Tag Archives: Euro

Executive Summary of IMFs Global Financial Stability Report

It is a long report – but good read nonetheless.

Here is the executive summary for those who are interested:

Financial stability has improved in advanced economies

Financial stability has improved in advanced economies since the April 2015 Global Financial Stability Report. This progress reflects a strengthening macrofinancial environment in advanced economies as the recovery has broadened, confidence in monetary policies has firmed, and deflation risks have abated somewhat in the euro area. The Federal Reserve is poised to raise interest rates as the preconditions for liftoff are nearly in place. This increase should help slow the further buildup of excesses in financial risk taking. Partly due to confidence in the European Central Bank’s (ECB’s) policies, credit conditions are improving and credit demand is picking up. Corporate sectors are showing tentative signs of improvement that could spawn increased investment and economic risk taking, including in the United States and Japan, albeit from low levels.

Risks continue to rotate toward emerging markets, amid greater market liquidity risks

Despite these improvements in advanced economies, emerging market vulnerabilities remain elevated, risk appetite has fallen, and market liquidity risks are higher. Although many emerging market economies have enhanced their policy frameworks and resilience to external shocks, several key economies face substantial domestic imbalances and lower growth, as noted in the October 2015 World Economic Outlook (WEO). Many emerging market economies relied on rapid credit creation to sidestep the worst impacts of the global crisis. This increased borrowing has resulted in sharply higher leverage of the private sector in many economies, particularly in cyclical sectors, accompanied by rising foreign currency exposures increasingly driven by global factors. This confluence of borrowing and foreign currency exposure has increased the sensitivity of these economies to a tightening of global financial conditions (see Chapter 3). As emerging market economies approach the late stage of the credit cycle, banks have thinner capital cushions, while nonperforming loans are set to rise as corporate earnings and asset quality deteriorate. In China, banks have only recently begun to address the growing asset quality challenges associated with rising weaknesses in key areas of the corporate sector. These developments in emerging market banking systems stand in contrast to those in advanced economies, where banks have spent the past few years deleveraging and repairing balance sheets, raising capital, and strengthening funding arrangements. Against a challenging backdrop of falling commodity prices and weaker growth, several emerging market sovereigns are at greater risk of losing investment-grade ratings in the medium term. Pressures on sovereign ratings could intensify if contingent liabilities of stateowned enterprises—with a large and rising share of emerging market corporate bond issuance—have to be assumed by the sovereign, for example, from firms in the oil, gas, and utility sectors.

Policymakers confront a triad of challenges

The baseline outlook for financial stability, consistent with the October 2015 WEO, is characterized by continuing cyclical recovery, but with weak prospects for medium-term growth in both advanced economies and emerging markets. In advanced economies, improvements in private balance sheets and continued accommodative monetary and financial conditions have spurred a cyclical recovery, but the handover to higher levels of self-sustaining growth is incomplete. Emerging markets face substantial challenges in adjusting to the new global market realities from a position of higher vulnerability. Successful normalization of financial and monetary conditions would bring macrofinancial benefits and considerably reduce downside risks. This report analyzes the prospects for normalization according to three scenarios: the baseline, an upside scenario of successful normalization, and a downside scenario characterized by disruptions in global asset markets. Against this backdrop, the global financial outlook is clouded by a triad of broad policy challenges in evidence over the past several months:

Emerging market vulnerabilities—As examined in the WEO, growth in emerging markets and developing economies is projected to decline for the fifth year in a row. Many emerging markets have increased their resilience to external shocks with increased exchange rate flexibility, higher foreign exchange reserves, increased reliance on FDI flows and domestic currency external financing, and generally stronger policy frameworks. But balance sheets have become stretched thinner in many emerging market companies and banks. These firms have become more susceptible to financial stress, economic downturn, and capital outflows. Deteriorating corporate health runs the risk of deepening the sovereign-corporate
and the corporate-bank nexus in some key emerging markets. China in particular faces a delicate balance of transitioning to more consumption-driven growth without activity slowing too much, while reducing financial vulnerabilities and moving toward a more market-based system—a challenging set of objectives. Recent market developments, including slumping commodity prices, China’s bursting equity and margin-lending bubble, falling emerging market equities, and pressure on exchange rates, underscore these challenges.
• Legacy issues from the crisis in advanced economies—High public and private debt in advanced economies and remaining gaps in the euro area architecture need to be addressed to consolidate financial stability, and avoid political tensions and headwinds to confidence and growth. In the euro area, addressing remaining sovereign and banking vulnerabilities is still a challenge.
• Weak systemic market liquidity—This poses a challenge in adjusting to new equilibria in markets and the wider economy. Extraordinarily accommodative policies have contributed to a compression of risk premiums across a range of markets including sovereign bonds and corporate credit, as well as a compression of liquidity and equity risk premiums. While recent market developments have unwound some of this compression, risk premiums could still rise further. Now that the Federal Reserve looks set to begin the gradual process of tightening monetary policy, the global financial system faces an unprecedented adjustment as risk premiums “normalize” from historically low levels alongside rising policy rates and a modest cyclical recovery. Abnormal market conditions will need to adjust smoothly to the new environment. But there are risks from a rapid decompression, particularly given what appears to be more brittle market structures and market fragilities concentrated in credit intermediation channels, which could come to the fore as financial conditions normalize (see Chapter 2). Indeed, recent episodes of high market volatility and liquidity dislocations across advanced and emerging market asset classes highlight this challenge.
Strong policy actions are needed to ensure “successful normalization”

