NC Renegades

FREEMANSPERSPECTIVE

This is the question that astute investors are forced to ask themselves these days. No reasonable person believes that a system of ever-expanding debt can resolve painlessly. It simply cannot happen… not, at least, until 2+2 stops equaling four.

But the international money system, while deeply interconnected, can implode in sections. In fact, it’s highly unlikely that it will crash as a single unit.

So, if you have significant moneys to invest, you end up coming back to our question: Who will be the last to crash? Once you decide that, you can concentrate your assets in that place, hoping to come through the crash with at least most of your value intact.

Let’s look at several aspects of this:

#1: Background statistics:

• World debt is upwards of $200 trillion, and growing steadily. World GDP is $70-some trillion, only about a third of the debt. This debt will not be paid back. Massive amounts of debt will have to be written off in losses.
• US debt is north of $18 trillion. (Amazingly, *cough*, it hasn’t changed in months *cough*.) Forward promises are north of $200 trillion, meaning that a child born today is responsible to repay $625,000. And since roughly half the US population pays no income tax… and presuming that this newborn will be a member of the productive half… he or she is born $1.25 million in debt. Such repayments will never happen. Most of those debts will not be repaid.
• Japan is worse off than the US. The UK is bad. Many EU countries are worse.

These numbers, by the way, are ignoring more than a quadrillion dollars of derivatives and lots of other monkey business. (Rehypothecation, *cough*, *cough*.)

#2: No one wants to rock the boat.

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As we enter the second half of 2015, financial panic has gripped most of the globe.  Stock prices are crashing in China, in Europe and in the United States.  Greece is on the verge of a historic default, and now Puerto Rico and Ukraine are both threatening to default on their debts if they do not receive concessions from their creditors.  Not since the financial crisis of 2008 has so much financial chaos been unleashed all at once.  Could it be possible that the great financial crisis of 2015 has begun?  The following are 16 facts about the tremendous financial devastation that is happening all over the world right now…

1. On Monday, the Dow fell by 350 points.  That was the biggest one day decline that we have seen in two years.

2. In Europe, stocks got absolutely smashed.  Germany’s DAX index dropped 3.6 percent, and France’s CAC 40 was down 3.7 percent.

3. After Greece, Italy is considered to be the most financially troubled nation in the eurozone, and on Monday Italian stocks were down more than 5 percent.

4. Greek stocks were down an astounding 18 percent on Monday.

5. As the week began, we witnessed the largest one day increase in European bond spreads that we have seen in seven years.

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In his latest Investment Outlook, Bill Gross describes what events might trigger a retail exodus (thus tipping the first domino), and says investors should hold enough cash to ride out the storm without participating in a firesale caused by rising rates or some manner of exogenous shock.

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From “It Never Rains In California”:

Mutual funds, hedge funds, and ETFs, are part of the “shadow banking system” where these modern “banks” are not required to maintain reserves or even emergency levels of cash.Since they in effect now are the market, a rush for liquidity on the part of the investing public, whether they be individuals in 401Ks or institutional pension funds and insurance companies, would find the “market” selling to itself with the Federal Reserve severely limited in its ability to provide assistance.

While Dodd Frank legislation has made actual banks less risky, their risks have really just been transferred to somewhere else in the system. With trading turnover having declined by 35% in the investment grade bond market as shown in Exhibit 1, and 55% in the High Yield market since 2005, financial regulators have ample cause to wonder if the phrase “run on the bank” could apply to modern day investment structures that are lightly regulated and less liquid than traditional banks. Thus, current discussions involving “SIFI” designation – “Strategically Important Financial Institutions” are being hotly contested by those that may be just that. Not “too big to fail” but “too important to neglect” could be the market’s future mantra.

Aside from the obvious drop in trading volumes shown above, the obvious risk – perhaps better labeled the “liquidity illusion” – is that all investors cannot fit through a narrow exit at the same time. But shadow banking structures – unlike cash securities – require counterparty relationships that require more and more margin if prices should decline. That is why PIMCO’s safe haven claim of their use of derivatives is so counterintuitive. While private equity and hedge funds have built-in “gates” to prevent an overnight exit, mutual funds and ETFs do not. That an ETF can satisfy redemption with underlying bonds or shares, only raises the nightmare possibility of a disillusioned and uninformed public throwing in the towel once again after they receive thousands of individual odd lot pieces under such circumstances. But even in milder “left tail scenarios” it is price that makes the difference to mutual fund and ETF holders alike, and when liquidity is scarce, prices usually go downnot up, given a Minsky moment. Long used to the inevitability of capital gains, investors and markets have not been tested during a stretch of time when prices go down and policymakers’ hands are tied to perform their historical function of buyer of last resort. It’s then that liquidity will be tested.

And what might precipitate such a “run on the shadow banks”?

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Earlier today, John O’Connell, CEO of Davis Rea, spoke to Canada’s BNN from what may be Greece’s top tourist attraction, the island of Santorini, to give a sense of the “mood on the ground.” Not surprisingly, his feedback was that, at least as far as tourists are concerned, nobody is worried. After all, it is not their funds that are capital constrained plus should the Drachma return as the local currency, the purchasing power of foreigners will skyrocket.

