Thursday, July 31, 2014

Argentina Defaults on Debt

Argentina was declared in default on bonds after it was unable to reach a deal with the bondholders. Most articles on the default suggest that any problems with this situation will remain contained with Argentina and there not should not be any "contagion" that would impact the global financial system. But Jim Rickards says its too early to know that in an interview with CNBC. Below are links to his interview and a few other articles about the default.

When a nation defaults on its sovereign debt, that is something we will cover here because it can potentially impact the global financial system. In the case of Argentina, most analysts are saying they don't expect that to happen here as you can see in the linked articles below.

That doesn't mean there is not concern about global impact though. Both the IMF and the World Bank issued statements of concern in this case about the US courts siding with the bondholders. Their concern is that this will make it harder in the future to resolve other cases where a nation defaults on its debt. 

Back to this case. Jim Rickards points out in this CNBC interview  that it is too early for analysts to say with certainty there will be no contagion because of hidden derivative products that could be out there tied to this debt (something we have noted here as well). In other words, a problem anywhere can lead to a problem everywhere. 

Here are a few articles that will provide you broad coverage on the event. If anything does develope suggesting contagion in the next few days, we will certainly cover that here.

The Guardian (this article references the IMF unsuccessful effort to set up a Sovereign Debt Mechanism or SDRM)

We have also seen some articles suggesting that this may open the door for Argentina to join the BRICS once this debt is resolved. They are very unhappy with how the US courts handled this case. China in particular is interested in closer ties with Argentina. Some are saying that China might help restore Argentina's credit standing in exchange for access to natural resources and to gain a stronger foothold in South America

Everything that happens these days seems to have geopolitical ramifications on the giant world chess board. And those ramifications could include impact on the monetary system at some point in the future.

For us here, we have to keep watch because some day one of these sovereign debt situations may become a trigger event that does cause global contagion. That could lead to rapid monetary system changes. Sometimes it is not the debt itself that is the problem, but the unknown derivative products out there that may be tied to the debt or interest rates. 

Related to that, here is a tweet out from Jim Rickards this morning:

"The problem in 2007 wasn't $1 Trillion in subprime, it was $6 Trillion in subprime linked swaps. Watch swaps for the real action"

Wednesday, July 30, 2014

US Second Quarter GDP Exceeds Forecasts

As a counterweight to yesterdays IMF downward revision in its global growth forecast, the 2nd Quarter US GDP rose to 4%. This exceeded most analyst forecasts of around 3%. The 1st Quarter GDP was also revised upward from -2.9% to -2.1%.

So what does this mean? Has the tide turned and Jim Rickards forecast of a coming recession will be wrong? It's too early to tell. So far we have a very bad 1st quarter now offset by a better than expected 2nd quarter. We will get further revisions later on the 2nd quarter that could raise or lower todays reported number. And the overall rate for the year is still not good when you blend the two quarters together.

What this news does is setup the 2nd half of 2014 as the key to who will be right or wrong.

If the strong 2nd quarter results continue the rest of the year, Rickards will miss his recession forecast and we can expect the US FED will simply continue down the path they are on. An end to their QE program but continued low interest rates well into the future.

If growth drops off the second half of 2014 it will put the FED in a difficult position. They will have to admit that QE has not been successful and that their forecasts were too rosy once again. If they have to revert back to more QE, the markets will not react well to that.

For now this news will buy the FED more time and will probably just extend the status quo.
We'll track it here the rest of the year to see who was right and who was wrong for 2014.

Later today we will find out how the Argentina debt situation is resolved. Either they will make payment, default, or some last minute extension of time will be granted. We'll check on that tomorrow to see what happened.

Added note: Here is another article on the GDP news with a less rosy view. Here is another that notes that buried in the GDP report was a downward revision for 2011-2013. So we have to keep in mind that these reported numbers get changed a lot later on.

There does seem to be a consensus that the FED will have to show its hand by the end of the year as to whether there is a real recovery in place or not.

Update 2pm (CST): FED does as expected. I would not see this changing much for at least the next 2-3 months minimum. Nothing on the horizon right now to alter things significantly.

Update 7:30pm (CST): Argentina declared in default. But it may not mean much of anything yet. We will see what happens tomorrow in the news on this story.

Tuesday, July 29, 2014

Bloomberg: IMF Warns of Potential Risks to Global Growth

Well, in this article we have the IMF once again warning that global GDP may be lower than they had expected. This is in line with what Jim Rickards predicted earlier this year. But so far the FED is not indicating any change in its QE tapering plans. Below are quotes from the article and then a few comments:

"Sharply higher interest rates around the world could combine with weaker growth in emerging markets to slice as much as 2 percentage points off global growth in the next five years, the International Monetary Fund said on Tuesday."

"The two developments would reinforce each other, prompting slower growth and hurting in particular those emerging markets with large economic imbalances, such as Argentina, Brazil, Russia and Turkey."

"Central banks in the United States, Japan, the euro zone and Britain sharply lowered rates to boost growth in the wake of the global financial crisis, but Britain and the United States are now preparing to reverse course."

