As the 2nd Quarter ends, World Markets are mostly up, but have been radically shifting on almost a daily basis because of direct and indirect effect of events going on all over the world. Central banks are both talking about and taking direct action in regard to raising interest rates and unwinding their portfolios and holdings, which have dominated the global bond markets since 2008, but especially the last two years.
Along with Central banks, elections have created all kinds of uncertainty and it looks like that trend will continue. UK Prime Minister May called for a snap election in June and lost her conservative majority, but was able to form a coalition government with Northern Ireland’s Democratic Unionist Party to keep her position as Prime Minister. Macron beat back Le Pen for the French Presidency and created quite the stir when he purposely squeezed Trump’s hand for an extended time in a photo shoot. Looks like Merkel has a lock on German elections, but she is being criticized for being too nice to Trump, maybe she should squeeze Trump’s hand too. Italian Elections are still in play and the anti-EU candidate is leading in the polls, as two of Italy’s largest banks have to be bailed out, which the Italian government blames on the EU.
India’s cash ban continues to create havoc and protests. Venezuela continues its descent into dysfunction and default. The state of Illinois may become the first state in the union to default. Cash is beginning to be squeezed from all directions, as Bitcoin and Ethereum are entering into the mainstream and their market values have climbed to record levels. Financial institutions, international corporations and governments are both discussing and taking action toward eliminating cash and utilizing blockchain technologies.
Europe’s Banking Union Fails Its Latest Test (Audio) (6-28-17)
Italy’s Padoan on Commitment to Two Failed Banks (6-26-17)
India Economy Trails Forecasts as Cash Ban Continues to Weigh (5-31-17) https://www.bloomberg.com/news/articles/2017-05-31/india-economy-trails-forecasts-as-cash-ban-continues-to-weigh
A New Financial System Is Being Born (5-26-17) by Tyler Durden
Cryptocurrency Mania Goes Beyond Bitcoin (5-24-17)
Post-Bitcoin Technology Has Geeks, Giants, and Hackers Excited (3-28-17) https://www.bloomberg.com/news/articles/2017-03-23/post-bitcoin-technology-has-geeks-giants-and-hackers-excited?cmpid=socialflow-twitter-businessweek&utm_content=businessweek&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social
The Future of Cryptocurrency – By Investopedia Staff | http://www.investopedia.com/articles/forex/091013/future-cryptocurrency.asp
The Federal Reserve decided to begin to unwind (reduce) their bond holdings and purchases, but they have to be careful because too much too soon could drive down treasuries and hurt the US and global bond markets, as they begin to shrink liquidity levels. As expected, the Fed raised interest rates a quarter point and is planning to raise them again in September or October. Historically, 84% of the time the Feds have raised interest rates the economy has gone into recession; this has happened in 16 of the last 19 rate hike cycles. The Fed is confused and not sure what to do, because inflation and the stock market are not responding like they have in the past. They continue to error, because their methods of analyses are too narrow in their scope and insufficient for today’s global marketplace. In the June 16th – 5 Minute Forecast, Jim Rickards said, “the Fed blithely dismisses all the lousy economic data and recent dis-inflationary trends as ‘transitory,’ that’s the Fed’s favorite word when the data don’t fit their thesis… The Fed also saw strength based on job creation and a low unemployment rate — which totally ignores declining productivity and labor force participation.” Jim believes the Fed has grossly miscalculated and this will cause the Fed to flip to easing later in the year, and that the financial markets don’t see this coming.
Reuters has reported: “The Federal Reserve is inconsistent in the way it monitors big banks and that lack of consistency could make it difficult to identify emerging risks across banks, according to a study by auditors at the U.S. central bank released on Monday. Each of the 12 regional Federal Reserve Banks nationwide had different guidance for how they continuously monitored large financial institutions, the study from the Office of the Inspector General found.”
Bloomberg also reported: “The Fed raised interest rates again on June 14, even though inflation is below its target. That’s because it’s counting on low unemployment to push up wages and prices. The U.S. central bank isn’t sure why inflation is staying so low—but it’s raising rates anyway, risking a recession. But those who set interest rates are in the awkward position of not understanding how things got so good—and are therefore confused about what to do next.”
