Productivity, Robots, China, Growth

On April 18, 2015, in , by aboguypoe


Congratulations. You are more productive than ever. Just don’t expect to be paid more for it. In reality, some machine is doing all that for you.

Japan Times reports Robots Leave Behind Chinese Factory Workers

According to the International Federation of Robotics, an association of academic and business robotics organizations, China bought approximately 56,000 of the 227,000 industrial robots purchased worldwide in 2014 — a 54 percent increase on 2013. And in all likelihood, China is just getting started. Late last month, the government of Guangdong Province, the heart of China’s manufacturing behemoth, announced a three-year program to subsidize the purchase of robots at nearly 2,000 of the province’s — and thus, the world’s — largest manufacturers. Guangzhou, the provincial capital, aims to have 80 percent of its factories automated by 2020.

The government’s involvement in this process shouldn’t come as a surprise. The Chinese government (nationally, and in Guangdong) has long wanted to shift the country’s manufacturing away from low-quality products that are manually assembled and toward higher-value ones — like automobiles, household appliances and higher-end consumer electronics — that require the precision of automation.

And it’s no secret that demographics aren’t on the side of China’s traditional, labor-driven factories. Urbanization, population control policies, and cultural shifts have pushed China’s average birth rate below those in more developed countries like the United States. Meanwhile, as a result of growing urban affluence, workforce participation rates are in decline, especially among women. Together, these factors are pushing wages upward, with an average annual increase of 12 percent since 2001. That trend offers plenty of incentive to factory owners and government officials to pursue automation.

Of course, what looks sensible from the perspective of the economic planner’s office is more distressing from the factory floor. In March, Caixin, a Chinese business magazine, reported that Midea, a major Chinese manufacturer of air-conditioners and other appliances, plans to cut 6,000 of its 30,000 workers in 2015 to make way for automation. By 2018, it will cut another 4,000. What will happen to those and the millions of other low skill workers who will be displaced by the shift?

When Foxconn, the contract manufacturer for many Apple products, announced in 2011 that it was beginning a three-year program to replace some of its workers with as many as 1 million robots, the company said it was doing so out of a “desire to move workers from more routine tasks to more value-added positions in manufacturing such as R&D.” But even if those intentions were sincere, Foxconn never gave any indication that it would have enough higher-skilled positions to employ every displaced iPhone assembler.

Still, it’s easy to see how China’s millions of low-skill workers might still be left with an uncomfortable sense of impending obsolescence — a sense not unknown to their working class counterparts in more developed economies.

Their best hope is the simple fact that China’s economy continues to grow. True, at a projected 7 percent for 2015, the country is not growing as fast as a decade ago. But that should be plenty fast enough for China’s shrinking labor force to find other opportunities, and avoid competing — for now — with China’s inevitable robot workforce.

Growth Hope Not the Answer

If China’s best hope is growth, then China has little hope.

Two to three percent growth is the best China can hope for, on average, over the next decade or so. Growth in robots though, is here to stay.

Chinese growth (global growth too) is headed one way, lower, and at a faster pace than most think. The key problems are debt, demographics, and asset bubbles.

Mike “Mish” Shedlock

Tagged with:


Submitted by Rebecca Miller via The National Interest,

The conservative German daily Die Welt, well-known for its unflinching support for Israel, recently published an article stating “with near certainty” that the Federal Republic of Germany, or West Germany, helped finance Israel’s nuclear program in the 1960s.

According to the Welt report, in 1961 West Germany agreed to loan $500 million to Israel over ten years. Although the official purpose of this funding was said to be the development of the Negev Desert— where Israel’s Dimona nuclear reactor is located— it is widely suspected that the money was actually meant to finance Israel’s nuclear weapons program.

This agreement was reportedly hatched during a 1960 meeting between then-Israeli Prime Minister David Ben-Gurion and German Chancellor Konrad Adenauer at the Waldorf Astoria hotel in New York City. Franz Josef Strauss, a former West German defense minister, previously claimed Ben Gurion and Adenauer discussed Israel’s nuclear weapons program during a meeting in Paris in 1961.

This top secret initiative was reportedly named “Aktion Geschäftsfreund,” which translates as “Operation Business Partner.” It bypassed both the Israeli cabinet and the German parliament, with the money being funneled through Kreditanstalt für Wiederaufbau, a West German-government owned development bank.

The Welt report comes after former Israeli President Shimon Peres (who was the head of Israel’s nuclear-weapons program at the time of its inception in the 1950s) denied that funding for Israel’s nukes came from Germany earlier this month.

The Welt article dismissed this denial, however, arguing that when it comes to German-Israeli cooperation on nuclear weapons, secret-keeping is part of the game. (Indeed, the practice—or art, rather—of secret-keeping with regards to sensitive matters of defense should be expected of any regime, nuclear or otherwise.)

Israel first began constructing a nuclear reactor in the Negev Desert near a town called Dimona in the 1950s. U.S. intel revealed the existence of the Dimona reactor in 1960 (although the U.S. knew of the reactor much sooner, new archival releases show). This prompted a statement by Prime Minister Ben Gurion that the reactor was purely for non-military purposes. Hardly anyone in the international community believed this was its true function.

Peres has stated that $40 million of Israeli government funding was going toward the Dimona reactor, but that this was only half of the amount necessary to complete the project. This prompted questions about where the other half of the money was coming from. Peres’ statement, according to Welt, is the only one that indicated that international donors contributed funds to the program (although it has since been revealed that some private American citizens helped fund the program).

The suspicion that West Germany was involved in financing Dimona first emerged when Ben Gurion made a background comment to an Israeli newspaper that a confrontation with Adenauer’s government would disrupt the development of Israel’s nuclear deterrent, which was integral to Israel’s security and the prevention of future wars. 

Still, whatever the West German involvement was in Israel’s nuclear weapons acquisition, it is undeniable that France played the largest role of any foreign power. In 1957, following the Suez Crisis, Peres and representatives from France signed three confidential contracts that allowed France to establish a 24-megawatt heavy-water reactor in Israel, loan it 385 tonnes of natural uranium, work together with Israel on nuclear-weapons research and production and back the building of a processing plant for plutonium extraction. This came a year after Peres asked French defense minister Maurice Bourges-Maunoury: “What would you think if Israel were to establish its own potential for retaliation?”

Norway also provided Israel with 20 tons of heavy water, which was actually delivered by the United Kingdom.

