Saturday, October 31, 2015

No Crisis Emerges in September - October

A few months ago the internet was flooded with predictions that a financial crisis of some kind was imminent including many predictions of a huge drop in the US stock market. We are now at the end of October and none of the many predicted crisis events have happened. 

I won't recap all the forecasts as there were too many to review them all. At this point the proper question to ask is, what do we learn from this?

I think what we should learn from this is that no one has a crystal ball and can predict the future with certainty. It is certainly proper to point out the conditions do exist the could lead to a crisis at any time. We have documented dozens of warnings from both the IMF and the BIS here on the blog warning about potential systemic risks.

The problem arises when people start making specific predictions that a certain period time will see a crisis unfold. Clearly, no one really knows anything like this about a specific date or time frame. We would encourage readers to be open minded and consider many points of view including listening to credible voices that issue warnings. 

But we also encourage readers to look at those who continually forecast a crisis event will happen at a certain date or "very soon" etc. and hold them accountable when they miss those predictions. People who continually make such predictions and miss them hurt their own credibility. It does not mean we won't eventually see a crisis or even that those missing the forecast do so with evil intent. But they need to understand that most people quit listening when you repeatedly issue dire warnings for specific dates that do not happen. That's to be expected.

Here, we have never issued any such type of forecast. In fact, we told readers that our most reliable sources did not see anything pointing to an imminent crisis in these two months.

What we do here is encourage readers to stay alert and informed so that if a crisis does emerge, they will not be caught by surprise and will have thought through a plan to deal with one ahead of time.  

Friday, October 30, 2015

One Net, One Future & The Wrong War for Central Banking

Below are links to a couple of interesting articles appearing recently on Project Syndicate. Below each link is a brief quote from the article. Former Swedish Foreign Minister Carl Bildt talks about potential threats to the internet in the future and Stephen Roach says Central Banks are too focused on inflation targets.


One Net, One Future by Carl Bildt

"Once upon a time, two superpowers, the United States and the Soviet Union, held summits to reduce the danger of a nuclear war. Today, the summitry is between the US and China, a large part of which is to reduce the dangers of confrontation and conflict in cyberspace.

The stakes could not be higher. How the world responds to the threat of cyber attacks will determine the extent to which future generations will be able to benefit from the digital era. In addition to the possibility of conflict, there is the danger that governments will overreact, erecting barriers to information that undermine the potential of the Internet."

"Fixated on inflation targeting in a world without inflation, central banks have lost their way. With benchmark interest rates stuck at the dreaded zero bound, monetary policy has been transformed from an agent of price stability into an engine of financial instability. A new approach is desperately needed."

Thursday, October 29, 2015

IMF Set to Green Light Adding Yuan to SDR Basket - What's the Impact?

This a story we have been following here for quite some time. Last December we noted that inclusion of the yuan into the SDR currency basket was an event to watch for in terms of monetary system change. With that event now seemingly close at hand, below are links to a couple of articles that discuss the coming change and its potential impact globally.


IMF set for green light on China's yuan joining currency basket

"International Monetary Fund staff are set to give the all-clear for China's yuan to be included in the lender's benchmark currency basket, laying the groundwork for a favorable decision by policymakers, people familiar with the discussions said.
The IMF's executive board is scheduled to decide in November on putting the yuan on a par with the dollar, yen, euro and pound sterling and a key factor will be its performance against a checklist of technical criteria, as assessed by IMF staff.
Three people briefed on the IMF discussions, who asked not to be named because of the sensitivity of the issue, said on Oct. 25 a draft report from staff reached a favorable conclusion on including the yuan, also known as the renminbi (RMB)."
. . . . . . 
"An IMF spokesman said staff were finalizing a report to be considered at a formal board meeting planned for November, although no date had yet been set.
"The decision on the possible inclusion of the RMB in the SDR basket will ultimately be made by the IMF's Executive Board when the meeting is held," he said.
The second official said that may be postponed until early 2016. Any change to the basket will take effect in October 2016."

. . . . . .
What happens if the yuan is included?
Let’s assume that the yuan does make it into the SDR, becoming its fifth component (replacing another currency is in theory possible, but highly unlikely). The demand generated strictly by trade in SDRs won’t be anything to write home about, but the IMF stamp of approval comes with side benefits.

