Category: Debt

S&P strips UK of top-notch rating

27-Jun (FT) — Standard & Poor’s on Monday cut the UK’s rating by two notches, becoming the last of the three major credit rating agencies to strip the country of its top-notch status.

S&P reduced the rating from “AAA” to “AA”, and warned that more cuts could be on the horizon. The New York-based group said that the country’s surprise vote to exit the EU was a “seminal event, and will lead to a less predictable, stable, and effective policy framework in the UK”.

[source]

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Posted in Debt |

S&P cuts UK sovereign debt rating to AA from AAA, citing fiscal and constitutional issues. Outlook negative.

PG View: As a further reminder of how the world has turned upside down, 10-year Gilts fell 10 bps to an all-time low of 0.93%.

There was a time — not so long ago — when this would have made absolutely no sense at all.

The debt market is neither healthy nor logical. Those seeking a haven in sovereign debt should reconsider and buy gold.

Posted in Debt |

Cat’s Cradle

PG Note: The Epsilon Theory newsletter, written by W. Ben Hunt, Ph.D., Chief Risk Officer at Salient Partners is one of my favorite reads. The most recent installment is a must read for all investors. There are a lot of arguments in his writing that should excite the gold owner. In his summation of the Epsilon Theory of investment strategy Hunt warns that “We’re in a policy-driven market” and that “A policy-controlled market is next”. His suggestion is that you “look to real assets”.

Here are several key snippets:

…when governments undertake emergency actions and extraordinary policies, they obliterate the focal points that make our cooperative games of investing and market making possible.

Specifically, extraordinary monetary policy has obliterated the focal points of price discovery.

I’m often asked if I think that negative rates will ever come to the U.S. My answer: they’re already here by proxy (U.S. Treasury rates are so low today because German Bunds are negative out to 10 years duration), and negative rates will hit the U.S. in earnest and in practice early next year.
…just wait until your money market fund starts charging you interest for the privilege of investing your cash in short-term government obligations. Just wait until Nestle floats a negative interest rate bond. Just wait until borrowing money, not lending money, becomes a profit center. Just wait until the entire notion of compounding — without exaggeration the most important force in human economic history — is turned on its head and becomes a wealth destroyer.
You know, I’ve written a lot of Epsilon Theory notes over the past three years. As I figure it, about three novels’ worth and just over the halfway mark of War and Peace. But in all that time and across all those notes I’ve never felt so … resigned … to the fact we are ALL well and truly stuck. The Fed is stuck. The ECB and the BOJ are stuck. The banks are stuck. Corporations are stuck. Asset managers are stuck. Financial advisors are stuck. Investors are stuck. Republicans are stuck. Democrats are stuck. We are all stuck in a very powerful political equilibrium where the costs of changing our current bleak course of ineffective monetary policy and counter-productive regulatory policy are so astronomical that The Powers That Be have no alternative but to continue with what they know full well isn’t working.
My god, you think I’m a downer? This is the President of the St. Louis Fed, saying that everything the FOMC has been doing for the past four years is just a bad joke!
So, Bullard says, let’s stop this charade of dot plots and just admit the truth: rates are not going up, maybe not EVER, until something beyond the Fed’s control shocks the world into some other macroeconomic regime.

Read the entire piece here.

Posted in Central Banks, Debt, Economy, Monetary Policy |

U.S. 10-Year Bond Falls to Near Record Low As Bund Yield Turns Negative

14-Jun (WSJ) — The yield on the benchmark U.S. government note fell to near a record low on Tuesday as the yield on Germany’s 10-year debt fell below zero for the first time on record.

Tuesday’s move extends the record declines in high-grade global government bond yields, reflecting investors’ consistent concerns over sluggish global economic growth and the limit major central banks are facing in boosting growth via their unconventional monetary stimulus.

The yield on the benchmark 10-year Treasury note was recently at 1.587%, according to Tradeweb. It already traded below 1.616% on Monday, which was the lowest close level since December 2012.


source: tradingeconomics.com

The yield’s record closing low was 1.404% set in July 2012. Some analysts and money managers say they expect the yield to breach that level in the months ahead.

