Tag Archives: FED

Jul 5 2017

China to Open Bond Market to Foreign Investors


Armstrong economics Blog/China

Re-Posted Jul 5, 2017 by Martin Armstrong

QUESTION: Mr. Armstrong; it is becoming obvious that China follows your advice to the last letter. That makes sense when you were the western adviser they flew in to Beijing during the 1997 crisis. You told them to bypass the primary dealers and demand to buy US debt directly and they did within 30 days. Everything you have advised they have done and now they have opened the bond market to foreign investors. Is this the step that makes China surpass the West?

ANSWER: Yes. It is a process. Europe would not listen to my warning that unless they consolidated the debt of all member states, then the euro could never compete against the dollar. In order to the Chinese yuan to become an actual reserve currency, there must be a bond market that is secure into which foreign capital can park. This was the missing link in Europe.

The fools who pretend to be analysts and kept saying that the Yuan will defeat the dollar by merely trading commodity in yuan terms, are truly without any comprehension of how the world economy function since they have no experience in the field whatsoever. You can price oil in yuan, but without a bond market, you instantly transfer your profits to dollars to park in Treasuries.

Without a viable bond market, no currency can become the reserve currency and compete against the dollar. It does not matter what you price in yuan, it still requires a trustworthy place to park your money.

Jul 2 2017

Financial Flagellation – Illinois Budget Deadlines Passes Without Action…


Re-Posted from The Conservative Tree House on July 1, 2017 by

Utilizing some Bloomerberg and Zerohedge reporting – treeper SeekerofTruth provides a nice recap of Illinois financial self-flagellation.  Charging head-first into the abyss:

SeekerOfTruth – June 30 came and went and the Illinois legislature did nothing. So the courts have stepped in now.  Bloodbath coming. Fun to watch if any news outlets would report on the story. The bloodbath of decades of liberal policies and corruption.

“From Horrific To Catastrophic”: Court Ruling Sends Illinois Into Financial Abyss.

By the end of Friday – the last day of the fiscal year – Illinois legislators failed to enact a budget, and while negotiations continued amid some glimmers of hope and lawmakers planned to meet over the weekend, the failure marked a continuation of the historic impasse that’s left Illinois without a full-year budget since mid-2015, and which, recall, S&P warned one month ago will likely result in a humiliating and unprecedented downgrade of the 5th most populous US state to junk status.

Then came the begging.

According to Bloomberg, on Friday Illinois House Speaker Michael Madigan, a Democrat who controls much of the legislative agenda, pleaded with rating companies to “temporarily withhold judgment” as lawmakers negotiate. “Much work remains to be done,” the Democrat said on the floor of the House Friday, before the chamber adjourned for the day. “We’ll get the job done.”

… However, in a “shocking” development, just hours remaining before the midnight deadline to pass the Illinois budget, and Illinois’ imminent loss of its investment grade rating, federal judge Joan Lefkow in Chicago ordered Illinois to come up with hundreds of millions of dollars it owes in Medicaid payments that state officials say the government doesn’t have, the Chicago Tribune reported.

Judge Lefkow ordered the state to make $586 million in monthly payments (from the current $160 million) as well as another $2 billion toward a $3 billion backlog of payments – a $167 million increase in monthly outlays – the state owes to managed care organizations that process payments to providers.

Friday’s court ruling, which meant that the near-insolvent state must pay an additional $593 million per month, may have been the straw that finally broke the Illinois camel’s back.

“Friday’s ruling by the U.S. District Court takes the state’s finances from horrific to catastrophic,” Comptroller Susana Mendoza, a Democrat, said in an emailed statement after the ruling.

As a result of the court decision, “payments to the state’s pension funds; state payroll including legislator pay; General State Aid to schools and payments to local governments — in some combination — will likely have to be cut.”

Also, without a budget that includes borrowing to pay down the bill backlog, Illinois by August will run out of money for key expenses for the first time since the stalemate began, according to Comptroller Mendoza. That means school funding, state payroll, and pension payments could be affected, she said. There won’t be enough money for these mandated or court-ordered payments.

she said that payments to bond holders won’t be interrupted (more below).
As noted above, Mendoza said that this won’t jeopardize debt-service payments, however she probably should have added “for now.” For now, Illinois hasn’t missed any bond payments and state law requires it to make monthly deposits to its debt-service funds.

