In A World Of Artificial Liquidity - Cash Is King

By: Nomi Prins

Sun, Jul 5, 2015

And you'd better have some stashed out of the system

Global central banks are afraid. Before Greece tried to stand up to the Troika, they were merely worried. Now it's clear that no matter what they tell themselves and the world about the necessity or even righteousness of their monetary policies, liquidity can still disappear in an instant. Or at least, that's what they should be thinking.

The Federal Reserve and US government led policy of injecting liquidity into the US and then into the worldwide financial system has resulted in the issuance of trillions of dollars of debt, recycling it through the largest private banks, and driving rates to 0% -- or below. The combined book of debt that the Fed and European Central Bank (ECB) hold is $7 trillion. None of that has gone remotely into fixing the real global economy. Nor have the banks that have ben aided by this cheap money increased lending to the real economy. Instead, they have hoarded their bounty of cash. It's not so much whether this game can continue for the near future on an international scale. It can. It is. The bigger problem is that central banks have no plan B in the event of a massive liquidity event.

Some central bank entity leaders have admitted this. IMF chief, Christine Lagarde for instance, warned Federal Reserve Chair, Janet Yellen that potential US rate hikes implemented too soon, would incite greater systemic calamity. She's not wrong. That's what we've come to: a financial system reliant on external stimulus to survive.

These "emergency" measures were supposed to have healed the problems that caused the financial crisis of 2008 -- the excessive leverage, the toxic assets wrapped in complex derivatives, the resultant credit and liquidity crunch that occurred when banks lost faith in each other. Meanwhile, the infusion of cheap money and liquidity into banks gave a select few of them more power over a greater pool of capital than ever. Stock and bond markets skyrocketed as a result of this unprecedented central bank support.

QE-infinity isn't a solution -- it's a deflection. It's a form of financial subterfuge that causes extra problems. These range from asset bubbles to the inability of pension and life insurance funds to source longer term less risky long-term assets like government bonds, that pay enough interest for them to meet liabilities. They are thus at risk of rapid future deterioration and more shortfalls precisely because they have nothing to invest in besides more risky stock and lower-rated bond markets.

Even the latest Bank of International Settlement (BIS) 85th Annual Report revealed the extent to which global entities supervising the banking system are worried. They harbor growing fears about greater repercussions from this illusion of market health (echoing concerns I and others have been writing about for the past seven years.)

The BIS, or bank for the central banks was established during the global Great Depression in 1930 in Basel, Switzerland, when bank runs on people's deposits were the norm. The body no longer buys into zero-interest rate policy as an economic cure-all. In their words, "Globally, interest rates have been extraordinarily low for an exceptionally long time, in nominal and inflation-adjusted terms, against any benchmark. Such low rates are the remarkable symptom of a broader malaise in the global economy."

They go on to note the obvious, "The economic expansion is unbalanced, debt burdens and financial risks are still too high, productive growth too low, and the room for maneuvering in macroeconomic policy too limited. The unthinkable risks becoming routine and being perceived as the new normal."

These are troubling words coming from an organization that would have much preferred to deem central bank policies a success. Yet the BIS also states, "Global financial markets remain dependent on central banks." Dependent is a strong word. How quickly the idea of free markets has been turned on its head.

Further, the BIS says, "Central bank balance sheets remain at unprecedented high levels; and they grew even larger in several jurisdictions where the ultra low policy rate environments were reinforced with large purchases of domestic and foreign assets."

Central banks are not yet there, but rising volatility is indicative of the accelerating approach to the nowhere left to go mark from a monetary policy perspective. This, after seven years of a reckless Anti-Main Street, inequality and instability inducing, policy.

Not only have the major banks been the main recipient of manufactured liquidity, they have also received consolidated access to our deposits, which they can use like hostages to negotiate future bailout situations. Elite bankers moan about the extra regulations they have had to endure in the wake of the financial crisis, while scooping up cash dispersed under the guise of stimulating the general economy.

Central banks seek fresh ways to keep the party going as countries like Greece shut down banks to contain capital flight, and places like Puerto Rico and multiple states and municipalities face economic ruin. But they are clueless as to what to do.

In this cauldron of instability and lack of leadership, cash is the one remaining financial possession that Main Street can translate into goods, services and security. That's why private banks want more control over it.

Banks Want Your Cash For Their Latent Emergencies

One of the most inane reasons cited for restricting cash withdrawals for normal people is that they all might turn out to be drug dealers or terrorists. Meanwhile, drug-dealing-money-laundering terrorists tend to get away with it anyway, by sheer ability to use a plethora of banks and off shore havens to diffuse cash around the globe.

Every so often, years after the fact, some bank perpetrators receive money-laundering fines. For average depositors though, these are excuses for a bureaucracy built upon limiting access to cash whether from an ATM (many have $500 per day limits, some have less) or an account (withdrawals above a certain level get reported to the IRS).

As Charles Hugh Smith wrote at Peak Prosperity recently, there's a difference between physical cash (the kind you can touch and use immediately) and the electronic kind, associated with your bank balance or credit card cash advance limit. If you hold it, you have it - even if keeping it in a bank means it's probably slammed with various fees.

Banks, on the other hand, can leverage your deposits or cash, even while complying with various capital reserve requirements. That's not new. But the expanding debates about how much of your cash you get to withdraw at any given moment, is.

The notion of a bail-in, or recourse to people's deposits, is related to the idea of restricting the movement, or existence, of physical cash. Bail-ins, like any cash limitations, imply that if a bank needs emergency liquidity, your deposits are the place to find it, which has negative repercussion on your own solvency. This is exactly what the Glass-Steagall Act of 1933, coupled with the creation of the FDIC sought to avoid - banks confiscating your money at the worst possible times.

The ‘war on cash' is thus really a war on the difference between the money you can hold on to and the money the banks can take away from you. The existence of this cash debate underscores the need for a personal policy of cash extraction from the big banks. Do you have one?