“It’s amazing. I never thought I’d see the day where 10y German rates would go negative,” said Anthony Cronin, a Treasury bond trader at Société Générale SA . “It is difficult to say what is next but it seems safe to expect money to continue to flow into U.S. Treasurys.”

[source]

PG View: Investors paying for the “privilege” of financing the German government . . . that’s pretty messed up . . .


source: tradingeconomics.com

Posted in Bond Bubble, Debt |

Bill Gross warns over $10tn negative-yield bond pile

09-Jun (FT) — The $10tn pile of negative-yielding government bonds is a “supernova that will explode one day”, according to Janus Capital’s Bill Gross, underscoring the rising nervousness over the previously unthinkable financial phenomenon.

Central banks in Europe and Japan have moved their benchmark interest rates below zero. This, combined with investors’ ravenous appetite for bonds, has pushed the yields of more than $10tn of sovereign debt into negative territory.

This is costing investors billions of dollars and forcing many to buy increasingly longer-dated or more lowly rated bonds that still offer positive yields — and has sparked concerns that investors could be exposed to painful losses if yields, which move inversely to prices, snap back up.

In a tweet on Thursday Mr Gross, the founder of bond powerhouse Pimco and now a fund manager at Janus, said: “Global yields lowest in 500 years of recorded history…. This is a supernova that will explode one day.”

…Jeffrey Gundlach, the head of Los Angeles-based bond house DoubleLine, recently told a German newspaper that negative interest rates “are the stupidest idea I have ever experienced”, and warned that “the next major event [for markets] will be the moment when central banks in Japan and in Europe give up and cancel the experiment”.

[source]

PG View: As global central banks sail ever-deeper into uncharted waters, the risk of something really bad happening grows each day.

Posted in Debt |

Bond yields in global domino fall as investors seek safer assets

10-Jun (FT) — Global sovereign bonds set new milestones on Friday, as negative interest rate policies, renewed angst over the US economy and simmering fears over the UK leaving the EU sent investors into some of the world’s safest financial assets.

After gilt yields hit record lows on Thursday, German Bunds and Japanese bonds took up the baton with the yield on the 10-year Bund — a benchmark for the whole of the eurozone — almost touching the zero mark. The yield briefly slipped below 0.02 per cent.

The introduction of negative interest rate policies by the European Central Bank and Bank of Japan is fanning the march higher in bond prices and forcing global investors to scramble for those sovereign bonds, including Treasuries, that offer juicier yields.

“The surge in foreign demand for Treasuries speaks as much to a lack of ‘safe’ assets as fear of recession,” said Kit Juckes, a strategist at Société Générale.

The yield on the 10-year Treasury — the global benchmark — broke through 1.66 per cent, the low touched in early February thanks to a plunging oil price and fears that central banks’ move to drive rates into negative territory could backfire.

[source]

PG View: “Fear of recession” and a market that has clearly swung back against the rate hike meme puts the Fed back in a box. As investors scramble for safer assets, gold will shine as well.

Posted in Debt |

Global Governments Are Boosting Spending at the Fastest Rate since 2009

06-Jun (Bloomberg) — The world’s governments are stepping up to the plate to relieve monetary policymakers of some of the burden of supporting persistently slow-growth economies, according to HSBC Holdings PLC.

Around the world, government spending is poised to grow by more in 2016 than any year since 2009, when fiscal authorities embarked upon a coordinated plan of boosting expenditures to deal with the damage wrought by the financial crisis.
Source: HSBC

“Overall we now have a fiscal stimulus in the global economy,” writes Global Chief Economist Janet Henry. “It is not large, but it is getting bigger and, for the first time since 2010, we estimate that global government spending will grow more quickly than global GDP.”

This news is music to the ears of international organizations such as the International Monetary Fund as well as financial heavyweights like former Fed Chair Ben Bernanke and BlackRock’s Larry Fink, who have long argued that governments should play a larger role in driving growth.

…However, this pick-up in government spending may prove insufficient to offset sluggish investment and trade, the economist warned.