Standard Chartered plc (ADR: 
SCBFF ) has estimated that over CNY 6 trillion ($945 billion) in offshore deposits could flow into the country by 2020, while renminbi invoicing for merchandise trade could reach $2.6 trillion per year. The bank estimates that the offshore renminbi market has grown 21-fold since 2010. AXA Investment Managers forecasts a migration into yuan-denominated reserves of over $1 trillion.
My added comments:
This event will be a significant event that signals change the the world monetary system. However, by itself this event is not likely to create a condition where the average person would notice any significant change in their daily life in the short term. It is just another step in a slow global move away from the US dollar as the sole major global reserve currency. Also, the very slow process of making this change illustrates how changes tend to happen slowly over time rather than suddenly absent any major financial crisis.

Wednesday, October 28, 2015

BRICSPOST: Yuan to Replace US Dollar in new BRICS Bank

In this new article in the BRICSPOST, Indian Prime Minister Modi talks about the new BRICS Bank. He touches on a variety of topics including the fact that the US dollar will be replaced in the BRICS Bank with the Chinese yuan. Modi also repeats the call for changes to global governance at the global institutions. Below are quotes from the article.

"Indian Prime Minister Narendra Modi on Friday said the New Development Bank launched by the BRICS will have Africa as a “major area of focus”.
In a written interview with African journalists at the editors forum of the third India-Africa Forum Summit (IAFS) in New Delhi, Modi said the New Development Bank was a significant initiative that can have a profound impact on the global financial order."
. . . . . 
"The BRICS New Development Bank will name its first investment in April next year and the first loan will be issued in Chinese yuan not dollar, top officials have confirmed.
The bank has an initial authorized capital of $100 billion.
Its initial subscribed capital of $50 billion will be equally shared among the founding members.
The paid-in reserves are planned to be denominated in each country’s currency. The Chinese renmimbi is also expected to replace the dollar at the BRICS Bank, especially for projects in Asia."
. . . . . 
"On Friday, Indian Prime Minister Modi also asked 54 African nations to join India in demanding an overhaul of the United Nations and other global institutions to make them more “democratic, inclusive andrepresentative”. Modi said that “the world is undergoing political, economic and technological transition on a scale rarely seen in recent history” and facing new challenges such as terrorism and climate change, which did not exist when the UN was founded 70 years ago. He warned that the UN and other global bodies run the risk of losing relevance if they do not adapt."

Tuesday, October 27, 2015

Is Adding the Yuan to the SDR Basket a Big Deal?

Former Fed Vice Chairman Alan Binder gives his take on the news that the IMF will likely add the yuan to the SDR currency basket in this recent interview.  Below is a summary of the interview.


Is IMF Adding China Yuan to Reserves Basket a Big Deal?

Oct. 23 -- IMF representatives have told China that the yuan is likely to join the fund’s basket of reserve currencies soon, according to Chinese officials with knowledge of the matter, a move that may make more countries comfortable using the unit or including it in their foreign-exchange holdings. Former federal Reserve Vice Chairman Alan Blinder also discusses Fed policy on "Bloomberg Markets."

Monday, October 26, 2015

Eric Sprott on Gold and Silver Markets and Miners

In this recent interview precious metals expert Eric Sprott gives his take on the current state of the precious metals markets and mining industry.

Sunday, October 25, 2015

Escape from The World Bank

In this article on Project Syndicate, Professor Devash Kapur says The World Bank is getting a needed challenge from the new BRICS oriented financial institutions. Below are a few quotes. 


"The elephants in the room at the annual International Monetary Fund/World Bank meeting in Lima, Peru, were the China-inspired Asian Infrastructure Investment Bank (AIIB) and New Development Bank (or “BRICS Development Bank,” as it was originally called). Will these new institutions behave like the World Bank or the more conventionally “bank-like” European Investment Bank (EIB)? Above all, will they be vehicles to promote – or, paradoxically, constrain – China’s interests?

The reality is that over the next decade, these new institutions will not be huge lenders. The paid-in capital of each is $10 billion; so, even with an equity-to-loan ratio of 20% (the current floor for the World Bank), each will be able to lend only about $50 billion over the next decade – not chump change, but hardly a game changer – unless they “crowd in” substantial private investment. What matters is that the larger emerging markets are putting substantial capital into institutions that will be dominated by China – an indication of how frustrated they are with the World Bank and the IMF.

