Monthly Archives: February 2017

World Political Change, International Economies & Markets

What’s going to happen in 2017? Who will the new political leaders be, how many more nations will exit the EU, how will negative interest rates and government debt affect world markets? How much currency can a nation print and how many bonds can they buy before the weight of their debt causes them to default? Will international disputes be negotiated or will these disputes escalate? We may very well find out the answers to these questions in 2017.

2016 was the year of “never happened before’s” and wrong bets. Brexit wasn’t supposed to happen, but it did. The EU was supposed to expand, but it contracted, as Switzerland, Sweden, Iceland and others withdrew their applications. The EU utopian idea of open borders and an end to the sovereign nations of Europe is gone, as borders are closed and many more referendums on exiting the EU are coming. Clinton was supposed to win, but Trump did. The US economy was supposed to have a growth rate of 2.8%, but it didn’t, and interest rates were supposed to be raised four times, but like the year before, they were only raised a quarter point in December. The Japanese economy was supposed to expand and the yen was supposed to devalue, but they didn’t, instead the yen rose and the BOJ dropped interest rates to negative.1%. Assad was supposed to be defeated and the rebels were supposed to create a democracy, but they didn’t, and now the Assad government is poised to retake control over Syria with the help of Russia.

Speaking of Russia, it was supposed to give back Crimea and be forced into submission by EU and US economic sanctions, but that didn’t happen. The Russian Central Bank bucked the trend of the other central banks of the world by raising their interest rates to 15% and took the hit to bring back their economy. In fact, Russia’s stock market had one of its best years ever, the Ruble was the best preforming currency against the USD in 2016, and Russia accomplished all of this without doing business with the EU or US.

Negative interest rates started in 2014, but negative yielding sovereign bonds and debt have never existed before until last year. Until 2016 governments and their central banks have only bought government bonds(sovereign debt), but Japan and the EU bought so many that they ran out of government issued bonds and started buying corporate bonds, and Japan has been buying ETFs as well. In fact, Japan and the EU governments are bordering on becoming controlling owners of public companies because of this, which has also never happened before. The problem with things that have never happened before is that no one has any idea what the ramifications will be. In other words, we have no idea what will happen next.

Massive Political Change & EU Shakings
It won’t be politics or business as usual in 2017. The current ruling elite, political leaders, parties and establishment structures are being rejected across the globe at breath taking speeds and proportions. France is going to be more pro France and less pro EU no matter which candidate wins, Fillon or La Penn, however if La Penn wins, a referendum and a potential French-exit is almost guaranteed. Italy’s prime minister just resigned in December and they have been in a banking crisis for the last nine months. Italy is very frustrated with EU regulations which prevent them from bailing out their banks and have been vehemently arguing with Germany over the last year. This, along with the immigration issue, could be enough to cause Italy to exit the EU; no doubt they, along with other EU nations, are closely watching the UK exit process and taking notes.

The Netherlands referendum & elections are coming up and both the anti-EU candidates and the EU exit referendum and are favored to win. Germany has been trying to keep the EU together, but is now having its own banking problems with its largest bank, Deutche Bank teetering on the edge of insolvency and having trouble recapitalizing. Germany has also been opposed to the ECB QE program from day one. To make matters worse German Chancellor Angela Merkel, the most prominent EU leader is running behind in the poles as well, due to her relentless support of open borders, and all the terrorist incidents resulting from her polices.

The UK and EU have been facing off aggressively, but can’t get off square one, which is immigration. The UK said immigration and full control of its borders is not negotiable and the EU says the UK must accept EU immigration rules and free movement with no borders to have free trade with the EU. Prime Minster May has decided to proceed with a hard Brexit which has driven the pound down, but it won’t stay there long, as May has already begun to negotiate deals with the US, China, Japan and others. A hard Brexit means the UK is going to exit the European Union single market and not take two years to negotiate an exit. In other words, the UK will focus its attention on trading with the rest of the world, even if the EU completely shuts them out of the European market. This is highly unlikely, because the EU stands to lose more than the UK and most of its members want to trade with the UK. Even more threatening to the EU is if the UK does not negotiate a gradual exit and continues to prosper, basically ignores the European Union, it would virtually guarantee more member nations leaving, ultimately resulting in the eventual disintegration of the EU.