In Part 2: They're Coming For Your Cash we detail out the growing threats to the liquidity that sustains the modern global banking system, and why it's more crucial than ever for people to consider extracting a portion of cash from their bank accounts. As existing liquidity streams dry up (as they are beginning to around the world), increasingly desperate banks will turn to the largest and most convenient source they know of: the collective cash savings we have on deposit with them.

Getting Technical

S&P 500 Suffers Technical Breakdown; Cash Is King

Charts show index dipping below 200-day moving average for second straight day amid fierce volatility.

By Michael Kahn           

July 8, 2015 4:17 p.m. ET

Blame China. No, not the 32% market massacre that occurred in Shanghai over the past month but the old Chinese curse, “may you live in interesting times.” One look at the charts of major market indexes suggest that “interesting” is an understatement. Wednesday’s temporary suspension of trading on the New York Stock Exchange was just icing on the cake.

After months of sideways action and false moves, the Standard & Poor’s 500 finally scored a true technical breakdown. It moved below the pattern that had held it in check since February, taken out the May low, and now dipped below the more important 200-day moving average for the second day in a row (see Chart 1).

Chart 1

Standard & Poor’s 500

That is enough for even casual users of charts to get worried. What gets me worried is that Tuesday’s session, in which the Dow Jones Industrial Average saw a morning loss of 200 points turn into a closing gain of 93 points, was erased quickly Wednesday.

In technical circles, the positive reversal of fortune left sizable “hammers” on Japanese candlestick charts. In candle-speak, the market is hammering out a bottom and after a two-month slide it did look that it was time for a rebound. But as with many chart patterns, confirmation in the form of upside follow-through was needed to prove that the market had found a floor. That was not to be.

Failure to capitalize on such a reversal is bearish. And now seven of the nine major Select SPDR sector exchange-traded funds, and that includes technology and financials are at or below their 200-day averages, as well.

Consider that last week all eyes were on Greece and the referendum that was to take place over the weekend. When voters said “no” to another bailout, global markets fell sharply.
Wednesday, the panic shifted to China and a market meltdown there that was already in progress (see Getting Technical, “Greek and Chinese Stocks in a Dangerous Situation,” June 22). It seems Greece is already old news and considering the sizes of the two economies that is not a surprise.

Stepping outside the charts for a moment, an economic slowdown in China could indeed spread. And while the International Monetary Fund’s suggestion that the Federal Reserve hold off raising rates here may not hold sway, it does speak to worries about the global economy.

A breakdown in the SPDR S&P Bank ETF manifests that idea in the charts. Banks were supposed to benefit from a rising rate environment (see Getting Technical, “Finally! Bank Stocks Break Out, Including Fifth Third, Key,” May 13). That they have cracked now suggests the market is no longer looking for the Fed to start raising rates any time soon.

In the past, any time the Fed assured the market it would not rush to raise rates, stocks benefited. Banks are telling us now that may not be true anymore. Weak fundamentals, rather than low interest rates, may be the driver over the coming months.

The question for investors is whether this is a correction or the end of the cyclical bull market that began in 2009. Unfortunately, the answer is still not known although it is very likely that cash should be an important part of any portfolio at this time. Here are three technical ideas that we can use to differentiate a correction from a bear market:

First, Dow Theory will tell us that the primary trend has changed when both the Dow Industrials and Transports make significant new lows (see Chart 2). The Transports have clearly been weak and are well below their significant lows from earlier this year. Some will say that if the Industrials move below their February low at 17,037 the sell signal will flash (the Industrials traded near 17,590 Wednesday afternoon).

Chart 2

Dow Jones Industrial Average

Second, if the market declines in a somewhat orderly manner, the Industrials should suffer a moving average death cross, where the 50-day moves below the 200-day, by that time. This is often a signal that the primary trend has already changed although it is not a timing signal in the short term.

The third signal would be a move below the major bull market trendline drawn from the correction of 2011. That trendline is currently in the 17,200 area, somewhat higher than the February low.

This is not meant as a hard cutoff between bull and bear market but rather a long-term framework behind short-term analysis. In that context, short-term strategies should be defensive and for most investors that means sitting it out. It does not yet indicate more aggressive traders should sell short.
Michael Kahn, a longtime columnist for, comments on technical analysis at A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.

The Greek Vote and the EU Miscalculation

By George Friedman



In a result that should surprise no one, the Greeks voted to reject European demands for additional austerity measures as the price for providing funds to allow Greek banks to operate. There are three reasons this should have been no surprise. First, the ruling Coalition of the Radical Left, or Syriza party, is ruling because it has an understanding of the Greek mood.

Second, the constant scorn and contempt that the European leadership heaped on the prime minister and finance minister convinced the Greeks not only that the scorn was meant for them as well but also that anyone so despised by the European leadership wasn't all bad. Finally, and most important, the European leadership put the Greek voters in a position in which they had nothing to lose. The Greeks were left to choose between two forms of devastation — one that was immediate but possible to recover from, and one that was a longer-term strangulation with no exit.

The Europeans' Mistaken Reasoning

As the International Monetary Fund noted (while maintaining a very hard line on Greece), the Greeks cannot repay their loans or escape from their economic nightmare without a substantial restructuring of the Greek debt, including significant debt forgiveness and a willingness to create a multidecade solution. The IMF also made clear that increased austerity, apart from posing an impossible burden for the Greeks, will actually retard either a Greek recovery or debt repayment.

The Greeks knew this as well. What was obvious is that austerity without radical restructuring would inevitably lead to default, if not now, then somewhere not too far down the line. Focusing on pensions made the Europeans appear tough but was actually quite foolish. All of the austerity measures demanded would not have provided nearly enough money to repay debts without restructuring. In due course, Greece would default, or the debt would be restructured.

