TPP – A Recipe for Financial Market Contagion

In response to the mantra, repeated ad nauseam in the media, of “Too Big To Fail”, activists around Occupy Wall Street developed “TIBACO” – that is, too interconnected, big, and complex to oversee.

By reframing the issue that large banks, insurance companies, and hedge funds hold positions in so many areas of the market that it is impossible to engage in any type of effective oversight, it becomes clear that the problem is a financial industry out of control. “Too big to fail” argues that big banks that are so essential to the adequate functioning of the global economy that they need the government to provide a backstop to whatever activities they pursue. TIBACO, on the other hand, makes the case that the system needs to be disaggregated to allow for effective regulatory oversight and to prevent trusts and monopolization.

It’s this framework – TIBACO – that should guide any analysis of the TPP’s financial services chapter, which is outside of ISDS, the most important, and of course, least reported on, part of the TPP. This chapter recreates the condition for an explosion of financial industry consolidation – magnifying the effects of a future financial crisis.

There are two clear issues with the TPP’s financial services chapter:

1) It mandates that nations – particularly Vietnam and Malaysia- – treat foreign banks in the same manner that they treat their own domestic banks. This will give rise to rapid market consolidation dominated by predominantly American financial firms.

2) It will mandate the partial privatization of Japan Post’s life insurance business – by far the largest untapped life insurance market in the world, with over $1.2 trillion in assets (total life insurance assets in the US were $3.2 trillion in 2011).

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We Have Never Seen Global Trade Collapse This Dramatically Outside Of A Major Recession

If you have been watching for the next major global economic downturn, you can now stop waiting, because it has officially arrived.  Never before in history has global trade collapsed this dramatically outside of a major worldwide recession.  And this makes perfect sense – when global economic activity is increasing there is more demand for goods and services around the world, and when global economic activity is decreasing there is less demand for goods and services around the world.  So far this year, global trade is down about 8.4 percent, and over the past 30 days the Baltic Dry Index has been absolutely plummeting.  A month ago it was sitting at a reading of 809, but now it has fallen all the way to 628.  However, it is when you look at the trade numbers for specific countries that the numbers become particularly startling.

Just within the last few days, new trade numbers have come out of China.  China accounts for approximately one-fifth of all global factory exports, and for many years Chinese export growth has helped fuel the overall global economy.

But now Chinese exports are falling.  In October, Chinese exports were down 6.9 percent compared to a year ago.  That follows a decline of 3.7 percent in September.

The numbers for Chinese imports are even worse.  Chinese imports in October were down 18.8 percent compared to a year ago after falling 20.4 percent in September.  China’s growing middle class was supposed to help lead a global economic recovery, but that simply is not happening.

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Goldman Now Thinks "The Economy Might Start To Overheat Unless Growth Slows From The Current Pace"

Remember when a month ago Goldman "called it" on the question whether there would be a rate hike in 2015, when, in response to the rhetorical question of "What is your own view of the appropriate liftoff date?" chief economist Jan Hatzius said the following:

A: Our own answer to that question has long been 2016. In fact, our own view is similar to that of Chicago Fed President Charles Evans, who recently shifted his call from early 2016 to mid-2016. Although it is definitely possible to rationalize a December 2015 liftoff using various forms of the Taylor rule, there are two good reasons to delay the move longer. First, the risk of hiking too early is bigger than the risk of hiking too late when inflation is so far below target and we have spent so much time stuck at the zero bound. Second, we have seen a sizeable tightening of financial conditions. At this point, our “GSFCI Taylor rule” suggests that the FOMC should be trying to ease rather than tighten financial conditions. Our own view in terms of optimal policy is quite strongly in favor of waiting well into 2016.

Well, the gambit worked and while the "rate hike delay thesis" sent markets soaring in October on one after another piece of bad news as "bad news was good news", the tables have now turned, and following the "stellar" October jobs report, it is time to attempt "good news is good news" for a change, and engage in the most hypocritical game of revisionist history, and pitch a rate hike as the bullish catalyst this economy has needed all along - because if only the Fed has raised rates in 2009 instead of engaging in QE2, Twist, QE3 and keeping ZIRP until now, the middle class would be thriving... just ignore the S&P at 2100.