"The IMF said the more sluggish expansion in the developing world, long the engine of the global recovery, was increasingly likely due to structural, not cyclical, factors."
My added comments: All this is what Jim Rickards predicted as he insists that the US FED is "tapering into weakness" which he says will lead to another recession by early next year. The IMF has had to backtrack once again on a too rosy forecast. Keep in mind that the US  first quarter GDP was way worse than forecast so they missed that badly as well. 
Despite all this, the FED is continuing to project the image that the economy is in recovery and that they "may raise interest rates sooner than people expect".  On the surface they project that things are stable and calm, but Mohamed A. El-Erian says in this article the FED has concerns below the surface and faces some tough choices soon. And this CNBC article suggests the markets are divided on what FED policy may do to the markets. So we will continue to follow that. 
The IMF article also notes that the Russian sanctions may impact global GDP and mentions how connected the global economy is. A problem anywhere can lead to a problem everywhere.
Also notice that the IMF lists Argentina as a problem area. Keep in mind that tomorrow we find out if Argentina is going to default on its sovereign debt

Added note 8-6-15: A full list of systemic risk warnings can be found on this blog page 

Monday, July 28, 2014

Jim Sinclair Notes Lawsuit on Illegal "Wash Trades"

No one has worked harder to try and inform people of important issues facing investors than Jim Sinclair. On his blog site Jim notes a recent lawsuit  filed against the Chicago Board of Trade alleging a high volume of illegal "wash trades" in the US futures markets. Below are Jim's comments, then a few key paragraphs from the article, followed by our concluding comment.

First Jim's comment on the article (here is direct link to the article):

Jim Sinclair’s Commentary
A wash trade is a false price because it occurs with the buyer and seller as one and the same party or two financially related parties.
Who is to say that the huge paper gold shares at the open in the US are not wash sales? There is no risk in a wash sale. You can artificially force the price in any direction you wish with wash sales. Wash sales are illegal under present rules and regulations.
Now a few key paragraphs from the article:

Since March 30 of this year when bestselling author, Michael Lewis, appeared on 60 Minutes to explain the findings of his latest book, Flash Boys, as “stock market’s rigged,” America has been learning some very uncomfortable truths about the tilted playing field against the public stock investor.
Throughout this time, no one has been more adamant than Terrence (Terry) Duffy, the Executive Chairman and President of the CME Group, which operates the largest futures exchange in the world in Chicago, that the charges made by Lewis about the stock market have nothing to do with his market. The futures markets are pristine, according to testimony Duffy gave before the U.S. Senate Agriculture Committee on May 13.
On Tuesday of this week, Duffy’s credibility and the honesty of the futures exchanges he runs came into serious question when lawyers for three traders filed a Second Amended Complaint in Federal Court against Duffy, the Chicago Mercantile Exchange, the Chicago Board of Trade and other individuals involved in leadership roles at the CME Group.
The conduct alleged in the lawsuit, backed by very specific examples, reads more like an organized crime rap sheet than the conduct of what is thought by the public to be a highly regulated futures exchange in the U.S.
The most stunning allegation in the lawsuit is that an estimated 50 percent of all trading on the Chicago Mercantile Exchange is derived from illegal wash trades.
The lawsuit says Duffy and his management team are tolerating wash trades “because they comprise by some estimates fifty percent of the Exchange Defendants’ total trading volume and also because HFT transactions account for up to thirty percent of the CME Group’s revenue.”
The complaint explains that the ability to continuously enter orders and get trade confirmations “of the price at which these orders are filled, before the rest of the public even knows about the executed trades,” empowers high frequency traders with “a massive informational and time advantage in discerning actual price, market direction and order flow before anyone else.”
By providing just a select group of market participants and high frequency traders with this “sneak peek” advantage, says the complaint, the defendants engaged in a “fraud on the marketplace.”
The Justice Department and FBI have opened investigations into high frequency trading. Let’s hope that includes both stock and futures exchanges.
My added comment: Filing a lawsuit does not prove guilt or innocence. That is determined in the courts so time will tell how this turns out. The point we want to make from this is that things like this are why the public is losing trust in the system. And why those in charge of the system need to work hard to build public trust. If too many people decide the system is corrupt or failing, it can lead to the "trigger event" that Jim Rickards mentions so often. The final snowflake that triggers the avalanche. 
So far those in charge of managing the current monetary system have done a near miraculous job of holding it all together and preventing a trigger event leading to systemic collapse. You really realize this even more when you follow all this news to prepare for blog articles and see how many difficult issues are out there to manage. It has been a great learning experience. 
While it is not possible to know the future, we hope wise decisions will be made to avoid another global systemic crisis. That will surely be a lose-lose scenerio where those using the system (we the people) and those running the system will both lose. What we hope for are creative solutions to problems that lead to win-win. A system where the people have the maximum freedom possible and that is financially stable. Where the people can once again have trust and confidence in their leaders and their currencies. We see hope for the win-win even as we know the lose-lose is always out there and cannot be ignored. We live in historic times.

Sunday, July 27, 2014

CNBC Contributor Art Cashin on his Global Concerns

In this interview with King World News, Art Cashin talks about his concerns about various threats facing the global economy. With over 50 years experience on Wall Street, Cashin is one of the more respected financial media contributors. Below we paste some of his comments from this article that are relevant to what we follow here.

