AS with other cities that have become such important hubs for growth in China and around the world, Shanghai is seeing rapid demographic change, increased wages and rising quality of life. When citizens
Ratings of Prudential Financial's (PRU) subordinated notes by credit rating agencies reflect its robust performance across all its segments.
Fund urges authorities to fast-track reform to give central bank financial stability mandate; reliance on customs union leaves economy vulnerable
Companies are among those employing young people without pay for six weeks or more under government-backed schemeHalfords and the financial services company Prudential have been criticised for employing young jobseekers without pay for six weeks or more under a government-backed scheme.Some smaller businesses and training providers are pushing schemes that last as long as six months. Continue reading...
Tesla (TSLA) saw its stock price pop on Monday after the electric car maker announced that it opened two new charging stations in major U.S. metropolitan hubs. The company also received some positive news regarding a driver who was killed while using Tesla's autopilot technology.
All the day’s economic and financial news, as shares rally in Europe and AsiaLatest: World markets at record highs as US joins the rallyMSCI World Index at fresh highsBGC Charity Day in Canary WharfIntroduction: Markets rally as North Korea refrains from missile testOffshore wind costs hit record low 5.44pm BST And finally, European stock markets have closed in a flurry of green electronic ink, as today’s relief rally runs its course.Every major indices has risen today, thanks to two factors; the absence of fresh missile tests from North Korea, and signs that Hurricane Irma’s total damage will come in below forecasts.The timing of Hurricane Irma wasn’t great seeing as it quickly followed the tropical storm Harvey. Irma was downgraded to a tropical storm, and even though it has caused a considerable amount of destruction, it hasn’t been as bad the markets were expecting. This also added to the bullish sentiment today, since the cost of the clean-up will be less than expected.Insurers like Aviva, Prudential and Legal & General are all higher today as the payouts relating to Irma are likely to be below initial estimates. Related: Florida Keys facing potential 'humanitarian crisis' in Irma aftermath Today’s price action marks a step change from a week ago, when fears of conflict on the Korean peninsula drove equities lower.Now normal service has apparently resumed, with triple digit gains on the Dow and the Dax. The FTSE is making heavy going of it, however, as sterling continues to gain ground versus the US dollar. The pound shows little nervousness so far ahead of a big week for UK data, and even the prospect of voting on the government’s EU withdrawal bill has not deterred the buyers. Related: MPs resume debate on EU withdrawal bill - Politics live 4.33pm BST The rally on the US stock market has legs; every sector on the S&P 500 index is now up on the day, with insurance firms leading the charge. Continue reading...
As discussed here in mid-August, when China reported its latest credit data, for the first time in 9 months China's trillion Shadow Banking Industry - defined as the sum of Trust Loans, Entrusted Loans and Undiscounted Bank Loans - contracted. These three key components combined resulted in a 64BN yuan drain in credit from China's economy, the first negative print since October, seen by analysts as more evidence that Beijing’s campaign to contain shadow banking and quash risks to the financial system, is starting to bear fruit. And, as a follow up report from Reuters overnight details, the crackdown against unregulated shadow financing is accelerating, noting that as the flood of unregulated cash swirls through the Chinese economy, Beijing has been taking aim at the trust companies whose unrestrained lending practices are worrying regulators. The trusts, which as we have discussed previously are at the heart of a vast shadow banking industry, are being pressured to step up compliance and background checks, and are being pushed towards greater transparency. But the fast-growing 20 trillion yuan ($3 trillion) industry, whose lending operations are cloaked behind opaque structures, will be tough to rein in, according to employees at some trusts. As Reuters details, a regulatory sanction against one trust, Shanghai International Trust, and a legal case against another, National Trust, offer rare insights into the industry, and reveals just how hard it will be to police it. Shanghai Trust was fined 200,000 yuan for selling a product that violated leverage rules, according to a regulator’s notice in January. Regulators provided no further details about the case. Under these rules, property developers are only allowed to borrow up to three times their existing net assets. According to two people with direct knowledge of the case, an unknown sum was loaned by China Construction Bank through Shanghai Trust to Cinda Asset Management Company. Cinda then invested the cash. One of the sources said Cinda used the cash to acquire land, a sector rife with speculation that regulators have singled out as a “risky” destination for trust company loans. The source provided no further details. The case against National Trust, which had revenue of 655 million yuan in 2016, involves wealth management products linked to the steel industry. According tot he Reuters reports, the trust was sued in June this year by eight investors who allege it misrepresented the risks involved in products it sold them and failed to adequately assess the guarantor’s creditworthiness. Like most other shadow products that have made news, the trust skirted restrictions on loans to the steel industry by using the products to raise money to lend to a subsidiary of Bohai Steel Group, according to Tang Chunlin, a lawyer at Yingke Law Firm, who is representing the investors. The plaintiffs invested different sums in the wealth management products, which National Trust promised would deliver an annual return of over 9 percent. National Trust lent the money collected to a Bohai subsidiary, Tianjin Iron and Steel Group Co, according to documents reviewed by Reuters. Bohai Steel Group, which is undergoing a state-financed restructuring, has liabilities of around 192 billion yuan. National Trust has now defaulted on the product, according to Tang and Gongyu Zhou, one of the eight investors, because Tianjin Iron and Steel is unable to pay back its loan.The products were also illegally sold via third-party non-financial institutions, Tang and Zhou said. In his complaint, Zhou said he invested one million yuan in the product over two years from 2015 through 360caifu.com, an online finance platform. And now that the government has not bailed him out, he is angry. He also may have to wait a long time before he recovers even a fraction of his investment: despite its eagerness to crack down on shadow debt, the biggest challenge facing regulators is that many trusts employ a baffling array of structures, and funnel money through complex webs of beneficiaries, which makes untangling transactions extremely difficult. Nine people working at trusts, including the two with knowledge of the Shanghai Trust case, said such complex structures were often deliberately used to sidestep lending restrictions on banks and borrowers. “Really, only the project manager knows exactly how the money flows,” said a senior employee at one trust firm. The source and others at the trust firms could not be named because they were not allowed to speak to the public. The shady, no pun intended, practices of the trusts, and the speed at which the industry is growing, have made them a target for Beijing as it tries to keep a lid on risky lending, cool overheated markets and control corporate