According to the WSJ: The Bank of Mexico lifted the overnight interest rate target by a quarter percentage point to 7%, the highest level since early 2009, and indicated that the tightening cycle that began in September has ended for now. Bloomberg reported: At the ECB Forum in Sintra, Portugal, Mario Draghi hinted at how he may sell a gradual unwinding of European Central Bank stimulus and how the ECB may, if appropriate conditions exist, become less accommodative in 2018. The ECB president repeated his mantra that the Governing Council needs to be patient in letting inflation pressures build in the euro area and prudent in withdrawing support. “Any adjustments to our stance have to be made gradually, and only when the improving dynamics that justify them.” The Canadian Central Bank has also signaled that they are going to raise interest rates in July and the UK said they may as well.
Pound Surges as Bank of England’s Carney Hints at Rate Rise (6-28-17) WSJ
Bank of Canada’s Poloz Signals July Rate Rise in Play (6-28-17)
Global Bonds Gyrate as Investors Try to Parse Central Banks Next Stimulus Moves (6-28-17) WSJ
Draghi Sees Room for Paring Stimulus Without Tightening Policy (6-27-17) https://www.bloomberg.com/news/articles/2017-06-27/draghi-says-stimulus-still-needed-even-as-euro-area-reflates
Mexico’s Central Bank Lifts Rates to 7% (6-22-17)
Central Bank Cash Flood Swells Bond Danger (6-2-17)
The Fed Is Flying Blind (6-14-17) Bloomberg | https://www.bloomberg.com/news/articles/2017-06-15/the-fed-is-flying-blind?cmpid=BBD061517_MKT&utm_medium=email&utm_source=newsletter&utm_term=170615&utm_campaign=markets
Federal Reserve Inconsistent in Monitoring Big Banks Say Auditors (10-12-17) Reuters http://mobile.reuters.com/article/idUSKBN1752HW
Political Unrest & Elections
UK’s PM made a huge mistake when she called for early elections and lost her conservative majority and had to form a coalition government with Northern Ireland’s Democratic Unionist Party. The 3rd Brazilian president in two years has been charged with corruption and has only been in office about 7 months since the last president was impeached. Merkel called the UK and US unreliable partners, because each has disagreed with her and the EU on different issues. Since WWII, the US and the UK have never been accused of not being reliable partners, so this is pretty significant rhetoric, especially when issues of global climate control and the right of a nation to determine its own national sovereignty are the divisive issues trumping international security and trade.
The US House and Senate are focused on Russian conspiracies and alleged collusion, they can’t seem to get anything done and Russia and the rest of the world are laughing, not at Trump, but at Washington. At the same time, whether deserved or undeserved, most of the western world is demonizing Putin and the last thing anybody wants is for Trump and Putin to meet face to face. Although they don’t agree on everything, they both are disrupters and are not part of the global leader good old boy club. The other G-20 leaders are very afraid of what could happen if two of the most powerful nations and leaders got together and started resisting their agenda. July 7-8, the G-20 nations will gather in Hamburg Germany and Trump and Putin will finally meet face to face, just like Obama & Bush did. This certainly will be the most significant meeting in the G-20 gathering.
The WSJ reported: the EU’s executive launched legal proceedings against Poland, Hungary and the Czech Republic for refusing to take in asylum seekers, reigniting a fight that is likely to widen as the bloc seeks unity in Brexit negotiations with the U.K. The former communist countries that joined the EU about a decade ago have almost no experience integrating Muslim populations. Poland and Hungary refused to take any asylum seekers, while the Czech Republic took 12 last year. It recently announced it would quit the program. Legal proceedings against member states can end up in EU’s top court and bring financial penalties unless the countries reverse course. None of the three countries have indicated they would change their minds. European Commission chief Jean-Claude Juncker has warned that refusing to admit refugees might result in Central and Eastern European states receiving less financial support. Polish Foreign Minister Witold Waszczykowski said that the threat of funding cuts amounted to “blackmail” and questioned the legality of such a move. “We will keep on defending our principles,” Waszczykowski said. The Blaze reported: “The European Union is so dedicated to the relocation of Muslim refugees from the Middle East to Europe that it is threatening members who don’t participate with economic sanctions. Poland answered the threat with a defiant message.” EU bureaucrats seem hell bent on pushing their immigration agenda in both Brexit negotiations as well as against its own member states. If they continue to arrogantly make their members give up their national identity and sovereignty to fit their European utopian ideal, they will be the cause of more nations exiting the EU.
