Rates Are Rising for All the Wrong Reasons

Submitted by Michael Pento – Pento Portfolio Strategies

Wall Street carnival barkers are relishing in the fantasy that the economy has finally achieved escape velocity. Therefore, they accept with alacrity that this is the primary reason why interest rates have started to rise. However, the fact still remains for the first half of 2015 GDP growth will probably be less than 1%.

GDP contracted by 0.7% in the first quarter of 2015.  The Atlanta Fed, whose GDP Now calculation has been on the money, now sees second quarter growth at 1.9%. Therefore, it is prudent to conclude the most optimistic case for growth in the first half of the year will be about 1%.  Of course, the perpetually upbeat economists on Wall Street are always convinced the economy will skyrocket in the second half of each year. But still, if the Atlanta Fed is correct—and it looks like it will be spot on given the anemic data already released for April and May—annualized GDP for the first two quarters of 2015 will be running at a pace that is less than half of the 2.2% growth averaged since 2010.

Perpetual optimists will highlight the recent positive data in housing as evidence of a robust recovery. But most of the upbeat numbers in housing are a result of front running the inevitable mortgage rate increases, as people rush to lock into low rates while they still can. And even with this, housing data has been mixed at best. U.S. housing starts in May fell 11.1%, to an annual rate of 1.04 million units from a revised 1.17 million units in April. This rate of new home construction is far below the 1.5 million rate seen in the year 2000, and light years away from the 2.2 million rate at the height of the housing bubble.

And we also have some encouraging data in retail sales, courtesy of the booming auto market. But sales in cars have been driven by the resurgence of the infamous liar loans, loose lending standards and virtually free money that led to the collapse in Mortgage Backed Securities in 2007.

Yet, despite booming car sales and slightly better new home construction rates, the nation’s manufacturing base remains literally in the basement. For example, the Empire State’s business conditions index unexpectedly dropped to -1.98 in June and Industrial Production decreased 0.2 percent in May after falling 0.5 percent in April. May is the fourth negative reading in the last six months on I.P., with the other two readings being flat. Continue reading

The FOMC Decision – Studying the Flight of Birds and Gold

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Federal Open Yawn Committee puts Kremlinologists all over the World to Sleep …

The Fed’s monetary policy statement delivered on Wednesday was the non-surprise/yawn-inducer of the year. Readers can take a look at the trusty WSJ statement tracker, which reveals that apart from a few minor and unimportant changes, the statement was basically a carbon copy of the last one.

Not a single dissent mars this bland exercise in bureaucratese, so there isn’t even anything to report on that front. If you have trouble sleeping, reading this statement might be a very good alternative to Valium.

So did anything noteworthy happen? Well, yes. Apparently market participants believe they have to react to the forecasts of a bunch of bureaucrats who are quite likely among the worst economic forecasters in the world – and that’s really saying something.

augursAugurs in ancient Rome, observing the behavior of hens.

The High Priests of Augury

It is widely assumed that it is the job of economists to “make predictions”. This is actually not the case. The job of making predictions is that of augurs and soothsayers. In fact, modern-day economists strike us as today’s equivalent of the caste of augurs in ancient Rome.

As Wikipedia informs us:

“The augur was a priest and official in the classical world, especially ancient Rome and Etruria. His main role was the practice of augury, interpreting the will of the gods by studying the flight of birds: whether they are flying in groups or alone, what noises they make as they fly, direction of flight and what kind of birds they are. This was known as “taking the auspices.” The ceremony and function of the augur was central to any major undertaking in Roman society—public or private—including matters of war, commerce, and religion.”

(emphasis added)

Instead of studying the entrails of freshly slaughtered animals or the flight patterns of birds, today’s augurs are poring over statistics in order to “take the auspices” – but the success rate of their predictions is depressingly similar to that of the ancient birdwatchers. If the members of the FOMC board, the high priests of this caste in modern times, were to retire tomorrow and never again utter a forecast, the global economic soothsaying hit rate would likely improve considerably.

It is all the more astonishing that in light of the evidence to date – the chance that an economic forecast by the Fed actually pans out is approximately 0.0% (give or take a zero behind the decimal point) – market participants are actually paying attention to nonsense like the infamous “dot plot”.

dot plot june 2015The bizarre “dot plot” which indicates the estimates of FOMC members regarding the “future path of monetary policy”. Might as well throw darts, click to enlarge. Continue reading

History in Free Verse

Submitted by James Howard Kunstler  –  www.kunstler.com

History might not rhyme, exactly, but it’s not bad for free verse. Greece is this century’s Serbia — a tiny, picturesque backwater nation blundering haplessly into the center stage of geopolitics. And the European Union is, whaddaya know, Germany in drag, on financial steroids.