debt. In April, Deng Zhiyi, head of the CBRC’s trust department, warned of “severe risks” from funds flowing into the real estate, coal and steel sectors through trusts. The unregulated industry is now roughly a tenth the size of China’s commercial banking sector, and is one of the biggest sources of funding as the following Bloomberg chart shows. While the companies are overseen by China's financial regulator, the CBRC, they are not held to the same standards as banks. For example, they do not have to meet the same capital adequacy standards. However, as we reported at the time, the CBRC set out in detail in April certain structures that the trusts should not use, such as money-pooling schemes and structuring products to avoid restrictions on leverage. That was “a signal for financial institutions that from a legal and enforcement perspective, we are entering a stricter period,” said Armstrong Chen, financial compliance partner at King & Wood Mallesons. Trust firms will also have to start registering the details of their products, identifying the ultimate borrower of funds, this year, said Chen, who is in regular contact with the regulators. Chen said the requirement would improve transparency, but people at trust firms say it will still be difficult to detect the use of the under-the-table agreements typical of the industry. The Shanghai Trust case also reflected the tougher line being taken by regulators. The fine would have been negligible for the state-owned company, one of the largest trusts with a total of 3.89 billion yuan in revenue at the end of 2016. But, like in the case of Beijing's crackdown on China's major money-laundering conglomerates like Anbang and HNA, three Reuters sources said that Shanghai Trust was also barred from selling products to insurers for three years, a blow to a company that had made considerable sums selling products to the sector in recent years. One insurer invested as much as 10 billion yuan in just one of its property projects, according to one of the sources. In any case, should Beijing be successful, the supply - and demand - for Trusts will plunge, as they take on more of the characteristics of China's conventional loans offered by banks. To be sure, some of the trusts are already responding to the government pressure. Anxin Trust is increasing the number of onsite visits by staff and has doubled its compliance team, a Reuters source said. The trust is also looking at less risky deals – in healthcare, for example, rather than the more volatile property sector. Despite these changes, the government’s job managing the trusts keeps growing. In the first half of this year, trust loans increased by 1.31 trillion yuan, which compared with 279.2 billion in the period last year, according to central bank figures. That growth will be a challenge for the regulator, which is already facing staff shortages as it struggles to keep up with a broader official crackdown on financial risk. Meanwhile, the trusts see more boom times ahead: "the demand for trust loans is increasing," an internal report at a large trust firm in May said. “In the past, state-owned-enterprises would not consider such loans, but are now considering them,” according to the non-public report which was made available to Reuters on the condition the name of the company was not disclosed. * * * Finally, even if China manages to crackdown on Shadow Banking there is another problem: as a recent report by Natixis put it perfectly, "when one [credit] door closes [in China], another one opens up." This simply means that as Beijing slams the door shut on Trust and other key shadow debt components, these will be offset by an increased usage in others such as WMPs, NBFIs, Repos, Negotiatable Certificates of Deposit, and money markets. Below are the highlights from the report: As deleverage becomes a higher level objective (but sometimes conflicting) to the Chinese leadership, banks now face more restrictions from regulators. In any event, this is not the first time they find themselves in the regulatory whirlpool. From the usage of repo agreements to wealth management products (WMPs), and most recently negotiable certificate of deposits (NCDs), banks have been very creative in playing the cat and mouse game in front of evolving regulations. Flourishing financial innovation has helped China’s leverage process to continue unabated. The deleveraging process has hardly begun. In contrast, liquidity seems to be increasingly scarce, which keeps on lifting the cost of funding. In fact, overnight SHIBOR is at record high since the difficult events in 2015, very close to 3% (Chart 1). One of the key reasons for the liquidity shortage is related to tighter regulatory control from the People's Bank of China (PBoC), in particular stricter Macro Prudential Assessment (MPA). This has hampered the use of WMPs to fund banks’ asset growth. They have already shrunk by 1.6 RMB trillion to 28.4 RMB trillion in May 2017 (Chart 2). After the PBoC limited the use of WMPs, there are now also more regulations targeted at NCDs, which are short-term, non-collateralized paper with an even higher funding cost than the SHIBOR. This has led to a fall in issuance, but has grown again since June 2017. The underlying reasons could probably be a lack of other options and the regulations are not as tight as they may appear on the surface. In fact, the PBoC’s pressure affects banks very differently. It penalizes banks short of liquidity and benefits those long of liquidity. This simply means that China’s five largest commercial banks (all state-owned) are the winners while the others are the losers. As liquidity is increasingly expensive, liquidity scarce banks have also developed new ways to bypass regulations through money market funds (MMFs), which have reached 5.86 RMB trillion in a very short period of time. The quick pace of expansion may pose extra liquidity risks especially when three-quarter of the assets have a maturity less than 90 days. Beyond the – probably unintended – push for financial innovation, the PBoC’s regulatory move is also pushing further the duality of China’s banking system. When small banks are struggling for liquidity, large banks stand to benefit from the regulatory crackdown. The latest 2017 Q2 results have confirmed our expectations that large banks can gain from regulatory arbitrage and risks are rising for smaller banks. In other words, the improvement in bank results is not only due to better economic conditions but also to regulatory arbitrage. The full Natixis report on why Beijing is unlikely to ever be able to get full control of its non-traditional credit creation can be found at the following link.
Authored by Andrew Syrios via The Mises Institute, When Christopher Nolan was promoting his previous film Interstellar, he made the casual observation that “Take a field like economics for example. [Unlike physics] you have real material things and it can’t predict anything. It’s always wrong.” There is a lot more truth in that statement than most academic economists would like to admit. Alan Jay Levinovitz recently put forth the provocative argument that economics is “The New Astrology.” He notes that “surveys indicate that economists see their discipline as ‘the most scientific of the social sciences.’” But unfortunately “real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy.” Indeed, Levinovitz goes on to observe that, The failure of the field to predict the 2008 crisis has also been well-documented. In 2003, for example, only five years before the Great Recession, the Nobel Laureate Robert E Lucas Jr told the American Economic Association that ‘macroeconomics ... has succeeded: its central problem of depression prevention has been solved’. Short-term predictions fair little better — in April 2014, for instance, a survey of 67 economists yielded 100 per cent