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30% Bail-In Haircuts Coming Up

I warned countless times over the last six months that Greek citizens need to pull their deposits before it was too late.

Today I report it’s too late. 30% bail-in haircuts on Greek bank deposits are coming up.

Banks to Raid Deposits to Avert Collapse

The Financial Times reports Greek Banks Prepare Plan to Raid Deposits to Avert Collapse

Greek banks are preparing contingency plans for a possible “bail-in” of depositors amid fears the country is heading for financial collapse, bankers and businesspeople with knowledge of the measures said on Friday.

The plans, which call for a “haircut” of at least 30 per cent on deposits above €8,000, sketch out an increasingly likely scenario for at least one bank, the sources said.

“It [the haircut] would take place in the context of an overall restructuring of the bank sector once Greece is back in a bailout programme,” said one person following the issue. “This is not something that is going to happen immediately.”

Greece’s banks have been closed since Monday, when capital controls were imposed to prevent a bank run following the leftwing Syriza-led government’s call for a referendum on a bailout plan it had earlier rejected. Greece’s highest court rejected an appeal by two citizens on Friday who had asked for the referendum to be declared unconstitutional.

Depositors can withdraw only €60 a day from bank ATM cash machines, while requests to transfer funds abroad have to be approved by a special finance ministry committee in co-operation with the Greek central bank.

Greek deposits are guaranteed up to €100,000, in line with EU banking directives, but the country’s deposit insurance fund amounts to only €3bn, which would not be enough to cover demand in case of a bank collapse.

With few deposits over €100,000 left in the banks after six months of capital flight, “it makes sense for the banks to consider imposing a haircut on small depositors as part of a recapitalisation. . . It could even be flagged as a one-off tax,” said one analyst.

It’s Too Late

In honor of the bail-in I offer this musical tribute.

Link if video does not play: Carole King – It’s Too Late

That was Track 3 from the album, “Tapestry” (1971), one of the best-selling albums of all time.

Why Announcement Now?

The only thing curious is the timing of the announcement. Actually, there was no official announcement. Rather a statement by “bankers and businesspeople” who likely wish to influence the vote to yes.

This news could do it. However, haircuts will come either way.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

http://globaleconomicanalysis.blogspot.com/

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What makes the current sovereign default episode different from previous ones is the uncanny stability and lack of buying of “fiat remote” assets such as gold and silver, and to a lesser extent, digital currency such as bitcoin. Indeed, all throughout the Greek pre-default escalation and ultimately, sovereign bankruptcy to the IMF, it seemed as if there was an absolute aversion to the peak of Exter’s inverted pyramid.

What is even more surprising about the lack of any gold price upside is that it is not due to lack of demand. Quite the contrary, because as Bloomberg wrote last week, “European investors are increasing purchases of gold as Greece’s turmoil boosts the appeal for an alternative to the euro.”

Demand from Greek customers for Sovereign gold coins was double the five-month average in June, the U.K. Royal Mint said in an e-mailed statement. CoinInvest.com, an online retailer, said sales on Saturday and Sunday were the highest since Cyprus limited cash withdrawals in 2013, driven by a jump in German, French and Greek buyers.

 

Investors are searching for a safe haven after Greece imposed capital controls, closed banks and stopped selling gold coins to the public until at least July 6. Chancellor Angela Merkel on Monday said Germany is still open to negotiations if Greece wants.

 

“Most of our common gold coins are sold out,” Daniel Marburger, a director of Frankfurt-based CoinInvest.com, said by phone. “When people learned that the Greek banks will be closed, they started to think that it may not be such a bad idea to have some money in gold.”

The bullion dealers themselves are enjoying a jump in sales to retail customers:

GoldCore Ltd., which buys and sells bullion, reported coin and bar demand rose “significantly” on Monday. Sales to U.K. and Ireland today are about three times the average for the past three Mondays, the Dublin-based firm said in an e-mailed statement.

 

The U.S. Mint has sold 61,500 ounces of American Eagle gold coins this month, the most since January.

 

BullionVault, which says it operates the largest online physical gold trading platform, reported a jump in sales during the first half of this year, a sign of a broader increase.

However, it is the “paper” gold market where things were most perplexing in recent months. Recall that, as Zero Hedge broke and first reported, in the first quarter of the year, or the same time the Syriza government took power, something very dramatic took place in the US derivatives market, where first JPM saw an absolute explosion of its commodity derivative holdings (a broad umbrella which is not broken down further):

 

… coupled wih Citi’s surge in “precious metals” derivatives which soared from $3.9 billion to $42 billion.