Here are some of his comments with my comments added below that:

Eric King:  “Art, is there an alliance forming between Germany, Russia, and China?”

Cashin:  “I don’t think a full, specific alliance.  But I think what you are seeing is Russia demonstrating to the West that they can find customers elsewhere, and they are utilizing China.  The most interesting conversation in that area is that all of the BRIC nations are looking to find an alternative for the U.S. dollar as a reserve currency.  That could be a black swan that not many people are thinking about.

And the Germans would not be disappointed in that either.  So I think you want to keep an eye on what’s going on here and see if under the cover of some of these geopolitical strains we find that there is going to be a currency problem building that could be global.”

Eric King:  “You were one of the youngest traders to ever earn a seat on the exchange and you’ve been doing this for over half a century.  What are your big worries going forward?  I know we’ve covered geopolitics but what has you concerned?”

Cashin:  That (geopolitics) still remains at the top.  I think the ISIS group in Iraq can present a very clear, present, and almost instantaneous danger.  Second, the connectivity and possible contagion of the financial systems.  Europe in particular looks a little strange to me.  They don’t have the same kind of central government bond system that we have.  Certain benefits and protections that the Fed might still be able to find here will be denied there.  And the mystery that is the Chinese banking system -- that would be my third worry.

So from a financial standpoint, Europe and China.  And in geopolitics, primarily what’s going on with ISIS.


My added comments:  Art Cashin lists a number of issues we have also mentioned here on the blog. So it means we are covering the right issues for readers to keep track of. Listing them by bullet points would look like this:

-Global efforts to find alternatives to the US dollar based system (he mentions BRICS specifically). He says it could be an overlooked possible "black swan".

-the "connectivity and possible contagion of the financial systems". This is something we must always keep in mind. A problem anywhere can lead to a problem everywhere because things are so interconnected and there are huge interest rate related derivatives contracts out there (many still OTC and not really publicly reported anywhere).

-the "mystery that is the Chinese banking system". This somewhat ties in to #2 above since trouble in China now can lead to trouble globally. Also, Jim Rickards has written that he expects some investment products in China to fail eventually.  He believes this will lead to problems in the banking system in China as Cashin hints at. He also thinks it will cause the Chinese people to allocate more investment funds into hard assets.

At times it seems like trying to cover our topic here is overwhelming. There are so many issues than can impact the global monetary system at any time. So far, the change we believe is coming seems orderly and likely to unfold over time in a step by step process. We think this is certainly what the current financial institutions hope for and are planning for. We hope whatever change happens is orderly and  benefits the people as much as possible. 

We live in historic times with all kinds of outcomes possible. Everything from another GFC (Global Fiancial Crisis) to an orderly transition to a more stable system over time is still on the table. And all kinds of outcomes in between.

What we will do here is try our best to follow it all for readers who just don't have time to keep up with it all. We can attest it takes some time to follow it. We read at least 5 articles for every 1 that we may post here on the blog (sometimes more than that).

Hopefully, we select articles and factual information (IMF and BIS documents, etc) that keep readers as informed as possible. We try to provide links so readers can research and verify information on their own. We think it is very important for people to know as much as possible since global monetary system change will impact most people in their daily lives. 

Saturday, July 26, 2014

Dispelling the Myth that Central Banks Hate Gold

One of the keys we watch here along with the US dollar is the price and movement of gold. If you do any research on gold at all on the internet, you will quickly discover that there is a commonly held view that Central Banks hate gold and think of it as a useless asset that does not earn interest. As usual, if you dig a little deeper and do more research you discover a different story. Let's take a look.

First some definitions and background. When we say there is a commonly held view that Central Banks "hate gold" we mean that hard asset advocates sometimes suggest that Central Banks think owning gold is pointless and also try to discourage individuals from owning gold by  using their power to suppress the price of gold in the marketplace at times. We think they are likely right on the second part of that, but not the first part. We will explain why below.

First, let's look at Central Bank reserves. They own gold and lots of it. Tons and tons of gold. The US owns over 8,000 tons (the most of any nation). The IMF owns nearly 3,000 tons of gold. The major EU nations all own tons and tons of gold. Here are the top 10 gold holders (excludes IMF which is not one nation). And there are also tons of articles pointing out how Russia and China have been rapidly moving to build up their gold reserves to try and catch up with the other top holders. So the first idea we can discard is that Central Banks and nations think holding gold is a waste of time. Clearly that is not true even if you hear a public official now and then say that gold is useless because it does not earn interest.

Another common view circulating among hard asset advocates is that the Western nations and Central Bank nations gold reserve holdings are deceptive because they do not disclose how much of their gold they may have leased or swapped into the market. This part is true and is impossible for anyone to know because the Central Banks are not transparent on this issue. They are not willing to disclose any gold leasing or swap arrangements they may have to the public. 

When the US organization GATA sued the Federal Reserve under the Freedom of Information Act (FOIA) to try and learn this information, they received a letter from the FED stating that this information would not be disclosed and the courts upheld their right to prevent disclosure. Here is a key quote from this letter:

"In connection with your appeal, I have confirmed that the information withheld (from disclosure) under exemption 4 consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you."