Tagged with:


It appears the re-election of Rahm Emanuel as Chicago Mayor has done nothing to assuage concerns about the city’s insolvency. As Emanuel’s victory became more assured, credit risk (measured by the spread between Chicago Muni yields and Treasury yields) has soared from 180bps to over 240bps.



Furthermore, it has accelerated even more since the April 7th election. Recent statements by S&P that if the city fails to articulate & implement a plan by the end of 1015 to sustainably fund pension contributions, or if it substantially draws down reserves to fund contributions, they will likely lower the rating; has not helped (given that Moody’s already have Chicago at Baa2 – just 2 notches above junk).


Chart: Bloomberg


Tagged with:

Has The Fed Already Lost?

On April 18, 2015, in , by Tyler Durden


Submitted by Brian Pretti via,

Increasingly we live in a world of Now. Instantaneous access to digital real time data and news has simply become a given in our lives of the moment.

You may be surprised to know that the Federal Reserve has taken notice.


To the point, GDP data that routinely comes to us from the US Bureau of Economic Analysis (BEA) arrives after the fact. From the perspective of the financial markets and investors — who are always looking ahead and trying to discount the future — GDP data is “yesterday’s news.” Moreover, revisions to quarterly GDP can come to us three months after the original data release (with final revisions sometimes years later), essentially becoming an afterthought in terms of relevance to decision making.

Recently the Atlanta Federal Reserve has developed what they term a GDPNow model. This model essentially mimics the methodology used by the BEA to estimate real GDP growth. The GDPNow forecast is constructed by aggregating statistical model forecasts of the 13 subcomponents that comprise the BEA’s GDP calculation.

Private forecasters of GDP, such as the Blue Chip Consensus, use similar approaches to “forecast” GDP growth.  These forecasts are usually updated monthly or quarterly, but many are not publicly available, and many do not specifically forecast the subcomponents of GDP that speak to the character of the top-line number.

The Atlanta Fed GDPNow model acts to circumvent these shortcomings. By replicating the key elements of the data used by the Bureau of Economic Analysis, the new Atlanta Fed GDPNow model forms a relatively precise estimate of what the BEA will announce for the previous quarter’s GDP prior to its official announcement.  For now, the model is still young, but it’s beginning to be discovered more widely among the analytical community.

The reason I highlight this new tool to you is that I’ve incorporated it into my ongoing top down review of the US economy.  More important to “here and now” thinking is the current reading of this new model.  As you can see in the below chart, the current forecast by the Atlanta Fed for Q1 2015 US real GDP growth is 0.1%, up slightly from 0% at quarter end.  As is also clear from the chart, as of the end of the March, Blue Chip Economists were collectively predicting a 1.7% number, quite a differential relative to the Atlanta Fed’s real-time forecast:

Chart Source:  Atlanta Federal Reserve

Get Ready For More Economic Weakness

Why the sudden drop in the Atlanta Fed’s real-time forecast for Q1 2015 real GDP?

As we look at the underlying numbers in the model, we see recent weakness in personal consumption. Many had predicted an increase in consumption with lower gasoline prices, but that has not played out, at least not yet. Weakness in residential and non-residential construction has also played a part in the downward revision.  Weather on the East Coast has not been kind to builders as of late, but that’s a seasonal issue easily overcome by sunshine.  Also important, slowing in US exports and equipment orders meaningfully influenced the March drop-off in the Atlanta Fed model. 

We know global currencies have been weak, with the highlight over the last six months being the Euro.  With a lower Euro, European exports have actually picked up as of late. The message is clear, the strong dollar is beginning to negatively impact US exports. I do not see this changing anytime soon.  As you know, the importance of relative global currency movements has been a highlight of my discussions over the past half year.

Finally, durable goods orders (orders for business equipment) have been soft as of late due specifically to slowing in the domestic energy industry.  Again, a trend that is not about to change in the quarters ahead given dampened global energy prices.       

Like any model, the Atlanta Fed GDPNow model is an estimate. Whether Q1 US real GDP comes in near zero growth remains to be seen, but the message is clear: there is downward pressure on US economic growth singularly. This is set against a backdrop of already-documented slowing in the non-US global economy.

What Lies Ahead

Perhaps most germane to what lies ahead for investors in 2015 is what the US Fed will do in terms of raising interest rates, or not, if indeed the slowing the Atlanta Fed model predicts materializes. I believe this slowing the Atlanta Fed model shows becomes a real dilemma for the Fed this year and a potential perceptual issue for investors. The Fed has been backed into quite the proverbial corner. A slowing US economy, or otherwise, the Fed is going to need to start raising interest rates for one very important reason.

It just so happens that the end of the second quarter of 2015 will mark an anniversary of sorts.  It will be six years since the current economic expansion in the US began.  As of July, ours will be tied for the fourth longest US economic expansion on record (since the Fed began keeping official track in 1945).  There have been 11 economic expansions over this period, so this is no minor feat. 

The second quarter of this year will also mark the six and a half year point for the US economy operating under the Federal Reserve’s zero interest rate policy.  You’ll remember during the darker days of late 2008 and early 2009, the Fed introduced zero percent interest rates as an emergency monetary measure.  It was deemed acceptable as crisis policy.  At least as per Fed policy since, the current economic cycle has not only been one of the lengthiest on record, but apparently simultaneously the longest US economic crisis period on record as per the continuation of the crisis zero interest rate policy.  As we look ahead, the “crisis period” in the eyes of the Fed is coming to an end as they contemplate higher short term interest rates.

Although it still remains to be seen what the Fed will decide and when, there is one very important consideration that must be entering their interest rate policy decision making at this point in the economic cycle.  A consideration they will never speak of publicly.

The Key Question From Here

At some point, maybe sooner than later, the US economy will re-enter recession. Historically, that’s the time when the Fed would lower interest rates in attempt to spur economic growth. But today, interest rates are already at 0%. That’s what’s so dangerous for the Fed about its current ZIRP policy — it leaves no gunpowder left in the low-interest-rate bazooka. The Fed will enter its next battle defenseless.

This is clearly a situation the Fed wants to avoid, so raising rates — soon — is an urgent priority. But….practically, can the Fed (and other central banks) really raise rates now without killing the already-moribund global economy?

In Part 2: The Future Of Interest Rates, we delve into the Fed’s dwindling set of options and discuss what the most likely outcomes are, and what their implications will be. Some key questions explored include: could the Fed actually adopt a negative interest rate policy (NIRP), as we’re seeing elsewhere? And: is it already too late for the Fed’s next actions to matter?