The World Bank is like an old ship: in its seven decades, all kinds of barnacles – sticky budgetary accretions and transaction costs – have accumulated on its hull, steadily impeding its speed and performance."  . . . . . . . . . 

Saturday, October 24, 2015

IMF Decision on Adding Yuan to SDR Basket Likely Soon

The IMF is apparently hinting that an announcement on adding the yuan to the SDR currency basket is coming soon. Below are links to articles about it.


Yahoo News/Bloomberg video - IMF Decision Next Week?

Sputnik News - IMF Signals Posssible Approval on Renminbi

"As China gradually dismantles its mechanisms of planned economy in regard to currency market and monetary policies, the IMF and the US change their attitudes toward the renminbi’s inclusion in the Fund’s reserve currency basket from the utterly negative to favorable somewhat."

Forex Live - IMF Said to Give China Strong Signal on Yuan

"The IMF has told China that the yuan is likely to be included in the SDR reserve currency basket soon.
Officials are so confident of winning approval, they've begun preparing statements to celebrate the decision.
188 member nations use the SDR basket but the IMF is looking into convertibility issues.
This isn't a surprise. The IMF has been giving signals that it would be accepted. However, it could create a small tailwind for the yuan, which is something China would want to avoid.
From my perspective, I don't understand why the IMF is doing this before China allows full convertibility."

Bloomberg - IMF Said to Give China Strong Signs

"International Monetary Fund representatives have told China that the yuan is likely to join the fund’s basket of reserve currencies soon, according to Chinese officials with knowledge of the matter, a move that may make more countries comfortable using the unit or including it in their foreign-exchange holdings.
The IMF has given Chinese officials strong signals in meetings that the yuan is likely to win inclusion in the current review of the Special Drawing Rights, the fund’s unit of account, said three people who asked not to be identified because the talks were private. Chinese officials are so confident of winning approval that they have begun preparing statements to celebrate the decision, according to two people."

Friday, October 23, 2015

A Valuable Lesson from a Home Repair

One of the challenges for this blog is to cover the topics we do in a responsible way. With the systemic risks to the global financial system that are well known and documented here on the blog, it would be irresponsible to pretend they don't exist. 

On the other hand, there are many who are constantly preaching that a horrific collapse is going to happen on certain dates and times. When these dates and times pass and no collapse has happened, it is natural for people to dismiss such forecasts. Constantly using fear is not a responsible approach either.

This past week I learned a valuable lesson from a basic home repair problem we encountered. I arrived home from work to discover that the sprinkler system in our front yard had sprung a leak and water was free flowing from that leak. Assuming I knew what to do, I located the shut off valve for the main water supply to our house that connects to the city water line. Much to my surprise (and anxiety) I learned that I was unable to turn that valve off because it had been placed too close to the metal box in the ground that surrounded it. Even the emergency night water employee from the city could not turn it off. 

Fortunately, after much concern and scrambling to understand my sprinkler system I found a shut off valve to the sprinkler system itself. By turning off that valve I was able to stop the water leak until help could arrive to repair the leak.

The next day both a plumber and some city workers arrived to fix the problems. They were much appreciated and took time to educate me on what went wrong and what to watch for in the future to avoid a disaster. Just imagine if this leak had been inside our house and I was unable to shut off the water supply to our home. The result could be a disaster.

I learned a number of valuable things in this experience:

- I should have checked out the main water supply valve ahead of time to make sure I could turn it off in case of an emergency. I just never bothered to check it and assumed I would never have an emergency.

- I should have taken time to become informed about how my sprinkler system is designed and works so I could have immediately known what to do to fix that problem

- I learned that sprinkler systems have something called double check valves which prevent water from flowing backwards into your drinking water after having entered your sprinkler system (to prevent contaminated water from getting into your drinking water). Good to know.

- I learned that our house does not have its own private water shut off valve of its own. We only have the one valve at the city water line connection to shut off the water if need be.

- I learned that if you need to shut off that valve its a good idea to buy an inexpensive and simple device that makes it easier to turn the valve instead of trying to do that with a wrench underground. They are available at your local hardware store. 