“The U.S. cannot single-handedly lift the global economy out of this weak spot, any more than China alone was capable of being the global economy’s only real growth engine and absorber of the rest of the world’s disinflationary pressures for more than a few years,” writes Henry. “The world needs more than one engine.”

[source]

PG View: What is not mentioned in this article is the reality that increased government spending comes at the expense of higher government deficits and debt.

Case in point:

Posted in Debt |

Average yield on German bonds sinks under 0%

06-Jun (FT) — The average yield on German government bonds, referred to as the Umlaufrendite, has fallen below zero for the first time.

The measure is published daily by Germany’s Bundesbank, and takes an average across outstanding bonds, writes Thomas Hale.

The new low reflects the growing portion of European bonds that pay investors a negative yield, guaranteeing a nominal loss if held to maturity. German 10-year yields are only just above zero, and under heavy pressure. Last week, the amount of negative-yielding sovereign debt topped $10bn, according to ratings agency Fitch.

The phenomenon of investors paying to lend money comes after central banks in Europe and Japan have cut interest rates and bought bonds to help drive down borrowing costs.

[source]

Posted in Debt, Negative interest rates |

China’s Debt Load Is (Much) Higher Than Previously Thought, Goldman Says

06-Jun (Bloomberg) — Count total social financing (TSF) as another Chinese statistic of increasingly dubious value, according to analysts at Goldman Sachs Group Inc.

With many investors grappling to understand the degree to which China’s economic growth has been fueled by debt, efforts to get a grip on measures of new credit creation have gained fresh urgency. To date, many have relied on the TSF invented by the Chinese authorities in 2011 as a way of capturing a larger slice of the country’s shadow banking activity, but Goldman analysts led by M.K. Tang cast fresh doubt, in a note published on Wednesday, on the measure’s ability to gauge credit creation.

They identify a discrepancy between China’s official TSF and Goldman’s new proprietary estimates of credit, describing the increasing difference as “an uncomfortable trend that has gotten more discomforting.”

…On that basis, China’s credit creation came in at 24.6 trillion yuan ($3.7 trillion) last year—far outstripping the 16 trillion yuan increase in money supply and the 19 trillion yuan of TSF.

“Such a scale of deterioration [in China’s leverage] certainly increases our concerns about China’s underlying credit problems and sustainability risk,” the Goldman analysts conclude. “The possibility that there is such a large amount of shadow lending going on in the system that is not captured in official statistics also points to [a] regulatory gap, and underscores the lack of visibility on where potential financial stress points may lie and how a possible contagion may play out.”

[source]

Posted in Debt |

Chart shows China’s debt bubble bigger than subprime bubble

01-Jun (MarketWatch) — Here’s yet another sign that China’s economy may be teetering on the brink of a massive debt crisis.

Unproductive debt in China—that is, debt that’s used to drive up asset prices—swelled in 2015, eclipsing the level seen in the U.S. in the run-up to the Great Financial Crisis, said Torsten Slok, chief international economist at Deutsche Bank, in a note to clients published Tuesday.

…“The problem is that the banking sector in China has been pushing out new lending aggressively, but with slowing economic growth many loans have not gone to create more factories and jobs but to financial assets that have been leveraged to boost returns,” Slok said.

[source]

PG View: As a recent Observer article made quite clear: “China’s number one export is not steel, electronics, textiles or toys — It is deflation.”

Posted in Debt, Economy |

Puerto Rico, Illinois And California: Public Pension Dominoes

31-May (Forbes) — The U.S. Commonwealth Puerto Rico is making a lot of news these days, but for the wrong reasons—it’s economy, overburdened by government, can’t generate enough income to cover payments on its $70 billion debt. Measured on a per capita basis, each of the island’s 3.5 million residents owe $20,000, a debt they can avoid by simply moving. Compared to its economy, Puerto Rico’s debt-to-GDP ratio is about 68%.

