IceCap Asset Management On Europe: “If You Exclude All The Debt, There’s No Debt Problem”

Virtually every country in the world spends more money than they collect in taxes, and no group of countries has done a better job at this than those that formed the Euro-zone.
This collective group has so much debt, that a recent study by the Bank of International Settlements concluded it would take 20 consecutive years of surpluses to simply bring debt loads back to levels previously reached prior to the current crisis.
Considering that this has never happened before, we have little confidence that this type of spending constraint can be accepted and implemented by any of the respective governments.
There is only one way possible for any person, company or government to spend more money than they earn – they must borrow to make up the difference. And as long as the Euro-zone countries are able to borrow, they’ll be able to extend the charade a while longer.
This is the point when many investors and pro-Euro supporters will argue that all of the Euro-zone countries are able to borrow, and in fact each country is able to borrow at the lowest interest rate in history for each individual country.
This is indeed true. However, this is the point when IceCap reminds investors that there are two types of debt markets.
The first is the one where the price or interest rate you pay is determined by the open market, with no interference or influence by other forces.
In 2012, the Euro crisis reached it’s latest crescendo and each country’s ability to borrow was at the mercy of the open market…

This post was published at Zero Hedge on 09/09/2014.

Scottish Chaos? Should I Stay or Should I go?

It is very interesting to see the numerous emails pouring in from Scotland and England. Even in Scotland there is a strong left-wing socialist factor that has their hand out to whom Cameron is trying to persuade to stay in the UK and they will be rewarded. For the benefit of both England and Scotland, a separation would be fantastic if Scotland took the high road here. If Scotland lowered its taxes including VAT, this will put pressure on England.
Moreover, it has been argued that Scotland costs the British more than they get back. The Government Expenditure and Review Scotland (GERS) calculates how much money is raised through taxes in Scotland and the level of public spending north of the border. The Scottish nationalists argue the number are erroneous. However, the numbers appear to be fairly trustworthy. The GERS figures, for the financial year 2008/09, show that the Treasury spent about 54 billion on Scotland and only received 43.5 billion in revenue.
The Brits believe that the Scots do not pull their own weight. However, there is the question of a very important asset – the North Sea oil. Most of the United Kingdom’s fossil fuel lies off the coast of Scotland – not England. Therefore, the wealth the North Sea Oil generates should arguably be added to figures for total revenue from Scotland that England does not count. This introduces a whole string of important questions if there is a separation. Will this natural resource be returned to an independent Scotland?

This post was published at Armstrong Economics on September 9, 2014.

Preparing To Asset-strip Local Government? The Fed’s Bizarre New Rules

In an inscrutable move that has alarmed state treasurers, the Federal Reserve, along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, just changed the liquidity requirements for the nation’s largest banks. Municipal bonds, long considered safe liquid investments, have been eliminated from the list of high-quality liquid collateral. assets (HQLA). That means banks that are the largest holders of munis are liable to start dumping them in favor of the Treasuries and corporate bonds that do satisfy the requirement.
Muni bonds fund the nation’s critical infrastructure, and they are subject to the whims of the market: as demand goes down, interest rates must be raised to attract buyers. State and local governments could find themselves in the position of cash-strapped Eurozone states, subject to crippling interest rates. The starkest example is Greece, where rates went as high as 30% when investors feared the government’s insolvency. Sky-high interest rates, in turn, are the fast track to insolvency. Greece wound up stripped of its assets, which were privatized at fire sale prices in a futile attempt to keep up with the bills.
The first major hit to US municipal bonds occurred with the downgrade of two major monoline insurers in January 2008. The fault was with the insurers, but the taxpayers footed the bill. The downgrade signaled a simultaneous downgrade of bonds from over 100,000 municipalities and institutions, totaling more than $500 billion. The Fed’s latest rule change could be the final nail in the municipal bond coffin, another misguided move by regulators that not only does not hit its mark but results in serious collateral damage to local governments – maybe serious enough to finally propel them into bankruptcy.
Why this unprecedented move by US regulators? It is not because municipal bonds are too risky, since corporate bonds with lower credit ratings are accepted under the new rules. Nor is it that the stricter standard is required by the Basel Committee on Banking Supervision (BCBS), the BIS-based global regulator agreed to by the G20 leaders in 2009. The Basel III Accords set by the BCBS are actually more lenient than the US rules and do not include these HQLA requirements. So what’s going on?