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)



Tagged with:


Here come capital controls in Europe. Of that, I have little doubt. Actually, they are already here, both in legislative form and in action. Let’s walk through what they are, why they’re here, how they got here, and what you can do to avoid them.

What Are Capital Controls?

Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation’s government can use to regulate flows from capital markets (money) into and out of the country’s capital account. These measures may be economy-wide, sector-specific (usually the financial sector, ex. your bank). 

Why Are They Needed By Sovereign Countries?

In Despite What You Don’t Hear In The Media, It’s ALL OUT (Currency) WAR! Pt. 1, I discussed the “Trilemma”, as excerpted:

According to Wikipedia (and modified by us):

The Impossible trinity (also known as the Trilemma) is a trilemma in international economics which states that it is impossible to have all three of the following at the same time:

    1. fixed exchange rate (as attempted and failed by the Swiss and currently and unsustainably by the Danes)
    2. Free capital movement (absence of capital controls), as was the case in Cyprus before March of 2013 when capital controls were introduced
    3. An independent monetary policy – not capable by anybody in the EU save Germany due to the power of the Troika, yet all but Greece proclaim they are pursuing such.

It is both a hypothesis based on the uncovered interest rate parity condition, and a finding from empirical studies where governments that have tried to simultaneously pursue all three goals have failed. 

The Impossible Trinity or “The Trilemma”, in which three policy positions are possible. If a nation were to adopt positiona, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.

Put plainly, either balance sheets get burned trying to buy and sell currencies, capital controls are implemented, or QE (sovereign monetary policy) fails. Trying all three simultaneously has NEVER, EVER worked! Of course, according to the ECB, it’s different this time…


Guess what? Balance sheets are burned.

Realize why the ECB is doing this QE thing to the level that it is. Their banks are still in trouble, material trouble. Reference “Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe” from 5 years ago and tell me if you think its gotten better (Hint: pay very close attention to the countries these banks are domiciled in, capital controls data soon to follow several paragraphs below)…

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

 Well, it’s all relative. The banks are smaller, leverage is down – and that’s after 6 years of global QE, ZIRP and now NIRP, yet each and every bank is STILL big enough to collapse the country that it’s domicled in…

 Global Bank Risk as Determined by Veritaseum

With this in mind, let’s review the The Anatomy of a European Bank Run!

Below is a chart excerpted from our work showing the asset/liability funding mismatch of a French bank. The actual name of the bank is not at issue here. What is at issue is what situation this bank has found itself in and why it is in said situation. Both Lehman and Bear Stearns collapsed from the EXACT SAME PROBLEM! That problem is asset/Liabitlity mismatch.

bankrun diag

What many bank depositors who believe their bank deposits are actually cash don’t realize is that they are creditors to the bank – short term lenders. You bank accounts, time deposit accounts, CDs, checking and savings accounts are short term, UNSECURED loans to bank that uses said loans to engaged in significantly and materially more risky endeavors to generate profits. What sort of endeavors, you may ask? Well, as was the case with many French, Cypriot, Italian, Spanish and German banks, making real estate, corporate and government loans of a longer term to profligate nations such as Greece, for one. It’s good work of you an get it. Borrow from mom and pop savers at 25 basis points and lend to Greece at 23%. Good money, dude!

anatomy of a bank run

That is, until it becomes apparent that the money you lent Greece isn’t going to come back.

bankrun het map

Even that, in and of itself is not a problem since the fractional reserve banking system doesn’t really require you to have the money that you borrowed from mom and pop on hand to pay them all back. It works, until it doesn’t. When mom and pop figure out what you’ve done with their money by reading and article such as this, that’s when the stinky brown stuff hits the fan blades. You get a run on the bank as everyone tries to get those overnight, and 1 and 2 month deposits out – at the same time.

This is what happened to Bear Stearns and Lehman, literally overnight – although the signs were available months beforehand if you paid attention. I predicted both of these collapses at least 60 days before they occurred:

  1. The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear? 

  2. The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman’s hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following Bear Stearns. The question is, “Can they monetize those hedges?”. I’m curious to see how the options on Lehman will be priced tomorrow. I really don’t have enough. Goes to show you how stingy I am. I bought them before Lehman was on anybody’s radar and I was still to cheap to gorge. Now, all of the alarms have sounded and I’ll have to pay up to participate or go in short. There is too much attention focused on Lehman right now.

 Why are these bank metrics significant?

Well, the obvious answer is they can collapse the economy of the countries they’re domiciled in. The less obvious answer is what sovereign nations are willing to do to prevent that. Hint: It’s not significantly reducing the risks of the banks, nearly all of which are larger and more dangerous than they were in 2007! To get the answer, let me refer you to a post made in the forum two years ago.

First Off Let’s Make Bank Collapse Real…

To begin with, let’s make this Cyprus thing real, by showing a live example of what happens to a real small business that had the gall to bank with Laikie Bank in Cyprus. Look at the timeline of events:

February 10, 2013: The Financial Times comes out with an article that is not nearly as detailed and instructive as this one, yet still quite alarming.

    1. A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the country’s sovereign bonds, according to a confidential memorandum prepared ahead of Monday’s meeting of eurozone finance ministers.

      … The new plan has not been endorsed by its authors in the European Commission or by individual eurozone members. The memo warns that “the risks associated with this option are significant”, including a renewed danger of contagion in eurozone financial markets, and premature collapse in the Cypriot banking sector.

    2. … The radical proposal is intended to produce a more sustainable debt solution for the country, cutting the size of Cyprus’s bailout by two-thirds – from €16.7bn to only €5.5bn – by involving more foreign depositors and bond holders. 

    3. … By “bailing in” uninsured bank depositors, it would also involve more foreign investors

    4. Senior EU officials who have seen the document cautioned that imposing losses on bank depositors and a sovereign debt restructuring remain unlikely. Underlining the dissuasive language in the memo, they said that bailing in depositors was never considered in previous eurozone bailouts because of concern that it could lead to bank runs in other financially fragile countries.

    5. But the document also makes clear that both options remain on the table despite public insistence by eurozone leaders that Greece was “unique” and would be the only country to default on sovereign debts.

    6. Labelled “strictly confidential” and distributed to eurozone officials last week, the memo says the radical version of the plan – including a “haircut” of 50 per cent on sovereign bonds – would shrink the Cypriot financial sector, now nearly eight times larger than the island’s economy… [The charts posted above shows the Bank of Cyprus as a % of GDP is still smaller than Italian, Spanish and British banks. If Cyprus is/was at risk, then logic dictates those areas are even more at risk, no?]

