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About Me

Darren Winters is a self made investment multi-millionaire and successful entrepreneur. Amongst
his many businesses he owns the number 1 investment training company in the UK and Europe.
This company provides training courses in stock market, forex and property investing and since
the year 2000 has successfully trained over 250,000 people.

Wednesday, 18 February 2015

Oil Is A Slippery Trade

The recent spike in oil underscores how the market is stacked in favour of players with deeper pockets. I believe what we are seeing here is a classic example of a bear squeeze.

Firstly, let’s examine the fundamentals. As we know, the price of oil is driven by the demand for the black stuff and its supply. Looking at the demand side there’s a raft of economic data and recent spate of corporate results which tend to point in one direction, the global economy is beginning to slowdown. The Euro zone is moving in slow motion with many parts of the trading bloc still remaining in an economic quagmire. Japan continues to remain stagnant with lacklustre growth and it looks like it will experience another lost decade. China is definitely in deceleration mode as inventory overload continues to add up and domestic demand shows no signs of picking up momentum.

The US economic recovery, supposedly the strongest link in the chain, might not be what it’s cracked up to be. Recent disappointing retail figures underscore the fact that consumers aren't splashing their savings, from cheaper gas, at the retail stores. In fact, a recent survey showed that households are diverting their savings into rising health care costs. So, cheaper fuel at the pumps isn't juicing consumption. In view of the above, then we can see that on the demand side, there really isn't much that is going to push oil prices moving forward.

If the prospects of higher demand for oil isn't pushing oil price higher then it must be a supply side speculation story. Yes, that view would hold water bearing in mind that inventories are rising at record levels. The glut of oil on the market is now becoming so great that storage is an issue. There are talks about filling up huge tankers and docking them out at sea, like floating oil deposits on the high seas. With oil inventories building up, it’s most likely going to take time for these surplus inventories to work their way out of the system.

Moreover, there is no indication from the largest producer of OPEC, the Saudis, that they are planning to cut output. In fact we are seeing the contrary.

“Two other OPEC delegates, one of whom is from a Gulf producer, said they could not rule out prices dropping to as low as $30-$35 due to weak demand combined with global refinery maintenance in the first and second quarters of 2015,” as reported in CNBC on February 2.

OPEC last November decided against cutting its production despite misgivings from its non-Gulf members. OPEC oil ministers, who decide the group's output policy, are not scheduled to meet until June 5. So, we have no indication whatsoever there’s going to be a change in the supply side issue. Even the recent death of Saudi Arabia's King Abdullah last month has not led to a change in the Saudi oil output policy, which is to continue pumping unabated. Therefore, with global demand for oil stagnating and supplies remaining constant, it can only mean more of a glut of oil on the market moving forward. In view of the fundamentals, there is very little reason to expect oil prices to rise going forward.
So what is this recent spike in oil price down to?

What we might be seeing is a bear or short squeeze.

In other words, oil price is moving sharply higher not due to fundamentals but as a result of it being heavily shorted, then a few big pocket players gang up and bid the price higher. That then forces more short sellers to close out of their short positions, often at huge loses. You get a situation where the deep pockets players bet against the smaller players and it is obvious who wins in the end. It is like a game of poker where you know your opponent has a weak hand, but to see his cards you have got to put more money on the table, which you cannot afford to raise or risk. The deep pocket players know that they have this advantage.

It’s a slippery game and the reality is that more often than not the retailer gets shafted. Only the short sellers with deep pockets can afford to risk runaway losses on their short positions and may prefer to close them out even if it means taking a substantial loss.

The only way to counter act this is to stick to a trading discipline, don't let your losses run. There is no love in marrying your trading position. Better to be a slippery fish than a startled rabbit staring into the headlights when the market moves against you.

You need to keep this in mind; if a trading position looks too overcrowded, it’s time to bug out, evacuate your position swiftly.

Why? Because that’s when the deep pocket players bet against the rest of the market. That’s how a few players get even fatter.