 

But what is most confusing is how even as physical metal demand clearly rose across Europe in the past few months and the price of paper gold actually declined, perhaps facilitated by some “hedged” derivative positions on the short side of precious metals, some bullion dealers have actually found it impossible to survive, and in the last few days at least one major gold bullion dealer, Bullion Direct, greeted customers with the following notice on its website:

Bullion Direct has experienced significant transactional delays. To avoid further inconvenience or other adverse consequences to our customers, Bullion Direct is suspending its operations as it attempts to resolve those issues. We intend to keep you informed at this website. Thank you for your patience.

 

Just what are “significant transactional delays” and how bad is the physical gold supply-chain if it can put at least one dealer out of business. Another question: is this a solitary failure by gold vendor due to a one-off problem with working capital, or is something more systemic about to be revealed in the gold bullion sales industry?

We look forward to finding out, but in the meantime our advice to buyers of physical precious metals is the same as always: if you purchased it and you can’t hold it in your hand, it isn’t yours.

Zerohedge

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While the World Watches Greece THIS is Happening

On July 3, 2015, in , by Capitalist Exploits

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By Chris at www.CapitalistExploits.at

Watching the ongoing Greek saga unfold is enough to make a blind man grimace. Capital controls which could be seen coming down the track like a freight train are but one more notch on the disaster stick called European Monetary Union.

Why talk of Greek debt negotiations is even taking place at all is the height of absurdity. It’s akin to discussing how large an area of the desert should be dedicated to growing lettuces. The answer which no Eurocrat is prepared to acknowledge is, “Who cares? Nobody should be so daft as to grow lettuces in the desert”.

Let’s all be honest, shall we. What we’re talking about here is foreign aid. It’s not about debt repayments. Nobody is getting repaid. Anyone still clinging to that hope is simultaneously still waiting for Santa to come down the chimney, the Easter bunny to show up and for “liberating” forces to find weapons of mass destruction in Iraq.

Let’s just table debt talks, call them what they are, which is foreign aid, and move this thing along. The problem with acknowledging the ugly truth is that German banks would then have to write down those “assets” on their balance sheets: “Jeez, it’d just be so much easier if we could keep them at par value and ensure we pick up that bonus at year end. And so we must endure more saga and carry on this game of pretense”.

While I could spend time on Greece, what I’m more interested in is what few are paying attention to while this Greek saga unfolds.

That is what is going on with the Chinese yuan.

We’ve recently made the argument for a weakening yuan. My friend Brad and I both went up against the yuan late last year and Brad detailed his thinking in October of last year, then again in December, where he delved into the Chinese banking system, and once again in March of this year.

That, ladies and gentlemen, is our current bias. We’re currently short. It’s important to establish one’s bias early on in order to attempt to understand any argument, so now you have ours. Often fund managers are selling a product which leads them into making decisions which have more to do with an agenda than with sufficient critical thought.

Let me say therefore that we have an opinion right now. But since we are not selling any product, hopefully we can keep our minds open.

Let’s see where we get to and then I’m going to show you why we have a decent crack at making money without having an opinion either way.

By many accounts the yuan is one of (if not THE) most overvalued currencies in the world right now. But there are just as many well thought arguments arguing the opposite saying that it is indeed undervalued.

Both sides have credible and well thought out ideas so let me attempt to summarise the most credible I’ve found.

Why the Yuan will Rise

Chinese policy makers are unlikely to let anything take place which rocks the yuan exchange rate boat.

The yuan fell to 6.28 in early March of this year before the PBOC stepped in and threw $33 billion at the “problem”, reversing the decline and sending it back up to where it trades today around 6.21. They have around $4 trillion in reserves so if, like us, you’re a speculator looking at firepower this is well worth looking at. Clearly the monetary authority is prepared to dip into their vast currency reserves to offset capital outflows and stabilize the yuan.

The IMF discussions around including the yuan into the SDR basket of reserve currencies (currently the dollar, euro, yen and pound) is something which China has long been courting. Right now, the yuan has posted it’s biggest monthly advance since December 2011, on the heels of or in anticipation of inclusion in the SDR basket by the IMF.

Amongst other things, what is required is for the yuan to be “fairly valued”. Wild swings in the yuan –  whether up or down – would kill their chances of joining the hallowed ground of the other terrible units of payment.

In order to meet their criteria it’s essential that the yuan remain stable. Another IMF criteria is that the currency is “freely usable”. In other words, free floating. I’ll come back to this in a minute as I think it’s something overlooked by many observers.

Why the Yuan will Fall

On the other side of this argument is the fact that China’s economy is slowing and is facing increased competition from regional players, such as Japan, who are playing the currency card, devaluing their currencies and sucking up export market share.

A weaker exchange rate would help boost exports and while China is certainly moving towards a domestic consumer supported economy, they are not there yet and manufacturing and exporting to the developed world is still their “bread and butter”.