    7. Cyprus’s bailout, while small compared to Ireland, Portugal and Greece, has proven unexpectedly difficult because its size relative to the country’s gross domestic product would increase debt to levels considered unsustainable both by the International Monetary Fund and the German government.

Here are excerpts from the comments section said article:

gntimus Feb 18, 2013

It’s been a tradition by British media to secreted venom towards Cyprus in order to degrade the island and it’s people. These so called secret memorandums and information that the “FT” has been leaking recently are anything but a coincidence. It is obvious to me that the ulterior motive behind there comments are mostly attributable to the Russian Deposits in the island and of course to the huge gas and possibly oil reserves hidden off the south coast of Cyprus within the EEZ. The bureaucrats of Troika are well aware that the revenues from the gas and oil reserves are multiples to the amount required to keep the Cyprus economy afloat, even in the worst case scenario (EUR 17.5 Billion). So, why would Cyprus need a haircut not just on Government Bonds but also on deposits? (This is outrageous) 


philani33 Feb 11, 2013

I am amazed that FT is willing to post such articles especially when on the face of the article is clearly says that it has not been endorsed by its authors.

UoMCYstudent Feb 11, 2013

The Foreign Minister of Cyprus has stated early today that this article is not supported by any probable scenario. 


a greek Feb 11, 2013

Under a shamefully deceiptful title you say this: A not-so-confidential memo that you say you saw examines three theoretical options for the financial rescue of Cyprus. One of them, that would force losses on depositors, was not endorsed even by the memo’s authors, or anyone else, presumably it was put among the three as a theoretical example of the impossible. Yet, once it is printed in the FT, it becomes news, all nuance of non-endorsement and impossibility lost.
Although its editorials are generally balanced and constructive, the FT has printed thousands of articles trashing the euro since 2009. But this one sets a new record low for deceipt, scaremongering and underestimating the intelligence – nay, the reading ability – of its readers. Our trust is the FT’s capital, and you have squandered it.


FionaMullen Feb 11, 2013

@Idalion Yes they mean expropriation of private money from what should be the safest form of keeping it other than under the mattress. And it doesn’t just mean don’t keep your money in Cyprus. It means don’t keep it in the eurozone


March 25. 2103 (roughly a month and a half later), the Cypriot government accepted a Troika bailout under the conditions it confiscate the capital of depositors with accounts over 100,000 euro.

From the Bitcoin forum I excerpt a post that puts things into perspective, re: bank account confiscation:

Most of the circulating assets on our business Current Account are blocked. Over 700k of expropriated money will be used to repay country’s debt. Probably we will get back about 20% of this amount in 6-7 years. I’m not Russian oligarch, but just European medium size IT business. Thousands of other companies around Cyprus have the same situation. The business is definitely ruined, all Cypriot workers to be fired. We are moving to small Caribbean country where authorities have more respect to people’s assets. Also we are thinking about using Bitcoin to pay wages and for payments between our partners.

Laiki Bank has offered details…

DecreeEN Page 1

DecreeEN Page 2

DecreeEN Page 3

Let me make this clear. Roughly 50 days, from concept to confiscation of euros. This is not a long drawn out process, it’s something that can happen very quickly. Bear Stearns collapsed over the weekend. Laiki Bank had a “bank holiday” weekend. And Lehman… Watch out for those weekends, y’all!

Next, Let’s Realize That Cyprus Is Not A “Special Case”, It Is Like The Template For Future Actions

Just the fear of another wave of bank collapse has government officials and regulators in fear. Why are they afraid? I made the cause of such fear clear to all as the Keynote Speaker at the ING Valuation Conference in Amsterdam in 2011.

With the knowledge contained in the video above, it’s not hard to see the Infection spreads to North America as The Canadian Government Offers “Bail-In” Regime, Prepares For The Confiscation Of Bank Deposits To Bail Out Banks! Hold on, before you start worrying about your Canadian bank, you should be aware that the EU banks are still much, much, much worse off. Let’s forget Cyprus for a minute and look deeper into the EU. This is a tweet from Edward Harrison, the producer of the BoomBust TV show (no relation to BoomBustBlog) and author of

EU Capital Controls

Governmental Debt Assumed From “Too Big To Fail” Banks Are The Levers of Bail-ins. Liqidity Crises Born From Asset/Liablity Mismatches Are the Impetus 

Look at the government debt to GDP level that caused the Troika to act in the case of Cyprus, re: Capital Controls

Cyprus euro-area-government-debt-to-gdp

Source: Trading Economics

Basically, once you pierce the EU area average AND have an oversized banking industry relative to GDP, expect a HIGH probability of capital controls in the form of a bail-in, etc. The problem is, there are a lot of EU residents and foreign entities that lend unsecured money (in the form of check, savings and demand deposite accounts) that are highly susceptible to getting “Cyprus’d”. Check it out:

albania euro-area-government-debt-to-gdp

Croatia euro-area-government-debt-to-gdpFinland euro-area-government-debt-to-gdpFrance euro-area-government-debt-to-gdpGreece euro-area-government-debt-to-gdpItaly euro-area-government-debt-to-gdpKhazikstan euro-area-government-debt-to-gdpLuxemboourg euro-area-government-debt-to-gdpNetherlands euro-area-government-debt-to-gdpRomania euro-area-government-debt-to-gdpRussia euro-area-government-debt-to-gdpSlovakia euro-area-government-debt-to-gdpSpain euro-area-government-debt-to-gdpUkraine euro-area-government-debt-to-gdp 

If you have money in bank accounts (in other words, you are an unsecured lender) in any of these countries, you literally have a fiduciary responsiblity to yourself to read the remainder of this article. 


Capital Mobility & Banking System Bail-in Protection via Veritaseum “Smart Contracts”

Parties who are domiciled in free flowing capital hostile states that have tight capital controls, ex. China, India, have banned or limited BTC trading by banks and/or individuals can take advantage of Veritaseum contracts to gain multi-currency exposure without violating the law (this is not legal advice, and the counsel of an attorney is strongly recommended). Take note that the systems with the tightest capital controls have been the one’s exhibiting the most aggressive stance to bitcoin. Unfortunately, they don’t seem to understand what Bitcoin is and what it can do. Fortunately for those that seek relief from capital controls, they don’t understand what smart contracts can do.

Cyprus banks closed on a Friday and announced confiscation of bank assets over the weekend. Veritaseum contracts could have been used to move monetary value outside of the Cyprus banking system assuming the participants had a store of Bitcoin (it is rumored that this is how some of the Russian money was removed over the weekend). 