consensus: interest rates would rise over the next six months. Instead, they fell. A lot. There are, of course, many other examples of the failure of mathematical models in economics. The model Christina Romer put together during the height of the Great Recession concluded that unemployment could go as high as 8.8 percent without the economic stimulus bill. With the stimulus, unemployment went over 10 percent. The spectacular failure of Long Term Capital Management, which was built solely upon investing on mathematical models, is another great example. Indeed, Daniel Kahneman found the “correlations was .01” when asked to evaluate the investment outcomes of 28 different advisors. Warren Buffet is currently crushing the hedge fund Protégé Partners in their ten year, one million dollar bet. (Buffett picked an index fund that invests in the S&P 500.) Finance and economics are linked at the hip in this overconfident, mathematical malaise it would seem. Returning to Levinovitz, the problem as he sees it is that these highly complicated models built with mystifying and ingenious mathematical equations are completely useless if they are erected upon false assumptions. You may have built the most luxurious mansion imaginable, but if you built it on a hill of sand it might as well be a house of cards. Think of the Ptolemaic model of the universe that put the Earth at the very center. The Ancient Greeks would notice that the stars would move across the sky, then stop, then go backward, then start moving forward again. To resolve this conundrum, Claudius Ptolemaeus put together an ingenious model of “circles within circles.” Each star not only orbited around the Earth along a given trajectory, but also maintained a secondary orbit around a point moving along the first orbit to make it appear from the Earth that the star would sometimes move backward. The geocentric model of the universe was a stupendous mathematical achievement, but alas, it was all for naught given the assumptions it was built on were completely false. Levinovitz uses the example of astrology, noting that, As an extreme example, take the extraordinary success of Evangeline Adams, a turn-of-the-20th-century astrologer whose clients included the president of Prudential Insurance, two presidents of the New York Stock Exchange, the steel magnate Charles M Schwab, and the banker J P Morgan. To understand why titans of finance would consult Adams about the market, it is essential to recall that astrology used to be a technical discipline, requiring reams of astronomical data and mastery of specialised mathematical formulas. "An astrologer" is, in fact, the Oxford English Dictionary’s second definition of "mathematician." For centuries, mapping stars was the job of mathematicians, a job motivated and funded by the widespread belief that star-maps were good guides to earthly affairs. The best astrology required the best astronomy, and the best astronomy was done by mathematicians — exactly the kind of person whose authority might appeal to bankers and financiers. When Adams was eventually arrested in 1914 for laws that forbade astrology, “it was her mathematics that eventually exonerated her.” And this is by no means just a Western phenomenon. Another example the author references is the similarly mathematically impressive work done regarding Li in Ancient China. Li was also a mathematical model of the stars and for whatever reason, thought to be “essential to good governance.” Obviously it wasn’t, but the Chinese spent “astronomical sums refining mathematical models of the stars.” As we do with much that passes for economics today. Interestingly enough, Levinovitz quotes several famous Keynesian and neo-classical economists, including Paul Romer, who criticized the “Mathiness in the Theory of Economic Growth” and the man who’s always right (except when he isn’t) Paul Krugman. In this instance, though, Krugman is mostly correct observing that “As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” But this reliance on math to hide the underlying flaws in an economic theory sounds like it falls perfectly in line with “The Pretense of Knowledge” that Friedrich Hayek warned about all those years ago. Since then, many economists believed they had made economics into a scientific discipline based on modeling and empirical testing. They assured us that by using copious amounts of data and fine-tuned mathematical models they could centrally plan an economy, eliminate the business cycle and increase economic growth and prosperity. And they were wrong. Surprisingly, Levinovitz does not use the word “econometrics” because that’s the first thing that came to my mind while reading his essay. The econometric approach may be the best example of the mathematical arrogance Levinovitz describes. The flaws in its internal reasoning become obvious, however, as you peel away the math, as Robert Murphy shows, The econometric approach to stock price movements is analogous to a meteorologist who looks for correlations between various measurements of atmospheric conditions. For example, he might find that the temperature on any given day is a very good predictor of the temperature on the following day. But no meteorologist would believe that the reading on the thermometer one day somehow caused the reading the next day; he knows that the correlation is due to the fact that the true causal factors — such as the angle of the earth relative to its orbital plane around the sun — do not change much from one day to the next. Unfortunately, this distinction between causation and correlation is not stressed in econometrics. Indeed, for economists truly committed to the positive method, there can be no such distinction. Although the econometric pioneers may understand why certain assumptions are made and can offer a priori justifications such as “rational expectations” for the details of a particular model, the students of such pioneers are often caught up in the mathematical technicalities and lose sight of the true causes of economic phenomena. But more fundamentally, as Austrian economist Frank Shostak notes, “In the natural sciences, a laboratory experiment can isolate various elements and their movements. There is no equivalent in the discipline of economics. The employment of econometrics and econometric model-building is an attempt to produce a laboratory where controlled experiments can be conducted.” The result is that economic forecasts are usually just wrong. Levinovitz believes there is a conflict of interest at the heart of academic economics. He approvingly quotes one economist saying “The interest of the profession is in pursuing its analysis in a language that’s inaccessible to laypeople and even some economists. What we’ve done is monopolise this kind of expertise.” And furthermore, “…that gives us power.” But it’s more than even just that. It’s not just that economists fails to make accurate predictions or that hedge funds fail to beat the market. If economics is unable to provide bureaucrats with the ability to effectively guide and control an economy, the best alternative would be to turn it back over the market. It’s not just that “mathiness” gives economists “power.” In many ways, it’s the façade that justifies a large number of them having jobs in the first place. It appears that Levinovitz hasn’t quite grasped the full consequences of the argument he has espoused; namely that because economics models are mostly useless and cannot predict the future with any sort of certainty, then centrally directing an economy would be effectively like flying blind. The failure of economic models to pan out is simply more proof of the pretense of knowledge. And it’s not more knowledge that we need, it’s more humility. The humility to know that “wise” bureaucrats are not the best at directing a market — market participants themselves are.