Nobody knows what will happen next in the struggle to wring some kind of debt repayment promises out of poor Greece. Without “restructuring” — a virtual national bankruptcy proceeding — there can be no plausible promises of repayment. Both sides seem to have exhausted their abilities to juke their way out. The European Union and its wing-men at the European Central Bank (ECB) and the International Monetary Fund (IMF) can only pretend to kick that fabled can down the road because it has turned into a cement-filled 50-gallon drum. The Greek government can only pretend to further dismantle its civil service and pension systems lest angry citizens toss it out and replace it with a new government, perhaps an ugly and pugnacious one made up of Golden Dawn party Nazis.

In the background, Spain, Portugal, Italy, Ireland, and perhaps even France wait without peeping to see if Greece is allowed to restructure, because you can be sure they will demand the same privilege to debt relief. But that’s hardly possible because the ECB has been engineering a shift of debt-holding away from the big corporate banks  — which made all the stupid loans — to the taxpayers of their member states, especially Germany, which stands to be the biggest bag-holder when a contagion of serial default seeps across the continent.

This implies, of course, that along the way to that outcome something sickening happens to the price of all the bonds that the debt is embodied in. Namely, its value craters for the simple reason that the threat of non-payment makes interest rates shoot up to reflect the actualization of risk. That would certainly set off the booby-trap of derivative interest rate swaps and credit default swaps that have been laid into history’s greatest financial minefield. Thus, the big banks that were supposedly shielded by the ECB shell game of Hide the Debt Pea Somewhere Else, will blow up in a daisy-chain of unpayable obligations. Continue reading

Stressing the Stress Tests

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Recognizing the danger of overdoing it on Greece today, I think there is another important and complimentary factor that the uncertainty about default there is revealing. In addition to the economic re-awakening about how nothing much has really changed with Greece, including its fiscal impediments that endure despite its default three years ago, the financial theme that has provided such buoyant exuberance since late July 2012 is in danger of being repealed.

Start with credit default swap prices on Greek debt, which includes the five-year maturity that was floated just last year. The “market” is predicting that the Greek government is 70-80% likely to default on its debt yet again, maybe as probable as 90% or more.

Given these dramatic stakes, the risk of a Greek default has gone way up. One way to measure that risk is by looking at the skyrocketing price of insurance policies that would pay out if Greek bonds go bust. The cost to insure Greek debt for one year against the risk of default has skyrocketed 456% since the start of the 2015, according to FactSet data.
These insurance-like contracts, known as credit default swaps, imply there is a 75% to 80% probability of Greece defaulting on its debt, according to Jigar Patel, a credit strategist at Barclays.
The probability of a Greek default soars to a whopping 95% for five-year CDS, Patel said.

The entire point of Mario Draghi’s promise, on the financial end, was to convince the bond markets that sovereign debt in Europe would be treated as sovereign debt once again. That meant, in unspecified terms, that the ECB would never allow another loss event that would threaten the euro and the economic/monetary union (noose).

It has always (in the past few generations, under fiat) been a bedrock assumption of finance that sovereign debt was essentially risk-free. Governments, developed world anyway, possessed the ability to tax under almost any circumstances so if pressed on fiscal imbalance there would never be any real danger. What was left for banana republics was to be shut out of the bond markets after quite regular defaults by less “organized” sovereigns; no major nation would ever, it was assumed, suffer that great loss of borrowing capacity. Continue reading

Hold “Physical Cash,” “Including Gold and Silver” To Protect Against “Systemic Risk” – Fidelity

Submitted by Mark O’Byrne  –  GoldCore

– Hold physical cash “including gold and silver” says manager in one of largest mutual fund and financial services groups in the world
– “Systemic risk” threat to deposits says respected Fidelity  fund manager
– Record global debt unlikely to be sustained by higher interest rates
– Banks may not be prepared for “shock” of defaults
– Guarantees to depositors unlikely to be honoured
– Savers and investors should hold “physical currencies” “including precious metals”

A fund manager for one of the largest mutual fund and investment groups in the world, Fidelity,  has warned investors and savers to have an allocation to “physical cash,” “including  precious metals” to protect against “systemic risk”.