Congress recently moved to rescue Puerto Rico from its debt crisis. Ironically, this is the same U.S. Congress that has presided over the accumulation of a $19.3 trillion U.S. federal government debt for a U.S. debt-to-GDP ratio of 106%. Throw in the unfunded liabilities for Social Security, Social Security Disability Insurance, Medicare and other obligations, and the debt balloons to about $127 trillion, give or take.

Paying debt service is easier when you can print money and run deficits at will. Local and state governments, in contrast to the federal government, are obligated to balance their books. It’s this level of government where a looming debt crisis is gathering, the likes of which make Puerto Rico seem a minor prelude.

[source]

Posted in Debt |

US companies issued a staggering $517 billion of debt in the last year

31-May (BusinessInsider) — US companies have issued a staggering amount of debt, but it’s not a problem.

At least that’s according to Adam Parker, chief equity strategist at Morgan Stanley. In a note to clients Tuesday, Parker noted that the massive $517 billion in new debt issued by US corporations in the past 12 months is the second-highest mark ever.

“At the end of 4Q15, these companies had issued $517 billion in new debt, the second highest reading since 1985 ($574 billion was issued in the trailing 12-month period ending 3Q15),” wrote Parker.

“Net debt issuance in 4Q15 is nearly 90% above levels during the dot-com bubble(~$275 billion) and ~50% above pre-financial crisis levels (~$340 billion).”

This debt pile encapsulates the largest 1500 non-financial companies in the US, and the chart of its growth is certainly astounding.

[source]

Posted in Debt |

Global conditions echo post-Lehman crisis, Abe warns G7

26-May (FT) — Global demand is in as bad a state as it was after the Lehman Brothers crisis in 2008, Shinzo Abe told G7 leaders on Thursday, in a clear sign the Japanese prime minister plans to delay a scheduled rise in consumption tax.

In the first session of the G7 summit in Ise-Shima, central Japan, Mr Abe showed world leaders a series of alarming graphs comparing today’s economic conditions with those of 2008.

…Mr Abe has repeatedly said that only a major natural disaster or an economic shock on the scale of Lehman Brothers would justify a delay. The recent earthquake in Kyushu provides the first; now he has found the second.

Delaying the consumption tax rise, in addition to a planned supplementary budget, would mean Japan will head into 2017 with an anticipated fiscal stimulus instead of contraction.

[source]

PG View: And Japan may in fact be the epicenter of any such crisis. Delaying the consumption tax hike may buy some time, but it pushes Japan ever-deeper into debt.

Posted in Debt, Economy |

Greek Parliament Approves Fresh Austerity Measures to Secure Bailout Cash

22-May — Greece’s parliament approved a raft of fresh taxes and austerity measures that the country must legislate to unlock further rescue loans, as the country’s most influential creditors—Germany and the International Monetary Fund—remain deadlocked over debt relief.

The measures were backed by the 153 lawmakers from the ruling Syriza party and its junior coalition partner, the Independent Greeks, securing the majority in the 300-seat parliament late Sunday.

But Syriza lawmaker Vasiliki Katrivanou voted against two of the measures included in the bill. Early Monday, Mrs. Katrivanou announced her resignation from parliament. Another Syriza candidate from the prior elections, George Kyritsis, will run in her stead.

Parliamentary approval could pave the way for eurozone finance ministers meeting on Tuesday to clear the next disbursement of funds to Greece. But that could be complicated as the IMF and eurozone governments and especially Germany remain at odds over when Greece should get debt relief and how deep it should be.

“European leaders get the message tonight that Greece meets its obligations,” Prime Minister Alexis Tsipras told lawmakers ahead of the vote. “Starting from tomorrow it remains that the other side meets its own and I think this will happen.”

[source]

PG View: Remember when Tsipras and Syriza got elected on the platform of no more austerity? Good times . . .

Posted in Debt, European Debt Crisis |

A huge wave of sovereign defaults might be coming

18-May (BusinessInsider) — Oil prices are around seven-month highs.

West Texas Intermediate crude is around $48.74 per barrel, while Brent is at $49.50 per barrel as of 10:23 a.m. ET.

But if folks think this might be the end of all their commodity problems, they may want to think twice.

