in their fold and intend to use the debt Greece owes them as leverage to keep the status quo. If it were just Greece vs. this powerful group, I think we know who would be likely to prevail.

But now enter BRICS/Russia stage left. It seems they might see an opportunity to get a foot in the door in Europe by offering Greece "alternative options" (a popular phrase these days). This might be a dandy way to get the new BRICS bank off to a rousing start in 2015. Perhaps Greece might consider a helping hand from this new $100 billion funded bank if things don't work out with their western partners?

It seems like this may be latest move on the chess board. Greece gets an opportunity to avoid the Greek tragegy if it does do a Grexit. In exchange, BRICS/Russia get their foot in the door in Europe. Other EU nations not much better off than Greece (Spain, Portugal, et al) might be willing to listen to a competing (BRICS/Russia) offer if Greece gets one they like. You can hear BRICS/Russia whispering "check" even now as they eye some bigger pieces on the board.

But don't count EU/ECB/IMF/US out. They have been playing chess for a long time too. It's still early in the game with lots of potential moves out there on the board. It should be interesting watching them play out in 2015. In this case, it might be one time when the pawn actually has some leverage in the game. We'll track it and see what happens.

Update: CNBC - Greece says it will not cooperate with EU/ECB/IMF

Also: Bloomberg - Greece's Predicament

And this: RT - Russia might bailout Greece

Looks like the games have begun!

Thursday, January 29, 2015

Jim Rickards on Currency Wars 2015 - First Shots of the Year fired in Europe

Here is a good and fairly brief new interview with Jim Rickards on Russia Today. He talks about the recent move by the Swiss National Bank and currency wars in general. As we noted recently, this is a topic he knows a lot about.

CNBC: IMF Set for Lively Debate on Adding Yuan to SDR Basket

This new CNBC article provides an update on the prospects for the Chinese Yuan to be added to the SDR currency basket later this year. We identified this last month as potentially one of the biggest monetary issues flying under the radar for 2015. More and more it is showing up on the radar as we see in this CNBC article. First a few quotes, then a comment. Click on the link above to read the full article.


"China is expected to make another push for the inclusion of the yuan in the International Monetary Fund's in-house currency basket in a review later this year - and this time round its G20 partners may be willing to listen."
"U.S. officials say they will wait for an IMF paper on the issue later this year before taking a view, but officials in Asian and other G20 capitals say that, unlike in the review five years ago, the issue will at least be a live discussion."
. . . . 
"The chief argument against its inclusion then in the Special Drawing Rights, a basket of yen, dollars, pounds and euro used as the IMF's in-house unit of account, was that the renminbi was far from freely "usable" or convertible."
"That argument is gradually weakening as yuan offshore trading surges. This month leading currency platform EBS ranked it in its top five most traded currencies."
. . . .
"Harvard University professor Jeffrey Frankel said it was premature to consider the yuan "freely usable" but there may be other political reasons for a change this year."
"The Group of 20 major governments agreed in 2010 to give China and other emerging markets a greater say at the IMF, while reducing the dominance of Western Europe on its board. But those changes have not been ratified by the U.S. Congress."
"I think it is important to acknowledge the rise of China, and let them have a fair, proportionate weight in institutions like the IMF," Frankel said."
"If I were at the top of the IMF or the White House, I might feel that since China cannot be accommodated (with quotas) then we have to accommodate them in this other way (through SDRs), which after all won't do any harm."
My added comment:
We said in our blog article last month pretty much what professor Frankel says in this article. Here is what our blog article said:
A huge key to watch for in 2015: Does the Yuan make it in the SDR basket?   

I think it will because the IMF may be able to do this without the approval of the US Congress and it is a way to pacify the BRICS for not getting the 2010 IMF quota reforms passed. China will very likely overlook that issue if they get the big prize; inclusion of the Yuan in the SDR basket.
This CNBC article says it will require US approval to include the Yuan. I think the US will go along with adding the yuan to the SDR basket for the political reason mentioned by professor Frankel.
If the US does block adding the Yuan to the SDR currency basket on top of not passing the 2010 IMF reforms, that might push China and the BRICS over the edge. They might finally just decide the IMF is not the place to move forward. So how this turns out in 2015 is a big key to watch.