Here’s one more example of how central banks’ global coordinated monetary stimulus in the wake of the financial crisis has increased systemic risk in the US: According to an analysis conducted by BlackRock, insurers are more vulnerable to a market downturn now than they were ten years ago. The reason? Ultralow interest rates have forced insurers to venture into markets with higher yielding assets, forcing them to stomach more risk along the way. Whereas insurers once tended to adhere to only the safest types of fixed-income products – typically highly rated government and corporate debt – they’re increasingly buying exposure to risky high yield and EM products, along with illiquid private equity funds, to try and boost their earnings back to pre-crisis levels. These products carry a potentially higher reward for insurers, but heightened risks are also omnipresent. In a downturn similar to the 2008 crisis, BlackRock estimates that US insurers' holdings would drop by 11% - even more than they did during the crisis. Such a drop would be tantamount to $500 billion in losses. “The world’s largest money manager mined regulatory filings of more than 500 insurance companies and modeled their portfolios in a similar downturn. Their stockpiles - underpinning obligations to policyholders across the nation - would drop by 11 percent on average, according to its calculations. That’s significantly steeper, BlackRock estimates, than the group’s “mark-to-market” losses during the depths of the crisis. The reason is simple. Insurers needed to make up shortfalls after the crisis. But in a decade of low interest rates they had to venture beyond their traditional holdings of vanilla bonds. They now own vast amounts of stocks, high-yield debt and a variety of alternative assets - a bucket that can include hard-to-sell stakes in private equity investments, hedge funds and real estate.” Even as interest rates rise, Zach Buchwald, head of BlackRock’s financial-institutions group for North America, said that the insurers’ appetite for riskier assets will remain because “many of the allocations are hard to reverse.” ‘There is more risk being put into these portfolios every year,’ Zach Buchwald, the head of BlackRock’s financial-institutions group for North America, said in an interview. And such shifts may become permanent, especially because many of the allocations are hard to reverse, he said.” Which is a problem because, even though insurers claim they’re offsetting risk by “diversifying” into different types of risky assets, big losses can accrue if all of these assets were to drop at the same time – as one might expect during a “risk off” flight to quality. “The new diversity should provide a huge benefit, according to Buchwald. After all, it was concentrations of investments in mortgage-backed securities and certain equities that proved the biggest pitfalls during the crisis, a study by the Organization for Economic Co-operation and Development found. But even piles of investments that appear diverse can suffer big losses if care isn’t taken to ensure the assets won’t drop at the same time.” The BlackRock study was an attempt to market its new “Aladdin” analytics software. “BlackRock examined the insurers’ holdings as it pitches a service called Aladdin. It’s trying to sell the companies analytics and advice, helping them test how complex portfolios may perform under various conditions, so they can design them to withstand catastrophe.” According to Bloomberg, the study has been published at an “interesting time” for markets. “The assessment comes at an interesting time. With U.S. stocks trading near record highs and the Federal Reserve starting to unwind years of extreme measures, there’s a raging debate on Wall Street over whether a big correction is looming - and if so, whether unforeseen faults in financial markets might crack open, as they did a decade ago.” Mohamed El-Erian, chief economic adviser at German insurance conglomerate Allianz, warned that “non-banks” are increasingly reaching for high-yield bonds without regarding the risks. “The strong ‘quest for yield’ remains visible in non-banks,” Allianz SE Chief Economic Adviser Mohamed El-Erian said in a Bloomberg View column this month. The group, which typically includes insurers, has pushed into asset classes “including what most deem to be a stretched market for high-yield bonds.” Some insurers, like Athene Holding, have bragged about the outsized returns from their riskiest investments. “Athene Holding Ltd., an insurer that leans on Apollo Global Management to oversee investments, is wagering on complex, hard-to-sell debt. Its alternatives portfolio, representing about 5 percent of total holdings, posted a 12.3 percent return on an annualized basis in the second quarter. It’s among a handful of insurers backed by private equity firms betting they can earn better returns than peers focusing on traditional investments. But even MetLife Inc. and Prudential Financial Inc., two of the oldest and largest life insurers in the U.S., have said they’re pushing into commercial property bets and private market debt in search for yield.” When insurers invest in illiquid products like a private equity fund, they need to hold more capital on their books to offset the risk – money, that, as Bloomberg points out, “isn’t free.” After adjusting for the reverse capital, BlackRock found that the high-flying PE returns weren’t as spectacular as some insurers believed. “BlackRock’s study showed that the industry’s forays into alternative investments haven’t always delivered yields on par with what the underlying money managers project. Insurers have to hold large amounts of capital against the investments they make -- money that isn’t free. When adjusting for those charges, private equity returns are generally less than 4 percent, whereas they would have been above 6 percent. That, according to BlackRock, indicates insurers would probably earn more on investments in mezzanine real estate debt and high-risk equity investments in global real estate and other real-asset financing.” Since the crisis, insurers have increased PE investments by 50%, despite the lower risk-adjusted returns highlighted by BlackRock. Maybe some of them SHOULD consider buying the asset-manager's new software… “After experimentation with different assets, some insurers have shifted wagers. By the end of last year, the industry’s funds held in private equity had soared 56 percent to $56 billion from 2008. That trend is leveling off, Buchwald said. Real estate investments, meanwhile, hit a seven-year high in 2015, then dropped by $7 billion the next year to $42 billion. Hedge fund holdings spiked to $24 billion in 2015, only to drop to $18 billion the next year. MetLife and American International Group Inc. were among those that began changing strategies. The key is to find “other, more predictable income generators,” Buchwald said, ‘things like infrastructure and real estate.’” Whatever their risk tolerance, a growing number of market strategists believe that the next sharp downturn in markets could begin as soon as this year. This would mark the first real test of insurers’ capital cushions since the crisis. And, particularly if it triggers a wave of defaults in the high-yield sector (or even among European sovereigns), a market rout could wipe out trillions of dollars worth of insurance company holdings. Let’s hope that – for their sake - when the other shoe drops, insurers are ready. With Republicans controlling the White House and both chambers of Congress, failing insurers likely won’t receive the same type of bailout that AIG did during the crisis.