This is what might happen with oil prices over the next trading week. The small retailers come rushing in thinking that oil is about to make a comeback. Mainstream, which is control and managed by the deep pockets will help spin the illusion. They might even engineer the oil price movement to trigger a technical buy signal, again it is all a spin.

But the reality might be oil price moving high on short covering. Then when the herd rush in to buy, thinking that oil is staging a comeback, the deep pockets bet against them again, this time the other way. They take short positions and profit from the fall. Remember it’s a zero sum game. Your green is someone else's losses. Perhaps oil isn't making a comeback, but rather it’s about to tank. It's a tricky game.... At the time of writing this piece oil is at 51.02 USD.

Thursday, 12 February 2015

Currency Wars and A Fist Full of Dollars

We live in challenging and extraordinary times. The beginning of 2015 has seen incredible volatility on the 5.3 trillion US dollar a day foreign exchange market (forex). First to get the ball rolling was the Swiss National Bank (SNB) when it abandoned its three year old currency policy to peg the Swiss franc/euro at 120. The Swiss currency bombshell pounded the euro to a nine year low against the dollar, rattled a basket of emerging currencies and sent investors into the trenches as they rotated out of risky assets and back into safe havens. That propelled gold and silver to new year highs. The modern financial system is a complex interconnected network of entities that when a butterfly flaps its wings in the Amazonian jungle of South America, it creates a hurricane in Central Park. While a handful of pundits may have been able to predict the SNB de-peg to the euro, joining the dots in real time and predicting what impact that would have on other assets across the globe would probably be beyond the scope of human or artificial intelligence. The challenge we face is that we’re unlikely to know all the initial conditions of a complex system in sufficient, or perfect, detail. Due to these infinite variables, it becomes impossible to predict the ultimate fate of a complex system.

Needless to say it would be extremely profitable if a trader could predict the movement of all global asset prices the moment that one event occurs, but it’s probably not realistic.

Nevertheless, by simplifying the matter and focusing on how events might influence a particular currency, stock, precious metal or any other asset class, then a trader has a better chance of predicting its price.

Take for example the Australian dollar. We could predict that the end of the commodity super cycle was likely to have a negative impact on the currencies that have a commodity based economy. I wrote a piece in September 2014, which was posted in December entitled, “Aussie dollar Trouble Down Under,” The Aussie dollar was trading at 88cents to USD “The global economy is slowing down, that is becoming more evident with every bit of data being released and it is likely to accelerate next year”. The sharp decline in world commodity prices, triggered by a slow down in the world economy has reduced the demand for commodities and is depressing prices. Already, this trend is starting to have a detrimental impact on commodity based economies. “Slow global economy and a heavily reliant economy on commodities, means that there may be trouble down under, particularly if the global economy deteriorates further. With a drop in interest rates now likely to be on the cards the sliding Aussie dollar may have just begun making it a shorters delight”. Fast forward five months and that wasn't too difficult to join the dots and call the Aussie dollar trajectory. Today, the Aussie dollar is trading at 0.77 to USD, down a significant 1.3 percent at the time of writing this piece. The sizeable one day fall was due to the Reserve Bank of Australia lowering interest rates, again this move was predictable. When you have lower export earnings due to falling commodity prices, that triggers a fall in Capex and large infrastructure projects. So the central bank responded in the old fashion way by loosening its monetary policy, low interest rates with the aim of propping up business investments and consumer spending.

So what about the Euro? As I predicted in January the euro would experience volatility, it would continue its downward trajectory, which it did do, based on the the European Central Banks decision to launch its own trillion dollar QE programme and uncertainties over the Greek election. I then said that the Euro would reach a bottom following the Greek election and then would start moving upward. This has happened. As far as bad news goes, the Euro has had the kitchen sink thrown at it. With fears over the Greek crisis subsiding and the prospects of good economic data from the euro zone maybe in the pipeline, there might be only one way for the euro now, that is up.

The Swiss franc?