So here comes Goldman, not two months after it said that the Fed should think about easing, with what can only pass for Sunday evening humor saying that 7 years to the day after it landed on the zero bound on December 16, 2008, the Fed will hike because, "the economy might start to overheat by late 2016/early 2017 unless growth slows from the current pace".

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We made President Obama’s big TPP trade deal searchable

On Thursday morning, after months of questions about the contents of the Trans-Pacific Partnership trade deal negotiated and championed by President Obama, his administration released the agreement in its complex entirety.

The problem, though, is that it was released as a series of posts on Medium -- and, worse, a collection of PDFs -- making it hard to search for topics across the entire document.

Allow us.

We created the tool below to allow you to search the full agreement (except annexes) and to link back to the original to read more. There's a lot in there, we'll note, and spellings are internationalized. (Labor becomes "labour," for example.) So it's still not a perfect system.

But at least you can see it and search it! Critics of the deal spent months arguing that it was a secret agreement, which it no longer is. And thanks to your friends at The Fix, it's now easier to see what's in it than the government might have intended.

Click on link to do a search on the TPP

Former Reagan Administration Official Warns That Financial Disaster Is Dead Ahead

Why won’t the American people listen to the warnings?  David Stockman was a member of the U.S. House of Representatives from 1977 to 1981, and he served as the Director of the Office of Management and Budget under President Ronald Reagan from 1981 to 1985.  These days, he is running a website called “Contra Corner” which I highly recommend that you check out.  Stockman believes that a global “debt super-cycle” that has been building for decades is now bursting, and he is convinced that the consequences for the U.S. and for the rest of the planet will be absolutely catastrophic.  His findings are very consistent with what I have been writing about on The Economic Collapse Blog, and if Stockman is correct the times ahead of us are going to be exceedingly painful.

But right now, most people don’t seem to be in the mood to listen to these types of warnings.  Even though there is a mountain of evidence that the global economyhas already plunged into recession, U.S. stocks had a great month in October, and so most Americans seem to think that the crisis has passed.

Of course the truth is that the stock market is not an accurate barometer of the economy and it never has been.  Back in 2008, almost everything else started to go downhill before stocks did, and the same thing is happening once again.  In a recent article, Stockman explained that stocks are surging to absolutely ridiculous levels even though corporate earnings are actually way down…

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Marc Andreessen: 'We're in a long-term tech bust,' not a bubble

In Silicon Valley, you can't escape bubble talk.

On one side of the ring, Benchmark investor Bill Gurley, who was an investor during the dot-com bubble, has been sounding the alarm that companies are overvalued.

In a few years, Gurley has predicted that we'll have a lot of dead unicorns on our hands. "Unicorn" is the current Silicon Valley term for a startup valued at more than $1 billion.

On the other side is Netscape founder Marc Andreessen, who cofounded his venture firm, Andreessen Horowitz, in 2009, right after the bursting of the debt bubble sent the economy into a tailspin.

In an appearance at the Fortune Global Forum, Andreessen reiterated that tech is not in a bubble. Rather, these valuations are still startlingly low for the potential of some of these companies.

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Can The US Raise Rates When Everyone Else Is Cutting Them?

It’s understandable (sort of) that the Fed wants to raise short-term interest rates so it can cut them again in the next downturn. But what if the next downturn is already here? That’s the signal being sent by the world’s other central banks:

Does the rest of the world know something the US doesn’t? Obviously yes, which is that the global economy is tipping back into recession in an environment of historically unprecedented financial fragility. Government, consumer and business debt has never been this high, the leveraged speculating community has never been this leveraged, and unemployment in a lot of places is already too high for political comfort. Toss a recession into this mix and the result will be a whole series of possible crises, each more apocalyptic than the last.

So the other central banks are reacting as fiat currency central banks always do, with easier money. The fact that money is already as easy as it’s ever been won’t stop it from getting even easier. As one of the above articles noted, “Denmark’s deeply negative deposit rate illustrated that there was still room to reduce rates.”

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Wall Street’s Latest Bounce——Ostrich Economics At Work

It is more evident than ever that the world economy is heading into a deflationary conflagration, but today’s generation of house trained bulls wouldn’t recognize a warning if it slapped them upside their horns. They refused once again last week to exit the casino because they got another signal from Hilsenramp that the Fed is on “hold” until at least next March.