Submitted by Gary Evans of Global Macro Monitor We’re baaaccck!. We warned in our last post before leaving on holiday, “Look for some large sigma event, which is always the case when we are off the desk.” How about a vol spike caused by worries over a nuclear exchange? Nuclear war! The potential implosion of a presidency? We think yesterday’s presidential presser has a relatively high probability of being a (or the) structured criticality event that we could look back to as the tipping point that leads to a very volatile autumn. Structured criticality is a property of complex systems in which small events may trigger larger events due to subtle interdependencies between elements. This often gives rise to a form of stratified chaos where the general behavior of the system can be modeled on one scale while smaller- and larger-scale behaviors remain unpredictable. For example: Consider a pile of sand. If you drop one grain of sand on top of this pile every second, the pile will continue to grow in the shape of a cone. The general shape, size, and growth of this cone is fairly easy to model as a function of the rate at which new sand grains are added, the size and shape of the grains, and the number of grains in the pile. The pile retains its shape because occasionally a new grain of sand will trigger an avalanche which causes some number of grains to slide down the side of the cone into new positions. These avalanches are chaotic. It is nearly impossible to predict if the next grain of sand will cause an avalanche, where that avalanche will occur on the pile, how many grains of sand will be involved in the event, and so on. – Wikipedia We love applying the conceptual framework of physics and dynamic systems models to economics and the markets, but think the obssession with the math has perverted the analysis and will someday lead to a doozy of a market meltdown when the algos collide and short circuit on a day to be named later. In the hypothetical worlds of rational markets, where much of economic theory is set, perhaps. But real-world history tells a different story, of mathematical models masquerading as science and a public eager to buy them, mistaking elegant equations for empirical accuracy. As an extreme example, take the extraordinary success of Evangeline Adams, a turn-of-the-20th-century astrologer whose clients included the president of Prudential Insurance, two presidents of the New York Stock Exchange, the steel magnate Charles M Schwab, and the banker J P Morgan. To understand why titans of finance would consult Adams about the market, it is essential to recall that astrology used to be a technical discipline, requiring reams of astronomical data and mastery of specialised mathematical formulas. ‘An astrologer’ is, in fact, the Oxford English Dictionary’s second definition of ‘mathematician’. For centuries, mapping stars was the job of mathematicians, a job motivated and funded by the widespread belief that star-maps were good guides to earthly affairs. The best astrology required the best astronomy, and the best astronomy was done by mathematicians – exactly the kind of person whose authority might appeal to bankers and financiers. – Aeon Hat Tip: Jose Cerritelli We have have repeatedly warned our readers of potential political instability and to watch “the American street.” See here and here. Our sense is we are headed for some heated political instability in the United States. How will it affect the markets? Depends on trajectory of events, but unless inflation or interest rates spike providing competition for risk assets, don’t expect a bear market to start tomorrow. We have always lived our financial career by Bagehot’s dictum: “John Bull can stand many things, but he cannot stand 2.0 , [-1.5 or 1.25] percent” – Bagehot We still maintain yield and return chasers will not retreat to their caves, with, the exception of short-term bouts, such as last week, unless policy rates move up another 100-200 basis points and the monetary bases in the G3 shrink by double digit percentage points though quantitative tightening (QT). That is how much liquidity (potential buying firepower) is still in the global system, in our opinion, folks. What we are looking for? We still have high conviction the risk markets will experience a swift, short, and steep sell-off in October – 5 to 10 percent – based on: 1) seasonality; 2) the Fed balance sheet should, or could be shrinking ; 3) China’s Party Congress may have concluded, removing the country’s implicit policy put, and thus increasing the risk of a China policy or economic shock; 4) the new U.S. Federal government fiscal year begins October 1 and if the Trump administration has not passed any significant economic legislation, the markets may begin to throw in the towel; 5) there will be more clarity on ECB tapering; 6) even more elevated asset prices as the risk markets grind higher through the rest of summer as we suspect, setting up for a potential blow-off by the end of September; 7) nervousness over the debt ceiling; and, finally, 8) by then, the markets should be sufficiently overbought, overvalued and very vulnerable to event risk. – GMM Add to that possible key White House resignations. What do you think the markets will do if Gary Cohn resigns? That’s at least worth a 5 percent haircut off the S&P500, in our opinion, and a spike to 20 in the VIX, triggering another round of structured criticality. The exodus of executives sparked talk that Gary Cohn, Trump’s top White House economic adviser and a key liaison to the U.S. business community, might resign in protest as well. Cohn, who is Jewish, was upset by Trump’s remarks, though he is remaining with the administration for now, sources said. – Reuters, August 16, 2017 Cohn may also come to the conclusion that after the August Congressional recess he is wasting his time as he perceives that the Trump administration has lost all credibility on Capitol Hill and none of his policies has any chance of being implemented. If rumors begin to spread in mid-September, market will begin to wobble, bigly. If Chief of Staff, John Kelly, goes? Get shorty, big time. The 1987 Analog Since we know crash talk is surely coming, we’ve put together a two-year trading analog of the S&P500 from end of December 1985/2015 to December 1987 and August 16, 2017. First, over the 20-month trading period, the 1987 S&P500 outperformed the current 2017 S&P500 by over 31 percent as of today’s close. Not much of an analog. Second, the yield on the 2-year increased 287 bps (45 percent) from the beginning of 1987 to the eve of the crash with the 10-year up 252 (33 percent), peaking over 10 percent. The 2-year is up only 13 bps (11 percent) this year with the 10-year down 22 bps (-9 percent). Third, the 1987 S&P500 peaked on August 25th and banged around until October 5th, where it was only down 2.6 percent from the peak. It then fell 13.6 percent from October 5th to Friday, October 16, the trading eve of the crash. On Black Monday, October 19, 1987, the S&P500 closed down 20.47 percent, almost double the 1929 crash. Similarly, the 1929 stock market peaked on September 3, 1929 and fell sharply to close down 32 percent on the eve of Black Tuesday, October 29, 1929. That crash sliced 11.7 percent off Dow Jones Industrial in one day. In both cases, 1929 and 1987 the markets sent a loud signal and warning of an imminent crash as, a matter of fact, the markets were crashing before the big crash. The major difference of the two markets is the Dow didn’t regain the September 3, 1929 peak until November 23, 1954, more than 25 years later. The 1987 S&P500 reclaimed its August 25, 1987 high on July 26, 1989, less than two years. Compliments of easy monetary policy and the circumvention of a great depression. Upshot? It’s probably time to buckle up. We expect volatility to begin to pick up; for the markets to start banging around until October; then experience a Tower of Terror sell-off sometime in October. Though the sell-off may be the day the algos go rogue, there is no doubt, the full firepower of the PPT and the Fed will be put to work. Can they beat this new technology gone wild? Gotta be quick on the draw as it could be over in the blink of an eye. Could be wrong. fter all, isn’t this astrology, folks?