Since Europe's leaders are not stupid, it is important to understand the game they were playing. They knew perfectly well the austerity measures were between irrelevant and damaging to debt repayment. They insisted on this battle at this time because they thought they would win it, and it was important for them to get Greece to capitulate for broader reasons.

No other EU country is in a condition as bad as Greece's. However, a number of EU countries, particularly in Southern Europe, carry a debt burden they would like to renegotiate. They are doing better than Greece this year, but with persistent high unemployment — for example, 22.5 percent in Spain as of May — two things are not clear: first, what shape these countries will be in next year or the year after that, and second, what governments would come into office, and what the new governments' positions would be. Greece accounts for less than 2 percent of the European Union's gross domestic product. Italy and Spain are far more important. The problem of restructuring debt is once it is done for one country, others will want to restructure as well. The European Union did not want to set any precedents for future crises or anti-EU governments.

In Greece, Europe's leaders had a crisis and a hostile government. It was the perfect place to take a stand, they thought. They became inflexible on debt restructuring, demanding prior increased austerity measures in a country where unemployment exceeded 25 percent and youth unemployment was over 50 percent. The EU strategy in the past had been psychological: spreading fear about what default might mean, spreading fear of the consequences of leaving the eurozone and arguing that it was the European Union that lacked the ability to make concessions. In the past, the EU strategy had been to make agreements that it never thought the Greeks would be able to keep in order to kick the problem down the road. Europe's leaders demanded austerity measures but tied them to postponing repayments. They expected Greece to continue playing the game. They did not realize, for some reason, that Syriza came to power on a pledge to end the game. They thought that under pressure, the party would fold.

But Syriza couldn't fold, and not just for political reasons. If Syriza betrayed its election pledge, as the European leadership was sure it would, the party would split and a new anti-European party would form in Greece. But on a deeper level, the Greeks simply could not give any more.

With their economy in shambles and Europe insisting that the solution was not stimulus but austerity — an increasingly dubious claim — the Greeks were at the point where default, and the short-term wrenching crisis that would ensue, would be worth the price.

The European leaders miscalculated. They thought Greece could be more flexible, and they wanted to demonstrate to any other country or party that might consider a similar maneuver in the future just what the cost would be. The Europeans feared the moral risk of compromising with the Greeks. They created a more dangerous situation for themselves.

New Threats to the European Union

First, in its treatment of Greece, the European Union has driven home — particularly to rising Euroskeptic parties — that it is merely a treaty organization and in no way a confederation, let alone a federation. Europe was a union so long as a member didn't get into trouble. As I have said, the Greeks were irresponsible borrowing money. But the rest of Europe was irresponsible in lending it. Indeed, the banks that lent the money knew perfectly well the condition Greece was in. The idea that the Greeks pulled the wool over the bankers' eyes is nonsense. The bankers wanted to make the loans because they made money off of transactions. Plus, European institutions that bought the loans from them bailed out those that made the loans.

The people who made the loans sold them to third parties, and the third parties sold them to EU institutions. As for the Greeks, it was not the current government or the public that borrowed the money. And so the tale will help parties like Podemos in Spain and UKIP in the United Kingdom make the case against the European Union. The European Union appears both protective of banks and predatory to those who didn't actually borrow

Second, having played hardball, the Europeans must either continue the game, incurring the criticism discussed above, or offer a compromise they wouldn't offer prior to the Greek vote.

One would lead to a view of the European Union as a potential enemy of nations that fall on hard times, while the latter would cost the bloc credibility in showdowns to come. It is likely that the Europeans will continue discussions with Greece, but they will be playing with a much weaker hand. The Greek voters have, in effect, called their bluff.

It is interesting how the European leaders maneuvered themselves into this position. Part of it was that they could not imagine the Greek government not yielding to the European Union, Germany and the rest. Part of it was that they could not imagine the Greeks not understanding what default would mean to them.

The European leaders did not take the Greeks' considerations seriously. For the Greeks, there were two issues. The first issue was how they would be more likely to get the deal they needed. It was not by begging but by convincing the Europeans they were ready to walk — a tactic anyone who has bargained in the eastern Mediterranean knows. Second, as any good bargainer knows, it is necessary to be prepared to walk and not simply bluff it. Syriza campaigned on the idea that Greece would not leave the eurozone but that the government would use a "no" vote on the referendum to negotiate a better deal with EU leaders. However, all political campaigns are subject to geopolitical realities, and Syriza needed all options on the table. 

The EU leadership was convinced that the Greeks were bluffing, while the Greeks knew that with the stakes this high, they could not afford to bluff. But the Greeks also knew, from watching other countries, that while default would create a massive short-term liquidity crisis in Greece, with currency controls and a new currency under the control of the Greek government, it would be possible to move beyond the crisis before the sense of embattlement dissolves. Many countries do better in short, intense crises than they do in ordinary times. The Greeks repelled an Italian invasion in October 1940, and the Germans didn't complete their conquest until May 1941. I have no idea what Greece's short-term ability to rally is today, but Syriza is willing to bet on it.

Greece's Options in Case of a Grexit

If Greece withdraws from the European Union, its impact on the euro will be trivial. There are those who claim that it would be catastrophic to the euro, but I don't see why. What might be extremely dangerous is leaving the euro and surviving, if not flourishing. The Greeks are currently fixated on the European Union as a source of money, and there is an assumption that they will be forced out of the global financial markets if they default. But that isn't obvious. 