Remember I mentioned that part of the IMF criteria is that the currency float freely?

Well, many believe – and perhaps correctly – that when (or if) the yuan is added and floats freely there will be an almighty rush INTO the yuan. I’ve seen few who believe that this wouldn’t at least in the short-term allow the opposite to happen.

Consider for a moment that most Chinese have been going to great lengths to get OUT of the yuan. Does it not make sense that when they are allowed to do so there will not be a decent amount of them quite excited with the prospect of moving out of yuan?

In the simplest of terms the question boils down to the following…

Upon inclusion into the IMF and a subsequent floating of the yuan, does capital flow into the yuan or out of it?

The problem with China is that nobody knows the real numbers. Nobody!

What are the insiders doing? They’re shoveling their money out of the country so fast it’s going to catch fire from the friction. This is what the insiders are doing. That doesn’t mean that suckers won’t come in the other way and we get a strong yuan rally. It’s certainly possible and maybe it’s even probable.

Fortunately, the market is gifting us an opportunity right now and we don’t have to make that decision.

I just got off the phone with Brad who told me about me the below pricing of an at the money call option on the yuan (or the offshore yuan, to be more specific). Currently, you’re paying 2.5% premium for a 12-month call option.

USDCNH Call

Now, take a look at the below chart. You’ll see that buying a 12-month at the money put we’re paying just 0.3%. You can buy 100,000 USD/CNH puts for 12 months at the money and it’ll cost you a mere $300!

USDCNH Put

To break even on the first trade we need the currency pair to move by 2.5% in our favour within 12 months and on the second trade we need the pair to move by just 0.3% to break even. Pardon me for saying so but that is almost as insane as the Eurocrats discussing Greek debt.

Buying both is what traders term a “straddle” but don’t get hung up on terminology. The point is that for a 2.8% premium (2.5% + 0.3%) we can hold both positions. We don’t much care which way it moves but simply that it MOVES!

What could make it move? Well, inclusion at the hallowed table of disreputable currencies currently making up SDRs or of course non-inclusion.

Either of these events have the potential to create capital flows one way or the other causing the USD/CNH pair to move substantially more than a mere 2.8%.

Or any of the reasons we delved into in our USD Bull Market report where we detailed why we are short the yuan.

I’d suggest we’re likely to see MORE not LESS volatility over the next 12 months and the current lack of volatility being priced into the market is just the sort of golden gift which Brad looks for.

– Chris

 

“Eppur si muove (And yet it moves).” – Galielo Galilei

Zerohedge

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Egypt Is On The Edge Of Full Blown Civil War

On July 3, 2015, in , by Tyler Durden

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Via GEFIRA,

In the last few days there were dozens of separate attacks in Egypt from the Sinai up to Cairo. Probably more than 60 people died while the Egyptian army used F16 attack plains to protect itself against it disgruntled population. It is clear that the Egyptian rulers will not be able to contain the current situation, today could be marked as the start of Egypt’s civil war.

Democratic elected governments were violently overthrown, in Algeria, Egypt and  Palestinian territories. In Algeria the FIS  had won the first held elections with a convincing majority in 1990 and 1992. It has been removed from power in 1992 by a coup d’etat that was highly approved by the West. Probably 150.000 people died in the civil war that followed these events up.

HAMAS winning the 2006 elections in the Palestinian territories resulted in a war among Palestinians and ended up with a split of Gaza and the West Bank

In 2011 Morsi, leader of the Muslim Brotherhood won the first free elections in Egypt.

In 2013 the first elected president of Egypt was removed by the army. There are clear signs that anti-democratic forces were deliberately destabilizing Egypt before the coup d’etat in 2013. In the running up of the July 3th coup by General Sisi an artificial oil shortages was created that contributed to the mass protest against the elected president of Egypt.

The new army coup was financially supported by the Saudi rulers while the West was mute, the only vocalized opposition came from Turkey’s ruler MrErdo?an.

Washington was silent about Egypt’s coup and even resumed the delivery of military hardware to the Egyptian rulers, at the same moment Morsi received the dead penalty during a mock process.  The situation in Egypt will be much worse than the situation that we saw in Algeria in 1992.

Libya has been split in 3 parts, the by the West installed and recognized government in Tobruk could be seen as a supporter of the rulers in Cairo. The government in Tripoli is allied with the Muslim Brotherhood party and sees the government in Cairo as a threat to its existence. Both Governments do not rule Libya completely, big parts of Libya are under control of ISIS and other unregulated Islamist groups.

The war that is coming to Egypt will not be limited to Egypt and will be an extend to Libya’s war, for the sole reason that a lot of fighters and weapons will come over from Lybia.

The substantial amount of impoverished Egyptians are lacking any perspective and have nothing to lose. It is their party that has been removed from power in 2013.