Trump: military solutions 'locked and loaded' against North Korea threat (Reuters) Any Korean war could quickly escalate (Reuters) Could a North Korean Nuclear Missile Hit the White House? (BBG) Standoff Leaves China With Few Options (WSJ) Trump and Kim's War of Words Has Asia Bracing for Conflict (BBG) After years, South Koreans worry about North: food sales up, civil drills expanded (Reuters) Trump Hands McConnell a Daunting To-Do List to Regain His Favor (BBG) Google Cancels Staff Meeting to Address Diversity Crisis (BBG) Poker Site Wants Card Sharks to Fold So the Rest of Us Can Win (BBG) Number of Americans Caught Underpaying Some Taxes Surges 40% (WSJ) A Battle Over Goldman’s Hunger Bonds Is Being Waged in Florida (BBG) Vladimir's Venezuela - Leveraging loans to Caracas, Moscow snaps up oil assets (Reuters) IEA says strong oil demand growth helping market rebalance (Reuters) Parked Electric Cars Earn $1,530 Feeding Power Grids (BBG) ‘Hollywood Is Under Siege’: HBO Hack Exposes Industry’s Vulnerability (WSJ) Undaunted by tensions, Chinese tourists flock into North Korea (Reuters) Who Is Winning With the Fiduciary Rule? Wall Street (WSJ) Protesters storm Shell crude flow station in Niger Delta (Reuters) Overnight Media Digest WSJ - Benchmark Capital sued Uber Technologies Inc's former chief Travis Kalanick alleging that he defrauded directors into giving him more control over the board by hiding a range of "inappropriate and unethical directives". on.wsj.com/2vJweHW - Alphabet Inc's Google canceled a companywide meeting about diversity just before it was set to begin Thursday, citing safety concerns after right-wing commentators published the names of certain employees. on.wsj.com/2vK7XRQ -US investigators uncovered a global financial network run by a senior Islamic State official that funneled money to an alleged ISIS operative in the US through fake eBay transactions, according to a recently unsealed FBI affidavit. on.wsj.com/2vKKU9E -US President Donald Trump declared the opioid epidemic a national emergency Thursday, establishing a formal designation for the crisis that could shape the way his administration responds. on.wsj.com/2vKrguv -Wisconsin Governor Scott Walker defended a $3 billion tax-incentive package to lure Taiwan's Foxconn Technology Co Ltd to the state, amid a growing chorus of concerns about the hefty bill to taxpayers. on.wsj.com/2vKEXt5 FT UK's manufacturing output remained stagnant in June, in line with market expectations, according to figures published by the Office for National Statistics. UK's Information Commissioner's Office fined TalkTalk Telecom Group Plc 100,000 pounds ($129,740.00) for failing to protect the data of its customers, after the details of as many as 21,000 people were unlawfully accessed by three accounts at Indian IT services company Wipro Ltd. Credit Suisse Group AG has barred transactions involving certain Venezuelan bonds, fearing any potential fallout from being seen to support the increasingly autocratic government of Nicolas Maduro. The Bank of England has said that after "careful and serious consideration and extensive public consultation" it had decided to stick with printing banknotes that contain animal fat in spite of an outcry by campaigners who wanted them to be made meat-free. NYT - Benchmark Capital, the venture capital firm that is one of Uber Technology's biggest investors, sued Travis Kalanick, claiming fraud and other transgressions, in an attempt to remove him from the ride-hailing company's board. nyti.ms/2vKiL2h - Jeffrey Lord, a CNN contributor and Trump supporter, was fired after posting "Sieg Heil" on Twitter in an exchange with the president of a media watchdog site. nyti.ms/2vJPK70 - Google on Thursday canceled a scheduled companywide meeting at which executives had planned to discuss a memo that questioned the Silicon Valley giant's diversity efforts after employees expressed concern that they would be exposed to harassment online. nyti.ms/2vKjYGQ Canada THE GLOBE AND MAIL ** TMX Group CEO Lou Eccleston said his company is considering a move that could make it harder for investors to buy and sell the shares of marijuana companies with U.S. assets, raising doubts about the ability of some public Canadian pot firms to raise cash and expand south of the border. tgam.ca/2vsVNdF ** Aimia Inc sees a "huge sense of urgency" in finding new partnerships to strengthen its core loyalty program Aeroplan, following the announcement in May that Air Canada would end its exclusive relationship with that program. tgam.ca/2vsWeEP ** British Columbia's new NDP government warned Kinder Morgan on Thursday that the company won't be able to begin construction on its Trans Mountain pipeline expansion, as the province pledged to join a legal challenge to ultimately kill the project. tgam.ca/2vsE2uN NATIONAL POST ** As nuclear rhetoric between North Korea and the United States heats up, Citibank analysts are anxiously watching commodity prices due to the importance of the North Asian market. bit.ly/2vt1jNm ** With quarterly GDP figures putting it near the head of the G7 pack, it would take a major disruption to make 2017 anything but a big economic win for Canada. But looking ahead to 2018, things are less certain, according to a recent report from Toronto-Dominion Bank. bit.ly/2vt1zMk Britain The Times Prudential Plc will combine its UK insurance operation with the fund manager M&G in a move that could lead to the break-up of the insurer. bit.ly/2uu04jF Dong Energy hopes to secure subsidies within weeks to build what could be the world's biggest offshore wind farm off the coast of Yorkshire. bit.ly/2fx5ovY The Guardian Thousands of Asda Stores Ltd workers are facing redundancy or a dramatic cut in their working hours as Britain's third-largest supermarket chain looks to cut costs. bit.ly/2hPfn0i Four supermarkets have withdrawn products from their shelves as it emerged that 700,000 eggs from Dutch farms implicated in a contamination scare had been distributed in Britain. bit.ly/2hNxxjc The Telegraph Challenger bank Aldermore Group Plc saw its profits shoot up in the first half as demand for fresh funding increased among Britain's homeowners, landlords and small businesses. bit.ly/2vTYsQw Manx Telecom Plc announced Danny Bakhshi had been suspended "on a precautionary basis pending investigations being carried out" and that the charge was unrelated to his professional role. bit.ly/2vJSIs3 Sky News Sabre, a car insurer whose brands include Go Girl and Insure2Drive has picked bankers to steer it onto the London stock market. bit.ly/2vrJxKm Lego has announced it is replacing its chief executive just eight months after he took up the role. bit.ly/2uuUBFo The Independent Wal-Mart Stores Inc has apologised for a sign in one of its stores that appeared to market guns as items for school children. ind.pn/2usllX2 According to a survey, carried about by international recruiter Hired, the majority of respondents working in the U.S. tech industry said they were dissuaded from relocating to the UK since Brexit had made the country a less desirable place to live. ind.pn/2urDmc7
The listening bank? The BoE is sticking with traces of animal products in its notes despite 88% of respondents in its consultation saying it shouldn’tHas the Bank of England got the hang of this public consultation lark? On the vexed question of whether the nation’s banknotes should contain traces of animal products, 88% of respondents to the Bank’s survey said they shouldn’t. Threadneedle Street’s response to the respondents? Tough luck, we’re sticking with our polymer mix.It didn’t put it like that, of course. Rather than deploying traces of earnest verbiage, the Bank opted for excess. The decision was reached after “careful and serious consideration”. The Bank “fully recognises the concerns raised by members of the public”. It understands not all parties will feel their concerns have been addressed. But the decision stands. Continue reading...