After thinking about this incident I realized that this is exactly the reason why we all need to stay alert and informed about the status of the global financial system. We can never know what day an emergency might arrive even as we assume it will never happen. We also need to do some reasonable advance planning to deal with an emergency if one does arise. 

Waiting until a crisis arrives to find out what you need to know to deal with the crisis creates a very stressful situation as I found out with the water leak. Had I done some simple information gathering and a few preparations ahead of time, I could have more calmly dealt with the emergency when it did arise. 

That's what we try to encourage here on this blog. We encourage readers to stay alert and informed and make a few simple preparations in the event we do get another major financial crisis some day. If we don't, that's great. If we do, you will be very glad you did not wait until it's too late to be informed and have a game plan in mind to deal with the situation.


Note: In my case the shut off valve (as shown above) was jammed up against the side of the surrounding metal box making it impossible to turn the valve off. It had been that way for years and I had no idea. Fortunately, we never had a plumbing leak inside the house during that time. I encourage you to check out your shut off valve to make sure you could turn it off it you ever needed to. You can get a turn key like the one shown below for about $10 to turn the valve easier.

Thursday, October 22, 2015

BRICSPOST: South Africa Preparing to Quit the International Criminal Court (ICC)

I saw this article recently in the BRICSPOST. It is an editorial piece that suggests that Africa in general and South Africa in particular are perhaps ready to leave another international organization perceived to be biased in favor of the West and the US. The signifigance of this article is that is shows yet again that impatience is increasing in the BRICS nations for changes in their voice in the existing global institutions (IMF, World Bank, UN). Below are a few quotes.

"A ruling ANC policy meeting has given its nod for South African plans to withdraw its membership of the International Criminal Court (ICC). This ‘landmark’ decision is bound to spur greater debate on the ICC and its ‘inherent biases’.
Let’s rewind a bit here.
At its national conference in 2012, South Africa’s governing party the African National Congress (ANC) resolved to engage with the International Criminal Court to seek amongst other matters the perceptions that the court treated African nations unfairly on matters of global justice.
The court was seen as only focused on Africa and no other continent. In the court’s 13-year history it has only brought charges against Africans."
. . . . . 
"The decision of South Africa’s ANC this past weekend should be seen as a part of Africa’s renewal and her demands to be heard and treated as an equal in global politics.
As Africa finds its voice and refuses to be colonized in commerce, justice and global politics,the next frontier will be her push for meaningful UNSC reforms to include her one billion population.
South Africa is seen as a front-runner for a permanent seat on the UNSC. The issue of UNSC reforms is inextricably linked to the ICC fallout as the UNSC controls much of ICC’s activities even though the majority of permanent members are not ICC state parties.
A month ago Chinese President Xi Jinping welcomed the Sudanese president in China as an “old friend”. Beijing, like Washington, is not a member of the ICC, although both are permanent UNSC members.
Instead, the ICC has been seen by many as a proxy tool of the US to further its narrow global hegemonic political interests and to even effect its policy on regime changes through the ICC itself. This has made this court unequal and inequitable in every sense."
. . . . . .
"South Africa has not only consistently shown the ability to negotiate and kick-the-can but has also been able to come up with global alternatives as seen in the formation of the BRICS bank as a counterweight to the unreformed International Monetary Fund.
South Africa’s BRICS partners India, China and Russia are not state parties to the ICC.
At the center of the South African move at ICC, is the demand for a representative global order and the ruling ANC is showing impatience with the dragging negotiations to achieve equitable balance amongst United Nations member states."
My added comments:
As we move into an election year in 2016 in the US we have an interesting dynamic to keep an eye on. At the same time we see increasing signs of frustration and impatience in the BRICS nations over the US refusal to back reforms at global institutions that would increase their influence, we see Donald Trump emerging in the US. Trump's entire message is that US interests come first and that if elected he will see to it that the US "wins again." Nothing about his message suggests he plans to be very concerned about the BRICS nations desires to gain more influence globally.  
This pretty well sums of the stalemate we see in the US and the world. While most everyone likes to hear about "global cooperation" and other appealing sounding phrases, the reality is that when push comes to shove individuals and nations seek to look out for their own interests first. 
Right now most analysts predict the Republican party will at a minimum retain control of the US House of Reps. Many think they will retain control of the Senate or at least prevent a Democratic control since it takes 60 votes in the Senate to do much of anything most of the time. The White House is viewed as a toss up right now. 
The point being that the same forces that tend to promote gridlock (divided control of government) are likely to stay in place after the 2016 elections. If the Republicans were to somehow win control of both The White House and Congress, the chances of the IMF reforms and other reforms the BRICS want to see in the global institutions drop even further. 
For now, as far into the future as we can look, it seems unlikely that the reforms desired by the BRICS nations are likely to take place. At some point, they will just move on with their own Plan B and the idea of some kind of global cooperation for a monetary system becomes very unlikely (without a global crisis). More likely is idea that each area of influence continues to move forward somewhat independently while maintaining appearances at the IMF, World Bank and the UN as if they are globally cooperating. The outcome of the 2016 US elections will be interesting for sure.

