Can the World Deal With a New Bank Crisis?
July 27, 2016 10:30 PM EDT
By Satyajit Das Bloomberg.com
As Europe braces for the release of its bank stress tests on Friday, the world could be on the verge of another banking crisis. The signs are obvious to all. The World Bank estimates the ratio of non-performing loans to total gross loans in 2015 reached 4.3 percent. Before the 2009 global financial crisis, they stood at 4.2 percent.
If anything, the problem is starker now than then: There are more than $3 trillion in stressed loan assets worldwide, compared to the roughly $1 trillion of U.S. subprime loans that triggered the 2009 crisis. European banks are saddled with $1.3 trillion in non-performing loans, nearly $400 billion of them in Italy. The IMF estimates that risky loans in China also total $1.3 trillion, although private forecasts are higher. India’s stressed loans top $150 billion.
Once again, banks in the U.S., Canada, U.K., several European countries, Asia, Australia and New Zealand are heavily exposed to property markets, which are overvalued by historical measures. In addition, banks have significant exposure to the troubled resource sector: Lending to the energy sector alone totals around $3 trillion globally. Borrowers are struggling to service that debt in an environment of falling commodity prices, weak growth, overcapacity, rising borrowing costs and (in some cases) a weaker currency.
To make matters worse, the world’s limp recovery since 2009 is intensifying loan stresses. In advanced economies, low growth and disinflation or deflation is making it harder for companies to pay off what they owe. Many European firms are suffering from a lack of global competitiveness, exacerbated by the effects of the single currency.
Government efforts to revive growth -- largely through a targeted expansion of bank lending -- are having dangerous side effects. With safe assets offering low returns, banks have financed less creditworthy borrowers, especially in the shale oil sector and emerging markets. Abundant liquidity has inflated asset prices and banks have lent against this overvalued collateral. Low rates have allowed weak borrowers to survive longer than they should, which delays the necessary pain of writing off bad loans.
In developing economies, strong capital inflows, seeking higher returns or fleeing depreciating currencies, have contributed to a risky buildup in leverage. So have government policies encouraging debt-funded investment or consumption to stimulate aggregate demand.
What’s most worrying, though, is the fact that the traditional solutions to banking crises no longer seem available or effective.
To recover, banks need strong earnings, capital infusions, a process to dispose of bad loans and industry reforms. Yet today, banks’ ability to earn their way out of their problems and write off losses is limited.
Current monetary policy is partly to blame. Zero or negative rates drive down bank lending rates more than deposit rates, which can’t be cut because of the need to maintain deposits and comply with regulatory requirements for stable funding. Traditionally, banks have built capital by earning the margin between low deposit rates and safe, longer-term fixed rate assets, such as government bonds. Today, the term premium -- the difference between short and longer-term rates -- has fallen sharply.
Attracting new capital requires that the industry’s long-term prospects be sound. To the contrary, several structural factors are creating uncertainty about the future of banks and may have permanently reduced available returns. Bank business models in several countries are in need of major reform, which means consolidation and cost reductions ahead. Many countries where banks need assistance remain resistant to foreign ownership, capital and expertise that might help them become more efficient.
Poor institutional and legal frameworks, especially inefficient bankruptcy procedures, discourage new investment in banks or distressed assets. Foreclosures in Italy can take more than four years, compared to 18 months in the U.S. or U.K. In many emerging markets, the pervasive influence of the state among both banks and borrowers complicates the enforcement of claims. Politically connected borrowers can force loans to be rescheduled forever rather than recognized as unrecoverable.
Unanticipated political developments are added complications. Energy prices are affected by geopolitics as much as market forces. The Brexit vote has rippled through the banking system by driving down the pound and radically altering prospects for British financial institutions.
In Italy, political factors are impeding the recapitalization of banks. European Union procedures require progressively writing down equity, subordinated debt and then senior debt, protecting only insured deposits. But “bailing in” creditors in this way would result in writing down around $220 billion of securities held by retail investors, creating a political headache for the government. At the same time, EU banking regulations as well as budgetary and debt limits make it hard for the Italian government to intervene.