We Are All Going To Die! By Cognitive Dissonance This one is short and sweet folks. The subject alone could fill several books, so I decided to keep it contained to just a few……OK, five pages. With that in mind, I present the basic outline and ask you to let your imagination be your guide. One word of advice; if you find yourself triggered and defending not discussing or thinking about this subject (or screaming at me that you do) you just might be suffering from Stockholm Syndrome. I have a motto, a proverb if you will, that neatly encapsulates the root and process of our insanity. It goes something like this… “We are only as sick as our deepest darkest secrets.” Those things we do not talk about, especially to ourselves (or if we do, in only the most superficial manner) point directly and inevitably to the root of our insanity. And I use the word “talk” in its broadest possible sense and meaning because “We the Americans” can incessantly ‘talk’ about something and still never say a word about the actual subject matter. A perfect example would be our utter obsession with all things ‘sex’, a subject we rarely speak about directly. Our movies and various other media, our clothing, mannerisms, consumer products, nearly everything screams ‘sex’ in one form or another. Yet we use veiled terms such as ‘sleeping with him/her’ to convey the desire for, or the completed act of, copulation. I may be wrong, but sleeping is usually the last thing that’s actually going on. There must be at least a hundred words we use to not directly discuss sex and our obsessed desire to engage in the act itself. It has been conservatively estimated that up to 40% of all internet activity is directly related to the trafficking of pornography. Yet we rarely talk about it in public or private. The marketing of Viagra, Cialis and Levitra for “erectile dysfunction” is a case study in not talking directly about something, yet still speaking volumes on the subject. While most certainly the drugs have a medical use, the purpose of the advertising is to encourage the ‘patient’ to seek treatment to obtain the drug for ‘recreational’ use. I would call us humans silly if our behavior wasn’t so dangerously neurotic. The same can be said about death and dying. If there is one thing we know with absolute certainty, it is that at some point we are all going to die. While the where and when may always be in question, there is no ‘if’ about actually dying. And yet we are obsessed with death and dying, even though we cannot individually and collectively discuss the subject in depth and detail. I worked at Prudential for over eight years in the 90’s and the principal product I sold was life insurance. It would have been easier to sell refrigerators to an Eskimo than to sell the one product everyone is absolutely positively guaranteed to use. Or at least our beneficiary will use it. I was actually pretty good at my job, but only because I brushed past most of the discomfort exhibited by the client and talked about death in the same way I would talk about night and day, as a commonly understood fact and not a whispered-among-conspirators possibility. This is not to say I was rude or blunt. Rather I was sensitive to their discomfort while displaying no awkwardness of my own. The psychology behind this technique is called ‘mirroring’, where the person you are talking to will eventually reflect back or mirror your own mannerisms and attitude. Don’t believe me? While directly facing someone during a one on one conversation, cross your arms across your chest and keep them there. Then watch what happens. Never once in those eight years did I come across a single person who didn’t demonstrate some degree of neurotic behavior about death and dying. Often it was hidden beneath anger, indifference, suspicion, embarrassment, discomfort, subject change, outright avoidance, the use of ‘code’ word non-descriptive terminology and so on. We are so frightened of death we insist on spending ‘whatever it takes’ to get healthy once sick, while spending little to nothing to avoid becoming sick in the first place. The ‘medical’ procedures and pharmaceutical poisons we inflict upon ourselves, particularly when older, would be considered (elder) abuse, even torture, if it wasn’t culturally accepted, thus considered normal and natural. All this self inflicted pain and suffering just to possibly squeeze out a few additional moments of ‘life’, always assuming quality of life means very little and duration is the only thing that counts. What do you mean you don’t wish to participate in the cut, burn and poison procedures I’ve recommended? Don’t you want to live? Are you nuts? For a death culture that doesn't want to discuss our own inevitable death, we seem to be obsessed with creating a lot of it in others. We are deeply immersed in what can only be accurately described as a ‘death’ culture. Our children are purportedly witness to 10,000 ‘simulated’ murders or deaths via various media before the age of 18. The military, a sophisticated killing machine, is culturally glorified as ‘moral and just’ (as long as they kill by the rules) or just doing their job (civilian leadership calls the shots) while the wounded soldiers who did the actual dirty work (that means killing and maiming) are eventually discarded like moldy mystery meat found in the back of the fridge. Ever listen to a ‘professional’ military strategist speak about killing…oops, I mean ‘tactics’? Considering the words ‘kill’ and ‘death’, among many others, are never used, you’d think they were discussing their next blue chip corporate marketing campaign. In fact, in many ways they are. But what they aren’t discussing, while thoroughly and completely discussing it, is the actual ‘killing’. ‘Collateral damage’ is the perfect example, a phrase that reduces the ‘accidental’ spilling of blood and guts down to something not much worse than a severely stubbed toe. “I was chasing my wife around the kitchen table not trying to have sex with her when I suffered collateral damage and stubbed my big toe. It ruined the moment we weren’t having.” I suppose this is because life is sacred and must not be taken carelessly or cavalierly. Notice that doesn’t preclude taking someone’s life, the primary function of the military, but about giving great thought and deliberation about taking someone’s life; then doing so efficiently and without the loss of your own life in the process. Because your own life is sacred and shall be preserved at all cost. Everyone else? Umm…not so much. Our entire system of governance ‘operates’ via carefully veiled physical and psychological coercion. The government representative asks nicely, several times in fact, before calling in the men and women with guns to convince us it’s in our own best interest to do as we are ‘requested’. The state has a monopoly on institutional violence and we are conditioned from birth to applaud and obey. And make no mistake about it; we are trained from birth to accept the present state of violence as natural and normal, human nature in fact. Nothing we can do to change what we are, so just sit back and enjoy the show. If we won’t personally become sociopaths, at least accept (and obey) the sociopaths in power as just the way things are supposed to be. Silly rabbit, peace and mutual cooperation are for sissies and gadflies. Real men and women take what they want because they can. Of course, this is human nature because we are all descended from apes and apes are naturally violent. At least that’s what we are told. Besides, when “We the Advanced Humans” finally turned to hunting and gathering rather than beating each other over the head like apes, we still had to beat each other over the head like apes in order to protect what we had hunted and gathered. Do you see the madness inducing closed loop feedback system working to perfection here? A supposedly violent past is used to justify and rationalize a violent present and future. It is inferred we simply cannot, therefore will not, mature because violence is in our genes. The best we can do, we are helpfully informed, is to grin and bear it. And kill…but only if we must. And we must because ‘they’ made us do it. The killings will continue until the killings stop. Thank God we have the sovereign state to bring law and order to the art of violence and murder. Let the professionals handle it. They know what they’re doing. Please note I used the word ‘supposedly’ in a previous paragraph. By now we should all understand ‘history’, particularly ancient history, doesn’t always reflect actual truth, but rather the prevailing and ever changing historical narrative that sets the stage for the present day controlling memes. Because it’s all part of our overall belief system, we never ever consider how much our belief in a specifically defined, as well as hidden, past affects our view of today and tomorrow. It is nearly impossible to know where you are going without an understanding of where you have been and where you are now. That is how important it is for the controlling meme to manipulate our historical perspective. Let me state unequivocally that a culture of death will always attempt to convince us via various methods of ‘persuasion’ that a culture of death is perfectly rational and justified in being what it is, a culture of death. How could it be any other way and still exist? Considering we are in a controlling and abusive relationship with our serial abusers, is it any wonder we are all suffering from Stockholm Syndrome and are therefore unable to sanely confront and contend with our eventual demise? That which we refuse to confront controls us to some extent or another, and usually much more than we care to believe. Those who wish to exploit us only need to manipulate our fear of what controls us. It’s as easy as taking candy from a baby. We are all going to die. Get over it. Embrace it as part of the journey. Examine it for all it is and isn’t. And accept it, thereby removing the fear and rendering it impotent. This way we can move on towards a more glorious endeavor, that of fully living life rather than simply waiting ‘round to die. 08/06/2017 Cognitive Dissonance For a culture that loves death and destruction, we sure seem to like pretty things a lot.