European solidarity erupted in a full scale Ideological Civil War at the Davos Conference in Switzerland this month. Dutch Prime Minister Mark Rutte said, “The whole idea of an ever-closer Europe has gone, it’s buried,” and dismissing calls for full political union as a dangerous romantic fantasy. “The fastest way to dismantle the EU is to continue talking about a step-by-step move towards some sort of super state,” – ( Most of the current EU leaders are up for election and if the current polls hold, few will be re-elected. Bloomberg reported, Leaders in Spain and Germany voiced concern that the Europe Union faces collapse as a result of anti-establishment forces campaigning to tear down the bloc, singling out their common neighbor France as the potential trigger. The London Telegraph reported, “the eurozone must break up if its members are to thrive again,” according to a former European Central Bank official Jürgen Stark, who served on the ECB’s executive board during the financial crisis. “As long as the ECB gives a signal in its operations to governments that ‘we are the backstop’ and ‘we will prevent country ‘a’ or country ‘b’ from becoming insolvent’ – there will be no structural reforms,” he said. Many of the leading candidates are advocating leaving the EU, which will create more referendums. It looks very likely that the EU will have more nations exit in 2017, which will drive down the value of the euro, weaken its influence and lead to its eventual disintegration.

Eurozone Destruction Necessary if Countries Are To Thrive Again, Warns Former ECB Hawk (1-29-17)
France’s Neighbors Sound Alarm Over Election Catastrophe Risk (1-26-17)
May Faces Hurdles to Starting Brexit Talks After Court Rules (1-24-17)
Fillon Urges Merkel to Bring Russia in From Cold in Berlin Talks (1-23-17) Yahoo News
May Set to Defy EU by Opening Pre-Brexit Trade Talks With Others (1-23-17)
EU Populists See Trump Victory as Beginning of End for Old Order (1-21-17)
Ideological Civil War in Davos Dutch Premier Labels “Political Union a Dangerous Romantic Fantasy, Gone, Buried” (1-19-17)
Why Theresa May is Right to Take A Huge Gamble on Hard Brexit (1-18-17)
May Pledges Vote on Brexit Taking U.K. Out Of EU’s Single Market (1-17-17)
Renzi Quits as Italy Referendum Defeat Deepens Europe’s Turmoil (12-4-16)
First Brexit Then Trump Now Italy (12-3-16) Daily Reckoning
France Becomes Battleground for Protest Vote (12-2-16) Bloomberg Video
Gallo Euro Zone Break Up Risks Rising Next 6-12 Months (11-30-16) Bloomberg Video
Europe’s Next Unnerving Referendum QuickTake Q&A (11-25-16)

Central Banks
Things are not starting off well for the European Central Bank (ECB) in 2017. They have a growing shortage of short dated bonds, which can be used as collateral in repurchase agreements, however, their repo market is becoming more and more dysfunctional. Because the ECB has been buying so many bonds with its QE program, there are not enough bonds to go around. Bloomberg wrote:

“Demand for Core European Debt Intensifies ECB’s QE and repo policies have pushed yields down even further Source: (Bloomberg) Toward the end of December it became all but impossible to find offers to lend out core European government paper. Cash-rich foreign investors shifting into securities with higher yields and longer maturities, and investment funds’ usual year-end rotation out of equities and into fixed income, sapped supply for repo participants – neither of these buyers tend to lend their holdings.… Other regions, such as the U.K., have none of these issues, and their markets function smoothly. But they don’t have a clutch of bickering nations to contend with, and for euro-area money markets, that’s never going to change.” This is another reason for member nations to exit the EU. Bloomberg reported, annual price increases exceeding 2 percent in some states – and that German dissatisfaction with the ECB has morphed into frustration. Germany wants interest rates to go up now, but Spanish Prime Minister Mariano Rajoy expressed concern last week over a premature tightening, given that his nation still has about a fifth of its workforce standing idle, as EU disunity increases.