The relatively weak baseline for both financial stability  and the economic outlook leaves risks tilted to the downside. Thus, ensuring successful normalization of financial and monetary conditions and a smooth
handover to higher growth requires further policy efforts to tackle pressing challenges. These should
include the following:

• Continued effort by the Federal Reserve to provide clear and consistent communication, enabling the smooth absorption of rising U.S. rates, which is essential for global financial health.
• In the euro area, more progress in strengthening the financial architecture of the common currency to bolster market and business confidence. Addressing the overhang of private debt and bank nonperforming loans in the euro area would support bank finance and corporate health, and boost investment.
• Rebalancing and gradual deleveraging in China, which will require great care and strong commitments to market-based reforms and further strengthening of the financial system.
• More broadly, addressing both cyclical and structural challenges in emerging markets, which will be critical to underpin improved prospects and resilience.
Authorities in emerging markets should regularly monitor corporate foreign currency exposures, including derivatives positions, and use micro- and macroprudential tools to discourage the buildup of excessive leverage and foreign indebtedness.
• Safeguarding against market illiquidity and strengthening market structures, which are priorities, especially in advanced economies’ markets.
• Ensuring the soundness and health of banks and the long-term savings complex (for example, insurers and pension funds), which is critical, as highlighted in the April 2015 GFSR.

 

With bold and upgraded financial policy actions detailed in the report, policymakers can help deliver a stronger path for growth and financial stability, while avoiding downside risks. Such an upside scenario would benefit the world economy and raise global output 0.4 percent above the baseline by 2018. Further growth-enhancing structural reforms, detailed in the WEO, could bring additional support to growth and stability.

Full report here.

(German) Leftists demand 100 percent tax on the rich

It seems that taxing the rich is the new norm, or the idea of it anyways. Per the German news source, the German leftist party is considering a 100% tax on anyone making over 500,000.

If anyone has read any economics course, or has common sense, would see why this would be a terrible mandate. Also, what is not clear is that if it only applies to people? And how much is corporate tax is going to be affected by the mandate. However, a 100% taxation on income after a certain threshold will discourage hardworking and geniune people from working and creating social value through their businesses. There is limited data on how many persons make such money.  It is to be noted that it may work some very smart people from joining specific area of work. For example, if the same mandate is applied to income from financial institutions (or capped to per say a million euros), it will actually drive smart people to other industries (small businesses, technology), which may create increased value in socity as compared to banks.

Excerpt from the aricle:

The party paper said the total tax on those taking home over €40,000 per month would be used to fund social welfare and investing in the country’s future.

“Explosive inequality is threatening democracy,” said co-leader Bernd Riexinger. “I call capping income at half a million euros a democracy tax.”

The upcoming campaign for Germany’s election in September was going to be one focused on wealth redistribution, said Riexinger.

 

You can read the full article here.

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The euro crisis no one is talking about: France is in free fall [Fortune]

A fascinating article by Fortune Magazine! A full read is mandatory.

Given investors’ confidence in its sovereign debt, and its image as Germany’s principal partner in the sturdy, sensible “northern” eurozone, you’d think that France endures as the co-guardian of the endangered single currency. Indeed, the rate on France’s ten-year government bonds stands at just 2%, just a few ticks above Germany’s. From a quick look at the headline numbers, France doesn’t appear nearly as stressed as the derisively titled “PIIGS,” Portugal, Ireland, Italy, Greece and Spain. So far, the trajectory of its debts and deficits isn’t as distressing as the figures for the PIIGs, or even the U.K. and the U.S.