In addition, GATA also posts on their web site a 1999 IMF internal memo that discusses proper disclosure of reserve assets for Central Banks. Here is bullet point #15 (on page 6) from that memo:

"15. Central bank officials indicated that they considered information on gold loans and 
swaps to be highly market-sensitive, in view of the limited number of participants in such 
transactions. Thus, they considered that the SDDS reserves template should not require the separate disclosure of such information but should instead treat all monetary gold assets, including gold on loan or subject to swap agreements, as a single data item. They also confirmed a view, taken by a number of countries (both inside and outside the G-10) at the December Board meeting, that the disclosure of the composition of reserves by individual currencies would be market-sensitive but that they would have no objection to disclosure of such information by groups of currencies." 

The above IMF memo says that the IMF got feedback from Central Banks that they do not want to disclose any details about their gold leasing or swap deals. Instead they asked to just be allowed to list their gold reserves as one lump number (without explaining any liens that may exists against the gold). As an accountant, I understand what this means. It simply means they do not want to disclose the information because they feel it is too sensitive. This lack of transparency of course fuels a lot of speculation as to why the need for secrecy. That topic is beyond our scope here. 

What we can take from all this is that Central Banks clearly think gold is important. They think that their dealings with their gold reserves are so important and sensitive that they will not disclose them to the public. They do not feel they fall under the Freedom of Information Act as the FED clearly stated in their letter to GATA.

Need more proof? Let's just listen to European Central Bank (ECB) President Mario Draghi. Here is an article written by someone who was able to ask Mr. Draghi directly what he thinks about gold as a reserve asset. Here is the text of his answer:

"Dr. Mario Draghi: “Well you’re also asking this to the former Governor of the Bank of Italy, and the Bank of Italy is the fourth largest owner of gold reserves in the world, which is out of all proportion to the size of the country. But I never thought it wise to sell it, because for central banks this is a reserve of safety, it’s viewed by the country as such. In the case of non-dollar countries it gives you a value-protection against fluctuations against the dollar, so there are several reasons, risk diversification and so on. So that’s why central banks which have started a program for selling gold a few years ago, substantially I think stopped…most of the experiences of central banks that have leased or sold the stock of gold about ten years ago, were not considered to be terribly successful from a purely money viewpoint.”

If you prefer, you can listen to Mr. Draghi's answer here.

By now it should be clear that the idea that Central Banks hate gold is a myth. 
There are legitimate questions that can be asked such as:

-Do Central Banks at times sell or lease gold in the marketplace to control the price?
-Why do Central Banks resist transparency on their gold loan and swap dealings?
-What future plans do Central Banks have for gold?
-Do Central Banks view gold as "competition" for their fiat currencies?

We can't answer for the Central Banks. They know the answers and we don't. 

Jim Rickards says that any leases or swaps the US FED may have on gold don't really matter because in a crisis situation where gold reserves would become important, they can just refuse to deliver any physical gold that may be leased or swapped. Essentially, he says national security trumps everything else if push ever comes to shove. 

We will leave those questions and possible answers to others more qualified. We do think we can make these observations based on available evidence.

-Central Banks (and the IMF) own lots of gold and view it as a key reserve asset that helps back up the fiat system (unofficially). They don't hate gold.

-According to Mr. Draghi they view gold as a "safety" reserve asset and as a means of hedging a drop in value of any national currency (he specifically mentions the US dollar). He adds it provides "risk diversification."  He doesn't hate gold.

-It is very possible that in the future these Central Banks (and the IMF) may find new and creative ways to use their gold reserves (along with other assets) to provide better stability in currencies. We are following that possibility here over the coming months and years. 

Conclusion: It is understandable why some are skeptical and critical of Central Banks on the topic of how they use their gold reserves since they refuse to be transparent about that. Whether they should be more transparent is unknown to us. In general, we think the more transparency the better when it comes to building public trust. But there may be sensitive global financial system issues that justify it in the eyes of the Central Banks. We can't possibly know and are sure they aren't going to tell us:)    They refused to do so when sued under the FOIA.

We do think it is reasonable to believe that gold can be used by them in the future to improve systemic stability. How and when that happens is also unknown to us. But we do have some hints now and then. It's just another area we need to follow that could involve major monetary system change at some point in the future. We will try and do that.

Update 7-29-14: Silver Doctors ran this article on their site (which we always appreciate). In the comments below the article a reader questioned how I know the US really has the gold reserves they say they do. As I noted in the article, there is poor transparency on this issue so I cannot say that I know for sure how much gold the US actually owns (that is not loaned or swapped). 

However, the US does publish an inventory of the physical gold owned which is public information. I have to assume that is correct information unless proven to be wrong by verifiable evidence (which I have not seen). Here is the link to the US Treasury summary of gold owned and here is a pdf file on the US House Finance Committed that lists the gold inventory in detail by location. Unless someone can prove this information is false, I have to accept it as the best information I can verify from an official source.

In addition to all the above, as I noted in the article, Jim Rickards (who has contacts in the US intelligence community) says that in a crisis the US would likely take possession of ALL physical gold stored in the US if they felt national security was at stake (including other nations gold too). Jim Rickards does not question that the actual physical gold exists stored in vaults in the US. The question is whether that gold has been loaned or swapped.