Whether a crisis might begin there, perhaps as some fear with the world’s oldest bank, Monte dei Paschi de Siena, is impossible to say. But regulators everywhere should be asking themselves some tough questions: Has the financialization of advanced economies gone too far? Does the role of banking need to be altered to ensure that such crises are less frequent? Increasingly, the answer to both would seem to be yes.
New Legislation Proposes To "Bail-In' Social Security
ZeroHedge.com Jul 26, 2016 10:40 PM
Submitted by Simon Black via SovereignMan.com,
It was only a few weeks ago that I told you about the government’s annual report on Social Security.
It was a veritable death sentence for the program.
The Board of Trustees for Social Security (which includes the US Treasury Secretary) wrote that major parts of the program have already run out of money, and the rest of Social Security will run out of money in the next decade.
Amazing. Even Social Security knows that they’re bankrupt and unable to keep their promises to taxpayers.
This is going to cause an unbelievable crisis in the United States.
Think about it: half of Americans have ZERO retirement savings and will be fully dependent on the Social Security once they retire.
But by the time their retirement comes, the program will have likely already run out of money.
Well, the government has figured out a solution. And it’s genius.
Two weeks ago a new bill was introduced on the floor of Congress that, just like all the other really dangerous legislation, i.e. USA PATRIOT Act, this bill has a catchy acronym.
It’s called the SAVE UP Accounts Act, which stands for. . .
. . . “Secure, Accessible, Valuable, Efficient Universal Pension Accounts Act”.
I just tasted vomit in my mouth.
In short, SAVE UP mandates certain employers and businesses in the United States, including many small businesses, to start contributing a fixed amount of money per employee into a brand new national retirement fund.
Based on the contribution requirements and the average wage in the United States (about $50,000 annually), the bill is slapping a 2% wage tax on employers.
Funny thing, employers are already paying 6.2% to Social Security.
So an additional 2% tax effectively constitutes a 32% proportional increase.
This idea is such a classic example of government thinking.
Social Security is failing and will be unable to keep its promises to taxpayers in the next decade.
So there’s a pretty convincing track record suggesting that government-managed retirement funds are a very bad idea.
And yet the best solution these people can come up with is to raise your taxes, steal more money, and establish a brand new government-run retirement fund.
Their logic is unbelievable: “If at first you don’t succeed, keep trying the same loser tactics.”
Sadly, SAVE UP is not isolated.
A similar bill was introduced in the US Senate a few months ago.
The Senate version aims to create an “American Savings Account”, i.e. another national retirement fund to be managed by the government.
Then, of course, there’s President Obama’s “MyRA” program, where workers contribute a portion of their paychecks to a retirement account managed by the federal government.
And MyRA has already been launched.
(The SAVE UP bill, by the way, could also make it mandatory for a business to sign up all of its employees for a government MyRA account.)
The trend here is pretty clear.
Social Security is rapidly running out of cash, and they’re solving the problem by having American citizens and businesses essentially “bail in” the program with higher taxes and more contributions to government retirement funds.
And this is just what’s happening right now, at a time when very few people are paying attention to the problem. Just imagine how much more they’re going to steal once the looming Social Security bankruptcy becomes front-page news in a few years.
Right now time is on your side. They’re not going to unveil any hideous new program tomorrow morning.
But there are two key lessons to take away here:
1) It’s imperative to consider these long-term “bail-in” implications and structure yourself accordingly.
The more assets you keep within a bankrupt government’s jurisdiction, the more likely you are to become a victim of future taxation and confiscation.
2) You absolutely cannot depend on the government for your retirement.
These programs are going broke. That is not a sensational statement. It is a direct representation of the facts as they have been laid out by the Treasury Secretary of the United States.
Again, time is on your side.
If you invest it wisely, you can develop the skills to supplement your income in retirement (for example, how to generate extra income online), and how to manage your finances to generate higher returns while taking less risk.
Education is the greatest tool we have to solve this retirement problem… as long as you start early.