Greece has three alternative sources of money. The first is Russia. The Greeks and the Russians have had a relationship going back to at least the 1970s. It was quite irritating for the United States and Europe. It was quite real. Now the Russians are looking for leverage to use against the Europeans and Americans. The Russians are having hard times but not as hard as a couple of months ago, and Greece is a strategic prize. The Greeks and the Russians have talked and the results of the talks are murky. The BRICS (Brazil, Russia, India, China and South Africa) summit began July 6 in Russia, and the Greeks are sitting in as observers — and possibly angling for some sort of deal. Publicly, Russia has said it will not give a direct loan to Greece but will take advantage of the crisis to acquire hard assets in Greece and a commitment on the Turkish Stream pipeline project. However, bailing out Greece would give Russia a golden opportunity to put a spoke in NATO operations and reassert itself somewhere other than Ukraine. In Central Europe, the view is that Russia and Greece have had an understanding for several months about a bailout, which could be why the Greeks have acted with such bravado.

Another, though less likely, source of funds for Greece is China and some of its partners. The Chinese are trying to position themselves as a genuine global power, without a global military and with a weakening economy. Working alone or with others to help the Greeks would not be a foolish move on their part, given that it would certainly create regional influence at a relative low cost — mere tens of billions. However, it could come with the political cost of alienating a large portion of the European Union, making Chinese assistance a slight possibility. 

Finally, there are American hedge funds and private equity firms. They are cash-rich because of European, Chinese and Middle Eastern money searching for safety and are facing near-zero percent interest rates. Many of them have taken wilder risks than this. The U.S. government might not discourage them, either, because it would be far more concerned about Russian or Chinese influence — and navies — in the eastern Mediterranean.

Having shed its debt to Europe and weathered the genuinely difficult months after default, Greece might be an interesting investment opportunity. We know from Argentina that when a country defaults, a wall is not created around it. Greece has value and, absent the debt, it is a high-risk but attractive investment.

The European leaders have therefore backed themselves into the corner they didn't want. If they hold their position, then they open the door to the idea that there is life after the European Union, and that is the one thought the EU leaders do not want validated. Therefore, it is likely that the Europeans, having discovered that Syriza is not prepared to submit to European diktat, will now negotiate a deal Greece can accept. But then that is another precedent the European Union didn't want to set.

Behind all this, the Germans are considering the future of the European Union. They are less concerned about the euro or Greek debt than they are about the free trade zone that absorbs part of their massive exports. With credit controls and default, Greece is one tiny market they lose. The last thing they want is for this to spread, or for Germany to be forced to pay for the privilege of saving it.

In many ways, therefore, our eyes should shift from Greece to Germany. It is at the heart of the EU leadership, and it is going to be calling the next shot — not for the good of the bloc, but for the good of Germany, which is backed into the same corner as the rest of the European Union. 

Greece’s Vote for Sovereignty

Dani Rodrik

JUL 7, 2015

greece celebrates no oxi vote

CAMBRIDGE – Creditors and debtors have found themselves at odds for as long as money has changed hands. But rarely have the issues been framed as starkly – and in such a public manner – as in the just completed Greek referendum.
In a vote on July 5, the Greek electorate resoundingly rejected demands for further austerity by the country’s foreign creditors: the European Central Bank, the International Monetary Fund, and the other eurozone governments, led by Germany. Whatever the economic merits of the decision, the Greek people’s voice rang loud and clear: We are not going to take it anymore.
It would be a mistake, however, to view the vote in Greece as a straightforward victory for democracy – despite what the country’s prime minister, Alexis Tsipras, and his supporters like to claim. What the Greeks call democracy comes across in many other – equally democratic – countries as irresponsible unilateralism. There is, in fact, little sympathy for the Greek position in other eurozone countries, where similar referendums would undoubtedly show overwhelming public support for the continuation of the austerity policies imposed on Greece.
And it isn’t just citizens of the large creditor countries, such as Germany, who have little patience for Greece. Exasperation is especially widespread among the eurozone’s poorer members. Ask the average person on the street in Slovakia, Estonia, or Lithuania, and you are likely to get a response not too different from this one from a Latvian pensioner: “We learned our lesson – why can’t the Greeks learn the same lesson?”
One might argue that Europeans are not well informed about the plight of the Greeks and the damage that austerity has done to the country. And, indeed, it is possible that with better information, many among them would change their position. But the forces of public opinion on which democracies rest rarely take shape in ideal conditions. Indeed, one need look no further than the Greek vote itself to find an example of raw emotions and outrage winning out over a rational calculation of economic costs and benefits.
It is important to remember that the creditors in this instance are not a bunch of oligarchs or wealthy private bankers, but the governments of the other eurozone countries, democratically accountable to their own electorates. (Whether they did the right thing in 2012 by lending to Greece so that their own bankers could be repaid is a legitimate, but separate question.) This is not a conflict between the Greek demos – its people and the bankers, as much as it is a conflict between European democracies.
When the Greeks voted “no,” they reaffirmed their democracy; but, more than that, they asserted the priority of their democracy over those in other eurozone countries. In other words, they asserted their national sovereignty – their right as a nation to determine their own economic, social, and political path. If the Greek referendum is a victory for anything, it is a victory for national sovereignty.
That is what makes it so ominous for Europe. The European Union, and even more so the eurozone, was constructed on the expectation that the exercise of national sovereignty would fade away over time. This was rarely made explicit; sovereignty, after all, is popular. But as economic unification narrowed each country’s room for maneuver, it was hoped, national action would be exercised less frequently. The Greek referendum has put perhaps the final nail in the coffin of that idea.
It need not have been this way. Europe’s political elite could have framed the Greek financial crisis as a tale of economic interdependence – you cannot have bad borrowers, after all, without careless lenders – instead of a morality tale pitting frugal, hard-working Germans against profligate, carefree Greeks. Doing so might have facilitated the sharing of the burden between debtors and creditors and prevented the emergence of the us-versus-them attitude that poisoned the relationship between Greece and the institutions of the eurozone.
More fundamentally, economic integration could have been accompanied by the expansion of a European political space. Compensating for reduced national autonomy by creating room for democratic action at the European level really would have been a victory for democracy.
It is too late to debate whether the culprit was the unwillingness of the European public to embark on the path toward political union or the timidity of its national politicians to exercise leadership. The consequence is that in today’s Europe, democracy can be reaffirmed only by asserting national sovereignty. And that is what the Greek electorate has done.
The referendum is deeply important, but mostly as an act of political symbolism. What remains to be seen is whether the Greek public also has the stomach for the economic actions – in particular, an exit from the eurozone and the introduction of a national currency – that real sovereignty would entail.
After all, the terms on offer from the country’s creditors are unlikely to change much. If the Greeks voted “no” based on unrealistic expectations that other eurozone democracies would be forced to bend to their wishes, they may be in for another deep disappointment – and their own lesson in democracy.