Trump to Meet Putin at G-20 Summit for First Time as Leaders (6-29-17)
Brazil’s President Michael Temer is Charged with Corruption (6-27-17) WSJ
May Clinches Deal With Northern Irish Party to Support Minority Government (6.27.17) https://www.wsj.com/articles/theresa-may-clinches-deal-with-northern-irish-party-to-support-minority-government-1498473399?mod=nwsrl_world_news
EU Raises Stakes Over Refusal to Take Asylum Seekers (6-13-17) WSJ
The EU Threatens Poland for not Accepting Muslim Refugees & Their Response (6-19-17) Blaze http://www.theblaze.com/news/2017/06/19/the-eu-threatens-poland-for-not-accepting-muslim-refugees-heres-how-they-responded/
Putin Praises Trump and Suggests Russian Hand in Hacking (6-1-17)
Merkel Warns US, Britain no Longer Reliable Partners (5-28-17) MSN
Russians Are Laughing at the U.S., Not Just at Trump (5-19-17) By Leonid Bershidsky https://www.bloomberg.com/view/articles/2017-05-19/russians-are-laughing-at-the-u-s-not-just-at-trump
Bloomberg reported: “Britain is ready to fight the European Union’s demand that judges on the continent hold sway in the U.K. after Brexit. Brexit Secretary David Davis, in a direct challenge to officials in Brussels, said the European Court of Justice won’t have a role protecting the rights of 3.2 million EU nationals living in U.K. after the country leaves in 2019.” PM May said, she’ll be ‘bloody difficult’ in Brexit talks. “EU ministers finalized their Brexit negotiating position a day after the U.K. threatened to quit talks on its departure unless the bloc drops its demands for a divorce payment as high as 100 billion euros ($112 billion). Even a 1 billion pound settlement would be “a lot of money,” Brexit Secretary David Davis said in an interview published in the Sunday Times. Davis went on to say, “We don’t need to just look like we can walk away, we need to be able to walk away.” As the war of words continues, the EU has threatened the UK, the US and other EU nations, while decrying the demise of the British economy, which continues to out preform the EU. The UK and EU can’t seem to come to terms on any of the main points, so their supposed two years of negotiations will most likely be cut short and the UK will initiate a hard Brexit.
Brexit Fight Looms Over Role of European Court, U.K. Warns (6-23-17)
London’s Brexit Apocalypse Is Nowhere in Sight (6-1-17)
EU Finalizes Brexit Position as U.K. Threatens to Quit Talks (5-20-17)
Ted Cruz Destroys European Leader After he Taunts America Don’t Mess with Texas (4.1.17) http://www.theblaze.com/news/2017/04/01/ted-cruz-destroys-european-leader-after-he-taunts-america-dont-mess-with-texas/
EU to Trump Mess With Brexit and We’ll Mess With Texas (3-30-17)
Global Markets & Economies
The IMF, in its annual review, lowered its forecast for the U.S. economy from 2.3 to 2.1%, because they don’t think the Trump Administration can deliver tax cuts and higher infrastructure spending. The IMF believes the US growth rate will fall to 1.7%, over the next five years, if US policy does not significantly change. WSJ reported: “China’s efforts to open up its markets to global investors won a long-awaited endorsement when MSCI Inc. said it would add Chinese shares to its emerging-markets index. MSCI’s decision Tuesday to add China A-shares, stocks denominated in yuan and listed in either Shanghai or Shenzhen, to its MSCI Emerging Markets Index stands to boost demand for Chinese stocks by billions of dollars over time.”
The June 21st 5 Minute Forecast reported: “Russia updates its gold purchases on the 20th of the month. Over the last month the Central Bank of Russia added 21.8 metric tons to its stash. At 1,708 metric tons, Russia’s gold holdings are the sixth largest in the world, right behind China’s. Well, except that China is lowballing its numbers.”
Germany, unlike most of the EU, is doing very well and has been pressuring the ECB to stop printing money and raise interest rates. Hong Kong’s financial secretary announced a budget surplus of $92.8B ($11.9B in USD) and their total fiscal reserve was nearly HKD $1 trillion, around $120 billion USD.
