How China Covered The World In "Liquidity Swap Lines"

As we’ve discussed on a number of occasions and at great length, the market is periodically hit by systemic dollar shortages. For instance, in 2007 European commercial banks found themselves staring down a dollar funding gap on the order of several trillion (all in). Meeting USD funding requirements became immeasurably more difficult as the crisis intensified, necessitating what amounted to a Fed bailout via dollar liquidity lines to foreign central banks.

Then, in November of 2011 (so right around the time when, just like today, the financial world was glued to Greece), the Fed extended its “temporary” swap lines with The Bank of Canada, the BoJ, the BoE, the ECB, and the SNB, and also lowered the price of dollar liquidity. 

The most recent global USD funding shortage began to show up earlier this year and as we noted in March, has been ironically created by central banks themselves (for those interested in a detailed account of the conditions which lead to episodic dollar dearths, see the articles linked above).

Central bank liquidity lines like those the Fed used to bailout the world seven years ago have become a fixture of the post crisis financial system and as you can see from the following maps, their growth since 2007 has been remarkable. Perhaps the most striking thing about the following graphics is the extent to which China has (literally) covered the world in renminbi swap lines. Essentially, China has used bilateral swap agreements to help embed the yuan in international trade in the the post-crisis era. As you'll see below, counterparty countries have also tapped their yuan liquidity lines when they're cut off from dollar funding, making China a critical lifeline for bolstering FX reserves and helping to alleviate shortages of imported goods.

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Elizabeth Warren’s Trade Deal Fears Confirmed: Canada Uses NAFTA to Challenge Volcker Rule

In her attacks on Obama’s pending trade deals, Elizabeth Warren has argued that could undermine US financial regulations like Dodd Frank. The Administration has taken to trying to dismiss Warren as not knowing what she was talking about. More skillful defenders of the traitorous trade deals took the tact of saying that Warren could in theory be right, but the odds of her fears playing out were so remote as to not be worth worrying about.

In a long, careful article in the Nation yesterday, George Zornick explains even with the limited information that we have now about the contents of proposed treaties like the TPP and its ugly European step-sister, the TTIP, Warren’s worries are valid. For instance:

Like with TPP, we don’t know all the details of TTIP yet, but advocates have many fears. One is that the Federal Reserve’s plan to impose separate liquidity requirements on foreign banks might be scotched… 

And it’s not just Dodd-Frank: the leaked EU proposal for TTIP has a provision that new regulations first be “analyzed” to determine if they have an unacceptable impact on trade. Americans for Financial Reform (AFR) worries that this could “impose a presumption that regulations must be judged on the basis of their trade impact rather than their effectiveness as public interest policies promoting financial stability.”

Keep in mind that by design, a substantial portion of Dodd Frank implementation was kicked down the road to allow lobbyists to have a second go at weakening it, with studies required before rules would be written. Significant portions of rulemaking have yet to be completed and would appear to be subject to the TTIP analysis requirement, giving the banking industry yet another change to gut legislation.

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Why Are Exchange-Traded Funds Preparing For A ‘Liquidity Crisis’ And A ‘Market Meltdown’?

Some really weird things are happening in the financial world right now.  If you go back to 2008, there was lots of turmoil bubbling just underneath the surface during the months leading up to the great stock market crash in the second half of that year.  When Lehman Brothers finally did collapse, it was a total shock to most of the planet, but we later learned that their problems had been growing for a long time.  I believe that we are in a similar period right now, and the second half of this year promises to be quite chaotic.  Apparently, those that run some of the largest exchange-traded funds in the entire world agree with me, because as you will see below they are quietly preparing for a “liquidity crisis” and a “market meltdown”.  About a month ago, I warned of an emerging “liquidity squeeze“, and now analysts all over the financial industry are talking about it.  Could it be possible that the next great financial crisis is right around the corner?

