Greeks have to declare all their wealth

From January 2017, 8.5 million Greek citizens have to file a declaration of their belongings. The government is on the hunt for real estate, jewellery, art and even cash – outside the banking system.

Before government implements new tax, a directory of the soon-taxed wealth has to be prepared. Today Greece is required to auction public riches to service their debt. The debt which is impossible to be repaid even if all priceless monuments are sold. What is worse is a conflict between the IMF and the German government. A compromise between those two has not materialised yet, making Hellenic country afraid of every round of financial help negotiations. This time, the Greek government has to hedge against another crisis on the horizon – lack of liquidity – and money will be taken from those who still have some savings in one form or another.

Rating agencies – economic weapon of the USA

Far from being news – the US uses rating agencies as a weapon of economic warfare against countries trying to become independent from the superpower. Erdogan’s Turkey is in the cross hairs now. First cut came after failed coup (mid-July).

How to distinguish an attack from yet another revision of credit risk? Because what Moody’s and S&P did have little economic reasoning behind it. The failed coup had little economic fallout, but instead diplomatic ties with Russia and Israel became warm. This will translate into a better economic position of Ankara.

Tourism is one of the key sectors in Turkey’s economy. This is why shooting down Russian jet had dire political and economic consequences – empty rooms in Turkish hotels. After Erdogan apologised and renewed contact with Moscow, Russian tourists returned to their favourite resorts. Ankara and Moscow dusted off investment plans (Turkish Stream and others), signed new trade deals and removed sanctions. All those circumstances tend to paint a positive picture for a future rating increase. However, plans to remove Erdogan after the failed coup are still in place and if military means failed then economic arsenal is being used. By increasing the cost of servicing debt, the government in Ankara tasted the weapon of choice to force Turkey’s submission.

China and Russia to double the efforts to help Syrians

Chinese and Russian military delivers humanitarian help for Syrians in the conflict zone but will also start to arm and train Syrian military to fight the Islamic State. Until now Beijing has not meddled in the Middle Eastern conflict. The situation must have changed substantially for the foreign policy to shift.

Cooperation of this alliance is also visible in the South China Sea. Joint naval drills recently showed a clear signal towards the US that any hostile action against one will yield response from the other.

Sanctions against Russia make Europe rethink their interest

Moscow was supposed to soften its policy in Ukraine after an introduction of sanctions. To the contrary, Putin’s position is stronger. When Moscow returned the favour and sanctioned import of EU goods, the China found its way into the Russian market. What China cannot produce (mainly food) is imported from South America and Asia. Growing domestic food market is another proof of the scale of anti-Russian sanctions failure. Western companies with solidified position in Europe now have to compete against each other rather than export Eastwards. A failed attempt to isolate Putin gave Kremlin an economic baptism of fire showing that Russia is ready to challenge Western interests.

Governments tell people to stockpile food and water

Citizens of Germany, the Czech Republic and Finland received a chilling recommendation from their respective authorities to stockpile food and water as a safety measure against a crisis. Information was not detailed but we cannot rule out military confrontation and/or economic crisis.

Looking at Europe’s map we can assume German and Czech notification is not due to the fear of Russia. Taking a closer look, military operations are possible in connection with the latest terrorist attacks in Western Europe. The flow of immigrants is smaller but tensions between newcomers who already settled and Europeans are rising and could potentially lead to serious conflicts or a civil war in the worst case scenario.

Another angle comes from looming bankruptcy of Deutsche Bank – materialising in front of our eyes – that can lead to the banking crisis. This means millions of people without access to their money, not to mention problems with electronic payments. Food would literally disappear from supermarket shelves and storing basic products might as well be the best strategy to survive this crash.

Bill Gross criticises central banks’ policy

Many famous investors believe that central banks saved the economy from falling off the cliff through printing money. Bill Gross (bond market specialist) is not one of them. Cheap money caused misallocation of capital and stopped investments that could kick-start the economy (central bankers refuse to learn this lesson). The result is a drop in productivity – the key to long-term prosperity and economic growth.

Central banks’ policy distorted one of the basic mechanism in the equity market. Corporations no longer acquire more capital to expand their operations. It is no longer available for private investors, taking away their dividend-oriented portfolios. Instead, everyone is gambling their money in pursuit of profit hoping for another central bank’s intervention. It is nearly forgotten wisdom that production of goods represents wealth, not the number of zeroes in the bank account. Eventually, all those believing in the gospel of the “new economy” bringing prosperity without the need of work (TTID – “this time is different”) will experience a very painful wake-up call.

British debt and lack of liquidity

The Bank of England (BOE) buys government’s debt in its QE program (since 2012). The goal is to unload freshly printed currency into circulation and decrease interest rate the government pays. Years of monetary interventions and today’s debt market looks terrible. Recently, the BOE wanted to buy 1.18 bn GBP in bonds but it failed. The market is so shallow there were no assets to buy! This pushed the BOE to systematically offer higher price but with no one willing to sell, liquidity problem emerged.

Continuous central bank interventions and buying more and more assets created a very difficult situation – when the market lacks depth then even a small bid (given the size of central bank’s wallet) cannot be finalised.

We arrive at the point where central banks will not have enough debt to buy and future rounds of QE have to inevitably fail. The solution (think like a central banker now) is to add new classes of assets for purchase – just like the ECB in its corporate bond purchase program. Unfortunately, this is a simple recipe to nationalise the whole economy and completely erase the price discovery mechanism the equity market was created for.

Global consequences of RMB joining the SDR basket

Finally, Beijing can reap the benefits of their move to include RMB in the SDR basket. A perception of China shifted from a developing economy – good to invest in during boom but bad in times of crisis – to a safe haven. Steadily falling rates of Chinese bonds for 3 years turned their debt into a peaceful harbor in times of turmoil. Another step to marginalise USD and build the position of Asian challenger.

Spanish authorities are onto the Santander group

Spanish financial market regulator asks for more data regarding bank accounts, capital flow and risk calculation mechanisms bank uses. Santander Consumer USA Holdings has a big share in American consumer auto loan market. The bubble visible in auto loans shadows one that burst in 2008. A significant expansion in subprime lending lowered applicants’ requirements despite the fact that these loans are burdened with a high risk. The whole group is now in jeopardy thanks to one probable scenario. If clients stop paying their loans back, cars will be taken over by the bank. In the case of the aftermarket being flushed with a big number of cars, the bank can lose liquidity and fail. The American consumer is in a very bad situation now and the risk is very high for this bubble to burst. Seeing European entities engaged in such risky investments in the US heightens the insolvency risk of the banking sector in Europe.

Portuguese banks continue to gamble with government debt

It took them only two years to add 25% of their government debt share and nearly catch up with Spanish entities. Maybe soon they could take over Italy – with their own internal crisis. Why banks are so eager to invest in domestic debt? Let us look at 10-year bonds’ interest rate. Even after the ECB interventions, they pay 3% (this is reasonable – the higher the rate, the cheaper price is). For comparison: Spanish pay 1%, Italian 1.2%, German -0.05%. Among Eurozone countries, Portuguese 3% is very high given significant engagement of institutional investors.

There are two most probable outcomes (and motives):

1. The domestic banking sector is trying all their best to save Portugal from another episode of the financial crisis, which could be triggered by a huge budget deficit.

2. The banking sector found a cheap asset and increases their position in bonds in advance of expected problems the government is going to have with rolling over the public debt. Ultimately, the ECB will be pushed to increase their presence in Portugal debt market visibly lifting prices.


Independent Trader Team