Judge Rules Bitcoin Isn't Money Because It "Can't be Hidden Under A Mattress"
ZeroHedge.com Jul 26, 2016 10:40 PM
Submitted by Everett Numbers via TheAntiMedia.org,
In a landmark decision, a Florida judge dismissed charges of money laundering against a Bitcoin seller on Monday following expert testimony showing state law did not apply to the cryptocurrency.
Michell Espinoza was charged with three felony charges related to money laundering in 2014, but what appears to have helped to clear him of any and all wrongdoing was testimony given just a few weeks ago by an economics professor.
“This is the most fascinating thing I’ve heard in this courtroom in a long time,” Miami-Dade Circuit Judge Teresa Mary Pooler said after hearing Barry University professor Charles Evans present evidence during a May hearing that Bitcoin was more akin to“poker chips that people are willing to buy from you,” according to the Miami Herald.
Evans was given $3,000 in Bitcoin by defense attorneys for sharing his expertise, the newspaper reported.
Judge Pooler found the cryptocurrency, which is based on verified encrypted transactions that are recorded on a public ledger, did not constitute “tangible wealth” and“cannot be hidden under a mattress like cash and gold bars,” reported the Herald.
Pooler added that Bitcoin was not codified by government, nor backed by any bank.
“The court is not an expert in economics, however, it is very clear, even to someone with limited knowledge in the area, the Bitcoin has a long way to go before it the equivalent of money,” Pooler wrote in her decision.
Beware the $10 Trillion Glut of Treasuries as Big Deficits Loom
Liz McCormick mccormickliz Bloomberg.com
Susanne Barton SuziAnn2
July 24, 2016 — 7:00 PM EDT Updated on July 25, 2016 — 4:29 AM EDT
Negative yields. Political risk. The Fed. Now add the U.S. deficit to the list of worries to keep beleaguered bond investors up at night.
Since peaking at $1.4 trillion in 2009, the budget deficit has plunged amid government spending cuts and a rebound in tax receipts. But now, America’s borrowing needs are rising once again as a lackluster economy slows revenue growth to a six-year low, data compiled by FTN Financial show. That in turn will pressure the U.S. to sell more Treasuries to bridge the funding gap.
No one predicts an immediate jump in issuance, or a surge in bond yields. But just about everyone agrees that without drastic changes to America’s finances, the government will have to ramp up its borrowing in a big way in the years to come. After a $96 billion increase in the deficit this fiscal year, the U.S. will go deeper and deeper into the red to pay for Social Security and Medicare, projections from the Congressional Budget Office show. The public debt burden could swell by almost $10 trillion in the coming decade as a result.
All the extra supply may ultimately push up Treasury yields and expose holders to losses. And it may come when the Federal Reserve starts to unwind its own holdings -- the biggest source of demand since the financial crisis.
“It’s looking like we are at the end of the line,” when it comes to declining issuance of debt that matures in more than a year, said Michael Cloherty, head of U.S. interest-rate strategy at RBC Capital Markets, one of 23 dealers that bid at Treasury debt auctions. “We have deficits that are going to run higher, and at some point, a Fed that will start allowing its Treasury securities to mature.”
After the U.S. borrowed heavily in the wake of the financial crisis to bail out the banks and revive the economy, net issuance of Treasuries has steadily declined as budget shortfalls narrowed. In the year that ended September, the government sold $560 billion of Treasuries on a net basis, the least since 2007, data compiled by Bloomberg show.
Coupled with increased buying from the Fed, foreign central banks and investors seeking low-risk assets, yields on Treasuries have tumbled even as the overall size of the market ballooned to $13.4 trillion. For the 10-year note, yields hit a record 1.318 percent this month. They were 1.58 percent as of 9:28 a.m. in London, according to Bloomberg Bond Trader data. Before the crisis erupted, investors demanded more than 4 percent. One reason the U.S. may ultimately have to boost borrowing is paltry revenue growth, said Jim Vogel, FTN’s head of interest-rate strategy.With the economy forecast to grow only about 2 percent a year for the foreseeable future as Americans save more and spend less, there just won’t enough tax revenue to cover the burgeoning costs of programs for the elderly and poor. Those funding issues will ultimately supersede worries about Fed policy, regardless of who ends up in the White House come January.