According to Reuters, the companies that run some of the largest exchange-traded funds in existence are deeply concerned about what a lack of liquidity would mean for them during the next financial crash.  So right now they are quietly “bolstering bank credit lines” so that they will be better positioned for “a market meltdown”…

The biggest providers of exchange-traded funds, which have been funneling billions of investor dollars into some little-traded corners of the bond market, are bolstering bank credit lines for cash to tap in the event of a market meltdown. 

Vanguard Group, Guggenheim Investments and First Trust are among U.S. fund companies that have lined up new bank guarantees or expanded ones they already had, recent company filings show. 

The measures come as the Federal Reserve and other U.S. regulators express concern about the ability of fund managers to withstand a wave of investor redemptions in the event of another financial crisis. They have pointed particularly to fixed-income ETFs, which tend to track less liquid markets such as high yield corporate bonds or bank loans.

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Digital Money Forging Ahead

Econet Wireless is now allowing group savings on its mobile money platform, EcoCash, a development the company says will reduce risks associated with cash handling. 

The EcoCash Savings Club will earn interest on "all pooled funds" each month. 

Saving groups can appoint a chairperson who will undertake the opening of the account while approving members will also be selected from the group. 

Savings groups are common in most African communities whereby members in a group put money together for a common interest such as buying properties or for funding functions such as funerals or weddings. Most of these groups appoint a member or take turns to keep the money inside their houses. 

"They (saving groups) typically consist of a group of members who each contribute regularly into a cash pool that members borrow from on a rotating basis. While the practice is widespread, savings clubs face security risks in handling cash and difficulties in tracking contributions and withdrawals from members," said an official at Econet Wireless. – ITWeb Africa, May 8, 2015 

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Sovereignty For International Investors (Trans-Pacific Partnership (TPP))

Yves here. This post provides another vantage on one of the very worst features of the pending, mislabeled trade deals, the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership. Both are up for what is the critical vehicle for their passage, so-called Fast Track Authority, this week. The Senate vote is scheduled for today, May 12.

If you have not done so yet, PLEASE call your Senators as soon as you can to voice forceful disapproval. E-mail friends and post reminders on Facebook (one readers suggested alumni groups, an option to add if you’ve neglected that route so far). You can find your Senators phone numbers here. After you’ve given them a piece of your mind, be sure to call your Representative (numbers here).

It’s been striking to see how the Administration and Obama personally have stooped to personal slurs and failed to make substantive responses to criticism. Even the normally measured Robert Reich and Dean Baker have come as close to calling Obama a liar as card-carrying members of the elite dare to in public discourse.

While this may be Obamas’s of entitlement getting long in the tooth, it may also result from his team recognizing all too well that any honest discussion on the merits will not go well for them.

This post provided a good overview of the dangers of the so-called investor state dispute settlement panels, which might more accurately be called “turn over America to multinational rule” panels.

Source

IMF Preparing Greek Default Contingency Plan

The biggest slow motion trainwreck in history, one that everyone knows how it ends just not when (especially since the "when" is about 5 years overdue), that of the Greek sovereign default may just got a bit more exciting earlier today when the WSJ reported that the IMF can no longer lie - like Mario Draghi did to Zero Hedge in 2013 - that there are preparation for a Plan B. To wit: "the International Monetary Fund is working with national authorities in southeastern Europe on contingency plans for a Greek default, a senior fund official said—a rare public admission that regulators are preparing for the potential failure to agree on continued aid for Athens."

According to the WSJ, the IMF is focusing on nations neighboring Greece, asking their national banking supervisors to "ensure that subsidiaries of Greek banks have enough assets that they can exchange for emergency financing at their own central banks—in case financing from their parent institutions is suddenly cut off—and that deposit-insurance funds are at sufficient levels, Mr. Decressin said."

In other words, have a Greek default Plan B ready, preferably right now.

"We are in a dialogue with all of these countries,” said Jörg Decressin, deputy director of the IMF’s Europe department. “We are talking with them about the contingency plans they have, what measures they can take.”