The Egyptian army is heavenly weaponized by the USA, there will not be any doubt that those weapons will end up in the hands of Islamist groups. The Egyptian conscript army will be a huge risk for the country’s leaders as army units might switch loyalty.

Experienced fighters from Syria and Iraq will actively support their brothers in Egypt.

The new generation of Islamist’s will utilize the internet in their advantage. They will use it to mobilize their supporters and build their case against the Egyptian army and their backers in Riyadh and Washington.

The Internet will also be used for advanced communications and “crowd reconnaissance”. In Ukraine we have already seen how YouTube and mobile phones were used to pass on enemy’s positions. Modern professional armies are not prepared for new agile tactics that will be utilized by a new Islamic internet generation.

As the Muslim Brotherhood is enjoying massive amounts of support we are expecting that the situation in Egypt will deteriorate at the same pace as we have seen in Syria.

The Egyptian rulers will not be able to contain the current situation, today could easily be recorded as the start of Egypt’s big civil war.

*  *  *

Sources:

Algerian Civil War Source Wikipedia
Bouteflika said in 1999 that 100,000 people had died by that time and in a speech on 25 February 2005, spoke of a round figure of 150,000 people killed in the war.[5] Fouad Ajami argues the toll could be as high as 200,000, and that it is in the government’s interest to minimize casualties

Egypt’s Gas Shortage Fuels June 30 Protests Al Monitor June 2013
The latest gas crisis falls prior to the highly anticipated June 30 protests called by the Tamarrud movement demanding that Morsi step down for his failure to achieve any of the revolution’s goals

Libya supreme court rules anti-Islamist parliament unlawful Source The Guardian 6 November 2014
In a blow to anti-Islamist factions, Libya’s highest court has ruled that general elections held in June were unconstitutional and that the parliament and government which resulted from that vote should be dissolved.

Mohammed Morsi death sentence upheld by Egypt court Source BBC 16 June 2015
The sentence was initially passed in May, but was confirmed after consultation with Egypt’s highest religious figure, the Grand Mufti. The death sentences of five other leading members of the Muslim Brotherhood, including its supreme guide Mohammed Badie, were also upheld.

Egypt Officially Announces ‘State Of War’ Source Egyptian Streets 1 July 2013
In an official statement released by the Egyptian Armed Forces, 17 Egyptian soldiers were reported killed, in addition to 13 more who were injured. The statement added that 100 militants have been killed, in addition to destroying 20 of the militants’ vehicles.

Sheikh Zuweid Death Toll: Egyptian Police Kill 9 In Cairo Suburb Raid As Assault On Sinai Town Comes To An End Source International Business Times 1 July 2015
Egyptian police raided a home in a western suburb of Cairo on Wednesday, killing nine men who they said were armed and plotting a terrorist attack. The killings happened the same day an ISIS-affiliated group launched a major assault on Sheikh Zuweid, an Egyptian city in the Sinai Peninsula, resulting in at least 100 casualties. The assault ended Wednesday evening.

Two Bomb Explosions Resonate Through Cairo Source Egyptian Streets 30 June 2015
In an official statement, the Director of Civil Protection in Cairo, Magdy al-Shalaqany has confirmed that two bombs have detonated in Cairo’s 6th of October city, with a five minutes gap between the two explosions, reported AMAY.

Islamist Blitz in Sinai Kills 64 as Egypt Sends Fighter Jets. Source Bloomberg 1 July 2015
Egypt’s army struck at militants with fighter jets and attack helicopters after 64 security personnel were killed in Sinai on the bloodiest day of the country’s escalating war with Islamist insurgents.

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On Thursday, we highlighted the pitiable plight of Greek businesses which, facing an acute cash crunch and suppliers unwilling to provide credit ahead of the country’s weekend referendum, are being forced to close the doors.

The country’s banks are set to run out of physical banknotes “in a matter of days” according to a “person familiar with the situation” who spoke to WSJ and Constantine Michalos, the president of the Athens Chamber of Commerce, fears the country’s stock of imported goods will only last for two or three more weeks. 

Meanwhile, Greeks have resorted to scavenging for food and picking through dustbins for scrap metal and as we noted on Wednesday, this is hardly a recent development in Greece. High unemployment has plagued the country for years , becoming endemic and relegating many Greeks to a life of perpetual and severe economic hardship.

Indeed, as BofAML notes, a look back at the country’s history shows that Athens has been in default or some manner of debt rescheduling for nearly a quarter of the past two centuries. 

The bank goes on to make a rather unflattering comparison between the implied market cap of Greek stocks on Monday and a certain US-based bath towel supplier: “The announcement of a bank holiday & capital controls caused a 20% drop in the local equity market (as implied by ETFs), putting the market cap of MSCI Greece on a par with that of Bed, Bath & Beyond.” 