India's Central Bank Chief Questions Easy Monetary Policies

The head of India's Central Bank says the IMF needs to stop "applauding" easy monetary policies and start looking at the consequences instead. Below are some quotes from this article appearing on Yahoo news.

"The head of India's central bank on Monday called for the International Monetary Fund to stop "applauding" the monetary easing policies of many developed countries.
Reserve Bank of India governor Raghuram Rajan said in a speech that the IMF should be doing more to assess the knock-on effects of stimulus measures on the global economy.
"The IMF is supposed to be looking at these sorts of issues... but it is sitting on the sidelines and applauding such policies," he told a G20 consultation meeting in Mumbai."

Wednesday, October 21, 2015

CNN Money: The Biggest American Debt Selloff in 15 Years

CNN Money runs this article which notes a key trend reversal in foreign countries holding US debt in their reserves. For the first time in a long time US debt is being sold off in a big way. Also, total global cash reserves have dropped for the first time in years. Foreign countries no longer have the cash to keep buy US debt as they have in the past. If this trend continues it could have big implications on US interest rates and the global economy, Below are some quotes from the article.


"Countries around the world are selling their U.S. government debt holdings this year by the largest amounts seen since at least 2000. 

China has been selling U.S. debt but it's not alone. Lots of emerging markets like Brazil, India and Mexico are also selling U.S. Treasuries. Not that long ago all these countries were all huge buyers of U.S. debt, which is viewed as one of the safest places to park money.
"Five or six years ago, the big concern was that China was going to own the United States," says Gus Faucher, senior economist at PNC Bank. "Now the concern is that China is selling Foreign governments have sold more U.S. Treasury bonds than they've bought in the 10 consecutive months through July 2015, the most recent month of available data from the Treasury Department.
Just in the first seven months of the year, foreign governments sold off $103 billion of U.S. debt, according to CNNMoney's analysis of Treasury Department data. Last year there was an overall increase of nearly $45 billion.them."
. . . . . 

Tuesday, October 20, 2015

Reuters: UK Official Sees Sound Case for Yuan to Enter the SDR Currency Basket

Reuters runs this article quoting UK Treasury official Katharine Braddick as saying in her opinion China is making a sound case for inclusion of the yuan into the SDR currency basket. The article says most observers expect an announcement on this from the IMF on November 4th. Below are some quotes.

"China's yuan has a solid case for being judged a reserve currency by the IMF in a decision due early next month, according to a senior civil servant dealing with the development of Britain's financial links with China.
The comments by Treasury director Katharine Braddick follow signs China is making quiet progress on creating the market infrastructure needed to make the yuan, or renminbi (RMB), fully convertible. Braddick chairs the London Hong Kong RMB Forum and is Britain's member of the EU's Financial Services Committee.
Convertibility is the central condition for inclusion in the basket of currencies used to value the International Monetary Fund's Special Drawing Rights, a virtual currency that defines the value of IMF reserves and its emergency payouts to members.
Asked on the sidelines of a banking seminar on China if Britain supported the yuan's admission, Braddick said: "I personally think there is a sound evidence base, but the IMF will need to look at it in considerably more detail.

"The yuan is clearly trading, it will be an investment currency, it is here to stay," she added."