In a recent note to clients, a Macquarie Research team argued that the global economy may go through a “wave” of sovereign defaults given that something similar happened several decades ago.

“The last great collapse in oil and commodity prices from the end of the 1970s led to a decade-long wave of sovereign defaults. We believe another wave is coming, involving multiple debt restructurings over many years,” the team wrote.

[source]

PG View: Sounds like a fine time for the Fed to be contemplating another rate hike . . .

Posted in Debt |

Spain’s debt now worth more than value of the economy

18-May (AP, via CNBC) — Bank of Spain figures show that the country’s public debt is now worth more than the value of the economy.

The bank said Wednesday that Spain’s public debt stockpile stood at 1.09 trillion euros ($1.23 trillion) in the first quarter of the year. That represents 101 percent of the country’s annual GDP — 1.08 trillion euros — in 2015.

The government estimates the debt ratio will be 99.1 percent of GDP at the end of 2016.

Spain’s public debt has risen consistently since the beginning of the country’s economic crisis in 2008.

[source]

PG View
: I’m going to go out on a limb here and suggest to Spain that the solution to a debt crisis is not more debt. All they did is borrow some time, but I’m afraid this won’t end well . . .

Posted in Debt, European Debt Crisis |

U.S. Discloses Saudi Holdings of Treasuries for First Time

16-May (Bloomberg) — The Treasury Department released a breakdown of Saudi Arabia’s holdings of U.S. debt, after keeping the figures secret for more than four decades.

The stockpile of the world’s biggest oil exporter stood at $116.8 billion as of March, down almost 6 percent from a record in January, according to data the Treasury disclosed Monday in response to a Freedom-of-Information Act request submitted by Bloomberg News. The tally ranks Saudi Arabia among the top dozen foreign nations in terms of holdings of U.S. debt, and compares with China’s $1.3 trillion trove, and $1.1 trillion for Japan.

Yet the disclosure may bring more questions than answers, because Saudi Arabia’s foreign reserves amount to $587 billion, and central banks typically put about two-thirds of their coffers in dollars, according to International Monetary Fund data. Some nations accumulate Treasuries in offshore financial centers, meaning the holdings show up under the data of other countries. For example, Belgium, which held $143 billion of U.S. government debt as of February, is home to Chinese custodial accounts, analysts say.

“The politics has always been secretive, so have their finances,” said David Ottaway, a Middle East Fellow at the Woodrow Wilson International Center, a research institute in Washington. “It does answer the question of how much they own, which is surprisingly not that much.”

[source]

PG View: Why did the Saudis get to keep this info secret in the first place? Is this release to mitigate the Saudi threat to sell Treasuries if Congress passes legislation that would open the Kingdom to lawsuits associated with 9/11?

MK note:  Hey, Pete.  Not sure what’s going on here but the Treasury Department has been publishing Saudi Treasuries holdings since 2012.  Prior to that, it appears Saudi holdings were aggregated under “Oil Exporters”.  Looks like they removed that designation from the tables in 2012 and broke it out by country.  Here’s the history as published by the Treasury Department in TIC data:

http://ticdata.treasury.gov/Publish/mfhhis01.txt

I too see the number as low and not much of threat to international stability, but is it the real number?

What is even more astonishing to me about the Saudi situation is that it does everything possible to undermine the oil price, which in turn undermines its own economy.  It then borrows $10 billion through a consortium of international banks (end of April) to shore up things.  Why borrow the money when you have it sitting in reserves?  A long way from King Saud personally counting the 35,000 British sovereigns he received for the first oil concession with the West in 1933.  And now oil is back to $50/bbl. . . .Go figure. . . . .

Posted in Debt, Markets |

Greek lawmakers vote for austerity as protests turn ugly

09-May (CNN) — Buffeted once again by protests on the streets outside, Greece’s parliament has voted — by a razor thin margin — to cut pensions and increase taxes ahead of a crucial meeting in Brussels Monday.

At the meeting, Eurozone finance ministers will again debate whether to provide financial support to the beleaguered country.