Greek banks are big players in some of its neighbors’ financial systems. In Bulgaria, subsidiaries of National Bank of Greece SA, Alpha Bank SA, Piraeus Bank SA and Eurobank Ergasias SA own around 22% of banking assets, roughly the same as Greek banks own in Macedonia. Greek banks are also active in Romania, Albania and Serbia.

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In Most Countries, 40 Hours + Minimum Wage = Poverty

Last week, we noted that Democratic lawmakers in the US are pushing for what they call "$12 by '20" which, as the name implies, is an effort to raise the minimum wage to $12/hour over the course of the next five years. Republicans argue that if Democrats got their wish and the pay floor were increased by nearly 70%, it would do more harm than good for low-income Americans as the number of jobs that would be lost as a result of employers cutting back in the face of dramatically higher labor costs would offset the benefit that accrues to the workers who are lucky enough to keep their jobs. 

Regardless of who is right or wrong when it comes to projecting what would happen to low-wage jobs in the face of a steep hike in the minimum wage, one thing is certain: many working families depend on government assistance to make ends meet, suggesting it's tough to persist on minimum wage in today's economy and indeed, a new study by the OECD shows that in 21 out of the 26 member countries that have a minimum wage, working 40 hours per week at the pay floor would not be sufficient to keep one's family out of poverty.

Here's more from Bloomberg:

A global ranking out Wednesday by the Paris-based Organization for Economic Cooperation and Development painted a grim picture of the situation in member countries straddling continents. The 34-member organization found that a legal minimum wage existed in 26 countries and crunched the numbers to see how they compared.

Forget taking a siesta in Spain. There, you'd have to work more than 72 hours a week to escape the trappings of poverty. Turns out that is the norm, not the exception. In the 21 countries highlighted with blue bars in the chart below, a full 40-hour work week still won't lift families out of relative poverty. This list includes France, home to the 35-hour work week, which almost met the threshold. Minimum wage workers there who are supporting a spouse and two children need to work 40.2 hours to get their families out of poverty.  (The poverty line is defined as 50 percent of the median wage in any nation.)

Source 

First Quarter GDP Likely Negative as Trade Deficit Soars

Because of the blinkered way we talk about the economy in this country, news that the trade deficit widened in March well above consensus expectations will undoubtedly be met by cries that we must create more free trade deals to counteract that. Of course, the two have almost nothing to do with one another. In fact, what we’re likely seeing is that a strong dollar policy – usually promoted by the same officials who endorse free trade agreements – is significantly undermining our economic health.

First, to the numbers. Everything went up in March – imports, exports and the trade deficit – because of the impact of the resolution of the West Coast port strike. Goods flowed and a large backlog got worked through. The result was the worst monthly trade deficit in six years, but even the three-month rolling average increased around five percent relative to one year ago.

Fortunately, Administration officials are magicians that don’t count imports in trade statistics, so this was welcomed as good news. I have a press release from Commerce Secretary Penny Pritzker that begins, “Today’s data shows that despite challenges facing economies around the globe, the world wants what America is selling.” Really. She cited the 0.9 increase in exports and neglected the far faster increase in imports. Talking about trade while only talking about exports is like a sportscaster giving a score for only one team in a baseball game. “Today, Dodgers 4.”

The officialdom, on the other hand, seems not to know what to make of this development:

JPMorgan Chase economist Daniel Silver wrote to clients that “we do not know” if the weakness of exports is port-related, “or if the recent weakness in the data is mainly due to the stronger dollar.” 

Other economists put the blame mainly on the port disruptions […] “Yes, the stronger dollar is playing a role here, but currency shifts simply don’t feed through into real trade flows that fast and that dramatically,” Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a client note. What he meant is that it takes time for people to change their buying patterns after a shift in exchange rates. 