Ecuador’s Correa Wants to Co-Opt Pope Francis

The pontiff risks leaving the impression on his visit that the church condones repression.

By Mary Anastasia O’Grady

July 5, 2015 6:33 p.m. ET

Ecuadorean President Rafael Correa flutters a national flag after delivering a speech in Quito on July 2, 2015.  Ecuadorean President Rafael Correa flutters a national flag after delivering a speech in Quito on July 2, 2015. Photo: Agence France-Presse/Getty Images

Pope Francis’ journey to Ecuador, which kicks off on Monday, “is to cultivate the virtues of the people and not to politicize his presence,” Quito Archbishop Fausto Trávez said late last week in public remarks.

Good luck with that. President Rafael Correa has spent weeks appropriating the pope as his government’s very own 21st century socialist icon. So unless the Holy Father finds a way to signal Ecuadoreans otherwise, the visit is likely to leave the impression that the church is in solidarity with the repressive Correa machine.

That would be bad. But it could get even worse, depending upon what transpires during the pope’s visit to Cuba in September.

In early June, Havana Cardinal Jaime Ortega declared that there are no political prisoners on the island. That offended Cuba’s human-rights community, which estimates that the regime holds some 70 prisoners of conscience. The church doesn’t seem to want to know about them.

Last week, in yet another sign that the church wants to distance itself from the Cuban struggle for justice, a Catholic priest banned the women’s human-rights group known as the Ladies in White from attending Mass at his Cienfuegos parish dressed in white on the grounds that other parishioners object.

These events came in the same month that Francis hosted Raúl Castro at the Vatican. Castro used the photo op, which went viral, to claim legitimacy for the bloody 55-year-old dictatorship.
Now the Holy Father is walking into a political mine field in Ecuador—the first stop on a nine-day tour that includes Bolivia and Paraguay. In Ecuador he will celebrate open-air Masses in Guayaquil and Quito, have lunch with a Jesuit community, visit the Catholic University, and make a private visit to a historic Jesuit church.

The pope will also meet with Mr. Correa, who undoubtedly will have plenty of photographers on hand. In a republic that protected civil liberties, the meeting would be seen as nothing more than standard protocol. But in Correa’s Ecuador, where the government rules through intimidation and is increasingly unpopular, the meeting will be used for politics. This means that it is likely to overshadow the rest of the visit, possibly damaging not only the pope but also the church.

As Archbishop Trávez indicated, the trip has been framed by the Vatican as part of its mission of evangelization. Most South Americans are nominally Roman Catholic but the number who practice is much lower than it once was. “The joy of the church is to go out to seek the sheep that are lost,” Pope Francis said in a homily in Rome in December.

But this pope is very political and his politics, if we take him at his word, favor statist solutions to poverty. In terms of appearances that puts him on the same side of many policy debates as the region’s socialist tyrants.

The populist Mr. Correa smells opportunity. In the lead up to the visit, he posted billboards in Guayaquil and Quito featuring his government’s logo encircling a photo of the pontiff next to what appears to be a Francis quote that reads “one must demand the redistribution of wealth.” State television and radio delivered a similar message.

Of course there’s a world of difference between church teaching that we must strive for a generous heart and a politician preaching that it is virtuous to use the state’s monopoly power to take property away from rightful owners.

Mr. Correa wants to conflate the two. Yet Catholics understand very well that one does not grow closer to God by endorsing tyranny, even if it promises a more equal distribution of material wealth. The Holy Father will have the opportunity to bring moral clarity to the matter if he wishes.

Others are hoping he will speak against repression. Over more than seven years in power, Mr. Correa has collapsed what few democratic institutions there were and he has destroyed the free press. The owners of the surviving independent media and the journalists who work for them operate under continual threat of imprisonment or fines that would ruin them financially.

In a July 5 letter to Pope Francis, the Inter American Press Association says that Mr. Correa has silenced all who deviate from his “official truth.” The president “has shut down and punished the media and has imposed a culture of fear which has cut off public debate and the right to freedom of expression for members of the public.” The letter asserts that church teaching supports “the role of free expression, communication and media in modern life.”

The government says the economy will grow by less than 2% this year and investment is plummeting. Mr. Correa has good reason to want to gag civil society and to try to gain an endorsement for his authoritarian populism from the Holy Father. If Pope Francis is so used, it will be only because the Vatican allows it.

Europe should welcome Greece’s vote

Athens and the rest of the eurozone have a common interest in making Grexit as painless as posible

by: Gideon Rachman

A woman holds a placard reading in Greek 'No' during a demonstration
Demonstrations: Despite No vote Greece’s creditors are likely to take a very hard line

Greece’s “No” vote was greeted with euphoria in Athens’s Syntagma Square: the fountains were bathed in red light, the flags waved, the crowds sang patriotic songs. Alexis Tsipras, the prime minister, had said the vote was about national pride and his message had struck home.

One young woman, a freelance journalist, confided: “I actually voted Yes. But part of me is glad Greece said No.

We are a small country, but we have a big history. This is about our dignity.”