===> Missed bond payments and the state goes into default. If bonds are moved to junk status many bond funds will have to sell the bonds because many mutual funds do not allow any or much junk rated bonds in the fund.

PS. This is the real number 1 news story in the country right now. And almost nobody even conservative sites are reporting on it. Muh Russia narrative needs to be replaced with Illinois policy and legislative failures as the number 1 story all over in the country. Illinois is the not so shiny example of the policies that the MSM so longs for and preaches as good every day.

Nothing will likely be done until this does become a national story and people see just how stupid Illinois people are. Right now they can save some face but not if this becomes headlines all over. This is no longer a kick the can further down the road situation. They only have until the end of summer until the can falls into the abyss. Then schools will not open and more importantly Teachers Union people will not be paid.

Bond payments missed and the state instantly goes into debt default and that activates financial legal processes.  (link)

They’d better get things straightened out quick, they’ve got a library to help fund…

Jul 2 2017

The Euro & Optimistic Fool


Armstrong Economics Blog/Euro €

Re-Posted Jul 2, 2017 by Martin Armstrong

COMMENT: Marty; I see what you mean that it does not matter what the fundamentals are, markets move based upon what people belief be it right of wrong. To what the euro rally reminds me of the DOT.COM bubble. Blue skies forever.

REPLY: Yes. Human nature is such that we act always in anticipation of future events. This is why professional traders have always said – buy the rumor but sell the news. Markets simply MUST push to the extremes in both directions. That sucks the fools in to always buy the high and sell the low. That reminds me of the 1940 song Fools Rush In (Where Angels Fear to Tread) by Frank Sinatra.

Only the smart ones go on to try to analyze why they lost and learn from their mistakes. The majority, will not buy that instrument again and look for some other investment to reach the “blue skies forever” as you put it.

Jun 30 2017

Are Bail-Ins Supported by Free Market Philosophy?


Armstrong Economics Blog/Banking Crisis

Re-Posted Jun 30, 2017 by Martin Armstrong

QUESTION: Mr. Armstrong; Reading between the lines, it seems that you support bank bailouts at taxpayer expense. Is this not counter to free market philosophy?

KE

ANSWER: Yes it is contrary to free market philosophy. However, it is the only reasonable solution at this moment in time without structural reforms to the financial system. If we accept the bail-in that Europe just did in Spain selling the bank for one euro, the reality of that decision compels me to advise clients NOT TO OWN any bank shares. Seizing a bank and auctioning it off for one euro when its value, if liquidated, would have been significantly higher is in itself anti-free market.

The bailout conducted by the Fed was absurd. The theory that they just lend money to banks when in trouble is seriously flawed under the current system. Bill Clinton repealed Glass-Steagall and in doing so he seriously altered the banking system completely. The 1007 crash took place because banks no longer engage in relationship banking but have flipped everything to transactional banking. They make the loan, package it into a security, and then sell it off. The banks say this makes them stronger. Fine, I accept that principle. But then handing bankers trillions to “stimulate” the economy failed because they did not lend the money out and parked it at the Fed in excess reserves. They stopped securitizing debt and would not lend because of risk.

The problem is how our government operates. If they are trying to “stimulate” the economy then they need to cut taxes. You must put money directly into the hands of the people – not the banks who do not lend to the average person. This is why quantitative easing has failed. Mario Draghi needs to get out and really see how the economy functions live.

Under the current terms of the bail-in, I must advise clients to sell bank shares and stay with industrial shares. You can flip the coin. Both sides are anti-free market.

Jun 30 2017

Tell as Lie Often Enough it Becomes the Truth – How Lies Now Defeat Gold & Dollar


Armstrong Economics Blog/Gold

Re-Posted Jun 30, 2017 by Martin Armstrong

A flood of comments from central banks this week has been signalling that the era of easy money is coming to an end. Of course, the nonsense spouted out by the Gold Promoters that hyperinflation was coming has left 10 years of continually wrong forecasts yet the pretend analysts have done far more damage to the marketplace that is only now revealing itself. Note carefully, that gold has declined WITH the dollar. Something else the promoters said would never happen.