That means we are heading for 87 straight months of ZIRP. So you have to wonder if these fearless robo-machines and day-trading punters by now have come to believe that central banks have abolished time itself—-to say nothing of the law of supply and demand.

As to the latter, any rational investor should have headed out of dodge long ago in the face of the mother of all bond bubbles——a monumental worldwide distortion of debt pricing and “cap rates” which will bring down the entire financial system when it inexorably bursts.

After all, how is it possible that sovereign debt prices and yields have not been drastically repressed by $19 trillion of central bank bond-buying during the last two decades?

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How the U.S. Avoided Chronic Deflation by Relinquishing Monetary Control to Wall Street

The Eurozone today is going into the same deflationary situation that the U.S. did under Jackson’s destruction of the Second Bank, and the post-Civil War budget surpluses that deflated the economy. But whereas the Fed’s creation was designed to inflate the U.S. economy, Europe’s European Central Bank is designed to deflate it — in the interest of commercial banks in both cases.

1. Introduction

Deflation was the main U.S. financial problem prior to 1913. To replace the Treasury conducting its fiscal operations independently from the banking system, New York banks urged more power over public finances and to establish the Federal Reserve to increase the supply of money (a more “elastic” issue) in response to banking needs. Monetary policy since the Great Depression that started in 1929 has aimed at re-inflating the economy after downturns, fueling the post-2001 financial bubble and, since 2008, Quantitative Easing to provide banks with liquidity to support asset prices.

By contrast, Europe’s trauma of hyperinflation after World War I gave Europe’s bankers and bondholders a rationale for gaining power over governments to prevent them from monetizing their budget deficits. The rhetoric of fighting inflation has enabled German and French banks to impose tight money policies and smaller public self-funding than in the United States. On both continents, banks gained power over governments. But in America it was by insisting on more money creation and deficit spending, and in Europe by advocating limits on public money to finance deficits.

For most of the 19th century the U.S. Treasury conducted its monetary and fiscal policy in ways that imposed deflationary pressures on the banking system. President Andrew Jackson (1829-1837) of Democratic Party starved the economy of credit by his war on the Second Bank of the United States and removal of government deposits to sub- treasuries around the nation. His Democratic Party policy was backed by Southern plantation owners opposing Northern industry, seeing that its growth would increase urban industrial demand for food and other consumer goods. This would raise prices for the crops that plantation owners needed to feed their slaves.

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This Is The $64 Trillion Question From Today's Fed Statement

While on the surface, there was something in it for both hawks and doves, with the Fed admitting, and adding, that "the pace of job gains slowed" boosting the domestic economic dovish camp (the language about business fixed investment increasing "at solid rates in recent months" will be promptly removed as the recent re-plunge in oil flows through the energy sector's cash flow statement), it was the hawkishness about the global environment that appears to have been the primary catalyst for today's rally as it gave the market the impression that the global economic jitters from the past three months are now well in the rear view mirror.

Specifically, it was the complete removal of the line that "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term" and the addition that the fed is "monitoring global economic and financial developments" which were the kicker.

This is how Bank of America's Michael Hanson explained this change:

The October statement removed the notice that “recent global and financial developments” had posed some risks to economic activity and inflation “in the near term.” During the September press conference and in subsequent speeches, Fed officials stressed that they wanted to be prudent in the face of these risks, but had not fundamentally altered their outlook. The FOMC was concerned that downside risks could intensify into a significant global shock, which warranted their caution. But that did not happen, and other central banks have since stepped in to ease and support their domestic economies. Equivalently, the FOMC has indicated that September was an event that got their attention, rather than a shift toward systemic concern about global growth.

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UPS Continues Its “Wreck the Post Office” Campaign, Presses for Increases on Parcel Prices

The United Parcel Service is very concerned that you might be paying too much for a postage stamp.  

If you’re wondering why UPS would be worried about something like that, it has to do with the way postal rates are set.  According to the law, each USPS product is supposed to cover its share of the Postal Service’s operating costs, which includes costs attributable to that product as well as a share of total institutional costs.  

UPS believes that market-dominant products — First Class mail, Standard mail, and periodicals — are covering more than their fair share of the Postal Service’s operating costs, while competitive products — Priority and most shipping services — are not paying enough.