This post was published at Washingtons Blog on September 9, 2014.

Japan GDP Collapses 7.1% After Tax Increase – OOPS!

Often I get nasty emails from socialists who just want to raise taxes on the rich to punish them for having more than they do. Sorry, an honest correlation between economic growth and taxes demonstrates the higher the tax rate, the lower the economic growth. Japan’s economy provided a stark confirmation of this correlation as it shrank an annualized 7.1% in a single quarter – April-June. This has exceeded ALL preliminary estimates and it has confirmed the they jump in the sales tax has resulted in less consumer spending that is far bigger than anyone expected.

This post was published at Armstrong Economics on September 9, 2014.

Senate Hearing Today: Six Years After Wall Street Collapse, Banks Are Still Untamed

This month marks the six-year anniversary of the financial collapse of some of Wall Street’s most iconic names. As this New York Post cover of September 20, 2008 memorializes, rapper Sean Combs (P. Diddy) was stepping in dog excrement while the taxpayer was being dragged into something just as smelly – a government bank bailout that would grow to hundreds of billions in on-the-record cash infusions and $16 trillion in secret below-market-rate loans from the Fed.
Now it’s September 2014. Six years of crisis studies, hearings, reform legislation, rule-writing, stress tests, living wills, new bank scandals and no jail time for top dogs have darkened the public mood further about both Wall Street and the ability of Congress to meaningfully reform it.
The Senate Banking Committee is hauling all six regulators of Wall Street before it today to take the pulse on where reform has failed and where it’s working. (The fact that Wall Street still needs six regulators is your quick answer that these mega banks remain too big, too complex, and still too dangerous.)
Daniel K. Tarullo, a Governor at the Federal Reserve, will attempt to reassure the Senate panel that they have things under control with testimony that the Fed will be imposing capital surcharges on the most Global Systemically Important Banks or GSIBs.

This post was published at Wall Street On Parade By Pam Martens and Russ Marte.

Goldman Warns “Something Has To Give” On Tax Inversions

Treasury Secretary Lew’s comments on tax reform yesterday indicate that in the absence of legislative activity to address the expatriation of US-based companies, the Treasury will lay out its own plans “in the very near future.” Goldman interprets this to mean an announcement in the next couple of weeks. While the substance of the Treasury’s forthcoming announcement is still unknown, Lew’s comments seemed consistent with Jan Hatzius’ expectation that the steps the Treasury will announce will be incremental and not enough to fundamentally alter the outlook for these transactions.
Via Goldman Sachs’ Jan Hatzius,
Tax-focused activity in Congress is also likely to pick up. Legislation is expected to be introduced in the House and Senate in coming days to reduce the economic incentives for companies to move their tax domiciles. While a vote in the Senate is possible over the next couple of weeks, we continue to believe enactment of legislation on the issue is very unlikely prior to the election. In the “lame duck” session of Congress following the election in November/December, Congress looks likely to pass legislation renewing expiring or expired corporate tax provisions; those bills do not address inversions, but it would not surprise us to see some lawmakers try to raise the issue again in that context. More generally, we continue to hold the view that “something has to give” regarding corporate tax policy. The less the Treasury is able to address inversions through regulation this year, the more pressure will grow on Congress to address next year. Many lawmakers have said they prefer to address the issue as part of broader tax reform, and next year they will presumably have to at least try to do so. There are plenty of reasons that corporate tax reform legislation might not be enacted in the next two years, but the list of reasons it might be enacted does seem to be growing.

This post was published at Zero Hedge on 09/09/2014.