Watching the celebrations, however, it was hard not to feel real foreboding. Without a quick new deal with the creditors, Greek banks could collapse within days, introducing the country to a whole new level of economic misery. Pride and dignity would swiftly disappear along with jobs and savings.

Mr Tsipras has told his fellow countrymen that he can get a better deal from Europe. But, if he really believes that, he is seriously misreading EU politics. In reality, Greece’s creditors are likely to take a very hard line. They are angry and fed up with Greece. More important, many also believe that the long-term survival of the European single currency depends on making it clear that countries must live by common rules, balance their budgets and pay their debts. If Greece needs to be punished to

The tragedy is that both the Greek government and their creditors are now misreading their own interests. The Greeks still insist that they want to stay inside the European single currency — despite the mounting evidence that it has been a disaster for their economy. The leaders of the eurozone feel that they must be tough with Greece, to discourage other potential rule-breakers.

In reality, both Greece and the rest of the eurozone should treat the Greek vote as an opportunity to rethink the malfunctioning euro project. They can find a common interest in making it as painless as possible for Greece to leave the euro — both to lessen the suffering of ordinary Greek people and to establish a model that other countries might be able to follow in the future. For Greece is not the only country struggling to cope with a currency union. The current crisis could be a chance to show there are ways out of the euro that could benefit all sides — those that leave the currency union and those that stay

For the moment, however, all that eurozone leaders can see is the dangers of making any moves that appear to “reward” Mr Tsipras. They know that there are many heavily-indebted countries in Europe and do not want to encourage the idea that countries can avoid the hard work of getting their national finances in order, in the hope that one day, a debt write-off might come to their rescue. Greece’s national debt as a share of its economy is currently 178 per cent — the largest in the EU. But Italy’s debt-to-output ratio is more than 130 per cent. Even France is closing in on 100 per cent, the figure that Greece was at when the markets first took fright in 2009.

There is a similar fear of the political consequences of allowing an anti-austerity party to triumph in Greece. Countries such as Ireland, Portugal, Spain and Italy have all made painful cuts in an effort to restore their public finances. The governments of all four countries have Syriza-style, populist parties breathing down their necks. The last thing they want is for Syriza to be seen to succeed. Indeed, the grim truth is that they actually have a vested interest in seeing Greece suffer — as a warning to their own voters, not to take the route of left-wing populism.

In other EU countries, such as Finland, Germany or the Netherlands, it is right-wingers — who opposed the original bailouts for Greece and warned that the money would never be repaid — that stand to gain, if Syriza is seen to triumph. Here too, the political incentives all point towards European leaders taking a hard line.

To these factors must be added sheer irritation. Yanis Varoufakis, who as finance minister compared Greece’s creditors to terrorists, has now resigned. But even Mr Tsipras accused them of being conservative extremists, blackmailing Greece. Just as Greeks feel humiliated to be told they are deadbeats and debtors, so the Germans feel enraged to lend Greece money — only to be called Nazis in the Greek media.

The danger, however, is that anger and a fear of setting a bad example, is leading EU nations to take too narrow a view of the consequences of Greek failure. It may be that the EU is right to believe that financial contagion from a Grexit can be contained. But the political costs would be very high. A Greece that slips into economic chaos could easily turn into a failed state within the EU. That, in turn, would further discredit the European project — at a time when it is under pressure from all sides.

If European leaders were thinking clearly, they should see that rather than punishing Greece, it is now in the EU’s interests to do its level best to make sure that Greece can leave the euro, but stay inside the EU with a minimum of pain. If that means giving Greece debt relief as part of the exit package, so be it. Debt relief, in return for Grexit, could make political as well as economic sense.

Even so, restoring the drachma in Greece without provoking an even more intense economic crisis will be very difficult. But, if it could be done, the EU may finally have a model for liberating other European nations from a malfunctioning euro.

It Is Not Priced-In, Stupid!

by: David Stockman            

Among all the mindless blather served up by the talking heads of bubblevision is the recurrent claim that “its all priced-in”. That is, there is no danger of a serious market correction because anything which might imply trouble ahead - such as weak domestic growth, stalling world trade or Grexit - is already embodied in stock market prices.
Yep, those soaring averages are already fully risk-adjusted!

So the “oxi” that came screaming unexpectedly out of Greece Sunday evening will undoubtedly be explained away before the NYSE closes on Monday. Nothing to see here, it will be argued. Today’s plunge is just another opportunity for those who get it to “buy-the-dip”.

And they might well be right in the very short run. But this time the outbreak of volatility is different. This time the dip buyers will be carried out on their shields.

Here’s why. The whole priced-in meme presumes that nothing has really changed in the financial markets during the last three decades. The latter is still just the timeless machinery of capitalist price discovery at work. Traders and investors in their tens-of-thousands are purportedly diligently engaged in sifting, sorting, dissecting and discounting the massive, continuous flows of incoming information that bears on future corporate profits and the present value thereof.

That presumption is dead wrong. The age of Keynesian central banking has destroyed all the essential elements upon which vibrant, honest price discovery depends. These include short sellers which insure disciplined two-way markets; carry costs which are high enough to discourage rampant leveraged speculation; money market uncertainty that is palpable enough to inhibit massive yield curve arbitrage; option costs which are burdensome enough to deny fast money gamblers access to cheap downside portfolio insurance; and flexible, mobilized interest rates which enable imbalances of supply and demand for investable funds to be decisively cleared.

Not one of these conditions any longer exists. The shorts are dead, money markets interest rates are pegged and frozen, downside puts are practically free and carry trade gambling is biblical in extent and magnitude.

So a vibrant market of atomized competition in the gathering and assessment of information relevant to the honest pricing of financial assets has been replaced by what amounts to caribou soccer. That is, the game that six-year old boys and girls play when the chase the soccer ball around the field in one concentrated, squealing pack.

The soccer ball in this instance, alas, is the central banks. Until Sunday the herd of speculators was in full rampage chasing the liquidity, word clouds and promises of free money and market “puts” with blind, unflinching confidence.