France’s vaunted role in the creation and initial success of the euro enhances its aura of solidity. It was President Francois Mitterrand who in 1989 persuaded Chancellor Helmut Kohl to back monetary union in exchange for France’s support for German reunification. In fact, France and Germany, along with the Netherlands, dramatized their commitment by effectively uniting the franc and deutschemark in a currency union that held their exchange rates in a narrow band, and heralded the euro’s birth in 1999. In the boom years of the mid-2000s, France virtually matched Germany as the twin growth engine of the thriving, 17-nation eurozone.

A deeper look shows that France is mired in no less than an economic crisis. The eurozone’s second-largest economy (2012 GDP: 2 trillion euros) is suffering more than any other member from a shocking deterioration in competitiveness. Put simply, France’s products — its cars, steel, clothing, electronics — cost far too much to produce compared with competing goods both from Asia and its European neighbors, including not just Germany but even Spain and Italy. That’s causing a sharp and accelerating fall in its exports, and a significant decline in manufacturing and the services that support it.

The virtual implosion of French industry is overlooked by analysts and pundits who claim that the eurozone had dodged disaster and entered a new, durable period of stability. In fact, it’s France — not Greece or Spain — that now poses the greatest threat to the euro’s survival. France epitomizes the real problem with the single currency: The inability of nations with high and rising production costs to adjust their currencies so that their products remain competitive in world markets.

So far, the worries over the euro have centered on dangerously rising debt and deficits. But those fiscal problems are primarily the result of a loss of competitiveness. When products cost too much to make, the economy stalls or actually declines, so that even modest increases in government spending swamp nations with big budget shortfalls and excessive borrowings. In this no-or-negative growth scenario, the picture is usually the same: The private economy shrinks while government keeps expanding.

That’s already happened in Italy, Spain and other troubled eurozone members. The difference is that those nations are adopting structural reforms to restore their competitiveness. France is doing nothing of the kind. Hence, its yawning competitiveness gap will soon create a fiscal crisis. It’s absolutely astonishing that an economy so large, and so widely respected, can be unraveling so quickly.

The world’s investors and the euro zone optimists should awaken to the danger posed by France. La crise est arivée.

You can read the full article here.

Reading List: Enjoy!

Investors Prepare for Euro Collapse (Spiegel Online)

Banks, companies and investors are preparing themselves for a collapse of the euro. Cross-border bank lending is falling, asset managers are shunning Europe and money is flowing into German real estate and bonds. The euro remains stable against the dollar because America has debt problems too. But unlike the euro, the dollar’s structure isn’t in doubt.

Indeed, investors are increasingly speculating directly against the euro. The amount of open financial betting against the common currency — known as short positioning — has rapidly risen over the past 12 months. When ECB President Mario Draghi said three weeks ago that there was no point in wagering against the euro, anti-euro warriors grew a bit more anxious.

One of these warriors is John Paulson. The hedge fund manager once made billions by betting on a collapse of the American real estate market. Not surprisingly, the financial world sat up and took notice when Paulson, who is now widely despised in America as a crisis profiteer, announced in the spring that he would bet on a collapse of the euro.

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Reading List: Enjoy!

Wealth doesn’t trickle down – it just floods offshore, new research reveals (Guardian)

A far-reaching new study suggests a staggering $21tn in assets has been lost to global tax havens. If taxed, that could have been enough to put parts of Africa back on its feet – and even solve the euro crisis

Super rich hiding up to $32 trillion offshore (AlJazeera)

Rich individuals and their families have as much as $32 trillion of hidden financial assets in offshore tax havens, representing up to $280bn in lost income tax revenues, according to research published on Sunday.

The study estimating the extent of global private financial wealth held in offshore accounts – excluding non-financial assets such as real estate, gold, yachts and racehorses – puts the sum at between $21 and $32 trillion.

This amounts to roughly the US and Japanese GDP combined. Roughly 10 million people worldwide have offshore accounts, with 100,000 people owning half of those secreted assets.

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Gold Wheres it Going? How the World’s Safehaven has lately turned into Just another Risk Asset

Gold has been one of the hottest investments on the planet the last few years. However only a few people understand that there is a lot of money to be made on the daily, weekly, and monthly, fluctuations of gold. “Gold bugs” will tell you and they are correct its an ultimate store of wealth, hedge against hyperinflation, hedge against US fiscal problems with US dollar, and so on.

