Category Archives: Financial Crisis

The Global Economy’s New Abnormal by Nouriel Roubini – Project Syndicate

The recent market turmoil has started the deflation of the global asset bubble wrought by QE, though the expansion of unconventional monetary policies may feed it for a while longer. The real economy in most advanced and emerging economies is seriously ill, and yet, until recently, financial markets soared to greater highs, supported by central banks’ additional easing. The question is how long Wall Street and Main Street can diverge.

In fact, this divergence is one aspect of the final abnormality. The other is that financial markets haven’t reacted very much, at least so far, to growing geopolitical risks either, including those stemming from the Middle East, Europe’s identity crisis, rising tensions in Asia, and the lingering risks of a more aggressive Russia. Again, how long can this state of affairs – in which markets not only ignore the real economy, but also discount political risk – be sustained?

Welcome to the New Abnormal for growth, inflation, monetary policies, and asset prices, and make yourself at home. It looks like we’ll be here for a while.

The Global Economy’s New Abnormal by Nouriel Roubini – Project Syndicate

Why pensions are the new flashpoint in Greece’s crisis – Yahoo Finance

Critics say the reform will heap the most pain on self-employed professionals and farmers, forcing them to pay up to three quarters of their income in pension contributions and taxes. They warn the majority will be forced to change jobs or emigrate — accelerating the brain drain the country has suffered since the crisis started in 2010.

“We are fighting for our very survival,” said Georgios Stassinos, head of the country’s biggest engineers’ union. If the reforms are adopted, he said, “the country will be left without engineers, doctors, lawyers, pharmacists and economists.”

The head of Greece’s bar associations, Vassilios Alexandris, said the new system would reduce some lawyers’ net incomes to as little as 31 percent of their gross intakes, from the current 46 percent. “Professionals will not pay their (pension) contributions, not out of choice but because they will be unable to,” he said.

Why pensions are the new flashpoint in Greece’s crisis – Yahoo Finance

Russia Has Few Options for Turning Its Economy Around | Stratfor

After years of sanctions and declining oil revenues, the outlook for the average Russian is looking increasingly grim. Unemployment is rising, and average wages — already at their lowest since October 2005 — are still declining. Meanwhile, a growing share of the population (likely as much as 14 percent in 2015) is falling below the poverty line. The dauntingly small budget of Russia’s welfare system, which is meant to provide a robust safety net for the poorest of Russian society, is buckling under the weight of its burden, and the government is having trouble keeping its poorest citizens from sinking into utter impoverishment. Social tension is mounting, and unrest will likely only grow as the year progresses.

Meanwhile, raising capital reserve requirements and continuing to subsidize loans for Russian businesses will do little to make a dent in the high inflation putting strain on the Russian people in the short term. With social unrest already high and expected to escalate throughout 2016, the Kremlin could find itself in a precarious political situation as parliamentary elections at the end of the year draw near.

Russia Has Few Options for Turning Its Economy Around | Stratfor

There’s a big sign the US ‘could enter recession in the second half of this year’

But Deutsche Bank’s Joe LaVorgna thinks there’s a sign suggesting that the pessimists might be on to something.

In a recent note to clients, he noted that the decline in corporate profit margins is a glaring indicator that, in a worst case scenario, a recession could be here within a few months.

“Historically, the average and median lead times between the peak in profit margins and the onset of recession have been eight and nine quarters, respectively,” wrote LaVorgna in a note to clients Thursday. “This would imply that the economy could enter recession in the second half of this year.”

“Margins always peak ahead of recession,” he added. “Indeed, there has not been one business cycle in the post-WWII era in which this has not been the case.”

Profit margins peaked during the third quarter of 2014, and have been steadily declining since, which LaVorgna suggests is a red flag.

Profit margins call for recession – Business Insider

The man who cleaned up during the GFC reckons another financial crisis is on the way | Business Insider

Well known US hedge fund manager Kyle Bass believes the day of reckoning for China’s banking system may be only “months away”.

During an interview with CNBC, Bass suggested too few investors were paying attention to signs of stress in China’s banking system, warning that after growing to US$34.5 trillion, or more than three times GDP in recent years, a wave of defaults may be about to hit the financial system.

Bass cited a raft of concerns about the current state of the Chinese economy, pointing to a sharp deceleration in industrial production and the lowest nominal quarterly GDP growth reading seen in 40 years.

The man who cleaned up during the GFC reckons another financial crisis is on the way | Business Insider

A whiff of panic in the Kremlin as Russia’s economy sinks further

Signs of panic and dysfunction are everywhere. Finance Minister Anton Siluanov has demanded yet another round of 10 percent budget cuts. (A similar reduction occurred in 2015). Otherwise, Siluanov warns, Russia faces a repeat of the 1998-99 financial crash and possible default — not exactly reassuring words from the man in charge of Russia’s economic policy.

The 2016 budget, meanwhile, already included catastrophic reductions in education, health care and social spending. How will the Russian public react to additional cuts? No one knows. To raise revenues, the Kremlin is considering selling off shares in large state companies, including Rosneft, Sberbank and Aeroflot, while still maintaining majority control. Moscow has long vowed never to sell these shares in a depressed market, but that is exactly what would happen under current economic conditions.