Wednesday, January 28, 2015

News: Another "Deadline" passes with no IMF reforms in sight

This is a story we have followed closely for nearly a year now. In December IMF Director Christine Lagarde said that since the US Congress did not pass the 2010 reforms, the IMF would meet in January to look at "alternative options". We noted however that in her recent speech to the Council on Foreign Relations, she had a different tone to her comments. It sounded less like much would happen any time soon. 

Sure enough, today the IMF issues this press release that the new "deadline" appears to be in June 2015. I suspect the BRICS/China will not be amused. Below are some quotes from this IMF update.

The Executive Board of the International Monetary Fund (IMF) adopted on January 27, 2015, a report and proposed resolution to the Board of Governors—the IMF’s highest decision-making body—on the 2010 Reforms and the Fifteenth General Review of Quotas.
In its Report, the Executive Board notes that it has so far delayed commencement of its work on the Fifteenth Review in order to facilitate the implementation of quota and governance reforms agreed in 2010 (the “2010 Reforms”). As a result, it has not completed its work in accordance with the timetable set forth in earlier Board of Governors resolutions (see below). The Executive Board also reiterates its agreement that achieving broad consensus on a new quota formula would best be done in the context of the Fifteenth Review, and that the discussions on this issue would be integrated and move in parallel with the discussion on the Fifteenth Review.
Against this background, the Executive Board proposes that the Board of Governors adopt a Resolution expressing deep regret that the Fourteenth Review quota increases and the Board Reform Amendment have not become effective, and that the Fifteenth Review has not been completed. The proposed resolution also emphasizes the importance and urgency of the 2010 Reforms for the Fund’s credibility, legitimacy, and effectiveness, and reiterates the commitment to their earliest possible implementation, while urging the remaining members who have not yet accepted the Fourteenth Review quota increases and the Board Reform Amendment to do so without further delay.
The proposed resolution calls for the completion of the Fifteenth Review by December 15, 2015, in line with the timetable mandated under the Articles of Agreement. It also calls on the Executive Board to work expeditiously and to complete its work as soon as possible on interim steps in the key areas covered by the 2010 Reforms, and thus to enable the Board of Governors to reach agreement on steps that represent meaningful progress towards the objectives of the 2010 Reforms by June 30, 2015. The proposed resolution stresses that such interim steps should not in any way be seen as a substitute for the 2010 Reforms, which remain the highest priority.
My added comments:
This sounds pretty much like a white flag of surrender for now after the bold statement in December.  For sure, no showdown with the US Congress over the 2010 reforms is in the works. Now we wait until June to see what "interim steps in the key areas covered by the 2010 reforms" may be. And what "meaningful progress towards the objectives of the 2010 reforms" means. So far, it just means when a deadline passes nothing happens and another deadline is set. China Daily is noticing that too. Less than a week ago an article in China Daily said this:
"The failure to implement the reform plan has seriously affected public confidence in the IMF, making its representation, legitimacy and relevance questionable in the eyes of the international community. Therefore, it is imperative that the IMF rapidly advance the reform plan."
"The international community will closely follow the alternative reform options that the IMF comes up with later this month."

Why is this issue important? - The theory here is that this issue is critical to any plan for the IMF to become like a "global central bank" in the next global financial crisis. If the IMF cannot gets it lending capacity increased even this relatively smaller amount, it reduces the chances of it becoming seen as the "lender of last resort" on a global scale some day. With its prestige also on the line in the Ukraine, the IMF has a lot on its plate right now. If things go bad there, it seems doubtful that the IMF's global influence will be enhanced this year.
Of course, things can always change. If there is another huge crisis as many are predicting, perhaps that will change the picture. For now though, the IMF seems more in retreat than on the rise. We'll continue to follow it here to see how it turns out.
Tomorrow we will run a new article on the prospects for the Chinese Yuan to be added to the SDR currency basket later this year. This news release today will probably ramp up more pressure on the IMF to get that done.