I am here to give you a different perspective. All of those are correct, but lets get down to the core of why gold moves and how it does move.

In August, the US got downgraded from AAA to AA from S an P ratings. This caused a huge move in Gold based on Safe haven demand.  There are two reasons gold moves, either it moves as a safe haven asset when the stock market is crashing, US political gridlock damages economy, Fed Cuts Interest Rates, Fed prints more money via quantitative easing etc.  The move that has taken Gold from 1000 to where is it now is the QE1 and QE2 Programs enacted by our federal reserve.

When you look at the Financial Crisis of 2008,  Gold hit a high of 1000, and during the crisis sold off to below 800.

The same thing has happened with the European Debt Crisis, even though gold is still a winning safe haven trade, when big Hedge Funds, are loosing a lot of money they have to sell their winners to cover losses. John Paulson , of Paulson and Co, was the largest shareholder in the Spider Gold ETF GLD.  His 13f Filing shows he recently cut a big position in gold. His fund is down 44% this year, and this is from a guy that made billions betting on sub prime mortgages to fail, which means his investors made money while everyone else in 2008 lost.  His other trades were doing so poorly that many in the market feared he would have to sell his only big winner gold, in order to help his fund. All other hedge funds followed.  This is why we have seen a change in Gold lately.

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Speculation: New world reserve currency (Part I)

This article is under speculation, because this is what it is at best, at the moment.

There is growing concern that we might be seeing a new world currency being developed at the moment. Continued euro financial crisis could inevitably put the global finance sector into a tail spin. And why would we say that?

And this is why. There are 23 countries in the European Union, and almost all of them are in a financial crisis of some sort; Greece, Italy, Spain, Finland, Ireland, Portugal are the bigger economies to bear the burden of the crisis so far. Imagine this, the 10-year treasury notes from the Government of Italy have a yield of 7.30% (as of today), and Greece with a whopping 30.71%.  Compare this to an individual in Canada, who can get loans at prime + 2% (5.5%) at the major banks without much problem. What does this mean? This means that an individual in Canada is more capable of running their own finances, and is more able to pay back the loan taken, as compared to a government that can raise taxes, and implement different policies to increase its revenues and decrease deficits. In the end, this is just absurd. As mentioned in our earlier posts (here and here), CAPM is dead, and this is the proof that no government is safe from such a systematic failure and a run on their banks.

So what is next in the play?

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Gold – a bear’s best friend

If you have been following Gold for the last three months, you must be astonished by the total return received on the yellow metal, a whopping 109% (annualized return). The yellow metal increased in value by 27.4%.  So the question is, what is the reason for the increase in gold prices?

You

Or the investor sentiment. However there is much more that needs to be said about the topic.

Historically, whenever the price of gold goes up, the world sees an increase in the supply of gold. The supply is from Southeast Asia, notably Pakistan, India, Sri Lanka and Bangladesh, where families have been converting excess savings into gold for the last hundreds of years. Traditionally brides are gifted gold jewellery by her parents when she is married, so there is always an ample supply of gold laying around. Whenever the price used to go up, the increase in supply would temporarily dampen the price increase.

Well that is the old gold. The new gold rush is due to the fear of Fiat currency, and notably the prestigious U.S dollar decreasing in value. Investors seek refuge from inflation and growth fears that have been plaguing the Euro and the U.S. As of now, we know that the Euro might as well call it quits. Germany and France are cornered and they do not have a way to get Eruo debt in control. Their only gameplay is more austerity measures on the Euro countries, and devaluing the Euro, which is taking place unsystematic by the market  (unsystematic is a nice way to say, brutally).

Two months ago when the markets were in the fear of Euro, they rushed towards the U.S, because the U.S will always be the safe heaven. Just like the Greeks, the Romans, the Arabs, Chinese empire, and the British empire, the U.S. will always have its cool and be able to repay its debt. (Can you tell if I am being sarcastic enough?) However the market just realized, oh, this is not true any more. There is real growth problems in the U.S. But the bigger problem is the political restlessness that has gripped the U.S, where the politicians bicker and fight about measly decrease in deficits and threaten to default the country. The market will punish U.S for a long time.

As they say it in the olden times; Reputation is like fine china, takes hardwork to keep it in shape, and it only takes one mistake to break it into a million pieces.

I am bearish on the U.S economy, the U.S political system and worst, the U.S social system. As a disclosure, I am long Gold, and will be for the forseeable future.

 

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