IMF Lowers Forecast for U.S. Economy Amid Rising Policy Uncertainty (6-27-17) WSJ https://www.wsj.com/articles/imf-lowers-forecast-for-u-s-economy-amid-rising-policy-uncertainty-1498568402
IMF Cuts U.S. Outlook, Calls Trump’s Growth Target Unlikely (6-27-17)
Take Advantage of this Free Insurance Policy for your Savings (6-26-17) SMC
MSCI to Add China Shares to Indexes, Opening Market to More Foreign Investors (6-19-17)
Booming German Economy in Election Year Puts ECB in Crossfire (5-23-17) https://www.bloomberg.com/politics/articles/2017-05-23/booming-german-economy-in-election-year-puts-ecb-in-crossfire
Recessionary Signs, Debt & Defaults
Most markets continue to hold their own despite recessionary signs, rising debts and looming defaults. Housing starts dropped 5.5%. U.S. new-home construction declined for the third straight month in May, signaling a softening in home building at a time of tight supply. Bloomberg reported: “Illinois may soon become the first state on record to have its bond rating cut to junk. Illinois is on track this fiscal year to spend over $6 billion more than it brings in, and public universities are reeling from the loss of state aid. On June 1, S&P Global Ratings warned that the loss of its investment-grade rating is likely unless action comes soon. States aren’t eligible to petition U.S. courts to escape from their debts, the way cities such as Detroit have. While Congress amended the law to allow for Puerto Rico to do so, any effort to extend that to states is extremely unlikely, would face intense opposition and may not pass constitutional muster. Mutual funds that are only allowed to own investment-grade securities would be unable to purchase its bonds, leaving it potentially more dependent on non-traditional buyers such as high-yield and hedge funds. Putting the state’s bonds just one step below investment grade indicates that’s a fairly distant possibility. No state has defaulted since Arkansas did in the Great Depression.’ As international bond raters are about to lower Illinois municipal bonds to junk status, we’ll have to see what the US will do, if the state of Illinois does default. The US is only one of many nations dealing with debt. India has one of the fastest growing economies on the globe, but they have a growing mountain of bad debt at the nation’s banks. China was also downgraded because of its growing mountain of debt.
Italy’s Newest Bank Bailout Cost as Much as its Annual Defense Budget (6-26-17) SMC https://www.sovereignman.com/trends/italys-newest-bank-bailout-cost-as-much-as-its-annual-defense-budget-22088/?inf_contact_key=01fa71ed74275c2c2e276333889ade4ee3e27225c53853e98e4b9ccc96020d6e
Here’s One Record Illinois Doesn’t Want to Attain QuickTake Q&A (6-20-17) https://www.bloomberg.com/news/articles/2017-06-20/here-s-one-record-illinois-doesn-t-want-to-attain-quicktake-q-a
S&P, Moody’s Downgrade Illinois to Near Junk, Lowest Ever for a U.S. State (6-1-17) https://www.bloomberg.com/news/articles/2017-06-01/illinois-bonds-cut-to-one-step-above-junk-by-s-p-over-stalemate
Illinois Budget Crisis Is About to Get Even Harder to Solve (5-31-17)
Why India’s Zombie Debt Imperils Modi’s Plans (5-29-17)
China’s Downgrade Could Lead to a Mountain of Debt (5-24-17)
China’s Stocks, Yuan Erase Losses Triggered by Moody’s Downgrade (5-23-17) https://www.bloomberg.com/news/articles/2017-05-24/china-stocks-slump-yuan-falls-after-moody-s-cuts-credit-rating
U.S. Housing Starts Fall for Third Consecutive Month in May (6-16-17) WSJ
U.S. Consumer Sentiment Declined in Early June (6-16-17) WSJ
Sloppy Subprime Loans Will Deepen Auto Woes (5-22-17)
Retail Bankruptcies March Toward Post-Recession High (3-31-17) CNBC
In the June 21st Daily Reckoning report, Jim Rickards wrote, “The systemic dangers are clear. The world is moving toward a sovereign debt crisis because of too much debt and not enough growth. Declining productivity is the last nail in the coffin in terms of countries’ ability to deal with the debt. Unlike 1998 and 2008, the next panic will be unstoppable without extreme measures — including IMF money printing, lock-downs of banks and money market funds”
In the article below, Simon Black shares his experience with our current banking system. Black explains, “SWIFT is a worldwide banking network, it’s how one financial institution sends and receives wire transfers and payments and it is absolutely critical to global banking. SWIFT runs on Windows Vista, an obsolete operating system that Microsoft no longer supports. And the absurdity of having to find an obsolete computer running an obsolete operating system to connect to the supposedly most advanced and important international payment network in the world.” I think you will find the other Simon Black articles below both entertaining and insightful.