CNBC reported, the top 50 central banks around the world have seen a total of 690 interest rate cuts since the collapse of Lehman Brothers in September 2008, and may start to run out of ammunition soon. Alex Dryden, global market strategist at JP Morgan Asset Management, warned CNBC that central banks are running out of room to maneuver: “The Bank of Japan, now owns over 45 percent of the government bond market, over 65 percent of the domestic ETF market and are a top 10 shareholder in 90 percent of listed firms. They have also cut rates into negative territory. There isn’t much more they can do.”

Jim Rickards former CIA financial analyst, author and commentator, believes the Federal Reserve will raise interest rates as fast as it can, not because the US economy is improving, but because it needs interest rates to be up at least 3% or better, or they will be powerless to do anything for the recession they know is coming.

The incoming Trump administration is broadly supportive of congressional-led efforts to restrict the Federal Reserve’s ability to conduct monetary policy, a key lawmaker said: “We share many of the same goals,” House Financial Services Committee Chairman Jeb Hensarling said in a brief interview Wednesday. With two slots vacant on the Fed’s seven-seat board, Trump will have an opportunity to nominate monetary policy makers more to his liking. He’ll also have a chance to pick a new chairman and vice chairman in 2018, when Yellen’s term and that of her deputy, Stanley Fischer, expire.

Anti-ECB Sentiment Gaining Rapidly In Germany Due To Rising Inflation (1-29-17)
Germany’s Schaeuble urges ECB to start unwinding stimulus this year (1-13-17) Reuters
Europe’s Bond Market Time Bomb (1-4-17)
The Real Reason the Fed Is Raising Rates (1-3-17) Jim Rickards & The Daily Reckoning
U.S. and China on Collision Course (12-22-16) Jim Rickards
Central Banks Have Cut Interest Rates 690 Times Since Lehman Brothers (12-22-16)
Trump Team Broadly Backs Efforts to Rein In Fed, Hensarling Says (12-7-16)

Global Economies & Markets
European stocks are shaking off their 2016 blues just as they became the cheapest, relative to U.S. peers in more than seven years. “Though we’re not raging bulls on Europe, it’s a region we now strongly prefer over the U.S.,” said Alan Mudie, head of investment strategy at Societe Generale SA’s private banking unit. India’s economy and small business operations have been in chaos since December after Prime Minister Modi got rid of the 500 & 10,000 Rupee bills overnight and is forcing Indian companies to move away from using cash and toward automatic bank payments and checks. Currently India’s economy operates on a 90% cash basis and few people have bank accounts. Modi decided to go after what he claims is the black market (money launders, counterfeiters and other criminal elements), however, his real motivation is tax revenue from the 20% of illegal activity, and he has made it very difficult for the 80% of law abiding citizens of India.

Reuters reported, “The world’s largest trading nation posted gloomy data on Friday, with 2016 exports falling 7.7 percent and imports down 5.5 percent. The export drop was the second annual decline in a row and the worst since the depths of the global crisis in 2009.” Customs spokesman Huang Songping told reporters, The trend of anti-globalization is becoming increasingly evident, and China is the biggest victim of this trend.” If China were held to more rigorous accounting standards, much of their growth would be shown to be artificial.

European Stocks Slide to 3-Week Low as Trump Spurs Trade Angst (1-23-17)
China Posts Worst Export Fall Since 2009 as Fears of U.S. Trade War Loom (1-13-17) Reuters
Europe’s Bond Market Time Bomb (1-4-17)
U.S. and China on Collision Course (12-22-16) Jim Rickards
India’s Small Businesses Facing Apocalypse Amid Biggest Financial Experiment in History (12.21.16)
European Stocks Are Trading at Their Biggest Discount Since 2009 (12-7-16)

US Economy & Markets
20 years, to the day, after Greenspan’s iconic speech that warned of the unintended consequences of “irrational exuberance,” we find ourselves, yet again, in the midst of perhaps the largest asset bubble in history. Greenspan himself now says he’s more worried about debt than equity. He also recognized his warning had little impact; and repeated his view that bubbles are almost impossible to stop once they “get going.” In a Bloomberg, article Paul Schmelzing said, “The current bond market is facing the “perfect storm” of potential steepening of the bond yield curve, monetary policy tightening, and a multi-year period of sustained losses due to a “structural” return of inflation resembling that of 1967. Last quarter was the worst for government bonds since 1987, according to data compiled by Bloomberg.”