A whiff of panic in the Kremlin as Russia’s economy sinks further

Tokyo Doubles Down | Mauldin Economics

“When it becomes serious, you have to lie.”

“I’m ready to be insulted as being insufficiently democratic, but I want to be serious… I am for secret, dark debates.”

“Of course there will be transfers of sovereignty. But would I be intelligent to draw the attention of public opinion to this fact?”

“If it’s a Yes, we will say ‘on we go,’ and if it’s a No we will say ‘we continue.’”

“We all know what to do, we just don’t know how to get re-elected after we’ve done it.”

– All quotes from Jean-Claude Juncker, prime minister of Luxembourg and president of the European Commission

Whatever turmoil the Bank of Japan had already created was apparently not enough to concern a majority of its board, so they have moved to negative interest rates.

Let’s shift from Japan to the US. Last week, former Fed chair Ben Bernanke said in an interview that the Fed should consider using negative rates to counter the next serious downturn. “I think negative rates are something the Fed will and probably should consider if the situation arises,” he said.

The same story at MarketWatch mentioned that former Fed Vice-Chairman Alan Blinder has already suggested using negative interest rates for overnight deposits. And Janet Yellen, who said in her confirmation testimony to Congress in 2013 that the potential for negative interest rates to cause disruption was significant, now says they are an option the Fed would consider.

We often refer to the herd mentality when we talk about investors. Economic academicians and central bankers are equally prone to bovine behavior. Theirs is a slow-moving herd, to be sure, but it raises much dust as it lumbers.

Now, let’s fast-forward right into the future and the next recession in the US, which will probably be part and parcel of a global recession. Major central banks everywhere will be lowering rates, engaging in quantitative easing, and in some cases going even deeper into negative interest rates.

You sit on the Federal Open Market Committee. Almost everyone in the room with you is a committed Keynesian. That is the bulk of your training and experience, too, and everyone agrees with you. You are going to take actions that are in alignment with your theoretical understanding of how the world works.

And your theory says that you need to reduce the cost of money so that people will borrow and spend. You know that doing so will hurt savers, but it is more important that you get the economy moving again.

You need to understand that economists have faith in their theories in the same way that many people have faith in their religion.

In the world of the leading economists and central bankers, “everyone” believes what “everyone” knows to be true. All their research agrees with them, and any that doesn’t is labeled as flawed. Any empirical evidence that shows quantitative easing hasn’t been working is ignored or explained away, even when it is presented by outstanding academic economists. No, quantitative easing didn’t work because we didn’t do enough of it. Negative interest rates aren’t working because we haven’t gone low enough.

Tokyo Doubles Down | Thoughts from the Frontline Investment Newsletter | Mauldin Economics

China’s banking stress looms like Banquo’s Ghost in Davos – Telegraph

Bad debts in the Chinese banking system are four or five times higher than officially admitted and pose a mounting risk to the country’s financial stability, the world’s leading expert on debt has warned.

Harvard professor Ken Rogoff said China is the last big domino to fall as the global “debt supercycle” unwinds. This is likely to expose the sheer scale of malinvestment that has built up during the country’s $26 trillion credit bubble.

Prof Rogoff said the official 1.5pc rate of non-performing loans held by banks is fictitious. “People believe that as much as they believe the GDP data,” he told the World Economic Forum in Davos.

The real figure is between 6pc and 8pc. He warned that unexpected problems can come “jumping out of the woodwork” once a debt denouement unfolds in earnest.

China’s banking stress looms like Banquo’s Ghost in Davos – Telegraph

Goldman Sachs Calls Brazil a ‘Mess’ After Warning on Depression – Bloomberg Business

Goldman Sachs Group Inc. said the crisis in Brazil will get worse before it gets better after the bank last year warned that Latin America’s largest economy was being dragged into a depression.

“Brazil is a mess,” Alberto Ramos, the chief Latin America economist at Goldman Sachs, said at an event organized by the Brazilian-American Chamber of Commerce in New York on Wednesday. “Number 10 used to mean Pele. Now it’s inflation rate, unemployment rate and the popularity rate of the president.”

Goldman Sachs Calls Brazil a ‘Mess’ After Warning on Depression – Bloomberg Business

Russia’s Economy Faces Long-Term Decline – Bloomberg Business

“As grim as the numbers are, they may understate the increasingly dismal prospects for a country that only a few years ago was enjoying its greatest prosperity.”

Russia has weathered crises before, including a 2008 oil price plunge and a 1998 sovereign debt default. In those cases, robust growth returned within a year or two. This recession’s different, says Vladislav Inozemtsev, a professor at the National Research University Higher School of Economics in Moscow. “It’s not about oil or sanctions; it’s about structural weakness,” he says. There already were signs of malaise in 2012, when oil topped $100 and Western sanctions over Russia’s annexation of Crimea were two years off.

The trigger for the downturn, Inozemtsev says, was Putin’s return to the presidency in May 2012. He raised taxes on business and real estate to finance military spending and expanded the reach of inefficient state-controlled companies such as oil giant Rosneft. “Businesspeople became disillusioned,” curbing investment in factories and equipment, Inozemtsev says. Productivity slackened, corruption thrived, and foreign investment slowed as investors fretted about the state taking over their assets, says Timothy Ash, an emerging-markets strategist at Nomura International in London.

Russia’s Economy Faces Long-Term Decline – Bloomberg Business