A Secret Only a Tiny Number of Investors Understand

Gummed Up by Taxes, Debt and Regulation At 7 a.m. on Saturday morning we were in our room at the China World Hotel, looking down on eight lanes of traffic that had come to a dead stop in the Beijing traffic.
‘The last century was America’s century,’ says our Chinese colleague. ‘This is China’s century.’
‘You know why America was such a success,’ he continued. ‘Because it was a fairly free market with massive domestic demand. Companies could scale up in the highly competitive US market. That would make them larger and more advanced than their foreign competitors. They could then enter foreign markets and easily beat the locals.
‘Now, the US is gummed up by taxes, debt and regulation. Outside of Silicon Valley most of the companies are old. There are few new businesses and not much new technology.
‘I think you wrote something about the declining number of start-ups in the US. It’s a big deal that few people recognize. I think you said it was a result of crony capitalism. The feds subsidize and protect the big boys… and bail them out when they get into trouble. That’s why GM and Fannie Mae are still in business. But the little guys can’t even get credit.
‘China, meanwhile, is full of new companies. Everything is new. And the internal market is fairly free compared to America. Talk about scale. These companies have massive domestic growth and learning capacity before they have to compete on the world markets.’

US company births and deaths, via a (slightly dated) Brookings report (pdf)

This post was published at Acting-Man on September 9, 2014.

On A Clear Fund Raising Evening, Gov. Christie’s Pension Managers Can See Wall Street From Trenton

New Jersey investment officials have directed increasingly large slices of state pension money into riskier investments, such as hedge funds, touting their strategy as a means of limiting exposure to a volatile stock market. They’ve argued that their approach would maximize overall returns and justify the higher fees paid to Wall Street money managers.
But in seven of the eight years since the state began shifting pension funds into so-called alternative investments, returns have fallen well short of the broader stock market, an analysis of state financial records shows. In those seven years, New Jersey’s alternative investment portfolio has produced gains of just more than half of the S&P 500, the widely watched index seen as a proxy for shares of large corporations.
Since Gov. Chris Christie took office, he has nearly tripled the amount of retiree cash invested in alternative investment firms – many of whose employees have made financial contributions to political groups backing Christie’s election campaigns. In that time, the gap between New Jersey’s alternative portfolio and the broader market has rapidly expanded, costing taxpayers billions in unrealized returns and threatening the financial stability of the $78 billion pension system. The state’s pension funding shortfalls – which have been exacerbated by Christie’s market-trailing investment strategy – were one of the factors cited by Fitch Ratings in its decision last week to downgrade the state’s bond rating for the second time.

This post was published at David Stockmans Contra Corner on September 8, 2014.

More Lost IRS E-Mails. The IRS Tells Congress: ‘Go Fish.

Congress is impotent.
The IRS knows Congress is impotent.
The IRS can safely thumb its nose at Congress in full public view.
Everyone knows the IRS did illegal things when it refused to grant the privilege of tax exemption to conservative groups. ‘Go fish.’ Everyone knows the IRS destroyed the incriminating e-mails. ‘Go fish.’ Everyone knows the IRS is lying when it blames a hard disk crash. ‘Go fish.’ Everyone knows Boehner & Co. has only one response with teeth: to cut the IRS’s budget next year in retaliation. Everyone knows that Congress dares not cut one agency’s budget, above all government agencies: the IRS’s. ‘Go fish.’
I suppose I should be outraged. ‘The arrogance of these people!’ But why get upset this late in the history of the American welfare-warfare state? This is nothing new. It goes back to – in round numbers – 1789. Executive agencies have done their best to thwart Congress since the beginning. It just gets worse over time.
Congress has two meaningful powers over the other branches of the federal government. It refuses to use either of them. First, it has the power of the purse. It can refuse to fund any agency at any time for any reason. It can, in short, shrink the power of the President. It never doers this. To do this would mean shrinking the federal government. It absolutely will not tolerate such a suggestion.
The other power is to lock the Supreme Court in a box. It can withdraw the Court’s jurisdiction on any judicial issue except those enumerated by the Constitution. The Constitution is clear.

This post was published at Tea Party Economist on September 6, 2014.