As a percentage of the gross domestic product, revenue will remain flat in the coming decade as spending rises, CBO forecasts show. That will increase the deficit from 2.9 percent this fiscal year to almost 5 percent by 2026.
“As the Fed recedes a little bit into the background, all of these other questions need to start coming back into the foreground,” Vogel said.
The potential for a glut in Treasuries is emerging as some measures show buyers aren’t giving themselves any margin of safety. A valuation tool called the term premium stands at minus 0.56 percentage point for 10-year notes. As the name implies, the term premium should normally be positive and has been for almost all of the past 50 years. But in 2016, it’s turned into a discount.
Some of the highest-profile players are already sounding the alarm. Jeffrey Gundlach, who oversees more than $100 billion at DoubleLine Capital, warned of a “mass psychosis” among investors piling into debt securities with ultra-low yields. Bill Gross of Janus Capital Group Inc. compared the sky-high prices in the global bond market to a “supernova that will explode one day.”
Despite the increase in supply, things like the gloomy outlook for global growth, an aging U.S. society and more than $9 trillion of negative-yielding bonds will conspire to keep Treasuries in demand, says Jeffrey Rosenberg, BlackRock Inc.’s chief investment strategist for fixed income.
What’s more, the Treasury is likely to fund much of the deficit in the immediate future by boosting sales of T-bills, which mature in a year or less, rather than longer-term debt like notes or bonds.
“We don’t have any other choice -- if we’re going to increase the budget deficits, they have to be funded” with more debt, Rosenberg said. But, “in today’s environment, you’re seeing the potential for higher supply in an environment that is profoundly lacking supply of risk-free assets.”
Deutsche Bank AG also says the long-term fiscal outlook hinges more on who controls Congress. And if the Republicans, who hold both the House and Senate, retain control in November, it’s more likely future deficits will come in lower than forecast, based on the firm’s historical analysis.
Fed Holdings of Treasuries Coming Due
Bottom of Form
However things turn out this election year, what the Fed does with its $2.46 trillion of Treasuries may ultimately prove to be most important of all for investors. Since the Fed ended quantitative easing in 2014, the central bank has maintained its holdings by reinvesting the money from maturing debt into Treasuries. The Fed will plow back about $216 billion this year and reinvest $197 billion in the next, based on current policy.
While the Fed has said it will look to reduce its holdings eventually by scaling back reinvestments when bonds come due, it hasn’t announced any timetable for doing so.
“It’s the elephant in the room,” said Dov Zigler, a financial markets economist at Bank of Nova Scotia. “What will the Fed’s role be and how large will its participation be in the Treasury market next year and the year after?
"If You Can't Touch It, You Don't Own It"
ZeroHedge.com Jul 23, 2016 6:40 PM
Submitted by Jeff Thomas, Writer for Doug Casey’s International Man and Strategic Wealth Preservation, via SprottMoney.com,
The pending Brexit has, not surprisingly, caused a shakeup in the investment world, particularly in the UK. Of particular note is that, recently, asset management firms in Britain began refusing their clients the right to cash out of their mutual funds. Of the £35 billion invested in such funds, just under £20 billion has been affected.
For those readers who live in the UK, or are invested in UK mutual funds, this is reason to tremble at the knees.
So, why have these investors been refused the right to exit the funds? Well, it’s pretty simple. The trouble is that quite a few of them made the request at about the same time. Of course the management firms don’t keep enough money on hand to pay them all off, so, rather than spend all their money paying off as many clients as possible, then going out of business due to a lack of liquidity, they simply announce a freeze on redemptions.
Those who are outraged may read the fine print of their contracts and find that the fund managers have every right to halt redemptions, should “extraordinary circumstances” occur. Who defines “extraordinary circumstances?” The fund managers.
Across the pond in the US, investors are reassured by the existence of the Securities and Exchange Commission, which has the power to refuse this power to investment firms…or not, should they feel that a possible run on redemptions might be destructive to the economy.