Ian Spreadbury, who oversees the investment of over £4 billion of clients money in bond markets for Fidelity told Telegraph Money

“Systemic risk is in the system and as an investor you have to be aware of that.”

He believes that the record debt that has been ballooning since the crisis of ’08 due to interest rates being forced down to near zero by central banks. This debt, particularly where mortgages are concerned, would likely become unsustainable if, and when, rates rise to realistic levels.

“We have rock-bottom rates and QE is still going on – this is all experimental policy and means we are in uncharted territory.”

He points out that in such an environment banks would be unable to sustain the losses caused by defaults on unserviceable debt which would lead to a systemic crisis.

Spreadbury is not the first high profile financial expert to warn of an impending systemic crisis. We recently covered how Stephen King, chief economist at the world’s third largest bank HSBC, likened the global economy to the Titanic. Andrew Wilson, Goldman Sachs Asset Management’s chief executive in Europe recently gave similar warnings.

Spreadbury highlights that the £85,000 guarantee to UK depositors by the Financial Services Compensation Scheme is largely unfunded and that the government has said it will not intervene to rescue failing banks in the future – leaving deposits to be bailed-in.


The EU and other supra national institutions have been agreeing the architecture for bail-ins in recent years.  Just this month, at the start of June, the European Commission has ordered 11 EU countries to enact the Bank Recovery and Resolution Directive (BRRD) within two months or be hauled before the EU Court of Justice.

11 countries are under pressure from the EC and had yet “to fall in line”. The countries were Bulgaria, the Czech Republic, Lithuania, Malta, Poland, Romania, Sweden, Luxembourg, the Netherlands, France and Italy.

The new bail-in system is largely in place and emergency resolutions can be brought forward in the event of banks failing in the interim period. The “bail-in” will require that shareholders, bondholders and importantly now depositors will all suffer ‘haircuts’ or be burnt if a financial institution is in trouble.

The European parliament confirmed that depositors with more than 100,000 euros ($137,000) would be bailed in after shareholders and bondholders. It is important to note that the 100,000  figure is an arbitrary figure and there is a possibility that this figure could be reduced by an insolvent government faced with an imploding banking system.

To deal with these risks Spreadbury advocates a well diversified portfolio. Cash should be spread out in different banks. Savers should hold physical cash outside the banking system – a remarkable suggestion coming from somebody so well acquainted with the workings of the financial system.

He also suggests that investors hold gold and silver. He says that the unravelling he foresees is more likely to happen in “the next five years rather than ten”.

Fidelity’s bond manager echoes what we have been advising clients and the wider public for some years now.

Mr Spreadbury concluded

“The message is diversification. Think about holding other assets. That could mean precious metals, it could mean physical currencies.”

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

Five Horsemen Of The Euro’s Future (Politico)
The Three Victories Of The Greek Government (Jacques Sapir)
Greece and Germany Agree the Euro Can’t Work (Crook)
The Euro Was Doomed From The Start (Norman Lamont)
If Greece Defaults, Europe’s Taxpayers Lose (Bloomberg)
Why On Earth Is Greece In The EU? (Angelos)
EU Welcomes 11th-Hour Greek Proposals In ‘Forceps Delivery’ (Reuters)
EU Commission Gives Guarded Welcome To Greek Plan Before Talks Bloomberg)
Greece Creditors Aim To Strike Deal To Include 6-Month Extension (Guardian)
Pro-Greek Demos In Brussels, Amsterdam Before Crunch Summit (AFP)

The Flash-Crash Trader’s Kafkaesque Nightmare (Bloomberg)
China Regulator Official Fired After Husband Suspected of Illegal Trading (WSJ)
Australian Housing Market Facing ‘Bloodbath’ Collapse: Economists (SMH)
Canada’s Giant Pension Funds Are The New Masters Of The Universe (Telegraph)
EU Extends Economic Sanctions Against Russia For 6 Months (RT)
Ayn Rand Killed The American Dream (Mathieu Ricard)
Behind the Scenes With the Pope’s Secret Science Committee (Bloomberg)
UK Scientific Model Flags Risk Of Civilisation’s Collapse By 2040 (Nafeez Ahmed)

Much more here: Debt Rattle June 22 2015 – TheAutomaticEarth.com