Authored by Chris Whalen via The Institutional Risk Analyst, “While the US and the UK have been mired in political chaos this year, the EU has enjoyed improved economic conditions and some political windfalls. The question now is whether this good news will inspire long-needed EU and eurozone reforms, or merely fuel complacency – and thus set the stage for another crisis down the road.” Philippe Legrain, Project Syndicate This week The Institutional Risk Analyst takes a look a the recent reports out of the EU regarding a proposal to “freeze” the retail accounts of failing European banks. The original story in Reuters suggests that our friends in Europe actually think that telling the public that they will not have access to their funds, even funds covered by official deposit insurance schemes, is somehow helpful to addressing Europe’s troubled banking system. Investors who think that Europe is close to adopting an effective approach to dealing with failing banks may want to think again. Judging by the reaction to the story by investors and on social media, it appears that the EU has learned nothing about managing public confidence when it comes to the banking sector. In particular, the idea that the banking public – who generally fall well-below the maximum deposit insurance limit – would ever be denied access to cash virtually ensues that deposit runs and wider contagion will occur in Europe next time a depository institution gets into trouble. “The plan, if agreed, would contrast with legislative proposals made by the European Commission in November that aimed to strengthen supervisors' powers to suspend withdrawals,” Reuters reports, “but excluded from the moratorium insured depositors, which under EU rules are those below 100,000 euros ($117,000). While some Wall Street analysts are encouraging investors to jump into EU bank stocks, the fact is that there remains nearly €1 trillion in bad loans within the European banking system. This represents 6.7% of the EU economy, according to a report and action plan considered by EU finance ministers earlier this month. That compares with non-performing loans (NPL) ratios in the US and Japan of 1.7 per cent and 1.6 per cent of gross domestic product, respectively. But the most basic point to make about the proposal for a “temporary” suspension of access to cash is that such moves never work. Moratoria are part of the banking laws in Germany and many other European nations, but they are never used because once invoked the institution is dead for all practical purposes. In Spain, for example, the government had the power to impose a temporary suspension of access to deposits in the case of Banco Popular, but did not do so because it would have killed the franchise. Jochen Sanio, the former president of the German Federal Financial Supervisory Authority (BaFin), commented about banks subject to “temporary” deposit moratoria that “they never come back.” Sanio, who guided Germany through the 2008 financial crisis and forced the clean-up of insolvent state-owned banks, was retired and gagged for the rest of his life for challenging Germany’s corrupt political status quo of covert bailouts. So again, one has to wonder, why any responsible official in Europe would support the plan reported by Reuters. As the US learned the hard way in the 1930s and with the S&L crisis in the 1980s, the lack of a robust national deposit insurance function to protect retail depositors leaves an entire society vulnerable to banks runs and debt deflation. Until the EU is prepared to do “whatever is necessary,” to paraphrase ECB chief Mario Draghi, in order to protect retail bank depositors, the EU will remain far from being a united political economy. Readers of The IRA may recall the comments of German Chancellor Angela Merkel last Fall, when she suggested that the German government would not support Deutsche Bank AG (NYSE:DB) in the event that the institution got into financial trouble. At the time, DB was trading at about $12 per share in New York. We spoke about DB and the ill-considered comments made by US and German officials from Dublin on CNBC on September 30th. At the time, we reminded investors that political officials should never talk about a depository institution while it is still open for business. This is a basic, well-recognized rule that has been followed by prudential regulators around the world for many years. Yet because of the popular political pressures on elected officials such as Merkel, the temptation to engage in absurd hyperbole with respect to big banks is irresistible. We see this latest piece of news out of Europe as further evidence that there is still no political consensus about how to deal with troubled banks. As we learned last year, Merkel could not even make positive public comments about DB for fear of committing political suicide. The more recent bank resolutions in Spain and Italy were made to look like touch measures in public terms, even as the Rome government quietly subsidized the senior creditors of two failed banks in the Veneto. We noted in an earlier comment, “Fade the Great Rotation into Europe,” that the EU pretends to play tough on bank rules while bailing out the senior creditors: “Of note, Italy is being given control over the remaining ‘bad bank’ to wind down as the assets and deposits are conveyed to Intesa SanPaolo. This permits a bailout of senior unsecured creditors. So Italy gets what it wants – continued circumvention of EU bailout rules. If a bank disappears, notes a well-placed EU observer, ‘state aid rules do not apply.’” The Europeans appear to be playing a very dangerous game. On the one hand, EU officials talk publicly about getting tough on insolvent banks and even suspending access to funds for retail depositors. On the other hand, EU governments are continuing to bail out banks and large creditors in a display of cronyism and business as usual. “Under the plan discussed by EU states, pay-outs could be suspended for five working days and the block could be extended to a maximum of 20 days in exceptional circumstances,” Reuters reports. “Existing EU rules allow a two-day suspension of some payouts by failing banks, but the moratorium does not include deposits.” Contrast the EU proposal with standard practice in the US, where the Federal Deposit Insurance Corporation (“FDIC”) begins to market troubled banks before they fail and tries to execute bank closures and sales on a Friday to avoid frightening the public. The branches of the failed bank then open on the following business day as part of a solvent institution without any interruption in customer access to funds. Importantly, all insured depositors, as well as brokered deposits and advances from the Federal Home Loan Banks, are always paid out by the FDIC when the failed bank is closed in order to avoid precipitating runs on other institutions. In Europe, on the other hand, there appear to be a significant number of officials who seriously believe that denying retail bank customers access to funds covered by deposit insurance will not result in financial contagion. If such a proposal is adopted, the sort of bank runs seen in Cyprus and Greece could intensify and spread to the major countries in Europe. Imagine that a large bank failure occurs in Italy next year and Italian officials tell retail customers that they will not have access to any funds for several weeks. As we saw in 2012 in Spain and Cyprus and 2015 in Greece, retail bank runs tend to spill over into other countries and markets, creating a situation where fear takes over from rational behavior. The trouble is, Chancellor Merkel cannot commit Germany to supporting an EU accord to support the banks in the Eurozone without ending her political career. “If capital flight from the peripheral economies gathers pace, it could trigger runs on entire banking systems,” notes the infamous “Plan B” memo prepared for Merkel in 2012. “That would put the ECB—and thus, indirectly, the Bundesbank and Germany—on the hook for deposits worth trillions of euros.” In the dark days of 2012, Merkel’s government prepared for “Plan B” and was essentially ready to allow the weaker nations on the EU’s periphery – including Spain, Greece, Italy and Ireland -- to fail and drop out of euro as Germany withdrew to a core group of nations. Just as the EU still refuses to deal with Greece’s mounting debt, likewise it cannot seem to accept that protecting the small depositors of European banks is the price to be paid for preserving social order and the EU itself. Otmar Issing, former Chief Economist and Member of the Board of the European Central Bank and the German Bundesbank, summarizes the situation: “The euro crisis is not over.”
Oliver Denk, OECD Directorate for Employment, Labour and Social Affairs, and Gabriel Gomes, OECD Economics Department In a report issued in June 2017, the Trump administration laid out its proposal for overhauling some of the regulations President Obama had enacted with a view to avoiding a financial market meltdown of the kind we saw in […]
The Hartford (HIG) has entered into a pension risk transfer deal with Prudential to offload its pension risk liability.
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