Countries differ as to the level of freedom they will allow mutual fund and hedge fund management firms to have on their own, but all of them are likely to err on the side of the protection of the firms rather than the rights of the investor, as the firms will undoubtedly make a good case that a run on funds is unhealthy to the economy.
The Brexit news has created a downward spike in investor confidence in the UK – one that it will recover from, but, nevertheless, one that has caused investors to have their investment locked up. They can’t get out, no matter how badly they may need the money for other purposes. This fact bears pondering.
Presently, the UK, EU, US, et al, have created a level of debt that exceeds anything the world has ever seen. Historically, extreme debt always ends in an economic collapse. The odiferous effluvium hasn’t yet hit the fan, but we’re not far off from that eventuality. Therefore, wherever you live and invest, a spike such as the one presently occurring in the UK could result in you being refused redemption. Should there then be a concurrent drop in the market that serves to gut the fund’s investments, you can expect to sit by and watch as the fund heads south, but be unable to exit the fund.
As stated above, excessive debt results in an economic collapse, which results in a market crash. It’s a time-tested scenario and the last really big one began in 1929, but the present level of debt is far higher than in 1929, so we can anticipate a far bigger crash this time around.
But the wise investor will, of course diversify, assuring him that, if one investment fails, another will save him. Let’s look at some of the most prominent ones and consider how they might fare, at a time when the economy is teetering in the edge.
Stocks and Bonds
Presently, the stock market is in an unprecedented bubble. The market has been artificially propped up by banks and governments and grows shakier by the day. Bonds are in a worse state – the greatest bubble they have ever been in. This bubble is just awaiting a pin. We can’t know when it will arrive, but we can be confident that it’s coming. Rosy today, crisis tomorrow.
Cash on Deposit
Cyprus taught us in 2013 that a country can allow its banks to simply confiscate (steal) depositors’ funds, should they decide that there is an “emergency situation” – i.e., the bank is in trouble. Unfortunately, the US (in 2010), Canada (in 2013) and the EU (in 2014) have all passed laws allowing banks to decide if they’re “in trouble”. If they so decide, they have a free rein in confiscating your deposit.
Safe Deposit Boxes
Banks in North America and Europe have begun advising their clients that they cannot store money or jewelry in safe deposit boxes. Some governments have passed legislation requiring those who rent safe deposit boxes to register the location of the box, its number and its contents with the government.
Each year, the storage of valuables in a safe deposit box is becoming more dubious.
Pension plans tend to be heavily invested in stocks and bonds, making them increasingly at risk in a downturn. To make matters worse, some governments have begun to attack pensions. Others, such as the US, have announced plans to force pensions to invest in US Government Treasuries – which, in a major economic downturn could go to zero.
These are amongst the most preferred stores of wealth and are all very much at risk. In addition, there are two choices that, if invested correctly, promise greater safety.
The Mutual funds in the UK that are presently in trouble are heavily invested in real estate. But real estate that you invest in directly does not face the same risk. However, any real estate that’s located in a country that’s presently preparing for an economic crisis, such as those mentioned above, will be at risk. Real estate in offshore jurisdictions that are not inclined to be at risk is a far better bet. (An additional advantage is that real estate in offshore locations is not even reportable for tax purposes in most countries, because it cannot be expatriated to another country.
Precious metals are a highly liquid form of investment. They can be bought and sold quickly and can be shipped anywhere in the world, or traded for metals in another location. Of course, storage facilities in at-risk countries may find themselves at the mercy of their governments. However, private storage facilities exist in Hong Kong, Singapore, the Cayman Islands, Switzerland and other locations that do not come under the control of the EU or US. Precious metals ownership provides greater protection against rapacious governments, but storage must be outside such countries.
The lesson to take away here is that, if you can’t touch it, you don’t own it. Banks and fund management firms can freeze your wealth, so that you can’t access it. Governments and banks can confiscate your wealth. If you don’t have the power to put your hands on your wealth on demand, you don’t own it.
This evening, take account of all your deposits and investments and determine what percentage of them you do truly own. If you decide that that percentage is too low for you to accept, you may wish to implement some changes... before others do it for you.