Tuesday, October 25, 2016


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The global economy has gone through whirlwinds of bad news lately, culminating in Wednesday’s barrage of negative and strange happenings.

The world is still abuzz about Sunday’s Greferendum, in which the Greek electorate rejected terms from their European creditors. In the wake of that momentous vote, Germany hardened its stance toward Greece, while the US and France, in concert with the IMF, pushed for debt relief for the struggling Mediterranean nation.

Pundits and financial analysts from influential journals and banking institutions are split on whether the OXI vote means an imminent departure from the Euro Zone for Greece. The Obama administration has expressed a strong desire to see the EU remain together.

Continued Greek default endangers the economies of Spain, Italy, France, and Germany, and nations that have bitten the austerity bullet and come through stronger like Iceland and Ireland are not in favor of granting further concessions.

Turmoil and uncertainty in Greece and the EU at large has dominated headlines, but Monday the markets didn’t show much of a reaction.

Thousands of miles away, though, the Chinese markets are enduring an extended collapse. Since mid-June, stock markets in China are down over 30%, losing in total more than $3 trillion and counting. That’s more than a quarter of the Chinese GDP.

The Chinese central bank, the PBoC, took the unprecedented move of injecting $19 billion of capital directly into the market, but only barely slowed the flood. On Wednesday the markets were down another 6%.

Analysts estimate that about 85% of the Chinese stock investments are from the working class, which means the average Chinese worker has been forced to watch their life savings evaporate. Even worse, over the last year China has seen a 900% increase in buying on margin – in other words, borrowing the money to buy stocks. The indebtedness of the general population combined with the rapidly disappearing value in their investments could lead to a major Chinese recession, or even depression.

Meanwhile, a recent study by the Mercatus Institute shows that only a handful of states in the US – specifically, those currently flush with natural resources like oil – are in anything resembling good financial shape. The rest are slashing spending on education, and raiding pension funds to pay bills.

Overall the US is still struggling to overcome the crash of 2008, with the Labor Force Participation rate staying at or near historic lows all year so far. Recent studies indicate that younger folks are increasingly having difficulty finding jobs, and older people are increasingly hanging on to them. In fact, since 2000, the 55 and over demographic is the only one (by age) that has seen an increase in jobs.

Against this troubling back drop came a cascade of news Wednesday.

Everything seemed to be happening at once, but, in some order, the Chinese declared a moratorium on large traders selling, United Airlines had to delay or cancel over 800 flights, several leading websites devoted to economic news were shut down, Microsoft announced the second largest layoff in its history (7,800), the minutes of last month’s FOMC meeting were released and suggested a looming US Fed rate hike, and the New York Stock Exchange shut down for four hours. Markets worldwide took a tumble in response to the craziness.

China, as previously noted, saw a 6% decline overall. The Chinese government has suspended sell-offs by all large stock holders for a six month period in a desperate bid to halt the freefall. Like the capital investment on Monday, it seems destined to be too little, too late.

Microsoft opened the news cycle in the USA with its announcement of 7,800 layoffs, primarily from its phone operations. The tech giant also announced a $7.6 billion write off from its acquisition of phone maker Nokia.

United Airlines had “degraded network connectivity” from a router leading to its problems. Flights were grounded for about two hours, and there were continued delays throughout the day.

In seemingly unrelated events, the New York Times, CNBC, Zero Hedge, the Wall Street Journal, and other websites and blogs that report on the global economy all went down for varying periods of time in the morning hours Wednesday. They were all back online by about 11:30, just in time for…

The New York Stock Exchange stopped processing most trades, and formally shut down around 11:35 EDT. The Exchange blamed “software updates” for the malfunctions, and remained closed for four hours. That is the longest closure for the NYSE since Super Storm Sandy in 2012. The Dow Jones fell 1.47% on low volume.

The various computer problems were generally deemed as unrelated, and not malicious. However, the hacker group Anonymous tweeted a message Tuesday speculating that the stock market would have a rough Wednesday.

“Wonder if tomorrow is going to be bad for Wall Street….” read the tweet. “We can only hope.” The DHS, the NYSE, and the Obama administration all made official statements to the effect that there was no indication of hacking. A glance at the huge array of computer problems all striking at the same time, though, coupled with the warning from Anon, strains the limits of credulity in these statements.