Ukraine Update: Still a Complicated and Messy Situation

In this update on the debt situation in the Ukraine, we have two articles to look at. One is in The Economist titled 'Bigger and Better'. The other is in The Gulf News and is titled 'Ukraine Headache Grows for IMF'.  Please use the links to read both full articles.

Both articles provide an update and touch on some of the complicated problems the IMF has to deal with. Meanwhile, Russia is holding a $3 Billion bond due from the Ukraine in December 2015 that they can call due tomorrow if they want to. It's a messy situation.

First some quotes from The Economist article:

"2014 was a terrible year for Ukraine’s economy. GDP shrank by nearly a tenth. The currency, the hryvnia, fell by more than 50%. As the cost of imports rose, inflation jumped, from 1% a year ago to 25%. In a desperate attempt to prop up the currency, the central bank has been throwing cash at the markets: Ukraine’s foreign-exchange reserves have fallen from more than $16 billion in the middle of 2014 to less than $7 billion. Debt repayments of at least $10 billion, gas-import bills and a lifeless banking sector mean that Ukraine will probably need $20 billion in external support to survive 2015."

"Western help thus far has been inadequate. In 2014 the IMF pledged to contribute $17 billion over two years. It has disbursed about $5 billion of this. After Ukraine passed its budget on December 29th there were hopes that more money might soon be forthcoming. The European Union offered €1.8 billion ($2.1 billion); America pledged $2 billion-worth of loan guarantees. Angela Merkel, the German chancellor, offered €500m (in response, her website was downed by pro-Russian hackers). These dribs and drabs were nowhere near enough."
. . . . .

The new bail-out can do nothing at all to solve Ukraine’s other big debt problem: a $3 billion bond, owed to Russia, that matures in December. A bizarre clause in the bond specifies that if Ukraine’s debt-to-GDP ratio exceeds 60%, Russia can demand early repayment. That, in turn, would trigger a cross-default on a big chunk of the government’s other debts. Everyone knows that Ukraine has already passed the 60% threshold, though this will not be announced officially for a few months. It may soon become clear that it is Russia, not the West, that holds the most sway over Ukraine’s economy.

Here are some quotes from The Gulf News article:

"The International Monetary Fund is far from being done with Ukraine, its latest mega-bailout client.
A new aid plan for Kiev — larger and longer — is under discussion and raises the risk for the global crisis lender as Ukraine sinks deeper into war against pro-Moscow separatists."
. . . . 
"The country has been choked by the loss of control to pro-Russia rebels of its key industrial region in the east, sapping productive output and revenues for the government."
. . . . 
"A new IMF program “will allow us to gain access to additional resources, which in turn will enable us to return to economic growth, restore adequate foreign exchange reserves, and ensure economic and financial stability going forward,” said Ukrainian Finance Minister Natalie Jaresko."
"The challenge is immense both for the country and the IMF, for which it will be the fourth bailout plan in less than 10 years."
"The Washington-based institution normally assists countries deep in financial crisis, such as Argentina in the early 2000s and Greece more recently."
"With Ukraine it has to reach into its pockets for a country brought economically to its knees by nine months of civil war."
“The IMF is entering unchartered waters,” Lombardi said.
. . . .
"Moreover, the IMF is weighing more money for Ukraine just as it mulls a restructuring of the country’s huge debt to commercial lenders, already equal to more than 73 per cent of gross domestic output."
"Asked about the debt issue Thursday, IMF spokesman William Murray would only say: “The mission is in Kiev and they will discuss this with the authorities among other things, full stop.”
"It is a complicated equation, according to Mitov. A debt restructuring, especially one that forces investors to write off some debt, would alleviate financial pressures on the country."
"But it also “risks alienating foreign creditors for quite some time,” meaning Ukraine would have limited access to debt markets, he noted."
My added comments:
This is clearly a very bad situation. Every time you read updates on the Ukraine you have to have empathy for the regular citizens there just trying to live some semblance of a normal life during all this conflict. For the IMF, the stakes are high. It's reputation is on the line. If they keep pouring more billions into the Ukraine and the government falls or the country defaults, it will be huge blow to the IMF's image.
Unfortunately, just this week the military fighting ramped up and many civilians were killed. So far, neither side in the conflict seems ready to back down. How the IMF can make a loan program work in this situation is puzzling to say the least as the country has to spend much of its limited resources funding military activities. Another problem for the IMF is that Russia holds a $3 billion Ukraine bond they can call due from the Ukraine at any time. Also, the Ukraine owes Russia more than $15 billion in total. So some of the aid will just flow on through to Russia which undermines the sanctions imposed by the US and the EU.
It's a very complicated and messy situation and it does have the potential to impact the global economic situation as well. We'll just continue to look for updates as events unfold.