Monday, October 19, 2015

Russia Wants IMF to Give Ukraine $3 Billion to Pay off its Debt to Russia

This very strange situation was one we mentioned here on the blog last year. The US/IMF find themselves in an odd position of possibly having to provide the Ukraine more money in order to pay off a $3 Billion bond due to Russia.  All this while the US has sanctions in place against Russia. Bloomberg updates the situation in this recent article. Some quotes are below.

"President Vladimir Putin called on the International Monetary Fund to help Ukraine repay a $3 billion bond due December, as Russia said it was weighing plans for a possible default on the debt.
The Washington-based fund is preparing to allow countries supported by a loan program to default on debt to official creditors, Finance Minister Anton Siluanov said at a government meeting with Putin on Tuesday. Current policy only allows member states to miss payments to private investors, meaning Ukraine would risk a $17.5 billion loan from the IMF by not fulfilling obligations on the note.
“Seems to me it’s easier to go this way, add these $3 billion, so that they can pay and everybody’s fine,” Putin said at the meeting. Russia has so far waived its right to call early repayment of the bond to avoid putting Ukraine in a difficult position, he said."    . . . . . . . . .
"Russia isn’t planning to compromise on the debt, the Russian state news service RIA reported Friday, citing Siluanov."
My added comments:
So far the split between the East (BRICS nations) and the US seems pretty genuine. It's always hard to tell if disagreements are serious or not since we have no access to all that goes on behind the scenes inside the system. But Russia is doing a number of things that seem to be irritating to the US (Syria, Iran, Ukraine, etc). China and Russia just continue to slowly and surely build alternative financial institutions and systems to bypass the US led western based institutions if need be. China still gives every indication that gaining acceptance of the yuan into the SDR currency basket at the IMF is very important to them. So far they have not carried through with threats to push forward a "Plan B" at the IMF due to the 2010 reforms remaining stalled in the US. 
What we can say is that all this lack of cooperation at the global level is contributing to the gridlock situation that seems to exist in the global financial system. The western banks continue to try to dominate the global financial system using the US dollar as reserve currency. The BRICS nations keep working to get out from under this arrangement, but do so very gradually so as not to rock the boat.
It still seems as though absent some kind of major global financial crisis we are likely to see this stalemate continue and therefore see change happening very slowly if at all in the global monetary system. A crisis changes that of course so we always have to stay alert since the conditions are always present for one to emerge (geo-political stress, sovereign debt problems, derivative contracts hidden in the system, etc, etc). The situation between Russia and the US would fall into the potential geo-political stress category.

Sunday, October 18, 2015

Mohamed A. El-Erian: Government's Self Disruption Challenge

In a new article on Project Syndicate, Mohamed A. El-Erian talks about how the gridlock that exists in the system is blocking disruptive change. He notes that if the gridlock persists within governments, disrupters will "leave them and their citizens behind." Below are some quotes from the article.


"One of the most difficult challenges facing Western governments today is to enable and channel the transformative – and, for individuals and companies, self-empowering – forces of technological innovation. They will not succeed unless they become more open to creative destruction, allowing not only tools and procedures, but also mindsets, to be revamped and upgraded. The longer it takes them to meet this challenge, the bigger the lost opportunities for current and future generations.

Self-empowering technological innovation is all around us, affecting a growing number of people, sectors, and activities worldwide. Through an ever-increasing number of platforms, it is now easier than ever for households and corporations to access and engage in an expanding range of activities – from urban transportation to accommodation, entertainment, and media. Even the regulation-reinforced, fortress-like walls that have traditionally surrounded finance and medicine are being eroded.

This historic transformation will continue to gain momentum as it expands in both scale and scope. But its benefits will not be fully realized unless governments take steps to empower the forces of change, ensure that the massive positive externalities are internalized, and minimize the negative impacts. Unfortunately, this is proving extremely difficult for many advanced-country governments, partly because the failure to recover fully from the recent crisis and recession has undermined their credibility and functioning.

. . . . . 

How economies function is changing, as relative power shifts from established, centralized forces toward those that respond to the unprecedented empowerment of individuals. If governments are to overcome the challenges they face and maximize the benefits of this shift for their societies, they need to be a lot more open to self-disruption. Otherwise, the transformative forces will leave them and their citizens behind."