But Athenians are in no mood for backhanded humor, because as one 83-year old told WSJ this week, “Tsipras has turned this country into North Korea.” 

Zerohedge

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Last week in “For Greeks, The Nightmare Is Just Beginning: Here Come The Depositor Haircuts,” we warned that a Cyprus-style bail-in of Greek depositors may be imminent given the acute cash crunch that has brought the Greek banking sector to its knees and forced the Greek government to implement capital controls in a futile attempt to stem the flow.

The depositor “haircut” would be a function of the staggered ELA haircut that the ECB could impose to escalate the rhetoric between the two sides, and could take place with as little as a 10% increase in the ELA collateral haircut from its current 50% level.

Unfortunately for Greeks, the ECB has frozen the ELA cap, meaning that as of last Sunday, Greek banks were no longer able to meet deposit outflows by tapping emergency liquidity from the Bank of Greece. 

Now, with ATM liquidity expected to run out by Monday and with the country’s future in the Eurozone still undecided, it appears as though Alexis Tsipras’ promise that “deposits are safe” may be proven wrong.

According to FTGreek banks are considering a depositor bail-in that could see deposits above €8,000 haircut by “at least” 30%. 

Via FT: 

Greek banks are preparing contingency plans for a possible “bail-in” of depositors amid fears

 

The plans, which call for a “haircut” of at least 30 per cent on deposits above €8,000, sketch out an increasingly likely scenario for at least one bank, the sources said.

 

A Greek bail-in could resemble the rescue plan agreed by Cyprus in 2013, when customers’ funds were seized to shore up the banks, with a haircut imposed on uninsured deposits over €100,000.

 

It would be implemented as part of a recapitalisation of Greek banks that would be agreed with the country’s creditors — the European Commission, International Monetary Fund and European Central Bank.

 

“It [the haircut] would take place in the context of an overall restructuring of the bank sector once Greece is back in a bailout programme,” said one person following the issue. “This is not something that is going to happen immediately.”

 

Greek deposits are guaranteed up to €100,000, in line with EU banking directives, but the country’s deposit insurance fund amounts to only €3bn, which would not be enough to cover demand in case of a bank collapse.

 

With few deposits over €100,000 left in the banks after six months of capital flight, “it makes sense for the banks to consider imposing a haircut on small depositors as part of a recapitalisation. . . It could even be flagged as a one-off tax,” said one analyst.

 

Earlier, via Bloomberg:

Liquidity for Greek bank ATMs after Monday will depend on the ECB decision, National Bank of Greece Chair Louka Katseli tells reporters in Athens.

Zerohedge

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Submitted by David Stockman via Contra Corner blog,

America is better off when President Obama is out on the stump bloviating and boasting rather than in Washington actively doing harm. But the whoppers he just told the students at the University of Wisconsin are beyond the pale. Said our spinmeister-in-chief:

 And the unemployment rate is now down to 5.3 percent. (Applause.) Keep in mind, when I came into office it was hovering around 10 percent. All told, we’ve now seen 64 straight months of private sector job growth, which is a new record — (applause) — new record — 12.8 million new jobs all told.

That’s a pack of context-free factoids. There is still such a thing as the business cycle, and only economically illiterate hacks—-like those who work on the White House speech writing staff—-would measure anything from the deep V-shaped but momentary bottom that happened to occur during Obama’s second year in office. What counts is not that we’ve had a bounce after a terrible bust, but where we are now on a trend basis.

The answer is absolutely nowhere!

We are now 29 quarters from the pre-crisis peak and total non-farm labor hours utilized by the US economy are no higher than they were in Q4 2007. In other words, if you use a common unit of measure—–labor hours rather than job slots which treat coal-miners and part-time pizza delivery boys alike—–there have been no new units of employment at all. Our teleprompter reading President is actually tooting his own horn about recycled hours and “born again”  jobs and doesn’t even know it.

And, no, he can’t take credit for digging us out of the hole created by the Great Recession, either. The long, slow climb back to square one shown in the chart above was due to the natural resilience of our capitalist economy—notwithstanding the tax, regulatory and massive debt hurdles that Washington policies have thrown at it.

The truth of the matter is that America’s employment machine has been failing for this entire century. As shown below, the number of non-farm labor hours utilized during the most recent quarter was only 1% higher than in the spring of 2000—-way back when Bill Clinton still had his hands on things in the Oval Office.

In short, we have gone through two business cycles and have essentially added zero new employment inputs to the US economy.  And that marks a sharp and devastating reversal of previous trends. In fact, the BLS’ own data convey an out-and-out crisis that the President should have been lamenting, not a cherry-picked simulacrum of growth based on born-again, apples-and-oranges jobs slots.