added note: Christine Lagarde says the situation in Ukraine is uncertain in this Bloomberg article. Here is her quote:

"Ukraine must have stability at its borders to be able to achieve economic recovery, International Monetary Fund Managing Director Christine Lagarde told French newspaper Le Monde in an interview published Monday. She said “no IMF partner would consider participating in a support program if there’s a question mark over 20 percent of Ukraine’s GDP.”
The link between the economic situation and the military one is blatant,” Lagarde said, according to Le Monde. The IMF is working on a four-year package of support for Ukraine, with “financing no doubt a little higher than what was anticipated. But that supposes the situation stabilizes -- that’s a priority,” she said."

"Lagarde said in Davos last week that she’s prepared to support the signing of a so-called extended fund facility that would replace the $17 billion standby arrangement the IMF granted in April as the conflict and a deepening economic contraction push Ukraine to the brink of default. The assumptions used since April are now “null and void,” Lagarde told Le Monde, and “we’re working on new hypotheses.”

latest info: Russian PM Warns against cutting Russia out of SWIFT

Tuesday, January 27, 2015

Art Cashin - CNBC Contributor - Talks about US Stock Market Action Today

Art Cashin is a respected Wall Street veteran. He offered his thoughts on the US Stock Market action today in this brief interview with King World News. The interview covers the market results today and also his thoughts on what could be ahead.

King World News does not permit anyone to use quotes from their site so please just click the link above to read the interview.

Coming up this week:

- Update on the Ukraine

- More IMF news

I am also working on an article that will look at some good news. Unfortunately, when you cover the topic of monetary system change and the stability of the present system you have to cover a lot a problems and potential bad news. So it;s good now and then to step back and realize there are some good things happening in the world. There are good people who do still care about other people. I have been fortunate to meet some because of writing this blog. They provide a breath of fresh air which I think we can all use more of these days.

We will try to feature some of that in this upcoming article which I hope will be ready by next week.

Jim Rickards was Currency Wars before Currency Wars were Cool

Readers here will note that we tend to stick with a just few expert opinions that we feature here on the blog. There are many very good and qualified experts out there so why so few here? 

The simple reason is that we want to feature those who have strong prediction track records, a solid resume and experience working inside the system, and people who the general public are likely to understand more easily (simplify complex topics). 

Jim Rickards meets all those criteria so we do feature his interviews and articles here quite often. Jim also does a lot of free interviews with various media that people know and that can easily be linked to here.

As just one clear example of why we feature him on the blog, just refer to the title of this blog post. In 2011 he wrote the book 'Currency Wars'. This was not the first time the term currency wars had been used to describe nations in a race to devalue their currencies. But at the time this book was released, the issues presented in the book were nowhere to be found in the mainstream media that most people refer to for information.

Now, everywhere we look we see the term 'Currency Wars' all over the mainstream media. Below are just a few examples to illustrate the point:

We could keep going on this all day long. Let's make it easier. Here is the link to the 
Google search for 'currency wars news'.  It goes on for a long time as you can see.