Friday, July 25, 2014

IMF Cuts GDP Forecast for the US and China

The IMF is lowering its GDP forecast for both the US and China. The US first quarter was very bad and the IMF cited bad weather as the main reason. They believe GDP will pick up the rest of this year, but the bad first quarter caused them to lower their overall 2014 forecast. They also cut their forecast for China as well.

This will bear watching as any signs of further weakness will pressure the FED which continues to project that an improving economy will allow it to end its QE program and eventually raise interest rates. Jim Rickards and others (John Williams, Micheal Pento, Peter Schiff, Jim Rogers, Marc Faber, etc)  are on record saying they believe the FED is "tapering QE into weakness" and this will result in another US recession by early 2015.

If Rickards is right it will have signifigance because the FED will lose credibility with the markets and be forced to rethink its forecast and its policies. That could impact the US dollar and cause some loss of confidence in it. 

On the other hand, if the IMF and the FED forecasts are correct, the US dollar should not take a severe hit any time soon. Since the value of the US dollar is the biggest key we watch for here this whole topic is very relevant.

So far Rickards has been right and the IMF/FED were wrong. Will that hold up or reverse? Will the FED change its forecast and reverse course? What impact will slower growth in China have? We will keep watching it here the rest of the year to see how it turns out and if it has significant impact on the monetary system or not.

Note: Here is actual IMF report link.  Here is an excerpt from the report regarding the medium term outlook.

"Looking at the medium term, potential growth is forecast to average just above 2 percent for the next several years, significantly below the historic average growth rate. This downgrade reflects the effects of an aging population and more modest prospects for productivity growth. This makes it critical for the authorities to take immediate steps to raise productivity, encourage innovation, augment human and physical capital, and increase labor force participation. 

Moreover, recent growth has not been particularly inclusive, with the latest data pointing to almost 50 million Americans living in poverty (as shown by the Census Bureau’s supplemental poverty measure) and the official poverty rate stuck above 15 percent despite the ongoing recovery."

Inerestingly, the IMF says medium term growth will be "significantly below the historic average growth rate". But the FED says they think they can end QE and then look to raise interest rates. We'll see what actually happens.

Wednesday, July 23, 2014

Argentina Debt Update - One Week to Go

This is a story we continue to follow because it has implications that go beyond just what happens to Argentina and these bond holders. The IMF and World Bank both expressed concern at a recent US Supreme Court decision to let stand a ruling that Argentina must pay these bond holders full value by next week or be in default.

Here are the most recent articles I can find on this situation. You would think this should get resolved because if Argentina really does default on these bonds it will hurt their standing in the credit market. And the bond holders will not get paid either. Both will lose. Here are links to three of the latest articles:

ABC News - Judge Orders 24-7 Argentina Debt Talks 

Reuters - Argentina Default in Balance as government refuses to capitulate

Wall Street Journal - Argentina Mediator postpones meeting to Thursday

The two sides have until next Wednesday to settle. Argentina requested a stay to get more time but the judge refused that and ordered them to meet around the clock to settle before the deadline. 

While most analysts believe that if Argentina defaults it will not lead to contagion elsewhere, we still have to watch it. The global financial system now is interconnected (even though most say the Argentina debt was islolated). And there are trillions and trillions of interest rate sensitive derivative products out there. Many are Over the Counter and not transparent. So any time a major country or too big to fail institution might default, we have to keep an eye on it.

Meanwhile the IMF prosposed rules to handle bad sovereign debt still awaits approval and this court ruling opens the door for other debt holders to fight with a chance to win in other situations. This is why the IMF and the World Bank issued statements of concern. 

Tuesday, July 22, 2014

The Fog of War

The Russia-Ukraine situation is one of the global hot spots we are following because it is possible that problem could build into one that could impact the global financial system. So far it is contained to that area and not having any dramatic impact on markets for the most part. But we will watch it just in case it escalates.

The latest event that could ramp things up of course is the downed Malaysian airliner. While we are concerned here with events that could lead to monetary system change, this event provides a good example of how the truth gets lost once the "Fog of War" sinks in.

As soon as this event happened, both sides of this conflict immediately went into spin mode to convince public opinion that the other side was at fault. These are standard "fog of war" tactics used over and over in history. Intelligence agencies know that swaying public opinion to their side is possibly the most powerful weapon they can deploy when war is underway.

It is impossible for the average citizen to have any idea what the real truth is under these circumstances. Both sides will spin and deceive if they think they can pull it off and gain an advantage. The goal is to undermine the ability of the enemy to effectively function. If the public is overwhelmingly against you, it is virtually impossible to conduct a war. It puts you always on the defensive.

With all that said below are just some of the stories put out by both sides so far. If you use an ounce of common sense you can see the obvious spin and slant depending on whether the publication is pro West or pro East. I'll just list a few links to give you an idea without much comment. Readers can probably easily see what I mean in reading these articles:

First, the western slant:

Fox News  - US offers strong evidence Russian forces behind airplane strike

The Guardian - World Demands Answers from Russia

USA Today - Intercepted Calls pin MH17 shootdown on Rebels

Rebels were given anti aircraft training in Russia - Daily Mail Online

Now the Russian slant:

Russian Ambassador calls Militia phone call intercepts fake

Ukrainian SU-25 fighter detected in close approach to MH17 before crash - Moscow

Putin denounces Use of Ukraine Plane Crash for Political Gain

US Intelligence: No Direct Link to Russia in Malaysia Plane Downing

This is just a small sample. Do a google search and you easily find hundreds of similar articles with accusations flying everywhere. Do you really think we are going to learn the truth out of all this? Intelligence agencies are masters of making sure we don't and that the "fog of war" prevails so that the public will either be on their side or at least confused.