Late Sunday evening, Greek Prime Minister Alexis Tsipras’ coalition passed pension and tax reforms, which cover the majority of a €5.4 billion ($6.15B) package of austerity measures requested by creditors. A slim majority of lawmakers, 153 of 296, voted in favor of the bill.

…Tsipras campaigned on a platform of opposition to EU-imposed austerity. However, the parlous state of the Greek economy has forced him to accept the necessity of the measures, which remain unpopular with voters.

…On Sunday evening, police and masked demonstrators clashed outside of the parliament buildings in Athens. Petrol bombs were thrown by protestors and police used tear gas and flashbang grenades to disperse the demonstrators, CNN affiliate CNN Greece reported.

[source]

Posted in Debt |

U.S. Consumer Credit Ballooned in March at Fastest Pace Since 2001

06-May (WSJ, via NASDAQ) — Borrowing by U.S. consumers ballooned in March at the fastest pace in more than a decade.

Outstanding consumer credit, a measure of non-real estate debt, rose by a seasonally adjusted $29.67 billion in March from the prior month, the Federal Reserve said Friday. The 10.0% seasonally adjusted annual growth rate was the fastest growth pace since November 2001.

Consumer credit rose at a 4.78% pace in February, revised down from an earlier estimate.

Revolving credit outstanding, mostly credit cards, increased at a 14.16% annual pace in March, the fastest pace since July 2000. Revolving credit rose at a revised rate of 3.72% in February.

Nonrevolving credit outstanding, including student and auto loans, increased at a 8.50% annual pace in March compared with February’s revised 5.17% growth rate.

The sharp increase in consumer borrowing follows months of modest economic growth. While the economy has been producing jobs at a healthy pace, overall economic activity has slowed.

[source]

PG View: A huge surge in consumer credit in March, and yet, Q1 GDP was a mere 0.5% . . . What happened?

Posted in Debt |

U.S. National Debt $19,171,815,928,698.82

Posted in Debt |

Puerto Rico defaults on $422 million

02-May (CNNMoney) — The island was unable to make a $422 million debt payment due Monday. It’s another alarm bell of how bad the situation is getting on the island.

Governor Alejandro Garcia Padilla calls it a “humanitarian crisis,” which a step above an economic emergency. He claims he is prioritizing paying Puerto Rico’s police and teachers over Wall Street.

“I had to make a choice. I decided that essential services for the 3.5 million American citizens in Puerto Rico came first,” the governor said in a speech Sunday.

This is the third time the island has defaulted on bond payments. The island paid the interest due Monday, but not the principal amount, resulting in a default of about $370 million, Puerto Rico’s largest yet.

Puerto Rico is deep in debt. It owes over $70 billion to creditors. For months, Garcia Padilla has warned that Puerto Rico doesn’t have enough money to pay its creditors.

[source]

PG View: In the years following the financial crisis, the federal government, states, municipalities, individuals — and oh yes, territories — have continued to rack up debt. Judgement day seems to be at hand for Puerto Rico and others are likely to follow . . . I’m looking at you Chicago and Illinois.

Posted in Debt |

US faces ‘disastrous’ $3.4tn pension funding hole

12-Apr (FT) — The US public pension system has developed a $3.4tn funding hole that will pile pressure on cities and states to cut spending or raise taxes to avoid Detroit-style bankruptcies.

According to academic research shared exclusively with FTfm, the collective funding shortfall of US public pension funds is three times larger than official figures showed, and is getting bigger.

Devin Nunes, a US Republican congressman, said: “It has been clear for years that many cities and states are critically underfunding their pension programmes and hiding the fiscal holes with accounting tricks.”

Mr Nunes, who put forward a bill to the House of Representatives last month to overhaul how public pension plans report their figures, added: “When these pension funds go insolvent, they will create problems so disastrous that the fund officials assume the federal government will have to bail them out.”

[source]

PG View: $3.4 trillion?! That’s nearly 20% of our entire GDP! There will be an uproar of epic proportion if folks without a pension are forced to pay for the pensions of other people.