That's why we say "Jim Rickards was Currency Wars before Currency Wars were Cool"

This should answer the question about why we feature Jim Rickards and a few others here more often. We try to select those who have displayed a proven ability to foresee events well before they become popular in mainstream media sources. No one gets every forecast right. And there are others besides those we feature here who also do well with forecasting.

But time has shown us that we can rely on those we feature here to have a strong track record concerning their forecasts. They also have the academic and work experience background to be credible for the many readers we get here that are new to the issues we cover here. We can't expect these readers to accept people who cite "anonymous sources" for example

It's important for anyone who is looking into these issues for the first time to see clear evidence that the opinions they are reading are from credible sources. We will do our best here to try and offer these types of credible alternative view experts along with other alternative media sources and opinions we think will benefit readers here. Jim Rickards, Nomi Prins, and Andrew Huszar are all good examples.

Added note: a thank you to Jim Rickards for mentioning this article on his twitter page.

Monday, January 26, 2015

Memo to IMF from China Daily - We are Still Waiting for IMF Reforms

By now readers here know the drill on this story. We have followed it now for about a year. The 2010 IMF reforms package that would boost IMF lending capacity and give the BRICS nations more voting power remain stalled as the US Congress has not approved them.

Here is yet another new article calling on the IMF do something about the situation. This article in China Daily prods the IMF to "Push on with IMF Reform."  Some quotes below and then a brief comment.


"As the US Congress failed to incorporate the International Monetary Fund reform package of November 2010 into its budget legislation, the IMF quota and governance reforms are once again stalled. Christine Lagarde, managing director of the IMF, indicated in a statement in December that the board is due to meet this month to weigh "alternative options" to the four-year-old reform plan and ensure that the IMF has adequate resources."
"The IMF reforms are designed to reflect the increasing importance of emerging economies and retain the influence of smaller developing countries in the IMF. According to the reform plan, 6 percent of the quota shares of developed countries will shift to emerging economies. China's quota share will rise from the current 3.99 percent to 6.39 percent. As a result, China will become the third-largest shareholder after the United States and Japan. China's voting share will also increase from 3.65 percent to 6.07 percent and the other BRICS countries such as Russia, India and Brazil will all be in the top 10. The reforms are hailed as the "most fundamental reforms of governance" in the history of the IMF."
"In spite of the fact that the United States will not lose its unique veto power in the institution, it still feels that its dominance in the IMF is at risk and therefore has adopted procrastination tactics in an attempt to drag the reform into limbo."
. . . . . 
"More and more countries are fed up with the US dragging its feet on approving the reform package. Some members of the IMF's steering committee have indicated their desire to deprive the US of its veto power on the IMF executive board."
"The US' reticence to endorse the IMF reform plan not only indicates its lack of confidence in its future growth and inward-looking inclination, it also undermines its claim to global leadership."
"The failure to implement the reform plan has seriously affected public confidence in the IMF, making its representation, legitimacy and relevance questionable in the eyes of the international community. Therefore, it is imperative that the IMF rapidly advance the reform plan."
"The international community will closely follow the alternative reform options that the IMF comes up with later this month."
Summary comment:
There is not much we can add on this at this point. The IMF said they will bring forward "alternative options" this month on this situation. In her recent speech to the Council on Foreign Relations, Christine Lagarge sounded less like something significant will happen. 
This China Daily article kind of has an impatient feel to it. Sort of like  -- OK, there is one week left in Janaury, we are waiting. What's your plan? We will be watching you like a hawk.
It's hard to tell what may happen on this right now. If nothing much happens in January, another "deadline" will have passed. We cover this issue because it is very clear from the comments in this article that the IMF is not in a position to take over as the global lender of last resort as things stand right now. Note this statement in the article: 
"The failure to implement the reform plan has seriously affected public confidence in the IMF, making its representation, legitimacy and relevance questionable in the eyes of the international community.
We will continue to watch for news on this very important issue to see if there is news next week. January is almost gone. China Daily notices that also.