Along with all the spin and posturing, we have the speculative theories. Those are everywhere too. You can choose any of them you like, but I doubt you will ever be able to find any real proof that one of them is the full truth. So we don't even try here. We just try to assess how things may impact the financial system. 

As a side note that we live in truly unusual times, I will put links to two more articles below. 

Here we have two men who were admirers of President Reagan (who once called the Soviets an evil empire). Things have changed so much that these men are basically on Russia's side in this war of words. I have no idea who is right or wrong. Instead I just watch to see if the conflict ramps up to the point where it becomes more global in impact.  Here are the comments of Paul Craig Roberts and former Congressman Ron Paul who seem more suspicious of the US than Russia. Times have surely changed. But the fog of war hasn't.

Ron Paul - Malaysian Jet Tragedy Propagandized

Paul Craig Roberts - What happened to the Malaysian Airliner

Monday, July 21, 2014

The UK Telegraph - Outstanding Article on the US Dollar and the Future

Today we have this outstanding article in the UK Telegraph discussing the future of the US dollar. Every reader here needs to read this article. Not only does it provide an excellent overview of the situation, it is the first hint from a mainstream media source of what we have been covering here on this blog. The possibility of a new virtual asset backed currency backed by Central Banks! 

This is such a great article it will save me a lot of time. Here is some info on the author of this article Liam Halligan. Instead of attempting to layout the future of the change that may be coming myself, I can just let the UK Telegraph article do the talking. Here are some interesting key quotes:

. . . . ."And for the past 70 years, the dollar has ruled the roost.
This won’t change anytime soon. Something just took place, though, which illustrates that dollar reserve currency status won’t last forever and could be seriously diluted. Last week, seven decades on from Bretton Woods, the governments of Brazil, Russia, India and China led a conference in the Brazilian city of Fortaleza to mark the establishment of a new development bank that, whatever diplomatic niceties are put on it, is intent on competing with the IMF and World Bank.
It’s long been obvious the BRICs are coming. The total annual output of these four economies has spiralled in recent years, to an astonishing $29.6  trillion (£17.3 trillion) last year on a PPP-basis adjusted for living costs. That’s within spitting distance of the $34.2 trillion generated by the US and European Union combined.

America’s GDP, incidentally, was $16.8 trillion on World Bank numbers, and China’s was $16.2 trillion – within a whisker of knocking the US off its perch. The balance of global economic power is on a knife-edge. Tomorrow is almost today." 

"Although the dollar’s reserve status won’t end overnight, the global payments system is now moving inexorably towards that outcome. The US currency accounted for just 33pc of all foreign exchange holdings in 2013, on IMF numbers, down from 55pc in 2001.

Within a decade or so, a “reserve currency basket” may emerge, with central banks storing wealth in a mix of dollars, yuan, rupee, reals and roubles, as well as precious metals. Perhaps some kind of synthetic bundle of the world’s leading currencies will be developed, with emphasis placed, after years of western money-printing, on assets backed by commodities and other tangibles.

I also believe central banks may include cyber-currencies (such as bitcoin) in their reserves. If you think that’s mad, consider that mankind has long sought scarcity – be it with shells, stones or metallic elements – to store wealth. Now the money-printing taboo has been broken by yet another generation, it makes sense to use complex computer algorithms to ensure that only a certain amount of a particular currency unit can ever exist."

My added comments: I absolutely do not think it is "mad" to consider the idea that central banks "may include cyber-currencies in their reserves."  In fact, we have been talking about this here all year long in articles like this and like this. It is nice to see a mainstream publication suggest this concept because it confirms what we have been reporting here.

This story also confirms the general time frame I have gotten from sources I view as credible inside the system. I believe the general view is that over the next 5-10 years we will see a transition from the current US dollar based system in order to address the problems in the current system. If there is a sudden, unexpected systemic crisis, that would change things. But I believe this is the time frame for change that is the prevalent thinking within the current system.

I can add that the cyber-currency under consideration is absolutely not Bitcoin. We have a recent update from Klickex on the status of their GSD (virtual asset backed currency) including an estimated  timetable for implementation if all goes as planned. We are planning an article in the future on this once we get some additional information that will allow us to expand on the story. It looks more and more like we will see some visibility on this story this year. For now, its nice to finally have some company talking about a central bank backed and asset backed virtual currency. It has seemed lonely out here :)

Sunday, July 20, 2014

Jim Rickards Latest Editorial: Stock Market Reality Check

Jim Rickards is on record earlier this year stating that the believes the economy is weak and that the FED is tapering QE into weakness. He predicted this would lead to another recession either this year or early next year. Today he writes this new editorial updating where he thinks things stand in the economy. How are his predictions panning out? Let's take a look.