“That said,” Barclays Capital economist Jesse Hurwitz wrote, “we do expect the net trade balance to drag on overall growth over the next several quarters.” That’s partly because Americans are consuming more and partly because of the stronger dollar, he said.

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SEC Commissioner Furious At Deutsche Bank's "Decade Of Lying, Cheating, And Stealing"

Last week we commented on the latest travesty in the legal system when Deutsche Bank paid $2.5 billion to settle charges that it had manipulated LIBOR, EURIBOR and various other -BORs. As usual in situations such as this one, not a single banker went to prison, but there was some hope that Deutsche Bank's gross criminal conduct would at least land it on the SEC's "bad actors" list, which is like the Dodd-Frank equivalent of ‘time out’ and restricts the offender from participating in exempt securities offerings.

Not to worry: as we reported as part of its settlement, Deutsche Bank, as well as every other criminal financial institution, had - deep in the fine print - inserted language that exempted the offender from such stigma. As the WSJ noted, "the language allows the banks to avoid asking the SEC for a waiver—a process that has become fraught with uncertainty amid commissioner disagreements over whether to allow financial firms to avoid a “bad actor” ban…"

We concluded that "It’s good to be TBTF" because clearly no matter how many laws are violated and how much money is stolen (LIBOR was the reference security for nearly $1 quadrillion in global rate-sensitive derivatives), i) nobody ever goes to prison, ii) there are absolutely no negative consequences, and iii) the cost of running a criminal organization is tiny - the settlement usually amounts to far less than 1% of the gains reaped from years of illegal activities.

Frankly, at this point one should just sit back and watch in amusement, because until the revolution and/or war predicted by Paul Tudor Jones arrives and the guillotines start working overtime, nobody in a position of wealth or power will be held accountable.

That same message was, in rough terms, what prompted SEC commissioner Kara Stein, a Democrat, to write her "dissenting statement" regarding granting Deutsche Bank the waiver for ineligible issuer status.

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Experts Are Warning That The 76 Trillion Dollar Global Bond Bubble Is About To Explode

Warren Buffett believes “that bonds are very overvalued“, and a recent survey of fund managers found that 80 percent of them are convinced that bonds have become “badly overvalued“.  The most famous bond expert on the planet, Bill Gross, recently confessed that he has a sense that the 35 year bull market in bonds is “ending” and he admitted that he is feeling “great unrest”.  Nobel Prize–winning economist Robert Shiller has added a new chapter to his bestselling book in which he argues that bond prices are “irrationally high”.  The global bond bubble has ballooned to more than 76 trillion dollars, and interest rates have never been lower in modern history.  In fact, 25 percent of all government bonds in Europe actually have a negative rate of return at this point.  There is literally nowhere for the bond market to go except for the other direction, and when this bull market turns into a bear it will create chaos and financial devastation all over the planet.

In a recent piece entitled “A Sense Of Ending“, bond guru Bill Gross admitted that the 35 year bull market in bonds that has made him and those that have invested with him so wealthy is now coming to an end…

Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date. To them, (and myself) the current bull market is not 35 years old, but twice that in human terms. Surely they and other gurus are looking through their research papers to help predict future financial “obits”, although uncertain of the announcement date. Savor this Bull market moment, they seem to be saying in unison. It will not come again for any of us; unrest lies ahead and low asset returns. Perhaps great unrest, if there is a bubble popping.

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HFT + Inept Regulators + Fed Distortion = More Flash Crashes

As luck would have it, we had Joe Saluzzi lined up to record a podcast the day the news broke recently that the suspected culprit for the 2010 flash crash, Navinder Singh Sarao, had been arrested. Saluzzi is co-founder of Themis Trading LLC, long-time cautionary on the dangers of high-frequency algorithmic trading, and co-author of Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio.