Let’s assume a small businessman would like to purchase 150,000 EUR worth of bitcoin, yet is concerned that the BTC volatility may cause more of a loss than the Cypriot capital controls (highly unlikely, since the Cypriot capital controls resulted in 100% losses for large depositors). He buys the BTC then hedges his large BTC position into EUR. He proceeds to do that with a quarter of his monthly cash flows, building up a sizeable, fully hedged position in cyberspace and on the blockchain (thus, effectively offshore as it relates to the legacy bankings system) and outside of the fragile Cyprus banking system. 

The Cyprus banks pull the trigger to confiscate funds and the Russian bank depositor has significant funds mobile and ready to deliver anywhere in the internet connected world within minutes, even on a Sunday afternoon. 

How To “Bail-in Proof” Your Money, a Step-by-Step Tutorial

  1. Make sure you computer is clean – Malware, Virus and Trojan Free. Start with a brand new, unused computer if you can. Preferably, in the original packaging, unopened. If that is not practical from a financial or logistical perspective, thoroughly clean the computer that you are going to use with a deep (not quick scan) scan from a prominet anti-virus software vendor (ex. NortonAVGKapersky).
  2. Ensure your privacy to the best of your ability. Install a compounding VPN system on your machine from a vendor that DOES NOT log your activity (ex. AIRVPNFREEDOMELIQUIDVPN), and get it up and running.
  3. Prepare your machine. Download the Oracle version of Java runtime on your machine if you don’t already have it. 
  4. Install Veritaseum’s Smart Contract Aware, Value Trading Wallet – Go download menu at the top of the screen and select Veritaseum Wallet, then the flavor of your choice. It’s also recommended that you download the quick start tutorial as well.
  5. Download veritaseum
  6. Open the wallet in “Live Mode”, go to the wallet tab on top and copy out your wallet’s address.
  7. wallet address
  8. Convert your fiat (government controlled) currency for bitcoin: Go to an exchange or BTC onramp provider to convert your fiat (likely EUR or USD in this case) to BTC (Bitcoin). Some popular services are (CoinbaseLocal Bitcoins). Once BTC is obtained, send your bitcoin to our Veritaseum wallet via your copied address.
  9. Create a Veritaseum Contract that suits your situation: Click the “Markets” tab to create a contract that exchanges the value of you BTC from your native currency (presumably EUR) to the currency, currency pair, or asset exposure of your choice for the time period you wish it to be for (this is where the quick start tutorial comes in handy). In the example below, you will be selling (paying) the value of EUR for the value of USD for 45 days. Keep in mind, you can also trade the value of BTC for EUR, or EUR for the value of gold (GLD) which may retain its value relative to the EUR should additional bank bail-ins arrive. You have a choice of over 45,000 ticker exposures in all asset classes (bonds, stocks, forex, commodities and indices) from any major exchange in the world. You can even do forex pairs and use leverage to mute the effects of BTC price fluctuation. 
  10. USD for EUR value trade
  11. Wait for your contract to be accepted by a counterparty. Once accepted, it will be listed in your trades page like this…
  12. List of contracts
  13. Remember, your funds are not “in contract” until someone takes the other side of the trade. Even without someone taking the other side of your trade you still have liberated your capital into the blockchain, where capital controls and bank holidays literally do not exist. Your money can be transferred to another location, either next door or to the other side of the world, within minutes and for pennies – literally!  
  14.  send funds

 Due to the weakness of the euro relative to the dollar, I see ample liqudity in the EUR/USD contracts. I will personally oversee it. So, come one and come all. Liberate your (likely) soon to be capital controlled capital (euros). 

Important to remember:

  1. You are not exchanging physical euros for dollars. Veritaseum contracts are derivatives that give you the price movement of whatever it is you are contracted for. Thus you the equivalent of dollar/euro movement added to your bitcoin balance at the end of the contract, just as if you sold euros to buy dollars (or whatever asset combination you chose to employ.
  2. We are a software and research firm, not a financial institution. At no time at all do you have any exposure to our balance sheet (like Bank Laiki, Bear Stearns or Lehman).
  3. You are not, and never do, send your money or capital to us. Your tranactions are totally peer-to-peer from a monetary perspective. You either have you money in your private wallet (which you have, not us), or on the blockchain (the fortified cloud), at all times. When on the blockchain, all you need to do is click the “track transaction” button to see exactly where on the blockchain it is, the path it took to get there, and how long it has been there.
  4. Bitcoin has material price volatility and this platform is in beta status. We have methodologies to mute bitcoin volatility. Email us for more details or search our site.

We believe this system is considerably safer than any bank out there.

 If you’ve read to the end of this article, you are obviously interested. I will assist anybody interested in mobilizing their capital. Anything mentioned in this article our team will assist with for free. More advanced techniques and strategies require a Veritas purchase. Learn more about Veritaseum or contact us to get started now.




Tagged with:


In light of the most recent GDP data out of China which showed the economy growing at the slowest pace in six years, we thought it time to revisit what we recently called “the flowchart for what is in store for the world for the next 12-24 months.” As we noted in early March, China faces a decelerating economy and a currency conundrum, the combination of which may eventually leave the PBoC with little choice but to first cut rates to zero then engage in outright QE.

In short, China needs to devalue in order to counter weakening economic growth and slumping exports. Maintaining the dollar peg at a time when the dollar is surging has led to double-digit REER appreciation for the yuan, a decisively undesirable outcome for the country’s export-driven economy in the face of still sluggish global demand. Additionally, this is all serving to hamper the PBoC’s existing liquidity easing efforts. Here’s Barclays summing up:

CNY overvaluation is getting more extreme, with USDCNY remaining relatively stable while trade partner currencies fall sharply versus the USD. Our BEER model estimates that the CNY is around 20% overvalued, making it one of the most expensive currency globally.


FX intervention to limit CNY weakness (ie, selling USD) is having the effect of tightening domestic CNY liquidity. The PBoC does have room to cut the reserve requirement ratio (RRR) rate to offset the liquidity impact of FX intervention, as the current RRR level of 19.5% is high by historical standards – the ratio was as low as 6% in 2002. However, a further drain of liquidity may not be appropriate if a step-up in monetary easing is needed to counter a sharper growth slowdown and to bring down elevated funding costs. 


The global recovery remains uneven and desynchronized, with the US being the sole engine of growth. While China’s exports are so far performing better than other EM Asian economies’, the recent sharp CNY REER appreciation might have a dampening effect on Chinese exports to countries apart from the US. 