added note: meanwhile President Obama vows to try and get the reforms passed while on his visit to India

Sunday, January 25, 2015

Time out for a little humor - How to save on home security

Every now and then we have to take a break from all the serious topics. In looking over all the usual media and blog sites that I review daily before writing blog posts, I see a lot of stuff. I ran across this letter from a reader to Jim Sinclair on his blog site. It made me lol so I thought I would share it with readers here:

Dear Jim,
I’ve disconnected my home alarm system and de-registered from the Neighborhood Watch.
I’ve got two Pakistani flags raised in the front yard, one at each corner, and the black flag of ISIS in the center. The local police, sheriff, FBI, CIA, NSA, Homeland Security, Secret Service and other agencies are all watching my house 24/7.
I’ve never felt safer and I’m saving $49.95 a month.
Now that's just funny!

News: Anti-Austerity Party wins the election in Greece

Bloomberg provides this election update. Final official numbers are not in yet, but it appears that the Syriza Party will win convincingly. Now we wait to see if this will impact markets or if the result was already priced in to the markets. Beyond the short term market impact (if any) will be the big question. Will the Syriza Party eventually leave the EU and discard the Euro currency (the Grexit)?  This CNBC article explores those questions.

It's too early right now to tell if there is going to be an impact from this election result that reaches beyond Greece itself. Some analysts believe that a convincing win will encourage the Syriza Party to play hard ball and threaten to leave the EU if the Greek debt is not renegotiated on more favorable terms to Greece. They also suggest that other anti-EU political parties in other countries will get a boost and gain more influence in the other EU member nations. If all that does happen, we can expect the impact of this to reach out beyond Greece.

Other sources feel that once the election is over, the Syriza Party will be forced to accept the reality that Greece would be worse off it leaves the EU and the Euro (at least in the short term). They expect that after some perhaps cosmetic changes to the Greek sovereign debt (minor write offs and restructuring of the terms for example), Greece will remain in the EU and things will not change all that much. In other words that the situation will stay local to Greece and be managed without much impact elsewhere.

The election results pretty clearly indicate that the Greek people are tired of the EU/ECB/IMF imposed austerity program and vented their frustration in the elections. We will have to wait and see if any actual meaningful change happens though. At the time of this blog post, markets seem calm.

added note: Mohamed El-Erian gives his take on things on Bloomberg View

"Q: How are markets likely to react when trading resumes Monday?
A: If the larger-than-expected Syriza win is confirmed, and especially if it results in an absolute majority, expect a sell-off in European risk assets, including equities. High-quality bonds would be supported by flight-to-quality flows, resulting in lower yields (particularly on German bonds). And look for prices to fall and risk spreads to widen on bonds issued by European peripheral nations such as Italy, Portugal and Spain.
On the currency front, the euro will probably come under pressure, too, exacerbating the recent weakening to levels not seen in 11 years.
Greek markets are likely to be subjected to the greatest pressures, including a notable widening in risk spreads on sovereign and bank bonds. The question is whether this also translates into a significant pick-up in withdrawals by residents of bank deposits as well as capital flight.  If it does, Greek politicians would need to quickly take major steps to counter the threat of cascading market dislocations."

Update: early market reaction is minimal with the Euro down a little and US stock market futures some lower, but nothing significant. Unless there is a surprise from the newly elected Greek government, the markets don't seem to think this is a significant event based on the initial reaction.

Latest Bo Polny Interviews

Bo Polny is claiming victory for his forecasts in this latest online audio interview.

In this new interview, he reviews his forecasts over the last several months since he did an interview in May 2014 in New York with Kitco. He feels the current move up is vindicating his analysis and definitely thinks we are seeing the start of the much bigger move he predicted. Of course he is also predicting a major stock market selloff starting this year.

Bo sent out an email date with a link to this additional new interview posted on youtube which you can listen to here.

For those who like technical analysis, here is some for gold and silver by Clive Maund:

Gold and the US dollar


It is still early of course, so we will just continue to follow things here. If Bo Polny does hit his forecast in 2015, it will have to mean that some events are happening that could impact monetary system change. That is our topic here which is why we are following his forecast.

