Better than never is late – IMF

Or was that ‘better late than never’ …

Yes a degree of sarcasm, apparently saying something positive – but in fact merely remarking on the continued problems within the IMF to grasp the global situation that they themselves monitor regularly.

And Geoffrey Chaucer appears to have been the first person to have put the proverb into print, in The Yeoman’s Prologue and Tale, Canterbury Tales, circa 1386. ]

I digress – reported today in The Guardian (1) that José Viñals, the IMF’s financial counsellor, said the threat of instability and recession hanging over economies including China, Brazil, Turkey and Malaysia was one of a “triad of risks” that could knock 3% off global GDP.

Note – he omitted a lot of other countries that are already in recession – which I find alarming from this organization and he mentions a – “triad of risks” – the second, he said, “was the legacy of debt and disharmony in Europe” – while the third is centred on battered global markets that are more likely to transmit shocks rather than cushion the blow.

Yes he is very late to the party and continues with absolute poppycock that – “At the very least, central banks would need to remain vigilant and be prepared to increase their stimulus programmes should difficulties in emerging market countries spill over into the financial system.

Excuse me whilst I feel sick – central banks are clueless and borrowed to their capacities and the World Bank is now suggesting that they ‘increase stimulus programs should difficulties arise … “.

Where do they get the money for that?

This against a ‘request’ by IMF’ LaGarde that countries – Central Banks – do not increase interest rates – on that comment alone one wonders who dictates the US Fed’s interest rate policies.

The emerging economies have no option but to increase rates – in order to borrow much needed funds to cover current account deficits during the route in exports.

The price is high.

If one reads the McKinsey Global Institute reports (2) – which I have referenced in prior ‘debt’ essays on this site and now repeating “Government debt is unsustainably high in some countries.

Yes this is important – very important – and the reason that I will keep on repeating this information is that these statistics are as at the end of the 2014 calendar year.

Commodities – across the board – have maintained their decline due to lack of demand – and commodities will continue to decline for some time to come as global demand has eased and will continue to ease – no more evident than in Europe who have entered deflation and all manufacturing data is negative month on month (with the exception of Spain).

Germany has declined 4 percent month on month – this is before the collapse of Glencore (who by the way has USD 100 billion of debt) – and the VW emission fraud – which will effect all German manufacturers – and finally Deutsche Bank reporting a huge loss for the September 2015 quarter – the crack in the financial fabric that holds USD 72 trillion of derivates as liabilities.

Add to Germany’s woes – the mouth of Merkel on refugees – thereby increasing the need to supply free housing – free medical and EUR 316 per month per adult. That means little at this stage but Merkel’s open invitation to refugees will swell the number from an estimated 250,000 to 1.2 million by 2017.

Do the math.

On the MGI global debt report – the February 2015 report stated that – Since 2007, government debt has grown by $25 trillion. It will continue to rise in many countries, given current economic fundamentals.

Global debt has grown by $57 trillion to reach $199 trillion in the seven years following the financial crisis – a 40.1% rise, according to this report.

All major economies are now recording higher levels of borrowing relative to gross domestic product (GDP) than they did in 2007.

Total debt as a share of GDP stood at 286% in the second quarter of 2014 compared with 269% in the fourth quarter of 2007.

Some of this debt, incurred with the encouragement of world leaders to finance bailouts and stimulus programs, stems from the crisis.

Debt also rose as a result of the recession and the weak recovery.

For six of the most highly indebted countries, starting the process of deleveraging would require implausibly large increases in real-GDP growth or extremely deep fiscal adjustments.

To reduce government debt, countries may need to consider new approaches, such as more extensive asset sales, one-time taxes on wealth, and more efficient debt-restructuring programs.

Notice the immediate stupidity – asset sales in a deflationary environment – tax the rich.

This is Marxism at its finest – this is socialism gone mad – destroying the very fabric of the investment confidence and laying the groundwork for a hard landing for the majority of indebted countries.

image

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Charts courtesy of MGI

The MGI article can be viewed here. (2)

The full article by the IMF is in The Guardian – feel free to read that article and then consider the last paragraph that :-

“Growth is slowing for the fifth year in a row, as the commodity super cycle and unprecedented credit booms have come to an end. This is of special relevance given the large share of emerging markets in the world economy, as well as the role that global markets play in transmitting shocks to other emerging markets and spillovers to advanced economies, featured in this summer’s financial turmoil.”

Yes – we had the largest financial depression in 2008 – the cure was for Central Banks to ‘bail out’ the too big to fail – throw cheap money at the situation and have consumer spending boost individual country GDP – whilst the commodity supercycle was coming to an end.

This has endured 5 years and those with the figures could not see the writing on the wall. The emerging economies are in strife – the knock on shocks will cripple capital globally.

Central Banks, Sovereign Funds, Pension Funds and retirees in the meantime invested in the equity markets – they gambled to get a greater return and offset depreciation in their own currencies.

This is no more evident that the Swiss National Bank attaining nearly ten percent of Apple . . .

If you read this blog then you know that I am repeating myself in that – the equity markets are in turmoil – $11 trillion wiped off the value and these markets which are choppy to say the least – price to earnings ratios plus the decline in commodity prices no longer indicate real equity values.

Money seeks safety – there is no safety in equities – therefore this money has sought refuge in short term bonds – zero or negative interest rates apply.

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Chart courtesy of The Fed Reserve – NYT

Longer term bonds are volatile – across Europe and in the US – there is little or no liquidity as evidenced by the Bunds (Germany) and the US Reserve.

Volatility in longer term bonds is the warning that there is no liquidity in these Bonds and as Bill Gross states (3) emphatically “there is no better position than cash.

I will finish by stating the obvious – the bond market is in a huge bubble – the zero interest rates on short term bonds means that ‘should interest rates increase through market forces’ or the Federal Reserve – then at what costs do the short and long term bondholders bail out of Bonds to seek a better return?

Carnage . . .

Edit – add on – couldn’t help myself.

“I would say, don’t worry” said Yi Gang, deputy governor of the People’s Bank of China, after the International Monetary Fund warned of risks in China’s economic challenges.

“The world economy is looking grim” – said Raghuram Rajan, Indian central bank governor and former chief economist of the International Monetary Fund.

1. http://www.theguardian.com/business/2015/oct/07/risk-global-financial-crash-increased-imf-emerging-economies-eurozone-stability-report

2. http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging

3. http://www.businessinsider.com/bill-gross-investment-outlook-june-30-2015-6

4. https://www.bondvigilantes.com/blog/2015/08/25/commodity-carnage-mayhem-exposed-high-yield-markets/

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