Posted in Debt |

Olivier Blanchard eyes ugly ‘end game’ for Japan on debt spiral

by Ambrose Evans-Pritchard
11-Apr (Telegraph) — Japan is heading for a full-blown solvency crisis as the country runs out of local investors and may ultimately be forced to inflate away its debt in a desperate end-game, one of the world’s most influential economists has warned.

Olivier Blanchard, former chief economist at the International Monetary Fund, said zero interest rates have disguised the underlying danger posed by Japan’s public debt, likely to reach 250pc of GDP this year and spiralling upwards on an unsustainable trajectory.

‘One day the BoJ may well get a call from the finance ministry saying please think about us – it is a life or death question – and keep rates at zero’ – Olivier Blanchard

“To our surprise, Japanese retirees have been willing to hold government debt at zero rates, but the marginal investor will soon not be a Japanese retiree,” he said.

Prof Blanchard said the Japanese treasury will have to tap foreign funds to plug the gap and this will prove far more costly, threatening to bring the long-feared funding crisis to a head.

[source]

Posted in Debt, Economy |

Japanese banks to impose negative rates on clients

30-Mar (FT) — Some Japanese banks will start imposing charges on the money they hold for clients such as pension funds, in a bid to curb the cost they incur from the Bank of Japan’s negative interest rate policy.

Mitsubishi UFJ Trust and Banking, as well as Sumitomo Mitsui Trust Bank, have already notified customers of their decision, they confirmed.

Mitsubishi will impose a fee of 0.1 per cent on any new cash it receives from investment trusts, and 0.06 per cent on extra cash it holds on behalf of pension funds. Sumitomo will charge maximum fees of 0.1 per cent on client money held at its banking account, to offset the cost from the BoJ’s negative rate of 0.1 per cent.

Japanese financial institutions had previously been reluctant to pass on the costs of the BoJ’s negative interest rate policy. Ordinary banks have kept their deposit rates in positive territory, with the BoJ claiming banks were “in a healthy state” to shoulder the cost of negative rates. But the new negative rates on clients from the trust banks could potentially prompt other financial institutions to follow suit, and pass on the cost to clients.

[source]

PG View: I would expect an uptick in gold demand from the Land of the Rising Sun…

Posted in Debt |

U.K. Economy Faces ‘Cocktail of Risks’ Says George Osborne

16-Mar (WSJ) — U.K. Treasury chief George Osborne announced downgraded growth forecasts for the U.K. amid a darkening global outlook but said he remains on track to close the nation’s budget deficit.

In presenting his annual tax-and-spending plan to parliament on Wednesday, Mr. Osborne, the Chancellor of the Exchequer, said that the British economy faces “a cocktail of risks” in light of the weaker outlook for the global economy.

“Financial markets are turbulent. Productivity growth across the West is too low. And the outlook for the global economy is weak. It makes for a dangerous cocktail of risks,” Mr. Osborne said.

“But one that Britain is well-prepared to handle, if we act now so we don’t pay later,” he added.

Reflecting the darker outlook, the Office for Budget Responsibility, the U.K.’s fiscal watchdog, on Wednesday cut its forecasts for growth in the U.K. over the next four years. It said it expects growth of 2% this year, compared with a previous forecast of 2.4%.

[source]

PG View: Can we safely assume the BoE won’t be raising rates any time soon? I believe we can . . .

Posted in Debt, Economy |

Long-term Japanese bonds set new record lows

08-Mar (FT) — Longer dated Japanese government bond yields declined to new depths on Tuesday, with the seven-, 10-, and 30-year benchmark yields all setting record lows.

While new lows for the JGB market are not unusual after the Bank of Japan cut interest rates below zero last month, a closely watched, Y800bn 30-year auction of new debt was unexpectedly strong — a reminder of the new scarcity of yield in one of the world’s major sovereign bond markets. JGBs with maturities out to 11 years are currently trading with negative yields.

The search for yield also encouraged Japanese investors to buy record amounts of foreign long-term debt securities last month.