What he did point out, however, that was quite notable is the diametrically opposing views between old and young Greeks when it comes to Grexit. According to O’Connell, “the old people want to vote for Europe cause they have a lot to lose, they have their pensions, but the younger population – they are already poor, they are already unemployed – and they don’t have much to lose. Their attitude is it’s going to be tough, it’s already tough, and so why not just move on go back to the Drachma, and they’re ok with that. Their attitude is in 5 to 10 years I’ll be better off. They believe there’s a lot of misinformation. They believe they’re being pressured by European countries particularly Germany that are holding them to very difficult terms.”

He continues: “whatever the polls may way, the young population is going to vote to leave the Euro and deal with the problems long-term.”

Finally, his take on capital controls and tourism: “You are going to see a big, big drop off in tourism because people are not going to want to come here. People are going to worry that if people do come here with a lot of Euro, are they going to be allowed to leave with those Euros. It’s going to have a dramatic impact on the Greek economy at some point, a lot of the people that live here are underestimating how bad it could get in the short term.”

The punchline:

There have been some people that worry that the military may actually get involved. It wouldn’t surprise me – there are some people in Greece that have raised the whole prospect of potential civil war.

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Puerto Rico’s governor has a message for Washington D.C: change the law, we want the right to declare bankruptcy.

On the brink of default, Governor Alejandro García Padilla demanded that the U.S. government allow Puerto Rico, a commonwealth, access to chapter 9 bankruptcy. That’s what Detroit used when it went belly up. At the moment, only cities, towns and other municipalities are able to declare bankruptcy.

“We cannot allow them to force us to choose between paying for our police, our teachers, our nurses, and paying our debt,” Padilla said in a televised announcement Monday night in Spanish. “We have to act now.”

Puerto Rico is running out of time. The island owes $73 billion that it can’t pay. Its debt is already junk grade and has one of the lowest possible ratings.

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Debt is slavery. As the world is finding out.

David DeGerolamo

h/t Watcher

… will only cost you a small Jizya …

… ’cause you no longer have any absolute “Rights” under this government … or any other.

Art from Blue’s Blog

A federal judge has ordered that the Brady Center to Prevent Gun Violence pay the legal fees of an online ammunition dealer it sued for the Aurora movie theater shooting.

The order, which was issued last week, comes after Judge Richard P. Matsch dismissed the gun control group’s suit that sought to hold Lucky Gunner legally responsible for the 2012 shooting. The Brady Center had argued in their suit that the way Lucky Gunner sells ammunition is “unreasonably dangerous and create a public nuisance.”

“A crazed, homicidal killer should not be able to amass a military arsenal, without showing his face or answering a single question, with the simple click of a mouse,” Brady Center’s Legal Action Project Director Jonathan Lowy said at the time. “If businesses choose to sell military-grade equipment online, they must screen purchasers to prevent arming people like James Holmes.”

Judge Matsch disagreed with the Brady Center’s argument. He said the suit was filed for propaganda purposes. “It is apparent that this case was filed to pursue the political purposes of the Brady Center and, given the failure to present any cognizable legal claim, bringing these defendants into the Colorado court where the prosecution of James Holmes was proceeding appears to be more of an opportunity to propagandize the public and stigmatize the defendants than to obtain a court order,” he said in his order.

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• China’s Stocks Enter Bear Market as Rate Cut Fails to Stop Rout (BBG)
• Stocks Tumble Around the World on Greek Crisis (WSJ)
• Some say back to the drachma for a Greek reboot (Reuters)
• Greece Imposes Capital Controls as Fears of Grexit Grow (BBG)
• Panic Sets in Among Hardy Hedge Fund Investors Remaining in Greece (NYT)
• Euro off Greece-driven lows after SNB intervenes (Reuters)
• Western Union to close in Greece for rest of week (Reuters)
• European banks, bonds shaken by Greek turmoil (Reuters)
• Greece Tries to Defy History of Capital Controls Doomed to Fail (BBG)
• Bunds Surge Most Since 2012 as Greek Crisis Escalates (BBG)
• Supreme Court Term to End With 3 Rulings (WSJ)
• Texas attorney general says county clerks can refuse gay couples (Reuters)
• Gross Gets Personal: ‘I Just Wanted to Run Money and Be Famous’ (BBG)
• Musk’s Space-Taxi Vision Sustains Blow as SpaceX Rocket Blows Up (BBG)

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While things have normalized since the open thanks entirely to the SNB’s aggressive EUR-buying, CHF-selling intervention (good to see that central banks have read the BIS’ report and have learned from their prior intervention mistakes), earlier this morning we got a snapshot of what happens if and when the SNB, and then the ECB itself, finally lose control when as a result of the Greek crisis the contagion promptly spread a few hundred kilometers west to Italy where as the WSJ reported, “several Italian banks failed to start trading on Monday as fears over a Greek debt default induced many investors to shed peripheral stocks, including Italian, with banks suffering the most.”

As the paper reported sales orders on Italian stocks, in particular financial stocks, piled up before the market opening. At the start, the sales orders were so numerous that the system couldn’t manage to process them, something that often happens when specific news causes a sell-off on a stock.

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