Gold had soared to reach record highs at $1,920.30 an ounce back in 2011 on the propaganda of hyperinflation coming because of Quantitative Easing (QE). Now with QE coming to an end, why buy gold? We see the same nonsense setting the euro up ripe for the slaughter. The prospect of QE ending at the European Central Bank (ECB) has been sending the euro up, yet once again to the delusion that all will be reversed and higher interest rates will save the Euro.

The German 10-year government bond yields hit five-week highs and the Euro a 14-month peak as investors geared up for the prospect of the ECB scaling back its massive monetary stimulus program. Comments from ECB’s chief Mario Draghi on Tuesday were seen as opening the door to monetary policy tweaks, while Bank of England Governor Mark Carney also raised the prospect of a UK interest rate hike in the coming months this week. This has all sent the dollar down as the fools rush in where no wise-man would dare go.

Now higher interest rates have miraculously flipped into bullish news. The problem is, the economy has not changed. Higher rates will not reverse the deflation in Europe. The idea is that higher rates will bring capital back to Europe. Nobody is addressing what comes next

Jun 29 2017

India Taxing Gold (Hunt for Taxes)


Armstrong Economics Blog/Gold

Re-Posted Jun 29, 2017 by Martin Armstrong

India has been fighting the gold trade for the past few years. They have sought to highly restrict it to prevent the net capital outflow. They even attempted to impose a 18% tax. As of July 1st, 2017, India is imposing a tax on gold bullion be it in coin or bar form of 3%. Gold jewelry in India is subject to a 5% tax. Many families have been rushing to buy gold jewelry in particular before the tax comes at the end of the week, Gold has played a traditional role in Hindu weddings. The “wedding season” actually begins only in the winter, but the advent of the tax is causing a mad rush. We saw the same human response in Japan the monthly prior to the imposition of the sales tax.

Narendra Modi has not merely tried to outlaw cash as much as possible last November, he is also responsible for the introduction of new taxes on the trading of physical gold. Modi has been very repressive in his policy objectives. Over the past few months, several complaints have been filed that financial officials of the government confiscates gold stocks of citizens without giving reasons .

Modi is trying to force India into the 21st century to comply with G20 objectives of eliminating all cash to enable a more efficient tax collection effor

Jun 29 2017

South Australia in Financial Trouble


Armstrong Economics Blog/Australia & Oceania

Re-Posted Jun 29, 2017 by Martin Armstrong

COMMENT: Marty; Thank you for doing your conference in Hong Kong. It made it really convenient for all us from Downunder. You are probably aware that South Australia is broke and they just imposed a huge tax on the banks. They are calling it the “surprise tax” of $280 million on the top 5 banks. Many who just hate the banks are cheering. You said at the cocktail party that South Australia was in deep trouble. While most cheer because they hate the bankers, they are missing the real krass here. The government is broke.

Thanks for a great conference, BTW, I attended your Adelaide conference in the nineties.

PK

REPLY: Yes, it is the “krass” point that South Australia is broke. They cheer taxing the bankers, but they are indeed overlooking the cause why they imposed the “surprise tax” in the first place. South Australia is struggling with the country’s highest unemployment rate, which has reduced tax revenues when they expected more.

I haven’t been to Adelaide since then. That was a good conference. I took some time to go into the bush. It was beautiful. Bought a painting of the landscape there I still have.

Hope you met Phil. He attended the Perth Conference around the same time I did that Australian tour

Jun 26 2017

European Commission Trying to Seize Control of Euro


Armstrong Economics Blog/Euro €

Re-Posted Jun 26, 2017 by Martin Armstrong

I reported previously that the European Commission is seeking to take the clearing of the Euro derivative transactions from London and move them to Paris. The European Central Bank (ECB) is warning that it must secure strong access rights for the supervision of the cross-border settlement of financial transactions after the departure of Great Britain from the EU. About 90%+ of all euro derivatives transactions are settled via clearing houses in London such as LCH.Clearnet. In the middle of a crisis, the ECB would have no power to shut the market to protect the euro from the free market forces. Of course, what they fail to grasp here is trying to seize the euro clearing and move it by decree to Paris will only undermine the euro even more. What will they do next? Forbid the euro to trade in New York, Chicago, or Asia? Do that and the euro will become a massive short.