[source]

Posted in Debt |

OECD’s William White: Monetary Policy Has Failed and Economists Are Making a “Profound Ontological Error”

26-Feb (FinancialSense) — William White, chairman of the Economic and Development Review Committee at the OECD and former chief economist at the Bank for International Settlements (BIS), says the risks posed by global debt levels are greater today than they were in 2007 and that central banking monetary policy has lost its effectiveness. He also explains the crucial differences between modern macroeconomic modeling and complexity theory (or viewing the economy as a complex adaptive system) and the key lessons this has for policymakers, both fiscal and monetary.

“Total non-financial debt — that is to say the debt of governments, corporations and households — as a percentage of GDP; that number has gone from 210% in 2007, to 250% today.” ± William White

[source]

PG View: There is a growing consensus that monetary policy has been a failure. While central banks will continue to forge ahead down this path to nowhere, politicians better start making a plan or there will be hell to pay . . .

Posted in Central Banks, Debt, Economy, Monetary Policy |

China is rapidly becoming one of the most indebted countries in the world

19-Feb (Economist) — THIS week began with the release of a staggering number. In January, new debt issued in China rose to just over $500 billion, an all-time high. Not all of the “new” debt was actually new; some represented a move out of foreign-currency loans and into local-currency borrowing (in order to reduce foreign-currency risk). But the flow of red ink is not a mirage. China’s government opened the credit taps early in 2016 in order to reduce the odds of a sharp economic slowdown. Private borrowing in China has grown rapidly and steadily since 2008, even as nominal output growth has slowed. As of 2014, according to an estimate by the McKinsey Global Institute, total debt in China stood at 282% of GDP. China is rapidly becoming one of the most indebted countries in the world.

So what? There is a cottage industry of analysts out there gaming out the ways in which a crisis of some sort might unfold within China. But with debts of this magnitude accumulating, you don’t need to posit a looming crisis to draw some reasonably strong, and reasonably gloomy conclusions about the near-term future of the Chinese economy—and the world as a whole.

…Zero rates and QE would place significant downward pressure on the value of the yuan. That’s just as well, since another thing history tells us is that demand-deficient, deleveraging economies depreciate their currencies and rely on exernal demand to support growth.

…Who knows what might happen next. Perhaps the euro zone would slip back into recession and then break up. Perhaps everyone would simply grit their teeth through another few years of economic difficulty. But the bigger China’s debt pile grows, the bigger a Chinese deleveraging episode looms ahead, somewhere in the not-so-distant future.

[source]

PG View: The burden of debt is causing the world’s economic engines to sputter and stall. First it was Japan. Then America. Now China . . .

Posted in Debt |

Philadelphia’s $5.7bn ‘quiet crisis’

19-Feb (FT) — The numbers for the city’s municipal pension fund are so troubling that there seems to be no point in adopting a softly-softly approach.

This is a scheme with a funding hole of $5.7bn; it owes far more money to present and future pensioners that it has in its coffers. The fund has less than half what it needs, with assets of $4.8bn in mid-2014.

The scheme, which manages the retirement funds of 64,000 current and former employees for the Pennsylvanian city, has been branded one of the worst-funded pension funds in the US. Its financial position has long been labelled the “quiet crisis” of Philadelphia.

[source]

Posted in Debt |

Illinois is facing a $10 billion shortfall

18-Feb (Fiscal Times, via BusinessInsider) — The messy budget situation in Illinois, one of the country’s largest economies, became even worse Wednesday afternoon when first-term Governor Bruce Rauner (R) delivered his second budget speech. Rauner’s first budget never passed, and this one has even less of a chance of a being blessed by the Democrat-controlled state legislature.

Without a budget, Illinois is running on fumes.

The bitter impasse began after Rauner’s inaugural budget address a year ago, when his proposed spending plan included deep cuts to Medicaid and higher education. The budget slashed by half the amount of income tax funds – about $634 million – the state would share with its 1,400 local governments and saved $2 billion by reducing state worker benefits — all to fill a projected $7 billion hole in the Land of Lincoln’s budget without raising taxes.

…Then there’s the looming $10 billion shortfall in the budget year that starts July 1.

[source]

Posted in Debt |