Long story short: preventing CNY depreciation is becoming very, very costly in a world characterized by a strengthening USD and still raging currency wars across DM central banks. This has fueled speculation that China, no longer able to take the economic pain, will eventually give in, and that expectation has in turn fueled capital outflows. Of course capital outflows may make it more difficult to devalue (you don’t want to throw fuel on the fire), which means that in the end, China is stuck with few options and as JPM outlines, Q1 marked the fourth consecutive quarter of capital outflows bringing the total to $300 billion over the period. Here’s more:

Chinese FX reserves were depleted for a second straight quarter, by $70bn cumulatively during Q4 2014 and Q1 2015 as China supported its currency. At the same time a current account surplus in Q1 combined with a drawdown in reserves suggests that capital outflows from China continued for the fourth straight quarter…


This brings the cumulative capital outflow over the past four quarters to $300bn. Again, we deduct capital inflow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate. The last time China suffered such pace of capital outflows was during 2012 when $165bn of capital left during the last three quarters of that year. And before then it was during the Lehman crisis when China suffered capital outflows, but much smaller in size (around $60bn of capital left China during the second half of 2008). So the 2012 capital outflow episode is more comparable in size to the current one…


The capital outflow appears to be driven by the more volatile “Other Investment” item in balance of payments. And within this item there are three components that saw the most significant swing during China’s most recent capital outflow episodes, i.e. the last three quarters of 2012 and the past four quarters (from Q2 2014 to Q1 2015): “short term trade credits” within foreign assets, “currency and deposits” within foreign assets and “short term loans” within foreign liabilities. The first component averaged -$10.5bn per quarter outside the above two episodes and -$26.0bn per quarter during the two episodes. A negative sign means that Chinese companies extended short term trade credit to foreign companies, which is equivalent to Chinese companies lending to foreign entities. In other words during the past two capital outflow episodes Chinese companies or the subsidiaries of foreign companies in China appear to have used trade credits to increase their long dollar exposure or to reduce their long renminbi exposure..


The second component, “currency and deposits” in foreign assets, averaged – $15.3bn per quarter outside the two episodes and -$28.0bn per quarter during the two episodes. A negative sign implies a capital outflow ? i.e. it means that during the past two capital outflow episodes Chinese companies or the subsidiaries of foreign companies in China held on to their foreign currency and boosted their dollar or foreign currency deposits…


The third component, “short term loans” in foreign liabilities, averaged $18.7bn per quarter outside the above two episodes and -$23.4bn during the two episodes; i.e. it experienced an even bigger swing that the first two components. A positive sign implies borrowing of Chinese residents from abroad (a capital inflow) while a negative sign implies repayment of foreign loans by Chinese residents (a capital outflow). The deterioration of this item is thus likely caused by 1) foreign residents reducing their renminbi deposits or previously extended short term loans to Chinese entities or 2) Chinese companies unwinding previous short dollar exposure by repaying foreign currency loans to foreign banks, e.g. Hong Kong banks. 



And while JPM believes the above does not “suggest that a new trend of broad-based capital outflows is emerging in China” but rather reflects “opportunistic currency and interest expectations,” it most certainly underscores the precariousness of the situation if you’re Beijing, or, as we have put it on a number of occasions: “devalue too much, and the capital outflows will accelerate, not devalue enough, and the mercantilist economy gets it.” Whether this rather untenable situation ultimately deadends in Chinese QE remains to be seen but given the economic situation, China may have no choice but to devalue especially once the country’s margin-driven equity bubble distraction comes to an unceremonious end.

Some Saturday morning headlines to ponder as you consider all of the above:



Tagged with:

Take Note: 2008 Was the Warm Up

On April 18, 2015, in , by Phoenix Capital Research


The 2008 crash was a warm up.

Many investors think that we could never have a crash again. The 2008 melt-down was a one in 100 years episode, they think.

They are wrong.

The 2008 Crisis was a stock and investment bank crisis. But it was not THE Crisis.

THE Crisis concerns the biggest bubble in financial history: the epic Bond bubble… which as it stands is north of $100 trillion… although if you include the derivatives that trade based on bonds it’s more like $500 TRILLION.

The Fed likes to act as though it’s concerned about stocks… but the real story is in bonds. Indeed, when you look at the Fed’s actions from the perspective of the bond market, everything suddenly becomes clear.

Bonds are debt.  A bond is created when a borrower borrows money from a lender. And at the top of the financial food chain are sovereign bonds like US Treasuries.

These bonds are created when someone lends the US money. Why would they do this? Because the US SPENDS more money than it TAKES IN via taxes. So it issues debt to cover its extra expenses.

This cycle continued for over 30 years until today, when the US has over $11 TRILLION in size. Because we never actually pay our debt off (or rarely do), what we do is ROLL OVER debt when it comes due, so that investors continue to receive interest payments but never actually get the money back… because the US Government doesn’t have it… because it’s still spending more money than it takes in via taxes.

This is why the Fed cut interest rates to zero and will likely do everything in its power to keep them low: even a small raise in interest rates makes all of this debt MORE expensive to pay off.

This is also why the Fed had the regulators drop accounting standards for derivatives… because if banks and financial firms had to accurately value their hundreds of trillions of derivatives trades based on bonds, investors would be terrified at the amount of leverage and the margin calls would begin.

The bond bubble is also why the Fed started its QE programs. Because by buying bonds, the Fed put a floor under Treasuries… which made investors less likely to dump bonds despite bonds offering such low rates of return.

This is also why the Fed is terrified of deflation. Deflation makes future debt payments more expensive. So the Fed prefers inflation because it means the dollars used to pay off debt down the road will be cheaper than Dollars today.

Again, when you look at the Fed’s actions through the perspective of the bond market… everything becomes clear.

The only problem is that by doing all of this, the Fed has only made the bond market even BIGGER. In 2008, the global bond market was $82 trillion. Today it’s over $100 trillion. And the derivatives market, of which 80%+ of all trades are based on interest rates (Treasury yields), is at $700 TRILLION.

The REAL Crisis will be when the bond bubble bursts. When this happens, it will be clear that real standards of living have been falling since the ‘70s and that sovereign nations have been papering over this through social spending and entitlements (a whopping 47% of US households receive Government benefits in some form).

Imagine what will happen to the markets when the Western welfare states finally go broke? It will make 2008 look like a picnic.

If you’ve yet to take action to prepare for the second round of the financial crisis, we offer a FREE investment report Financial Crisis “Round Two” Survival Guide that outlines easy, simple to follow strategies you can use to not only protect your portfolio from a market downturn, but actually produce profits.