The ECB actually came clean and the papers filed at the Commission seems to suggest that the central bank indeed expects the possibility of a very major and serious financial crises ahead. That reflects what I have been warning about that they are trapped. Once Draghi stops buying government debt, we may see a meltdown in the euro altogether. The ECB wrote: “It is to be expected that significant developments on both the global and the European level will increase the risks posed by clearing systems.”

Keep in mind that the European Commission has already outlawed naked short-selling of the sovereign debt and European shares. The ECB is now focusing on clearing houses of financial products to control any emergency they see against the euro.  Mario Draghi has been ringing the warning bell that they would have at best minor oversight of the UK-based clearing houses after a BREXIT. He believes they can simply muscle the markets to prevent a collapse.

The ECB estimates that repo transactions denominated in euro in the daily volume of €101 billion and open positions in interest rate swaps in euro reach daily trading volume of €33 trillion are cleared through clearing houses in Great Britain. Draghi has proposed that Article 22 of the ESCB Statute be amended in such a way that, even after the BREXIT, they still have sufficient control rights over euro clearing. Draghi wants it both ways. He wants the euro to be a world class currency, but then wants absolute control to shut down any undesirable counter trends.

Jun 25 2017

Wow – Standard and Poor’s Threaten Illinois With Municipal “Junk Bond” Status – First State Ever Facing “Junk Bond” Status…


Re-Posted from The Conservative Tree House on June 24, 2017 by

There was a widely read Chicago Tribune op-ed written a few days ago outlining an approach to dissolve the entire state and apportion the geography to Wisconsin, Indiana, Kentucky, Missouri and Iowa. –SEE HERE–  It was written tongue-in-cheek, but with an uncomfortable level of reality behind it.

Illinois has been struggling with its finances for a long, long time.

The Illinois long-term labor pension liabilities are ridiculous in the extreme.  However, things just went from bad to jaw-droppingly, gobsmackingly, unbelievably worse.

 

According to the latest financial media reports, Standard and Poors Global Ratings agency has positioned Illinois bonds to drop below “investment” grade; that would make Illinois the first state in the nation to achieve “junk bond” status.

(Via ABC) Illinois is on track to become the first U.S. state to have its credit rating downgraded to “junk” status, which would deepen its multibillion-dollar deficit and cost taxpayers more for years to come.

S&P Global Ratings has warned the agency will likely lower Illinois’ creditworthiness to below investment grade if feuding lawmakers fail to agree on a state budget for a third straight year, increasing the amount the state will have to pay to borrow money for things such as building roads or refinancing existing debt.

The outlook for a deal wasn’t good Saturday, as lawmakers meeting in Springfield for a special legislative session remained deadlocked with the July 1 start of the new fiscal year approaching.

That should alarm everyone, not just those at the Capitol, said Brian Battle, director at Performance Trust Capital Partners, a Chicago-based investment firm.

“It isn’t a political show,” he said. “Everyone in Illinois has a stake in what’s happening here. One day everybody will wake up and say ‘What happened? Why are my taxes going up so much?’”  (read more)

Ouch !

Jun 24 2017

ECB Declares Two Italian Banks Have Failed


Armstrong Economics Blog/Banking Crisis

Re-Posted Jun 24, 2017 by Martin Armstrong

The European Central Bank (ECB) has announced as of June 23rd, that it was declaring two Italian banks insolvent. Veneto Banca SpA and Banca Popolare di Vicenza SpA have failed since the two banks repeatedly violated the regulatory capital requirements. The determination was made in accordance with Article 18 (1a) and Article 18 (4a) of the Uniform Resolution Mechanism Regulation.

The European banking crisis continues.