Thus, during the comparable 29 quarters after the 1990 business cycle peak (Q2 1990 to Q3 1997) non-farm labor hours had increased by 12% and during the same period of time after the 1981 peak (Q3 1981 to Q4 1988) labor hours expanded by 17 percent.  That’s what employment growth used to look like, and absolutely nothing like that has happened on Obama’s watch.

When you get right down to it, however, even labor hours do not fully capture the actual jobs disaster happening in America. That’s because we keep shedding high productivity hours in the full-time  jobs sector in favor of low-skill, low-pay gigs in bars, restaurants, Wal-Marts and temp agencies.

So notwithstanding another month of 200,000 plus headline job gains, here’s where we actually are. The number of breadwinner jobs—–full-time positions in energy and mining, construction, manufacturing, the white collar professions, business management and services, information technology, transportation/distribution and finance, insurance and real estate—-is still 1.7 million below the level of December 2007; in fact, it is still lower than it was at the turn of the century.

Breadwinner Jobs- Click to enlarge

Breadwinner Jobs- Click to enlarge

There is no mystery as to how the White House and Wall Street celebrate year after year of “jobs growth” when the long-term trend of full-time, family-supporting employment levels is heading south. Its called “trickle-down economics”, and not of the good kind, either.

What is happening is that the Keynesian money printers at the Fed are fueling serial financial bubbles. This generates a temporary lift in the discretionary incomes of the top 10% of households, which own 85% of the financial assets, and the next 10-20% which feed off the their winnings. Accordingly, the leisure and hospitality sectors boom, creating a lot of job slots for bar tenders, waiters, bellhops, etc.

I call this the “bread and circuses economy”, but it has two problems. Most of these slots generate only about 26 hours per week and $14 per hour. That’s about $19,000 on an annual basis, and means these slots constitute 40% jobs compared to the breadwinner category at about $50,000 per year. Besides that, a soon as the financial bubble goes bust, these jobs quickly disappear.

Bread and Circuses Jobs - Click to enlarge

Bread and Circuses Jobs – Click to enlarge

This is reason enough for Obama to pipe down on the boasting, but he actually went in the opposite direction claiming a big recovery in manufacturing jobs.

And after a decade of decline, thanks to some of the steps we took…….we’ve added nearly 900,000 new manufacturing jobs. Manufacturing is actually growing faster than the rest of the economy. (Applause.)

But that one is not even a whopper; its a bald-faced lie. There has not been one “new” manufacturing job created during Obama’s term in office; and, in fact, the 12.3 million manufacturing jobs reported for June was still 10% below the level of December 2007, and nearly 30% lower than the 17.3 million manufacturing jobs reported in January 2000.

So the actual facts are not evidence of a trend reversal; they’re an exercise in political hogwash.

Indeed, if you take the entire high-productivity, high-pay goods production sector—-energy, mining, manufacturing and construction—the trend is even worse. As shown below, the 19.6 million goods producing jobs in June was 5 million lower than in January 2000. Is there any wonder that the median real household income has declined by 7% over the last 15 years?

Goods Producing Jobs - Click to enlarge

Goods Producing Jobs – Click to enlarge

Here’s the real truth beneath the bloviation issuing from stumping politicians and Wall Street stock touts alike. The June BLS report showed that the HES Complex (health, education and social services) generated another 48,000 jobs in June. This figure is nearly dead on the 42,000 monthly average for this sector since the turn of the century.

The minor problem with that trend is these jobs pay on average only $35,000 per year—–a level that does not remotely support a middle class standard of living, especially after payroll and income taxes are extracted from this gross pay figure.

The much bigger skunk in the woodpile, however, is that these jobs are almost entirely “fiscally dependent”. Yet the public sector in America is broke, and the total public debt just keeps on climbing higher.

To wit, the 32.2 million jobs in the HES Complex are funded by $1.5 trillion annually of Medicare, Medicaid and other health and social services entitlements. On top of that there is also about $1 trillion of public sector education funding, $200 billion per year of government guaranteed student loans and $250 billion annually in tax subsidies for employer provided and individual health insurance plans and Obamacare tax credits.

HES Complex Jobs - Click to enlarge

HES Complex Jobs – Click to enlarge

In effect, the public sector borrows and taxes to create low productivity jobs within the nation’s highly inefficient, wasteful and monopolistic health and education cartels—- but in the process squeezes everything else. In fact, there have been virtually no new jobs—even on a headcount basis—–outside of the HES Complex during the entirety of the 21st Century to date!