New Jersey’s Debt is Downgraded by Fitch as Chris Christie Funnels Pension Money to Private Equity and Hedge Funds

David Sirota must be commended for his incredible work this year exposing the insidious relationship between public pension funds and ‘alternative asset managers,’ namely private equity firms and hedge funds. It is the private equity component that has captured my attention the most due to the industry’s notoriously opaque and seemingly illegal fees.
One example I highlighted earlier this year was: Leaked Documents Show How Blackstone Fleeces Taxpayers via Public Pension Funds. The reason this relationship between public pension money and private equity is so incredibly important is because so many in the private equity world are so incredibly shady. Let’s not forget what SEC official Drew Bowden said back in May:
At a private equity conference this week, Drew Bowden, a senior SEC official, told private equity fund managers and their investors in considerable detail about how the agency had found widespread stealing and other serious infractions in its audits of private equity firms.
Despite the at times disconcertingly polite tone, the SEC has now announced that more than 50 percent of private equity firms it has audited have engaged in serious infractions of securities laws. These abuses were detected thanks to to Dodd Frank. Private equity general partners had been unregulated until early 2012, when they were required to SEC regulation as investment advisers.
So how do public pensions fit in to this racket? Here’s how:

This post was published at Liberty Blitzkrieg on Sep 8, 2014.

Why Illinois Is Bankrupt: 6,000 Teachers Get Pensions Of $100,000

From 2013 to 2014, the number of teachers receiving six-figure pensions in Illinois increased by 24 percent. Today, 6,000 retired Illinois teachers are collecting at least 100,000 in annual pension money.
Yet, as Kelly Riddell reports for the Washington Times, if the Illinois Teachers Retirement Service (TRS) were forced to pay out the pensions it owes today, it would only be able to pay retirees 40 cents for every dollar. Indeed, the state’s pension fund is in trouble:
According to a report from the spending watchdog group Open the Books, over 100,000 Illinois teachers had already broken even on their pension payments after just 20 months of retirement. Illinois taxpayers can pay up to $2 million per teacher per retirement. The TRS pension fund is underfunded by $54 billion, according to the Illinois Policy Institute. By 2029, the fund could be entirely broke. TRS is the largest pension fund in the state. According to Riddell, Illinois legislators have continued to underfund TRS in order to free up funds for spending elsewhere. Yet, over half of Illinois teachers are retiring before the age of 60, and many teachers are making twice the amount they earned while they were actually employed. For example:

This post was published at David Stockmans Contra Corner on 6th September 2014.

Japanese Economy Contracts Bigger than Expected 7.1% in 2nd Quarter; Really Bad Theories

By now it should be pretty clear that Abenomics is a complete failure. Abenomics did not spur lending, investment, hiring, or wage growth.
It’s one touted “success” is that prices have gone up. And for cash-strapped consumers facing higher taxes, that alleged “success” is actually a disaster.
Japanese Economy Contracts Bigger Than Expected 7.1% in Second Quarter
Please consider Japan says economy contracted 7.1 percent in April-June on bigger drop in business investment.
Japan’s economy contracted at a larger than earlier estimated annual rate of 7.1 percent in April-June, as companies and households slashed spending following a tax hike. The revised data released Monday show business investment fell more than twice as much as estimated before, or 5.1 percent, while private residential spending sank 10.4 percent, in annual terms. The earlier estimate showed the economy contracting 6.8 percent. The recovery of the world’s third-largest economy has slowed following the increase in the sales tax to 8 percent from 5 percent on April 1.

This post was published at Global Economic Analysis on September 08, 2014.

How The Fed “Mysteriously” Eliminated $7 Trillion In US Debt

Anyone looking at the Federal Reserve’s own data set, that provided with the generous “free” funding of the US taxpayer by way of the St. Louis Fed’s FRED database, will notice something quite welcome, if magical: total US debt held by the public – that which is not part of intragovernment holdings, read Social Security – has mysteriously collapsed from $12 trillion to $5 trillion. Somehow, with nobody looking, the Fed managed to reduce US total debt by $7 trillion.

This post was published at Zero Hedge on 09/08/2014.