You can pick up a FREE copy at:


Best Regards

Phoenix Capital Research






Tagged with:


Submitted by Thad Beversdorf via,

So the fundamental case for a 20 year bull run as BMO is calling for and  certainly many other banks seem to be onboard with that is not looking great YTD.  In fact, most perma bulls have shy’d away from even mentioning fundamentals other than to say that generally they aren’t looking great but don’t worry the Fed is still engaged.   And so I feel its a worthwhile exercise to have a look at the technicals.  Thing about the technicals is that you can cherry pick any baseline point to really make any case, good or bad.  But if we take a look at a time period that encompasses several cycles we negate our ability to cherry pick the baseline and we can be much more confident in our overall analysis.

So what I’ve done is taken a two decade period of S&P pricing which encompasses several cycles.  Mid 1990′s was a market mid cycle having recovered from the short recession of the early 1990′s but before things really began heating up in the late 1990′s.  If we just have a gentle look at the chart we see we’ve had a couple large cycles with fairly extreme booms and subsequent busts.  Currently we are in the midst of the third boom which has taken us to new all time highs.  Now even a 5 year old can look at the chart and say at some point this thing has a large down turn, same as it always does.  That’s easy to see and not many will argue it.  But as so many bulls remind us we could have said the same thing about this chart a year ago and we’d have missed out on significant returns.  Very true.  So the key is then figuring out where the down turn begins.  I know I know that’s the kind of stuff you have to go to biz school for eh.  Ok so let’s first have a look at the easy chart.

Screen Shot 2015-04-17 at 3.20.32 PM

So pretty simple.  Two full cycles and into the third which doesn’t tell us much.  Let’s add some markers to see if we can’t pick up on some technical cues.

Screen Shot 2015-04-17 at 2.39.28 PM

So what we’ve done is run a 2.5 standard deviation Bollinger Band (BB) using a 100 period moving average looking at monthly returns because we are interested long cycle technical cues.  We’ve also run Relative Strength Indicator (RSI) using 20 periods.  What we find is actually quite notable.  During the tech bubble cycle we saw the S&P rise to the upper BB where it tracked the upper band for some time.   During that same period we saw the RSI move above 70.  Now as the market peaked we saw the S&P move below the upper BB and we also saw a decline in RSI.  What is very interesting is that the point where RSI dropped below 70 is the point the tech bubble burst and sent S&P into a free fall.  The market continued to sell until the RSI dropped below 30 at which point the market stabilized and reversed higher.

This took us into the start of the credit bubble cycle.  Here the RSI move up very quickly and plateaued just below 70 for several years during which time the S&P moved up but never quite made it to the upper BB.  Then in 2007 the RSI moved above 70 but then quickly reversed back down below the upper band.  Interestingly again the RSI dropping below the upper band seemed to trigger the bursting of the credit bubble as we saw S&P again move into free fall.  Then here too we saw the market stabilize as the RSI moved through the bottom band.

And again this brought us into the latest Fed bubble.  Now during this latest cycle the RSI moved up but bounced off the upper band a few times without actually breaking through 70.  At the same time the S&P moved higher but with quite heavy volatility.  Eventually we saw the RSI move up and break through the upper limit.  It was about the same time that the S&P traded higher to the upper BB where it tracked for some time.  However, at the end of November 2014 the S&P started to dislocate and moving down below the upper BB.  And then ominously January of this year we saw the RSI also move below the upper RSI band.

Remember this technical signaled the popping of the past two bubble cycles.  Now February saw the RSI move back above the upper band but March moved back down below.  I would watch this very carefully now.  I would venture to say if April remains below the upper RSI band we could very well have moved into the latest and perhaps greatest period of wealth destruction. It is time to protect those assets.


Tagged with:

Dollar Bulls Bend, but Don’t Break

On April 18, 2015, in , by Marc To Market


The US dollar fell against other the major currencies and many emerging market currencies last week. Punished by disappointing data, it threatened to breakout of ranges that have confined it. However, the third consecutive upside surprises on core CPI helped the greenback stabilize ahead of the weekend. The price action reinforces our sense that after trending for several months, the dollar has entered a consolidative phase. Trading is choppy, and positioning is still stretched, but the divergence of monetary policy trajectories will likely prevent sharp dollar losses. 


The Canadian dollar may be an exception.  The combination of a less dovish central bank, higher than expected inflation and stronger than expected retail sales, coupled with the 30% rally in oil prices over the past month, sent the Canadian dollar sharply higher.  Indeed, the Canadian dollar was among the best performing major currency (2.6%), behind another petro-linked currency the Norwegian krone (3.4%) and Swiss franc (2.8%), where Grexit fears found succor.


Even though it was the biggest weekly advance in four years, the pre-weekend price action is potentially a bearish signal for the Canadian dollar (hammer).  The US dollar appears to have found support near CAD1.2080.  This corresponds to three standard deviations from the 20-day moving average (Bollinger Bands are two standard deviations from the 20-day average).  The CAD1.2300-30 area offers initial resistance, but it probably requires a move back above CAD1.24 to signal the breakout was false.   


The euro rallied three and a quarter cents of the low set at the start of the week near $1.0520.  It ran out of steam near $1.0850.  The RSI and MACDs are constructive, and the five-day moving average is above the 20-day.  Slow stochastics is crossing higher.   The broad range that has confined the euro for over a month now is seen $1.05-$1.1050.   The double top that we discussed last week has now been complimented with a double bottom.   


The cyclical recovery in the euro area, which is expected to be extended in next week’s flash PMI readings are largely offset by the ECB’s asset purchases and the drop in yields.  A little more than half of the outstanding German bunds now have negative yields, for example.  In addition, many perceive that the risks of a Greek EMU exit has increased. 


While the euro gained almost 2% against the dollar last week, the yen gained roughly half as much (1.1%) making it the worst major performer against the greenback.  The dollar was pushed to almost JPY118.50 before finding a decent bid.  The dollar shed about 2.25 yen last week from the high near JPY120.85 seen at the start of the week.  Technical indicators are not generating strong signals.  The weakness in global stocks and the drift lower in US Treasury yields may deter dollar buyers against the yen.   Since late-November or early-December, the dollar has been confined to a JPY116-JPY122 range.  Within that the JPY118-JPY121 denotes the near-term range. 