What events might lead to change? Here are just some we are trying to keep up with:

- ECB new QE plan and market reaction

- Greek elections and market reaction

-continued fallout from SNB currency move

-Ukraine debt and conflict and market reaction

-IMF reform package status

-on going currency wars all over the map

-shaking of confidence in central banks ability to manage things

-BRICS next moves at the IMF and with their own new BRICS bank

-falling oil and commodity prices

-rising precious metals prices

-Fed's next move on interest rates

-Russia and Putin's chess moves in regard to the US dollar

-risk of cyber attacks or flash crash in the markets

-derivative risks (oil, currencies, interest rates, etc)

I think that is probably enough to try and keep track of for now.

Coming up later today: Update on the outcome of the elections in Greece and any market reactions. As the vote is winding up, the party expected to win wants the EU, IMF, and ECB to write off some of the debt Greece owes and redo the bailout package. Germany opposes doing that. Markets could react to this situation.

Saturday, January 24, 2015

Peter Schiff: China will Follow Swiss National Bank's Footsteps

In this interview with Bloomberg TV, Peter Schiff makes several predictions. We will track them over time to see how he does. Below you can watch the interview (posted on Youtube). Schiff says US citizens should enjoy the higher dollar today as he predicts China will allow the Yuan to rise against the dollar in the near future.

Other forecasts in this interview:

- US will start up a QE4 by year end 2015 which will force China to allow the Yuan to rise

- The US QE4 program will be larger than QE1, QE2, and QE3 combined

- Chinese citizens standard of living will improve as the Yuan appreciates against the dollar

- US citizens standard of living will fall at the same time for the same reason

- Impact of this change on markets will be much higher than the Swiss Bank news

Central Bank Critics Showing up Everywhere

The move by the Swiss National Bank (SNB) to unpeg from the Euro has caused a massive reaction/disruption around the world. Not only in the markets themselves, but suddenly central banks are coming under attack from all sides. Even from sources normally friendly to them. 

This will be something to follow this year. Is this just a one time "gut reaction" because the SNB caught the world by surprise? Or, is this the start of a campaign to discredit individual national central banks as "too small" to deal with global problems? It's something to watch for over time. Let's explore it below.

Below are just a few of the barrage of articles calling the credibility of central banks into question after the move by the SNB. Each article is linked below with a brief quote or comment just below it.

Chicago Tribune article - this article offers some support for the SNB, but also says this:

"But this surprise has not been met with shouts of wild glee. Many eastern European homeowners suddenly have to repay their mortgages in now-much-more-expensive Swiss francs. Currency markets are in turmoil, banks are losing millions, and foreign exchange trading houses are flirting with insolvency. Paul Krugman, among other economists, says that it is abandoning its commitment to fight deflation, losing institutional credibility with markets, and in the process making it harder for other central banks to make credible commitments."

Macro Digest - End Game for Central Bankers - this one offers no support for central banks

"I fully understand the rationale for the move, but like most of the market I'm extremely disappointed in the SNB’s communication and handling of the issue, but that’s the bigger lesson: Why is it most people trust or bother to listen to central banksMajor central banks claim to be independent, but they are totally under the control of politicians."

"The new dimension of central banking is the “communications policy” which is not only the poorest policy but also only really a front for “talking the market into believing our dream” without any further action."

Wall Street Journal - Lagarde's swipe at the SNB - notice the IMF is not pleased and is pictured as the ultimate source of approval for central banks (hold that thought for the future)

"The move hasn’t been endorsed by the IMF: “I’m going to reserve judgment on the pertinence of that move because we have not discussed it with governor Jordan and I would certainly want to understand exactly where he was coming from.”

"That’s why central bankers must take greater care than the SNB showed Thursday to avoid global financial instability: “I think I understand why he’s doing it, but talking about it would be good.”

Now for some people who are always critics of central banks - they showed up everywhere on the internet after the SNB news.