The only thing in this utterly broken “market” which was really priced-in, therefore, was an unshakeable confidence that any disturbance to the upward march of asset prices would be quickly, decisively and reliably countermanded by central bank action. But now an altogether different kind of disturbance has erupted. It is one that does not emanate from short-term “price action” of the market or an unexpected macroeconomic hiccup or lend itself to another central bank hat trick.

Instead, the Greferendum amounts to a giant fracture in the apparatus of state power on which the entire rotten regime of financialization is anchored. That is, falsified financial prices, massive, fraudulent monetization of the public debt and egregious and continuous bailouts of private speculator losses, mistakes and reckless gambling sprees.

What has transpired in a relative heartbeat is that one of the four central banks of the world that matter is suddenly on the ropes. In the hours and days ahead, the ECB will be battered by desperate actions emanating from Athens, as it struggles with a violent meltdown of its banking and payments system; and it will be simultaneously stymied and paralyzed by an outbreak of public confusion, contention and recrimination among the politicians and apparatchiks who run the machinery of the Eurozone and ECB superstate.

Yes, the Fed will reconfirm its hundreds of billions of dollar swap lines with the ECB, and the BOJ and the Peoples Printing Press of China will redouble their efforts to prop-up their own faltering stock markets and to contain the “contagion” emanating from the Eurozone.

But this time there is a decent chance that even the concerted central banks of the world will not be able to contain the panic. That’s because the blind confidence of the caribou soccer players will be sorely tested by the possibility that the ECB will be exposed as impotent in the face of a cascading crisis in the euro debt markets.

Here are the tells. If the Syriza government has any sense, it will nationalize the Greek banking system immediately; replace the head of the Greek central bank with a pliant ally; refuse to heed any ECB call for collection of the dubious collateral that stands behind its $120 billion in ELA and other advances; and print ten euro notes until the plates on the Greek central bank’s printing presses literally melts-down.

If the Greeks seize their banking system and monetary machinery from their ECB suzerains in this manner - out of desperate need to stop the asphyxiation of their economy - those actions will trigger, in turn, pandemonium in the PIIGS bond markets. From there it would be only a short step to an existential crisis in Frankfurt and unprecedented, fractious conflict between Berlin, Paris, Rome and Madrid.

Either all of the Eurozone governments fall in line almost instantly in favor of a massive up-sizing of the ECBs bond buying campaign to stop the run on peripheral bond markets, or the Draghi “whatever it takes” miracle will be obliterated in a selling stampede that will expose the naked truth. Namely, that the whole thing since mid-2012 was a front-runners con job in which the ECB temporarily rented speculator balance sheets in order to prime the PIIGS bond buying pump, thereby luring the infinitely stupid and gullible managers of bank, insurance and mutual fund portfolios into loading up on the drastically over-valued public debt of the Eurozone’s fiscal cripples.

Needless to say, there is likely to emerge a flurry of leaks and trial balloons from the desperate precincts of Brussels, Berlin and Frankfurt. These will be designed to encourage the Greeks to leave their banking system hostage to “cooperation” with their paymasters, and to persuade traders that Draghi has been greenlighted to buy up the PIIGS debt hand-over-fist- and to do so without regard to the pro-rata capital key under which the current program is straight-jacketed.

But that assumes that the Germans, Dutch and Finns capitulate to an open-ended and frenzied bond-buying campaign that would make the BOJ’s current madness look tame by comparison. Yet if they do, its only a matter of time before the euro goes into a terminal tail-spin. And if they don’t, collapsing euro debt prices will infect the entire global bond market in a tidal wave of contagion.

Either way, its not priced-in. That’s been the real stupid trade all along.

Can The Fed Do More?

By: Steve Saville

Tue, Jul 7, 2015

It's not an overstatement to say that over the 6-year period beginning in September-2008, the US Federal Reserve went berserk with its Quantitative Easing (QE). The following chart shows that the US Monetary Base, an indicator of the net quantity of dollars directly created by the Fed*, had a gentle upward slope until around August of 2008, at which point it took off like a rocket. More specifically, the Monetary Base gained about 30% during the 6-year period leading up to September of 2008 and then quintupled (gained 400%) over the next 6 years. Is it therefore fair to say that the Fed has now 'shot its load' and will be unable to do much in reaction to the next financial crisis and/or recession?

Monetary Base

Unfortunately, the answer is no. The sad truth is that the Fed is not only capable of doing a lot more, it will almost certainly pump a lot more money into the economy the next time its senior management decides that the financial or economic wheels are falling off.

The Fed is capable of doing a lot more because it is not yet remotely close to running out of things to monetise. For example, the US Federal debt is presently about $18.1T and will probably top $20T within the next two years. This means that there is plenty of scope for the Fed to add to its current $2.5T stash of Treasury securities. Also, the Fed is not strictly limited in what it can monetise. Up until now it has been monetising Mortgage-Backed and Agency securities in addition to Treasury securities, but it could branch out into other asset-backed securities (those backed by auto loans or student debt, for instance), municipal bonds, investment-grade corporate bonds, and equity ETFs. If the situation were perceived to be sufficiently dire it could even change the rules to allow itself to monetise commercial and residential real-estate.

And the Fed almost certainly will do a lot more on the money-pumping front in the face of future economic and/or stock market weakness, because it has not only failed to learn the right lessons from the events of the past 15 years, it has learned exactly the wrong lessons. Rather than learning that injecting more money into the economy in an effort to mitigate the fallout from a busted bubble leads to a bigger bubble, a bigger bust, greater hardship and structural economic weakness, its senior management is convinced that the QE and interest-rate-suppression programs provided a substantial net benefit to the overall economy. Given this conviction in the righteousness of its previous actions, why wouldn't the Fed do more of the same if the perceived need were to arise in the future? The answer, of course, is that it would.