Contagion – What the Next Wall Street Crisis Will Look Like

Last week the Fed announced a plan for the next financial crisis that feels to some observers like a plan to burn down the trading houses on Wall Street – or, alternately, guarantee another massive taxpayer bailout of the biggest banks.
The Federal Reserve Board and its regional banks are overflowing with economists. What the Fed does not seem to have is an honest, informed voice to consult about how trading markets think in a severe financial crisis.
Last Tuesday, the Federal Reserve Board along with other bank regulators announced a new liquidity rule for the largest Wall Street banks – the ones that required the massive bailout in the 2008 to 2010 financial crisis. The goal of the new rule, according to the Fed, would be to force the biggest, most complex banks to hold enough ‘high quality liquid assets’ (HQLA) so that they could be easily liquidated if there was a run on the bank, eliminating the need for another taxpayer bailout. So far, so good.
Then the Fed and its fellow regulators did something that raises serious doubts about their market sophistication. They announced that in addition to U. S. Treasury securities, where a flight to safety always flows in a crisis, the big banks could also hold corporate bonds and corporate common stocks in the Russell 1000 index among their newly defined ‘high quality liquid assets’ earmarked for an emergency.
Just six weeks before the Fed anointed non-exchange traded corporate bonds as liquid assets, all the way down to investment grade, the Financial Times ran this opening paragraph in an article by Tracy Alloway:
‘The ease with which investors can trade corporate debt has declined sharply in the five years since the financial crisis according to research that is likely to feed fears over the prospect of an intensified sell-off in the $9.9 trillion US market.’

This post was published at Wall Street On Parade By Pam Martens and Russ Marte.

The Wrath of Abenomics Crushes Japanese Consumers, Eviscerates Economy

In April, after the broad-based consumption-tax hike from 5% to 8% had taken effect, retail sales collapsed 20% from March. Total vehicle sales collapsed 56% to the worst level since December 2012, and December is usually the worst month of the year in Japan. April was terrible. It was much worse than feared by the Abenomics soothsayers and apologists.
But the shock didn’t last long, and soon the soothsayers and apologists were at it again. In May, car sales were worse than a year earlier, but not much worse (-1.2%); and in June, car sales were actually a smidgen better ( 0.4%) than a year earlier, and hopes were being propagated that this would all somehow work out. But in July sales dropped 2.5% year over year, and other data points were going to heck as well.
Then August happened.

This post was published at Wolf Street on September 8, 2014.

The Wrath of Abenomics Crushes Japanese Consumers, Slams Economy

In April, after the broad-based consumption-tax hike from 5% to 8% had taken effect, retail sales collapsed 20% from March. Total vehicle sales collapsed 56% to the worst level since December 2012, and December is usually the worst month of the year in Japan. April was terrible. It was much worse than feared by the Abenomics soothsayers and apologists.
But the shock didn’t last long, and soon the soothsayers and apologists were at it again. In May, car sales were worse than a year earlier, but not much worse (-1.2%); and in June, car sales were actually a smidgen better ( 0.4%) than a year earlier, and hopes were being propagated that this would all somehow work out. But in July sales dropped 2.5% year over year, and other data points were going to heck as well.
Then August happened.
In August, vehicle sales as measured by registrations swooned, according to the Japan Automobile Manufacturers Association. All categories were down: sales of new cars, including minis (cars with tiny 500cc engines) plunged 9.4% year over year to 281,326 units; sales of new trucks of all sizes, including minis dropped 7.2% to 51,165 units. And total vehicles sales, retail and commercial, cars, trucks, and buses plunged 9% to 333,471 units.

This post was published at Wolf Street by Wolf Richter ‘ September 8, 2014.