Nonfarm Payrolls Less HES Complex Jobs - Click to enlarge

Nonfarm Payrolls Less HES Complex Jobs – Click to enlarge

One of these days the public sector is going to exhaust its capacity to tax and borrow, and to thereby finance job growth even in the HES Complex. Needless to say, Washington and Wall Street will be as clueless then as they are now.

Meanwhile, the White House whoppers will keep on coming.

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On Monday, in “Beggar Thy Neighbor? Greece’s Battered Banks Beget Balkan Jitters,” we took an in depth look at the potential for the Greek banking crisis to infect Bulgaria, Romania, and Serbia, where Greek banks control a substantial percentage of total banking assets. 

We noted that yields on the country’s bonds had spiked in the wake of capital controls in Greece and the ensuing ATM run, a reflection of souring investor sentiment despite assurances from local banking officials that there was no risk of similar measures being implemented outside of Greece.  

“Any action by the Greek government and the central bank to impose measures in the Greek financial system have no legal force in Bulgaria and can in no way affect the smooth functioning and stability of the Bulgarian banking system,” Bulgaria’s central bank said, in a statement. 

Still, as Morgan Stanley pointed out nearly two months ago, “the risk is that depositors who have their money in Greek subsidiaries in Bulgaria, Romania and Serbia could suffer a confidence crisis and seek to withdraw their deposits. Although well capitalised and liquid, Greek subsidiaries in the SEE region may see difficulties providing enough cash if withdrawals are intense and become problematic. In case of a liquidity shortage, Greek subsidiaries in Bulgaria, Romania and Serbia would probably create the need for local authorities to step in. Local central banks and governments would most probably provide additional liquidity, but if panic behaviour develops it would mean that certain banks would either have to find a buyer or be nationalised. In this case, the national deposit guarantee schemes will have to repay guaranteed deposits and, in case of insufficient funds, the government will have to provide them.”

Now, with Greece’s future in the EMU hanging in the balance, Bloomberg says the ECB has stepped up its efforts to shield Bulgaria from any fallout. Here’s more:

The European Central Bank is set to extend a backstop facility to Bulgaria and is ready to assist other nations in the region to ward off contagion from Greece, according to people familiar with the situation.

 

The ECB would provide access to its refinancing operations, offering euros to the banking system against eligible collateral, the people said, asking to remain anonymous because the matter is confidential. The ECB and the Bulgarian central bank declined to comment.

 

Eastern Europe is at risk of tremors from Greece via ties ranging from trade to finance, with lenders from the debt-ridden country owning almost a third of banking assets in Bulgaria. The possibility of Greece abandoning the euro after shutting banks and imposing capital controls has left eastern European currencies among this week’s worst emerging-market performers.

 

“The threat of ‘Grexit’ has understandably cast a dark cloud over the outlook,” for the region, London-based Capital Economics said last week in a note. “Ties with Greece are sizable in a few places, including Bulgaria and Romania.”

 

Bulgaria and its banks have been a main focus of concern for European Union officials looking at potential fallout from the Greek crisis in the region, according to people familiar with their thinking. The yield on euro-denominated Bulgarian government debt due 2024 has jumped 25 basis points this week to 2.61 percent.

It certainly appears as though the whole “Greece is contained” line is yet another example of a vacuous attempt to calm a panicked public by issuing hollow assurances from on high and compelling the media to parrot them to the masses in order to obscure the real risks — a strategy which works until the soup line photos start showing up on social media.

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Submitted by Omid Malekan via OmidMalekan.com,

Stock buybacks have been in the news lately, as their growing size has lead to criticism, especially from politicians who believe they contribute to economic inequality. But the simplest critique of the practice of buybacks can be made on economic grounds, in terms of value created or destroyed.

If you ask a seasoned investor to boil success down to one sentence, they’ll probably say “buy low and sell high.” Ask them to simplify even more, and they’ll say “buy value” – which usually correlates with buying something when its cheap. If we flip these maxims around then the worst kind of investing is to buy high. Expensive things do occasionally become more expensive –  but with greater risk.

I have always been weary of buybacks, going all the way back to the last buyback boom before the financial crisis. My concern then was that by purchasing shares management was making a declaration, that this is a good time to buy our stock, as opposed to the past or the future. But if management knows that then it knows how to time the market, and if management knows how to time the market, then it’s better off running a hedge fund. Since management is instead running a company, it should focus on what it was hired to do and leave the stock market alone.

Taking the practice to a more extreme measure, many large companies today are tapping the debt markets, borrowing money at record low rates and using the proceeds for buybacks. The practice is popular among blue chip companies like Apple and Microsoft, who despite their cash heavy balance sheets prefer the tax efficiency of financing buybacks with debt. The old me would find such a practice even more unwise, as it entails timing two markets at once, a feat even a seasoned hedge fund manager would have trouble pulling off. But the old me didn’t understand how buybacks really work.