Anonymous has previously hacked several government and political party websites and e-mails, including Sarah Palin’s e-mail, and ISIS operations accounts.

Minutes of the Fed meeting indicating a rate hike later this year were released in the early afternoon, while the market was still closed. Bonds, T-Bills, and the dollar all fell following the news.

With so much bad news packed into one day, it seems some good ought to be right around the corner. Unfortunately, given the nature of these tidings, things are likely to get worse before they get better.


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Amid an accelerating economic meltdown, Greek banks are considering a “bail in” to remain solvent. According to the Financial Times, bank officials are planning to take 30% from any account with more than €8,000.

The Greek government already shut down huge portions of the country’s financial sector, and limited the amount Greek citizens can withdraw daily to an amount roughly equivalent to $66. Despite the measures, the banks say they are running out of cash – with only about €90 per citizen left to give out.

Greece defaulted on its obligations to the International Monetary Fund last week, and Prime Minister Alexis Tsipras held a referendum July 5 on whether or not the country will meet the demands of the IMF, the EU, and other creditors.

Tsipras urged the citizenry to reject the terms in strong language, saying ““[Our creditors’] proposals, which clearly violate the European rules and the basic rights to work, equality and dignity show that the purpose of some of the partners and institutions was not a viable agreement for all parties, but possibly the humiliation of an entire people.”

The Greeks overwhelmingly agreed with Tsipras, voting 62-38 to reject the EU proposals. In the wake of the vote, lead analysts at JP Morgan Chase told economic journalists at Zero Hedge that a withdrawal from the EU was more likely than not.

Following the vote, the Greek “bank holiday” was extended into this week. German financiers, some of the most powerful voices in the euro zone currently, have told the Greeks that their old offer is off the table, and Syriza, Tsipras’ political party, needs to come up with some firm solutions quickly, or else.

For its part, the European Central Bank (ECB) declared that the “haircut” of the bail ins must be increased following the vote, from 50% of deposits to 60%.

The US Department of Treasury has weighed in, urging the EU to come to accommodation with the Greeks, and Obama met with German Prime Minister Angela Merkel to discuss how to keep Greece in the Eurozone.

Meanwhile, the banks have no obligation to repay their clients. International financial law dictates that checking and savings accounts in a bank are legally the banks’ money. Technically, any deposit someone trusts to a bank makes them an unsecured creditor of that bank.

In point of fact, the IMF has stated an unambiguous right to take depositors’ money without repercussions. Bail ins are “a statutory power of a resolution authority (as opposed to contractual arrangements, such as contingent capital requirements) to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity. The statutory bail-in power is intended to achieve a prompt recapitalization and restructuring of the distressed institution.”

So the confiscations that happened in Cyprus are not only perfectly legal everywhere in the world, there is no protection at all implied for the typical depositor.

Former Deputy Governor of the Bank of England Paul Tucker stated all the way back in 2005 that bail ins could happen in the USA “Today… and I mean today.”

The danger is real. According to economist Dr. Ellen Brown, JP Morgan Chase and Bank of America have combined derivatives assets in excess of the entire world’s GDP. Derivatives are commonly referred to as “hedging” investments, thought to decrease risk, but are in fact another form of monetary speculation like any other. When AIG imploded and had to be bailed out, a crash in its derivatives was the primary driver.

Now, Chase and Bank of America have mingled their derivative speculations with their depository operations as a matter of policy, meaning they are risking the money their customers trusted them with in a volatile market that spurred a major economic crisis only a few years back.

To its credit, the FDIC objected to these different arms of the banks being tied together, claiming that a decline in the derivatives market could bankrupt the FDIC itself, but the Federal Reserve endorsed the move.

So how can ordinary Americans protect themselves from the rapacious big banks?

Don’t let them have your money. Credit Unions operate under a different legal structure than banks, and are a good choice for many. Real Estate and physical commodities are other options. Stocks, bonds, or other “stakes” are not subject to unilateral action like bank deposits either.

The government doesn’t have to declare the banks too big to fail in the next crisis – the banks have already done it.



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