Business Insider reported that “retailers are bracing for a fresh wave of store closures at the start of the new year. The industry is heading into 2017 with a glut of store space as shopping continues to shift online. Nearly every major department store, including Macy’s, Kohl’s, Walmart, and Sears, have collectively closed hundreds of stores over the last couple years to try and stem losses from unprofitable stores and the rise of ecommerce. But the closures are far from over. Macy’s has already said that it’s planning to close 100 stores, or about 15% of its fleet, in 2017. Sears is shuttering at least 30 Sears and Kmart stores by April, and additional closures are expected to be announced soon. CVS also said this month that it’s planning to shut down 70 locations. Mall stores like Aeropostale, which filed for bankruptcy in May, American Eagle, Chicos, Finish Line, Men’s Wearhouse. As stores continue to close, many shopping malls will be forced to shut down as well.” When an anchor store like Sears or Macy’s closes, it often triggers a “downward spiral in performance” for shopping malls, Morningstar analysts wrote in the report from October. Another US territory, the Virgin Islands, are also now experiencing similar problems as Puerto Rico in 2016 when it defaulted on its bond payments four times last year.

Harvard Academic Sees Debt Rout Worse Than 1994 Bond Massacre (1-4-17)
A Giant Wave of Store Closures is About to Hit the US (12-31-16)
4 Economic Myths Surrounding the US Economy Peter Schiff (12-30-16)
As Puerto Rico Moves On, Another U.S. Territory Crisis Arises (12-21-16)
20 Years Later, Greenspan’s Irrational Exuberance has Become Even More Irrational (12-5-16)

Foreign Affairs
To say old leaders, new leaders, populists and candidates are not seeing eye to eye is an understatement. The differences are stark and the suggested solutions range from conventional same old solutions to innovative and radical. The US, Viet Nam, Japan, and the Philippians are all confronting China about the South China Sea islands. The US is also about to label China a currency manipulator, question the ‘One China’ policy in relation to Taiwan, potentially engage in trade wars, as well as contend with them on a number of other issues. Russian sanctions have failed and Trump is most likely going to eliminate them, while Germany wants to keep them, but other EU nations and other are questioning them as well. The UN Resolution against Israel has been denounced by the US, UK and other nations, and the US House and Senate already have bills in place to de-fund the UN. Russia and the US may team up to deal with ISIS as the rest of the world have not been decisive and handled it poorly. These are very volatile issues both financially and politically and how they are handled will have global ramifications.

Fillon Decries U.S. Bank Fines in European Pitch Against Trump (1-23-17)
China Slams Western Democracy as Flawed (1-22-17)
The Next World War (1-19-17) Daily Reckoning
War with China Could Break Out in the South China Sea (1-17-17) By Jim Rickards
We Have ‘Ironclad’ Info. That Obama ‘Helped Craft’ Anti-Israel Resolution (12.25.16)
Israel Rejects Shameful UN Resolution Amid Criticism of Netanyahu (12-24-16)

The Stock market is up, the Bond market is down. As of mid-January, gold was $1,200, a 4.6% gain so far in 2017. Excluding the US & Russia, global trade and markets are down and inventories are high, as there are too many goods chasing too few dollars. In the US, unemployment numbers are down, but the under-employed list is growing, currently its around 1.4 million people between the ages of 18-62 who are jobless. Restaurant attendance is down 20%, retailers are bracing for a fresh wave of store closures in 2017. Donald Trump is about to execute his plan to change the status quo, rewrite global trade agreements and institute new foreign policy. How will it all play out? We will just have to watch and see.

Summing Up 8 Years Of Barack Obama (1-20-17) SMC
Here’s What Happened When Ancient Romans Tried to Drain the Swamp (11-25-16) SMC
About that Fair Share (11-21-16) SMC
The Peak & Decline of International Reserves Warns of Massive Asset Deflation Ahead (11-19-16)
Global Trade is Slowing (11-17-16)