We cite Jim Rickards on this blog frequently. There are reasons why we do that. One is that he has a solid track record we have followed over a period of years of making accurate predictions. Another is that when he puts forward a theory he backs it up with documentation that the reader/listener can verify with their own research (something we require here to post articles on this blog). Finally, Rickards resume is strong. He has a strong academic background, a strong career resume, and clearly has high level contacts within the present system. Short version: he has proven to us his predictions are worth noting and tracking. There are others too, but Jim Rickards is one of the best.

So how has he done this year? Reasonably well, but its too early to tell if he will get his recession prediction right or not. When the FED announced their QE tapering program he said he believed the FED was "tapering into weakness" and predicted a summer "Yellen Pause". By this he meant that she would pause the taper this summer due to weak economic data.

I guess he was half right. So far the economic data is very weak with 1st quarter GDP a horrific number. The 2nd quarter data is coming up soon. But he missed on the FED pausing the taper. They did not pause and have stated they will wind down QE by year end. And now they are hinting at interest rate increases earlier than some were expecting (implying the economy is improving). 

The 2nd quarter numbers will be interesting because it will show if the FED stays on this track or has to rethink if the data is weaker than expected again. We'll watch that to see. 

Below are some quotes of interest from this recent Rickards article. He is clearly not backing off his forecast that the economy is still weak and will stay that way and suggests he thinks the stock market is about to reflect that weakness. One thing about him, he goes on the record and then you can see if he gets it right or wrong. We'll follow that into year end.

Here the quotes from his latest article:

"Listening to mainstream market commentary on television and reading the financial press leaves one with the impression that the economic recovery is gaining strength and that stock market indices, at or near all-time highs, will go higher still."

"But all is not right. In fact, the fundamentals of the U.S. economy are in awful condition and are getting worse. Almost everything about the happy talk story is superficial, and falls apart under scrutiny. There is an alternative narrative of bad news that is seldom discussed on mainstream business channels but is well known to analysts. When these adverse trends are taken into account one conclusion in inescapable. The stock market and economic fundamentals are on a collision course. One or the other will have to swerve. Either the economy will have to improve rapidly and unexpectedly and reverse its fundamental weakness, or inflated stock values are heading for a precipitous fall. The evidence suggests that the latter is more likely."

"The news from abroad is no better. China is slowing precipitously and may be on the brink of a credit collapse. European growth is near zero and even the mighty German economy, the locomotive of Europe, is slowing partly because of weaker demand from Ukraine, Russia and China."
"Against this backdrop, mainstream voices are beginning to call U.S. financial markets a bubble. The New York Times recently featured a front page story with the title, Welcome to the Everything Boom, or Maybe the Everything Bubble. The conservative Bank for International Settlements in Switzerland recently warned that stock markets had become “euphoric.” Even Janet Yellen of the Federal Reserve, the institution with the worst record for spotting asset bubbles, said that valuations of some securities “appear stretched.”
"So, the conundrum is complete. Stock indices march to all-time highs while economic fundamentals fall apart. The two will be reconciled either with a spectacular turnaround in growth or a spectacular collapse in stock prices. The problem is that a turnaround in growth can only come from structural reform, not money printing. Structural reform is the job of the White House and Congress, not the Federal Reserve. Since the White House and Congress are barely speaking, no help should be expected from that direction. Therefore a stock market collapse is almost inevitable and is probably coming soon."

My added comments: The above are selected quotes and readers should read the 
entire article to get the full context. Jim provides some supporting details for his general comments I selected. 

This is becoming interesting for me to follow. 

On the one hand there are many credible voices like Jim Rickards, Jim Sinclair, Peter Schiff, Michael Pento, and many others predicting serious systemic crisis and urging people to prepare for that. 

On the other hand, through this blog I have gotten some information from people working inside the system to try and deal with these problems to prevent a systemic crisis. These people are also credible, highly intelligent, and well connected. They view the problems as manageable over time and see much hope that the system can withstand shocks and transition to more stability.

All these people are very intelligent, very knowledgeable, and well respected. They all have strong backgrounds and resumes. And I believe they all are genuinely concerned for the future for people. I believe they are all working in their own way to try and be helpful to the average person who just wants to live in a relatively stable world and make a living. Most don't want to have to think about "major monetary system change" even if it may directly impact them.

These are very interesting and I think historic times. I can see all kinds of possible outcomes from a severe systemic crisis to new technology providing solutions and averting systemic crisis. I have no idea which way it will go, but following it all has been an interesting journey. We will continue to do that here and report the best information we can find as things unfold.

I do still believe major monetary system change is coming one way or another (the reason this blog was started). If anything, what I have learned doing this blog convinces me of that more than ever.The biggest question I have is will the change come quickly as a result of some kind of systemic crisis OR will the change take place over time in a more controlled way and avoid a worst case systemic crisis? And then will the change make things better or worse?

We think, as things do unfold, more and more people are going to be interested in following this topic. This blog actually proves that so far. We have had far more readers than we expected when this blog was started. And that is a good thing. The more people know, the better off we all are.

Saturday, July 19, 2014

Update on Argentina Debt Situation

Earlier we ran an article on the US Supreme Court decision that allowed some hedge fund bond holders to be paid in full on some bonds they bought from Argentina years ago at a steep discount. Argentina had settled with 90% of the rest of the bondholders who took losses on the bonds. Argentina has not yet agreed pay these bondholders with a July 30 deadline looming. If they don't pay and the deadline is not extended, Argentina will be in default. Here is the latest on that situation and also a couple of related articles of interest.