Former Reagan Budget Director David Stockman - no kind words here for central banks

"In Stockman's view, the unfolding drama in world financial markets simply underscores how the Federal Reserve and its lapdogs among other central banks have distorted honest capitalism and enriched speculators."

Bill Holter of Miles Franklin   - no kind words here either

"Another aspect to what and how the Swiss moved on Thursday is that of “central banks” themselves.  Did the Swiss not know they were going to float the franc on Monday when they confirmed the peg publicly?  Did they or did they not inform the IMF prior their actions?  What about the BIS which is headquartered within their borders in Basel, surely they tipped them off? " 

"Christine LaGarde claimed in an interview with CNBC that she had no prior notice, really?  If this is true then it shows the Swiss central bank has moved in an “every man for himself” type of action.  It also shows the “united front” of central banks is not so “united” anymore!  If Ms. LaGarde is not telling the truth and in fact the IMF did have prior knowledge, what would this mean?  It would mean the central banks are finally losing control of the rig.  It would also mean the central banks have distorted currencies, interest rates etc. so badly that once Mother Nature takes over, we can expect repeat performances all over the world and amongst all assets and currencies."

And then we have even the former chief economist for the Bank of International Settlements (the bank of central banks) questioning central banks ability to function properly any more. 


The Telegraph - former BIS economist warns that QE in Europe is doomed to failure

"The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world's financial system going into 2015."
"Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West."
"We are in a world that is dangerously unanchored," said William White, the Swiss-based chairman of the OECD's Review Committee. "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end."
"Mr White is a former chief economist to the Bank for International Settlements - the bank of central banks - and currently an advisor to German Chancellor Angela Merkel."

NY Times - New QE from ECB may be Too Little, Too Late

This article says the QE from the ECB may be too small suggesting that the problems are too big for just the ECB to handle. 
Concluding comments:
I could easily have listed many more articles, but you get the idea. All of a sudden, questioning the credibility and competence of central banks is in fashion around the world. Even by folks who are usually friendly.
Please note that both the IMF and a former BIS chief economist were happy to jump on the bandwagon. The NY Times article calls into question if the actions of the ECB are "too small".
It is impossible to know if the Swiss Bank decision was good or bad looking in from the outside. It is also impossible to know if all this blowback is just a one time "gut reaction" to all the uproar the Swiss move caused in the markets. We have to remain open to the possibility that this could be the start of a campaign to convince the public that individual national central banks just cannot manage the situation any more. That it is just "too big" for them to deal with. Look at what just one decision by one central bank just triggered. 
All during 2014, both the IMF and BIS issued repeated warnings that central bank QE policies were creating asset bubbles that could trigger another crisis some day. Now we have this incident where something bad did happen. Everyone was quick to pile on the SNB for its handling of things. The IMF emphasized that it is important for central banks to act in a "coordinated" way around the world.
Remember, Jim Rickards forecast is that there will be another major financial crisis bigger than the 2008 crisis. He says it will be deemed "too big" for any national central bank to handle this time. He says the IMF will step forward to take the lead at the global level. Not the US Fed or any other individual national central bank
Is all this just coincidence? It very well could be. But obviously we need to watch and see how things unfold. If Jim Rickards forecast eventually pans out, at some point we will be told that the new global crisis is "too big" for any national central bank to handle and must be managed at the global (IMF) level.

If he ends up missing this forecast however, then the odds are that we are seeing a series of unrelated events that really are just coincidence. My own feeling is that we probably will get an answer by the 2016 US elections. We'll see what happens and cover it here, regardless of the time frame involved.

Added note: Another fallout for central banks related to what the Swiss did is that it shows how when push comes to shove, national central banks are forced to do whatever they have to do in their nation's self interest (regardless of the impact on everyone else).

This interview with John Mauldin @ King World News talks about that problem. Going forward we can expect this problem to continue. So watch for increasing calls for someone (like the IMF) to "coordinate" central bank actions on a global level and keep Jim Rickards forecast in mind if that does happen.