In this discussion, Joe shares his suspicions about Sarao (a contributor to the crash, but highly unlikely to be the actual cause) and then provides his expert assessment of what has been done in the intervening years since the flash crash to safeguard the market against a similar failure (precious little). In his opinion, a winner-take-all high-tech arms race, clueless and toothless regulators, and central bank price distortion are conspiring to make us more vulnerable -- not less -- to another systemic breakdown:

What’s happened is the markets have evolved and they've obviously embraced computerization and technology. Some things have been very good for the markets and brought down cost. But regulators don’t seem to have evolved. They don’t seem to have caught up with times and they don’t necessarily have the eyes and ears out there to monitor things on a micro-second or nano-second level.

Just as an example: the FCC has proposed putting together a consolidated audit trail. This came about after the flash crash back in 2010. And we’re five years into this and they’re still out for bid, waiting for someone to bid on the project, and it’s nowhere near completion. And even when it does get completed, it’s still not going to be an all-encompassing view. They won’t be able to see futures, because the CFTC monitors that group. So it will be an incomplete set. It will be better than what they have now -- which is called Midas, basically a bunch of a direct data feeds that are supplied by the exchanges. And Midas, by the way, was built by a high frequency trading firm named Trade Works that still gets paid by the FCC over couple million dollars a year for this thing. So it makes you wonder how they're properly equipped to monitor it. And when you see cases like spoofing pop up and you’re like “How could they have missed it”? As you mentioned Eric Hunt from Nanex, he sees this stuff all the time and he tweets it. I mean if I was a regulator I would just follow Eric and I’d say: "There’s an example right there, I don’t have to do the work, I’ll just follow Eric, he’s doing the work"

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How Shale Is Becoming The Dot-Com Bubble Of The 21st Century

As I review the financials of one of the largest shale producers in the United States, Whiting Petroleum (WLL), I can’t help but notice the parallels to the .COM era of 1999 which, to some extent, has already returned to the technology and biotech sectors of today. Back then, the faster you burned cash to capture customers regardless of earnings to drive your topline, the higher your valuation. The theory was that after capturing the customers (in energy today, it is the wells) spending would slow and so would customer additions allowing companies to generate cash. By the way, a classic recent case is none other than Netflix (NFLX) which, in the past was exposed for accounting gimmicks that continue even today. It is still following this path of burning cash for the sake of customer additions, while never generating any cash in its entire existence.

Cash was plentiful in 1999 so it could always be raised as the Federal Reserve began its easy money era creating a series of bubbles for the next 15 years. Does this sound familiar to what is occurring now? It will end the same way and that process has already started as currency wars heat up and our economy grinds to a halt proving QE does not, in fact, create wealth (temporary yes for the 1%, short term, until POP) but instead it destroys it by distorting asset prices, misallocating investments, and ultimately creating an equity crash.

We just witnessed this in energy, as all the economic stats that distorted the real underlying economic weakness in the economy led energy producers to overproduce while easy money fueled it and expanded speculation in the futures market. Back in 1999 did the internet companies adapt their business models? Some which still survive today did, but most went bankrupt. The parallels here with energy are simply stunning as most E&P companies need to spend well over their operational cash flow in order to not only grow but to replace the wells that are producing tied to depletion. Money is free right? Well we are witnessing the first stages now and it may not last, as junk bond investors in energy can attest.

Further, US equity markets are beginning to “realize” that the US economy isn’t better off vs. Europe and the US dollar begins to fade as it shows signs of correcting as well. The Fed clearly isn’t as accommodative by instantly launching QE4, for a host of reasons, thus potentially opening the door to a deeper correction vs. prior ones in order to get what the 1% wants again: more QE. Yes the Keynesian feedback loop is real as, in the past, each equity correction was met with more QE.

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The Financial Markets Now Control Everything

The entire economic and political structure is now dependent in one way or another on the continued expansion of financial markets.

 

The financial markets don't just dominate the economy--they now control everything. In 1999, the BBC broadcast a 4-part documentary by Adam Curtis, The Mayfair Set ( Episode 1: "Who Pays Wins" 58 minutes), that explored the way financial markets have come to dominate not just the economy but the political process and society.