To call an action market timing is to imply participants care about price. They are buying today because today offers a good price whereas tomorrow might not. But executives doing buybacks don’t care about price. We know this because new buybacks are not announced with any limitations on share price. We are going to buy back $2 Billion worth of shares in the next quarter. What happens if share prices rises drastically beforehand? Management doesn’t care.

We also know this because currently, with the stock market at all time highs, new buyback announcements have gone parabolic to amounts never seen before. The current level of buying recently surpassed that of 2007, at the previous peak of the market.

 

But the buying has not been continuous, as companies took an extended break during the financial crisis while stock prices fell drastically. If you chart buybacks versus the overall stock market in the past 10 years you’ll find a neat correlation.

For over a decade now corporate management has been doing the exact opposite of what constitutes good investing. If you include the fact that some of the companies buying back shares before the crisis were selling shares to raise capital during the crisis, and are now buyers again, then management has been buying high to sell low to buy high again.

If you acted similarly in any other walk of life you would be the subject of ridicule and featured in finance books on what not to do. Imagine walking into a dealership and saying “I am going to buy this car, regardless of what price you quote me.” Then imagine selling that car at half the price, only to eventually buy it back at a premium.

On Wall Street however such behavior is now the norm. Take the example of Royal Dutch Shell, which recently announced the acquisition of BG Group. The deal is mostly financed by Shell issuing new shares. It’s said to be accretive next year, as in increasing the company’s earnings and presumably its stock value. It also comes with a plan by Shell to buy back millions of its own shares in 2 years. So the company has promised to sell something today, drive up its value tomorrow and then buy it back next week.

All of this would be laughable if not for the consequences. The net amount of buybacks executed in recent years has now surpassed $2 trillion. That’s $2 trillion in capital spent on an activity that at best creates no value and historically has destroyed it. As our business leaders continue to speculate on why the current recovery refuses to kick into high gear, they should look at wasteful buybacks as one possible impediment.

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The timing of the release of The IMF’s ‘Greece needs a debt haircut no matter what’ report this week was odd to say the least. Being as it confirmed everything the Greek government has been saying and provided the perfect ammunition for Tsipras to spin Sunday’s Greferendum as a Yes/No to debt haircuts – something everyone can understand (and get behind). It is understandable then that, as Reuters reports, Greece’s eurozone allies tried to block the release of the damning report this week but the Europeans were heavily outnumbered and the United States, the strongest voice in the IMF, was in favor of publication, sources said. While The IMF concluded, “Facts are stubborn. You can’t hide the facts because they may be exploited,” one wonders if this move merely reinforces Goldman’s concpiracy theory.

Euro zone countries tried in vain to stop the IMF publishing a gloomy analysis of Greece’s debt burden which the leftist government says vindicates its call to voters to reject bailout terms, sources familiar with the situation said on Friday. As Reuters reports, publication of the draft Debt Sustainability Analysis laid bare a dispute between Brussels and the Washington-based global lender that has been simmering behind closed doors for months.

At a meeting on the International Monetary Fund’s board on Wednesday, European members questioned the timing of the report which IMF management proposed at short notice releasing three days before Sunday’s crucial referendum that may determine the country’s future in the euro zone, the sources said.

 

There was no vote but the Europeans were heavily outnumbered and the United States, the strongest voice in the IMF, was in favor of publication, the sources said.

 

The Europeans were also concerned that the report could distract attention from a view they share with the IMF that the Tsipras government, in the five months since it was elected, has wrecked a fragile economy that was just starting to recover.

 

“It wasn’t an easy decision,” an IMF source involved in the debate over publication said. “We are not living in an ivory tower here. But the EU has to understand that not everything can be decided based on their own imperatives.”

 

The board had considered all arguments, including the risk that the document would be politicized, but the prevailing view was that all the evidence and figures should be laid out transparently before the referendum.

 

“Facts are stubborn. You can’t hide the facts because they may be exploited,” the IMF source said.

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Quite simply this should be horrifying to not just The Greeks (who just discovered their supposed ‘allies’ tried to hide the truth from them and in fact negotiated in bad faith) but to all Europeans who by now must realize the union is not for them, it is for the few ruling elite and their corporate and banking overlords.

Isn’t it time to Just Say No, if not to anything else than to being controlled by an unelected cabal of oligarchs whose only interest is making sure the wealthy get wealthier?

Of course, taking a step back from the table, it is clear that a forced decision by Washington against the interests of its European allies – that is likely to engender more chaos and strengthen Greece’s ability to destabilize Europe – must have been done for ‘another reason’. Perhaps after all is said and done, the powers that be need chaos, need instability, need panic in order to ensure the public gratefully accept the all-in QE-fest that they want.

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