Sterling briefly traded above $1.50 before the weekend for the first time since the FOMC meeting on March 18, when it reached $1.5165.    Its 2.3% gain against the dollar was the biggest in several years.  It nearly posted a key reversal week:  It recorded a new low for the move down near $1.4565, taking out the previous week’s low, before rallying through the previous week’s high (~$1.4995).  It failed to close above there, however.    The technical indicators are supportive.  Our caution stems from political uncertainty as the election now is within three weeks.  


The Australian dollar rallied nearly 3 cents of the lows seen at the start of last week.  Despite its 1.3% net gain against the US dollar, it was the second poorest major performer after the Japanese yen.  The strength of the recent string of data, including the jobs report, has seen the market scale back expectations for an RBA rate cut next month.  The odds implied by the derivatives market has fallen from 80-85% to 55-60%.  To signal a breakout, the Australian dollar needs to rise above $0.7950, and ideally $0.8000.  It failed before the weekend near $0.7850.  Support now is seen in the $0.7700-$0.7730 band.   A break of $0.7665 would warn of a return to the lows near $0.7750. 


Oil prices rose to new highs for the 2015.  The June light sweet futures contract rose to almost $59.00.  It has been bumping against the top of its Bollinger Band, but the technicals are constructive, and higher lows were set each day last week.   The $57 level may offer support now, and the $60-$60.50 is the technical hurdle. 


US 10-year Treasury yields continue to trade in a roughly 1.83% to 2.0%.  Disappointing US economic data weighs on yields.  However, despite the decline in US yields, the premium over Germany widened.  The German 10-year yield is below eight bp and the US is near 1.90%. .  German yields are negative out through nine years.  Over half of German debt has a negative yields (~$8 bln) and in Europe, some $2 trillion of debt have negative yields. 


The S&P 500 is also in a range.  The range since early February is roughly 2040 to 2120.  At midweek, it tested the 2100, but broke down at the end of the week and slipped below 2080.  The technical indicators deteriorated , and the risk is additional losses at the start of next week.  A break of 2070 would warn of a move back to the lows of the range.  A break of the range would open the door toward 1980 the lows for the year. 



Observations based on the speculative positioning in the futures market:


1.  Position adjustments were mostly minor in the CFTC reporting week ending April 14.   Mexican peso futures accounted for the biggest adjustments.  The net position swung from short almost 23k contracts to being long 8.4k, for the first time since early last October.   This was a function of 21.3k new longs being established while the shorts covered 10k contracts.  Technically the dollar appears poised to retest the MXN15.50 area, putting the late longs at risk.


2.  Even though the gross position adjustment were small, speculators added to the gross long and short positions in the euro (5.8k and 2.9k respectively) and the Canadian dollar (0.9k and 1.5k respectively).  While they added to the gross long yen positions (1.5k), the gross short yen positions were essentially unchanged (less than 50 contracts).  Speculators continued to move to the sideline on sterling with both longs and shorts parted (3.6k and 1.9k respectively).


3.  The speculative net short 10-year Treasury was pared by 50k contracts to 112k.  This was more a reflection of new longs being established (48.1k) rather than shorts covering (-2.4k).



4.  The speculative net long light sweet crude oil futures grew by 30.1k contracts to 282.2k.  The longs rose by 7.1k contracts to 528k.  A little more than 23k short contracts were covered, leaving 245.8k.


Tagged with:


With Greece teetering on the edge of insolvency and forced to raid pension and most other public funds, ahead of another month of heavy IMF repayments which has prompted even the ECB to speculate Greece should introduce a parallel “IOU” currency, a white knight has appeared out of nowhere for Greece, one who may offer $5 billion in urgently needed cash. The white knight is none other than Vladimir Putin. “Just because Greece is debt-ridden, this does not mean it is bound hand
and foot, and has no independent foreign policy,” Putin said previously.

According to Spiegel, citing a senior figure in the ruling Syriza party, Greece is poised to sign a gas deal with Russia as early as Tuesday which could bring up to €5 billion into the depleted Greek coffers.

The move could now “turn the tide” for the debt-stricken country according to a senior Greek official.

As Reuters adds, during a visit to Moscow earlier this month, Greek Prime Minister Alexis Tsipras expressed interest in participating in a pipeline that would bring Russian gas to Europe via Turkey and Greece.

Under the proposed deal, Greece would receive advance funds from Russia based on expected future profits linked to the pipeline. The Greek energy minister said last week that Athens would repay Moscow after 2019, when the pipeline is expected to start operating.


Greek government officials were not immediately available to comment on the Spiegel report.

Of course, this being Greece, the probability of actual repayment is negligible: after all the likelihood of a Greek default is astronomical, and €5 billion will do little to change the mechanics of Greek debt sustainability. And Putin very well knows this.

However, the Russian leader is not acting out of the kindness of his heart, but merely engaging in another calculated move, one which kills two birds with one stone:

  • Following the death of the South Stream, whereby the EU pressured Bulgaria to refuse passage of the Russian gas pipeline to Europe, Russia needed an alternative route of bypassing Ukraine (and Bulgaria) entirely, something which according to Kremlin’s plan should happen over the next 3 years. And with Hungary and Serbia all eager to transit Russian gas to the Austrian central european gas hub, Greece was the missing link for a landline transit. With this agreement, Russia gets the green light to extend the Blue Stream all the way to Austria and preserve its dominance over the European energy market while leaving Ukraine in a completely barganining vacuum.


  • Perhaps just as importantly, suddenly Russia will energy as the generous benefactor riding to Greece’s salvation, in turn even further antagonizing the Eurozone and further cementing favorable public opinion. As a reminder, several weeks ago we showed that Russia already has a higher approval rating among the Greek population thatn the Eurozone. In this way, Russia has just won a critical ally for the very low price of just €5 billion, without even having to restructure the entire Greek balance sheet should Greece have exited the euro and been attracted to the Eurasian Economic Union. Which also means that all future attempts to impose further sanctions on Russia by Europe will fail thanks to the Greek veto vote.

Russia is not alone in seeking to divide the spoils of the collapsing Eurozone: Beijing has also sought to invest in Greece’s infrastructure and bought up €100m worth of short-term government debt last week the Telegraph reports.

Ironically, it was none other than Germany’s finance minister Wolfgang Schauble who said the Greeks are free to pursue deals with Russia and China as they rush to avoid an impending bankruptcy. Turns out the Greeks decided to do precisely as the German suggested, and the outcome will certainly not be to Germany’s liking.

The only question following what may well be another masterful stroke by Putin is what will Europe do, now that Putin has in the span of under one year, not only “annexed” Crimea but fully drawn Greece into its sphere of influence.


Tagged with:
Get Adobe Flash player