As a result, argues UPS, the average customer who buys a First-Class stamp is paying too much because part of the stamp’s price is being used to subsidize competitive products.  UPS wants the cost allocation methodology changed so that competitive products pay a larger share of the Postal Service’s operating costs. 

Then the Postal Service will to have to raise the prices of the products that UPS competes with, which will put UPS in a better competitive position and increase its profits.  UPS doesn’t really care that some USPS customers are paying too much for postage.  UPS cares about UPS.

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Schadenfreude - How The US Is Helping China Create A New Financial Order

Here we have an image of a Chinese banknote, featuring Chairman Mao, followed by a seemingly incongruous German word - schadenfreude. Is there an error here?

Happily, no. We’ll begin with the word, schadenfreude, which means “harm-joy.” It’s used to express an occurrence that’s destructive, yet brings about happiness.

This would seem to be a conflict in terms, but, looked at a bit more deeply, it could be said that the killing of an enemy may mean that peace will soon prevail - and so the event brings happiness. Or, another analogy: the bulldozing of an old structure may mean that a new one - a better one - will soon be under construction.

And that’s the case here. The world’s most powerful (and most oppressive) political/economic power structure has begun to go under the bulldozer. Its replacement will hopefully be a better one.

The Brussels SWIFT system is currently the largest economic settlement system in the world. Almost all financial transfers are made possible through this system. As such, those who control SWIFT have the power to threaten financial institutions and sovereign nations that, if they don’t do as they’re told, can be denied access to the system.

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The Mechanics Of The Fed As Seen By The Eurodollar Curve

For a while, in that brief period between the August flash crash and the terrible September jobs report, it seemed that things may revert back to normal: bad news are bad news, good news are good news, and the economic cycle - as in the recession - is allowed to make a long-overdue repeat appearance from under the suffocating pressure of central banks.

Alas, it was not meant to be.

This is how DB's Alekandar Kocic explained it:

Last week’s developments in Europe (more QE, negative rates) and Asia (China cutting interest rates) are further reducing the probability of Fed liftoff. In all likelihood, we are one weak number away from a full relent and the market is already on the way to pricing it. But, to fully embrace this scenario, the market will likely wait for an explicit statement from the Fed. We continue to believe that repricing of the curve will follow a two step procedure with initial bull steepening followed by a bull flattening. This rates and macro view is roughly consistent with the curve approaching its shape of the late 2011, post low-for-long and operation twist, environment.

And while many - mostly those with no money on the table - debate daily what, how and when the Fed should move, for a specific subset of massively levered traders, even more so than the HFT algos who frontrun the equity market, every hiccup, stutter and vomit by Janet Yellen can mean the difference between early retirement and suicide (we hope this is a joke).

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Presenting America's New Debt Ceiling: $19,600,000,000,000

Even as the bond market has been rather concerned about another possible debt ceiling showdown as we showed before, and which earlier today prompted the Treasury to announce the purposefully dramatic step of postponing the auction of 2 Year Notes next week, the reality is that one way or another, with an equity-driven wake up call for the GOP or without, the debt ceiling will be raised.

The only question is how much.

As a reminder, the reason why the total US debt held by the public hasn't budged from $18.1 trillion since March 16, 2015 is because that is when the last debt ceiling limit was hit. In the seven month since, the US Treasury has been cruising along on emergency cash measures, even as the total debt - if only for reporting purposes - has not budged (in reality it has grown by about half a trillion).

It will budge very soon, because no matter what the outcome of the upcoming week of debt ceiling negotiations, one thing is certain: the US has to be able to borrow more in order to survive.

And as The Hill reported, when one gets beyond the traditional posturing, the outcome will be the following:

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Negative Interest Rates Are Here

Not so long ago, a bank was by definition a business that took deposits from customers, paid them for the use of their money, and lent the cash to other customers at a profit. But that’s not how it works anymore:

Negative interest rates can take many forms, including higher fees that lower or negate the interest a bank pays for deposits, or limitations on what customers can do with deposited funds that lower the real value of those funds. So banks charging fees on deposits are functionally the same as banks offering negative rates to customers.

With the global economy slowing dramatically, led by plunging corporate profits, US interest rates will have to fall in 2016. And cash will have to be marginalized or made obsolete in order to get rates down to where they have a stimulative effect.

So the story of 2016 will be the emerging negative interest rate world and its many, many unintended consequences.

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