And it will.

In conclusion, those who think that the Fed is incapable of further monetary expansion do not have a good understanding of the situation, and those who believe that the Fed could do more, but will choose not to as the result of newfound financial prudence or concern for the well-being of savers, are naive.

Heard on the Street

Troubling Lessons in China’s Crumbling Stock Market

By Alex Frangos                  

Updated July 5, 2015 9:23 a.m. ET 

It is easy to dismiss China’s stock market as nothing but an old-fashioned speculative bubble. But the government’s direct involvement in pumping it up, and its failure to keep it aloft, should have investors concerned about China’s ability to control even more consequential markets.

Chinese stocks crumbled another 6% Friday, despite the government throwing everything but the kitchen sink at engineering a rebound. In fact, it did throw in some kitchen sinks, telling investors they can now use apartments as collateral on margin loans.

The government upped the ante again Saturday, involving itself in an audacious plan by the country’s largest brokerage houses to institute a $19 billion stabilization fund to prop up stock prices. Such “price-keeping operations,” as the Japanese called similar moves in the early 1990s, are quixotic at best, and at worst, signal a panic mentality has infected China’s top decision makers. Regulators also suspended initial public offerings to preserve liquidity in the market.

Other measures over the past week include an interest-rate cut, a loosening of bank-lending and margin-lending conditions, rule changes allowing pension funds to own stocks and a powerful state investment fund buying exchange-traded funds.

So far anyway, what’s resulted is a market that has lost more than a quarter of its value in 13 trading days.

China gets all sorts of credit for managing its economic boom over the past three decades. But promoting an equity market bubble—including vocal cheerleading in state media—was a clear policy mistake. It is a reminder that China’s reputation for omnipotence in economic matters is hardly unassailable.

Similar mistakes handling the economy’s deleveraging could prove more devastating. A campaign this year to clean up local government debt turned out to be insufficiently thought through. Beijing had to walk back key elements and supplement the program with a bailout through a central bank bond swap program.

Another area where investors have come to rely on Beijing is the currency. Even as it professes to let market forces play a larger role, China keeps a firm hand on the yuan with daily exchange rate setting and periodic market interventions.

Why The Greek Gods Show Gold No Favor

by: Markos Kaminis            

  • A disturbing Greek vote disrupted trading in stocks globally Monday morning, yet gold was hardly moved.
  • The value of gold is determined by multiple factors, including the value of the dollar.
  • The dollar gained sharply Monday morning against global currencies, as it attracted capital seeking safe haven and because of relative strength versus the euro.
  • For gold, the impact of the dollar's gain offset the impact of European uncertainty today, and kept the price of gold in check.
  • When looking to gold as a safe haven destination, investors should always consider the dollar.
Gold investors may be dumbfounded this Monday morning by the inaction of the precious metal. The Greeks voted "no" over the weekend and stocks opened to turmoil on Monday. Uncertainty around the Greece issue has never been more prominent, and yet the SPDR Gold Trust (NYSE: GLD), which tracks the spot price of the metal, was relatively unchanged in the early AM on Monday. The reason is simple, the dollar factor still outweighs the safe haven factor for gold, and so as the dollar gained this morning, the upside for gold was stymied. Thus, it does appear the Greek Gods show no favor to gold.

To make my point, let me show how much turmoil was present in the markets Monday morning. Greek stocks (NYSEARCA: GREK) were down sharply and the GREK ETF was down more than 5% after a 10% drop on the open. European shares were sharply lower, as evidenced by the 1.9% drop of the Vanguard FTSE Europe ETF (NYSE: VGK). The SPDR S&P 500 (NYSE: SPY) was off as well, but like other securities came up off its lows. Most importantly, the volatility security, the iPath S&P 500 VIX (NYSE: VXX), gained by 4% at the open, and was still higher by 1.9% as I scribbled Monday morning.

A flight to safety should have been in process, and it was, but not into gold. The relative calm in the GLD price sure did reflect that. Why though?

(click to enlarge)
Dollar Index Day Chart at Bloomberg

It is because while stocks were shaken, the dollar was gaining ground Monday. The dollar is the first safe haven, or U.S. treasuries, especially when the euro is challenged. The dollar index chart here shows how the dollar opened significantly higher this morning and remained higher into the noon hour. Naturally then, gold priced in dollar terms is going to decline in value. In fact, most commodities should decline in value if the dollar gains, keeping all other factors in check. Oil (NYSEARCA: OIL) fell Monday, partly due to the dollar gains but also on the prospect of an Iranian deal. The Bloomberg Commodity Index was down 2.0% around noon, making my point clear.

Precious Metals Relative SecurityMonday at Noon
SPDR Gold Trust+0.2%
iShares Silver Trust (NYSE: SLV)+0.5%
Market Vectors Gold Miners (NYSE: GDX)+1.4%
Market Vectors Junior Gold Miners (NYSE: GDXJ)+0.1%
Direxion Daily Gold Miners Bullish 3X (NYSE: NUGT)+3.9%
Randgold Resources (NASDAQ: GOLD)+0.9%

The price of gold was hardly changed, as obvious by the fractional move in the GLD. Yet, gold's safe haven factor was evident despite the lack of action, as it was doing better than most commodities. Gold miners are levered to the price of gold, as it has a direct impact on revenues for miners, so their shares are prospectively looking higher today. The levered NUGT security is sharply higher because of its leverage but also because of prospective demand for these securities as a bet on chaos.

Gold investors are right to see the precious metal I define as mankind's default currency as a safe haven. However, they should also keep the dollar in mind when looking for upside. Chaotic events are going to have to be extreme to move gold if it means a move against the dollar factor.

However, chaotic events that occur in the U.S. and threaten America or the American economy should have an extreme impact on the price of gold. In the case of Greece, that is not the case.