My added comments:

Mr. El-Erian says what we have been saying here for some time. The gridlock in place everywhere in the financial and political systems has slowed change to a snail's pace. Instead of the world moving towards more global cooperation, the opposite is happening. Things are breaking down into a more de-centralized system with various competing special interests basically stalemating each other. While this impedes policy making at a global level, it does give the individual more of a voice. Disruptive individuals operating outside the constraints of the gridlocked system may have an opportunity to help change the world for the better while those inside the system fight to preserve their power and the status quo.

Saturday, October 17, 2015

Jim Rickards: In Depth on the IMF and recent TV interviews

Below is a summary of topics covered in the most recent webinar with Jim Rickards. You can listen to the audio of the webinar here. Most of the questions centered around the IMF and gold. If you prefer, you can read a transcript of the interview here.

Further below are links to some recent TV interviews.


The Gold Chronicles: October 7, 2015 Interview with Jim Rickards

Jim Rickards, The Gold Chronicles October 2015:
*History of IMF, one of the big 3 Bretton Woods institutions
*The IMF has evolved into its most powerful role ever
*IMF is a functioning world Central Bank
*The Fed has in effect been operating in a 2 year tightening cycle
*China’s reserves are being consumed at a rate of $100B per month stabilizing the currency
*The Fed may easy by mid 2016. Available tools include: Forward guidance, Negative Interest Rates Policy (NIRP), Direct easing (Helicopter money), QE4
*Emerging markets debt crisis, $9.5 Trillion on emerging markets corporate debt denominated in USD
*IMF is warning about declining liquidity in the bond markets and is encouraging governments to take precautionary measures
*IMF: Bond market liquidity could dis-appear instantaneously
*Physical Gold in non-bank storage is one way to protect against what governments might do under conditions of seizing bond markets
*The IMF has a little less than 3000 tons of gold
*IMF gold assets are the third largest holding in the world according to the WGC
*19 Members of the Eurozone combined hold 19,000 tons
*IMF gold was contributed by members joining when it was originally formed
*IMF has not created SDR’s and purchased gold with it
*Gold price required to support world liquidity in this sense would have to be higher than $10,000 per troy oz
*What tools can investors use when it comes to gold in light of potential problems with liquidity
Added notes:

Friday, October 16, 2015

The Economist: Review of IMF and World Bank Meeting in Lima Peru

The Economist reviews the most recent IMF and World Bank meetings held in Lima Peru. They describe the atmosphere as "gloomy" as it appears the global economy may be about to head downward in growth. Below are some quotes from the article.

"As LIMA bid farewell to the annual jamboree of the International Monetary Fund and World Bank on October 11th the leaden sky that greeted the global economy’s great and good earlier in the week had cleared. But among the 12,000 delegates, policymakers, their retinues, academics and do-gooders departing the Peruvian capital, the mood was distinctly unsunny. Clouds will continue to hang over the global economy in the foreseeable future, all agreed; anxieties over China’s slowdown, weakening emerging markets, and the effects of the Federal Reserve’s decision to hold steady on interest rates have done nothing to dispel them.
At least, quipped those optimistically inclined, sentiment on October 11th was no worse than on October 6th, when the IMF cut its forecast for global growth this year to 3.1% and to 3.6% next. Indeed, the meetings that took place in Lima brought little new information. There were the usual platitudes about the need for structural reforms. There were expressions of "deep disappointment" over the American Congress’s sad refusal to ratify the 2010 reform of the global financial institutions to allow greater say to emerging economies."
My added comments: 
The tone of this article is clearly downbeat. It sounds like there is growing concern that the economy has peaked out and many are worried about a coming downturn. The mention of the ongoing refusal of the US Congress to ratify the 2010 IMF governance reforms just emphasizes how everything seems grid locked at the global level in terms of moving forward with any kind of global cooperation at the IMF.

All of this fits in with the idea that for now things seem stagnant as we wait to see if anything leading to significant change in the monetary system will unfold any time soon.

Thursday, October 15, 2015

Carmen Rienhart: The Hidden Debt Burden of Emerging Markets

A new article by Carmen Rienhart on Project Syndicate says the debt burdens in emerging markets may be underestimated and therefore hidden. She says this could lead to another major crisis. Below are quotes from her article.