Scottish Independence Referendum: The Complete Summary

For those just catching up on the main news event of the weekend, namely the sudden surge in Scotland “Yes” vote polling surpassing 50% for the first time, here is a complete round up of the background, updates and expert reactions from RanSquawk, Bloomberg and AFP.
Recent polling shows the ‘Yes’ campaign overtaking the unionists for the first time, just 10 days ahead of the final vote on September 18th Independent Scotland runs the risk of limited currency options and fiscal uncertainty UK debt ratings hang in the balance as worst-case scenario sees Westminster shouldering an estimated extra GBP 140bln in former Scottish debt BACKGROUND
The ‘No’ party – the unionists – are led by Alistair Darling, former Chancellor of the Exchequer, previously held a lead over the nationalists but this has reversed in the most recent polling, with the ‘No’ vote holding 49%.
The ‘Yes’ party – the nationalists – are led by Alex Salmond, Scotland’s First Minister, and harbour hopes of swinging the referendum in their favour as latest polls suggest they have been overtaken the ‘No’ camp by 2ppts.
Serious doubts remain over the future of Scotland’s currency if the nationalists win. Salmond has repeatedly stated his intention of keeping the GBP, but all 3 main UK parties have made clear they would not be willing to share their currency and central bank with a foreign state. Also, a potential use of the GBP without a currency union would not be compatible with EU membership, as the EC requires member states to have a monetary authority of their own.
‘No’ Victory – Given the somewhat complacent attitude market participants have had towards the vote indicates that the upside in riskier assets is limited in case the unionists win the referendum with a large majority. Nevertheless, expect to see some tightening in spreads of the shorter-dated implied volatilities which have widened heading into the risk event.
However, a close vote could lead to a second referendum in 5-10 years and as such, changes to UK regional governance would take place as a result of more devolution, with additional powers going to Scotland such as more autonomy over taxation. In turn, business leaders, including the head of Standard Life and RBS, will have to decide as to whether to relocate their headquarters to the UK or stay in Scotland depending on what type of policies Scotland decides to pursue with its additional powers.
‘Yes’ Victory – Great uncertainty revolves around an independent Scotland, specifically due to the lack of clarity over the potential new fiscal arrangements such as interest rates, taxation, investor protection, financial stability and monetary policy.

This post was published at Zero Hedge on 09/08/2014.

Here Is Why Europe Just Launched The “Nuclear Option” Against Russia

Europe’s leaders, we assume under pressure from Washington, appear to be making a big weather-related bet with their taxpayers’ lives this winter. As they unleash funding sanctions on Russia’s big energy producers, Europe has pumped a record volume of natural gas into underground inventories in an effort to ‘outlast’ Russia and mitigate any Napoleonic “Winter War” scenario. The plan appears to be to starve Russian energy firms of cashflow – as flows to Europe are already plunging – and remove their funding ability, potentially forcing severe hardship on Russia’s key economic drivers. There appears to be 3 potential problems with this plan…

This post was published at Zero Hedge on 09/08/2014.

EU – Nothing Works, Not Even Stimulation

Mario Draghi cannot launch QE without German political assent … It is surely wishful thinking to suppose that the ECB is ready to launch full-fledged QE, given its political make-up … Mario Draghi’s comments on the eurozone economy at Jackson Hole have put him in direct conflict with Berlin – UK Telegraph
Dominant Social Theme: These last five years have been a problem, but now you can smell the hope and change.
Free-Market Analysis: We’ve written regularly about the difficulties with the EU for years and what’s astonishing is that almost all of our predictions about its dysfunctional nature – and predictable results – have been realized, and yet the EU staggers on.
There were even, as we anticipated, street demos and open rebellion in parts of the EU at the height of the current crisis. Athens was bloodied and Spain, Italy and Portugal among other countries saw serious unrest, especially among youth. And yet, surprisingly, the EU withstood the blows primarily through the use of uncompromising political, civilian and military force. The elites were not afraid to “crack heads.”
It is Southern Europe that has borne the brunt: Taxes have risen, services have been cut and formal employment has never returned. Young people have little work; older workers cannot trust the vaunted EU safety net. Retirements have been put off. Poverty has risen.
Enter Mario Draghi and the Eurocrats once again to salvage a continually unsalvageable mess. Draghi intends to print lots of money in order to buy securities in the open market, presumably including national and EU debt.

This post was published at The Daily Bell on September 08, 2014.