 

In effect, politicians now look to the markets for policy guidance, and any market turbulence now causes governments to quickly amend their policies to "rescue" the all-important markets from instability.

 

This is a global trend that has gathered momentum since the program was broadcast in 1999, as The Global Financial Meltdown of 2008-09 greatly reinforced the dominance of markets.

 

It's not just banks that have become too big to fail; the markets themselves are now too influential and big to fail.

 

Curtis focuses considerable attention on the way in which seemingly "good" financial entities such as pension funds actively enabled the "bad" corporate raiders of the 1980s by purchasing the high-yield junk bonds the raiders used to finance their asset-stripping ventures.

 

This increasing dependence of "good" entities on players making risky bets and manipulating markets has created perverse incentives to keep the financial bubble-blowing going with government backstops and changing the rules to mask systemic leverage and risk.

 

The government must prop up markets, not just to insure the cash keeps flowing into political campaign coffers, but to save pension funds and the "wealth effect" that is now the sole driver of "growth" (expanding consumption) other than debt.

 

To maintain the illusion of growth and rising wealth, the financial markets must continually reach greater extremes: extremes of debt, leverage, obscurity and valuations. These extremes destabilize markets, first beneath the surface and then all too visibly.

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Goldman Paid Bill Clinton $200K Before Lobbying Hillary On Export-Import Bank

As documented here on several occasions of late, there are new questions surrounding charitable contributions to the Clinton Foundation. Most notably, a Reuters investigation revealed that the Clinton family charities may have suffered what we called a “Geithner moment” when they failed to report tens of millions in contributions from foreign governments on tax documents. The foundation will now refile five years worth of returns and hasn’t ruled out the possibility that it may need to amend returns dating back some 15 years. 

This prompted acting CEO Maura Pally to pen a lengthy blog post in which she explains the “mistakes” and attempts to reassure the public that the Clinton Foundation is taking special care to guard against “conflicts of interest” as Hillary begins her run for The White House. Pally also notes that similar measures were taken when Clinton was Secretary of State although, as we noted, the charity accepted donations from the likes of Kuwait, Qatar and Oman while she was the nation’s top diplomat. 

Now there are new questions as IBTimes suggests there may be a connection between a $200,000 payment made to Bill Clinton by Goldman Sachs in 2011, and the bank’s efforts to lobby the State Department ahead of legislation involving the Export-Import Bank which was set to provide a loan that would end up financing the purchase of millions of dollars in aircraft from a company partially owned by Goldman. Here’s more: 

Goldman Sachs paid former President Bill Clinton $200,000 to deliver a speech in the spring of 2011, several months before the investment banking giant began lobbying the State Department, then headed by Hillary Clinton, federal records reviewed by International Business Times show.

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The 23 Count Indictment of the TPP

To really appreciate what a travesty the TPP is, and the scandal of the failure of our Congress to reject it, and the “Fast Track Authority“ sought for it, out of hand, I’m going to list 23 negative consequences that would likely follow from it. Any one of these, would, by itself be sufficient for any representative of the people, Senator or Congressperson, to vote to kill it. I’ll offer this list in the form of stanzas appropriate for a chant, except for the starting point in the list.

The tune of the chant that might be used is the tune used for Dayenu, the passover seder chant in which Dayenu means “It would have been sufficient,” where the reference is to all the things the almighty is purported to have done for the Israelites on their way out of Egypt and during their wanderings in the Sinai. I’m sure the President is familiar with this chant since he has had seders at the White House more than once. I’m also sure that he never envisioned using Dayenu to highlight the horrors of one of his favorite projects, the passage of “Fast Track Authority,” the TPP, and other “free trade” agreements such as the TTIP, and the TISA, all of which would get “Fast Track Authority” if the present bill passes.

The Stanzas of the Anti-TPP Chant

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