"As central bankers and finance ministers from around the globe gather for the International Monetary Fund’s annual meetings here in Peru, the emerging world is rife with symptoms of increasing economic vulnerability. Gone are the days when IMF meetings were monopolized by the problems of the advanced economies struggling to recover from the 2008 financial crisis. Now, the discussion has shifted back toward emerging economies, which face the risk of financial crises of their own.

While no two financial crises are identical, all tend to share some telltale symptoms: a significant slowdown in economic growth and exports, the unwinding of asset-price booms, growing current-account and fiscal deficits, rising leverage, and a reduction or outright reversal in capital inflows. To varying degrees, emerging economies are now exhibiting all of them.

The turning point came in 2013, when the expectation of rising interest rates in the United States and falling global commodity prices brought an end to a multi-year capital-inflow bonanza that had been supporting emerging economies’ growth. China’s recent slowdown, by fueling turbulence in global capital markets and weakening commodity prices further, has exacerbated the downturn throughout the emerging world."        . . . . . 

"In short, though emerging economies’ debts seem largely moderate by historic standards, it seems likely that they are being underestimated, perhaps by a large margin. If so, the magnitude of the ongoing reversal in capital flows that emerging economies are experiencing may be larger than is generally believed – potentially large enough to trigger a crisis. In this context, keeping track of opaque and evolving financial linkages is more important than ever."

Wednesday, October 14, 2015

Two Systemic Risk Situations to Keep an Eye On

We have covered many times here on the blog that the global financial system is highly interconnected and that means a problem anywhere can lead to a problem everywhere. Lately we have two situations (at least) that bear keeping an eye on. One is the problems at Glencore which the Bank of England warned about recently. The other was the news that Deutsche Bank would have to take more than a $6 Billion loss in its 3rd quarter. Because both of these entities are huge dealers in derivatives, the risk of further problems being triggered with derivative contracts obviously is still out there.

We would assume that whatever risks are there are known and measures to contain them are available, but there is never really any way we can know this for sure. 

Anything that triggers a massive global derivatives problem could certainly turn into the type of major crisis Jim Rickards and others have been predicting. I have no way of knowing if this could happen here or not, but it would irresponsible to readers not to mention the risks are out there. Below are quotes from the two articles linked above.


The Guardian - Bank of England Warns on Glencore

"The Bank of England has told major banks to check the impact of falling commodity prices on their lending positions.
Threadneedle Street has been asking for information from the major players in light of the rout in the shares in Glencore, the commodity trading and mining firm.
Glencore’s shares plunged by 29% a week ago on Monday to 68.62p. Although they have subsequently recovered to 120p, the shares are trading far below their 2011 flotation price of 530p. The fall in Glencore stock came amid concerns about its debt position and fears that the Chinese economy was on the cusp of a hard landing that would further reduce already softening global demand for commodities.
The demand for information by the Bank of England has emerged at a time when banking analysts have been questioning the exposure of banks to the the fallout in the commodity sector. In a research note entitled The $100bn Gorilla in the Room, Bank of America analysts said: “The banking industry may have significantly more exposure to Glencore than is generally appreciated in the market.”
"When Deutsche Bank stunned markets this week with a profit warning, part of the rationale the bank gave was to write down the value of an acquisition of a bank it bought 16 years ago.
Deutsche Bank DB, +3.35% DBK, +3.46%  said it will report a 6.2 billion euro ($6.99 billion) third-quarter net loss that included a write off of the remaining premium paid in 1999 to purchase Bankers Trust, which at the time was a $10.1 billion deal.
John Cryan, Deutsche Bank’s Co-CEO, told employees in a message that current assessments of Bankers Trust and Deutsche Postbank, acquired in 2010, “no longer support the carrying values on our balance sheet.”
An unusual mid-year assessment of its balance sheet and the admittedly stale goodwill and intangibles balance in its investment bank prompted the dramatic write off. The bank said in a statement the move was driven by “anticipated higher capital requirements on the value of Corporate Banking & Securities and Private & Business Clients along with current expectations of higher disposal costs for Postbank.”

Along with this we have the massive fraud exposed at VW that will certainly hit them hard and also an increasing number of layoffs being announced around the world. On top of all this we have increasing tension in the Middle East around the Russian move into Syria. When we see all these kinds of things happening, it is obviously important to stay alert and informed as any or all these situations could escalate into a bigger problem.