So with about 11 days to go Argentina has not settled yet and according to the Reuters article above has not even scheduled talks. Here is a quote from one of the investors holding the bonds:

"The Argentine government appears determined to default. We hope it chooses to avoid this dead-end path," NML said.

The article also says:

"NML Capital Ltd, a unit of Elliott Management Corp suing for full repayment on its bondholdings, said Argentine officials refused to meet or negotiate ahead of a July 30 deadline."

It looks like Argentina is playing hard ball in this situation and has asked for a stay of the July 30th deadline. It is hard to tell if this will get resolved or if Argentina will actually default on these bonds. We will follow it to see what happens.

This story allows us to mention a couple of other semi-related articles of interest. First we have this news of China giving Argentina a $7.5 billion loan. A reasonable question to ask is why would you loan $7.5 billion to a country which may default on its old bonds in a few days? A guess might be to allow China (and BRICS) to gain influence with Argentina and elsewhere in South America. Putin went to Argentina just before the BRICS summit and talked about improving trade and relations etc. The BRICS were said to be courting Argentina to join with them "after they clean up their bond situation". So this could be a strategic move by China-BRICS to gain influence seeing that Argentina is upset with the US court ruling right now.

Here is the really interesting article all readers here need to read. It is an article in the Economist  titled "Busted Flush" about sovereign debt restructuring. The article uses the current Argentina situation to bring up the general topic of how the IMF wants to deal with sovereign debt problems in general. This where the article gets our attention.

Below we will paste a few quotes and then add some comments in bold type just below.

"Meanwhile the IMF’s new plans could make the modification of debt contracts more frequent. Because the fund is often a troubled debtor’s only source of cash, the terms on which it lends can dictate whether or not other creditors get paid. It is seared by the experience of Greece, where (along with the European Union) it provided a giant bail-out in 2010 to avoid a restructuring that nonetheless took place in 2012. In response, it is proposing two changes to its rules. First, it wants greater leeway to support the “reprofiling” of sovereign debt. Reprofiling is a relatively gentle form of restructuring, in which the maturity of bonds is extended but the amount owed and interest rate stay the same.
The fund also wants to limit the risk of being dragooned into lending huge amounts to stave off default in a country whose debts are unlikely to be sustainable by getting rid of a “systemic exemption” to its lending rules. Introduced during the euro crisis, this exemption condones large loans to countries that are poor credit risks if they are important enough to pose a threat to the global financial system.
It's important to know what the IMF is thinking about how to resolve sovereign debt problems because there are still plenty of places around the world where a sovereign crisis could happen. Right now things seem calm, but we all know that there is unsustainable debt out there. Obviously the IMF is concerned because they want to get rid of a rule that might make them issue loans to "a country whose debts are unlikely to be sustainable" as noted in the article. 
The article also points out this rule was put in place because of countries that are "poor credit risks" and also "important enough to pose a threat to the global financial system". Using some common sense, this tells us that there are still countries out there with possible unsustainable sovereign debt that could pose a threat to the global financial system. Today things may be calm, but the IMF wants off the hook if things change tomorrow. Just something to note because an event like that would clearly impact the global monetary system and certainly cause major change.
"The two proposals—which have yet to be approved by the IMF’s board—are much less ambitious than earlier ones. In 2002 the fund pushed for, but failed to get agreement on, a “sovereign-debt restructuring mechanism”(SDRM), akin to an international bankruptcy court. The new plan would simply lead to more equal treatment for would-be borrowers and, at the margin, might encourage more countries to reprofile their debts earlier."
A couple of things to note here. First, once again, these reform proposals are not yet approved at the IMF (like the 2010 quota reforms). Second, this article mentions the earlier attempt in 2002  to set up a "sovereign-debt restructuring mechanism (SDRM), akin to an international bankruptcy court". 
All of this tells us these sovereign debt issues are an ongoing problem and there still is not a general agreement on how to resovle them when they happen. As we see in Argentina, there is the potential for a mess. If a country that could be "a threat to the global financial system" were to default, we could have a really big mess.
This is why the Argentina case is so important to the IMF, the UN, and others who issued public statements of concern about the US Supreme Court decision. The whole issue of how to deal with sovereign debt default is up in the air now.
We noted in our earlier article "Where is all this Leading? When will it happen" that we believe the resolution of unsustainable sovereign debt will be part of the process of a transition to a new system. The question is whether this will get taken care of in controlled way over time using a master plan or whether a crisis will erupt suddenly that spins out of control with no approved plan in place to deal with it. 

And always keep in mind that around the world there are huge interest rate related derivative products out there. It is literally impossible to know what might happen with those if a default happened in a major country. It can quickly set off a chain reaction because of the interconnected nature of all this.
It is just another area we need to be informed about and watch. At times it seems like the problems are endless, but we do know that efforts are being made inside the system to address the problems. We believe there is awareness of the problems as well. So, all we can do here is just watch and see what happens and hope the right plans are put in place to deal with the debt problems as they arise.