The SNB negative interest rate is saying one thing to foreign investors, your money is unwelcome here. With Russian oligarchs money unwelcome in Switzerland and the US, the euro zone might be one place where they could go next. Note that the SNB isn't done. If they see a further undesirable appreciation in the Swiss franc the SNB could still intervene with more negative rates, or sell the local currency to depress the value of the Swiss Franc.

The US dollar?

That all depends on whether you believe the US recovery is real or an illusion. If it is real, then a rate rise is likely to be on the cards and that would send the US dollar higher.

I don't believe that scenario is likely. In fact there is enough economic data and bellwether earnings to suggest that the US economy isn't doing as well as mainstream depicts. The consensus of a three percent rise in economic activity doesn't seem realistic, bearing in mind that there is no QE to juice assets prices to continue the illusion of a recovery.

I believe that QE is more likely going forward rather than rate rises, bearing in mind that the dollar crisis is hitting US exports. Perhaps US dollar run has done its course and we might see a fall in US dollar moving forward.

End of an Era of Pretending and Extending?

Is this the end of an era of pretending and extending?

You can't solve a liquidity crisis with more debt and the markets should be allowed to play out for lenders. If you were to apply the classic rule of the free market, it is very clear what should happen to those who ignore risk management; they go out of business.
Think of it this way, if someone were to offer a borrower a billion dollars, knowing that they are insolvent and already struggling to keep up with the existing interest payment, then who is the fool?

Lending to Greece was a losing game and getting excited about Greek bonds paying 6 percent interest was ignoring the risk-reward maxim of investing. I remember a year ago investors were getting excited about Greece returning to the bond market and paying 6 percent yields, while mainstream was peddling the Greek recovery story. But how could any investor think that lending to a bankrupt nation that pays six percent yield is a good return and good investing. When a business makes a poor commercial decision it suffers the consequences. Likewise, these lenders, consisting of the European Central Bank (ECB) and the International Monetary Fund (IMF), known as the Troika, played the game of extend and pretend. But when the illusion wears off, the reality sets in that lending to a bankrupt state just delays the inevitable credit default some time down the line. So Troika made a professional misjudgement lending to Greece. Maybe a more cynical view might be that lending to Greece was a deliberate ploy to drown it in debt, strip the nation of its assets, then launch a fire sale. The result being that a few obtain trophy assets at bargain prices, thereby making spectacular profits at the expense of the many. Well if that is the case, perhaps the last laugh is then on Greece.

But could the Greek crisis mark the beginning of the end of reckless lending or piranha type of capitalism, which is against the spirit of competition and free markets? The political tide may be changing.

French officials said two weeks ago they would support the new Greek government’s efforts to get the country's economy back to life again after five years of choking on austerity. However, the French argued against any write-down of Greece's debt and insist that Athens should continue with a program of economic structural reforms, which is believed to be the only way of getting the Greek economy back to prosperity.

“France is more than prepared to support Greece,” Michel Sapin, the French finance minister, said during a news conference after a two-day visit by Yanis Varoufakis, his new Greek counterpart. “Greece needs time to put things to work,” he said. But he added, there was “no question” of forgiving Greek debt.

The US is also taking a softer stance on Greek austerity. President Barack Obama suggested the loosening of austerity programs, "You cannot keep on squeezing countries that are in the midst of depression,"

Indeed, Greece is in a desperate state. Its economy contracting by 25 percent and has mass unemployment above Great Depression levels experienced in 1929 and needs emergency funds just to keep the lights burning. Greek Finance Minsiter Yanis Varoufakis said that although Athens was “desperate” for money, it would not seek a 7 billion euro installment on its 240 billion euro international bailout package because it would be required to carry out more bailout terms.

“We have resembled drug addicts craving the next dose. What this government is all about is ending the addiction”, Mr. Varoufakis said, adding it was time to go “cold turkey”.

But could other debt junky European Union member look at Greece and decide that they too need to end the intoxication of debt and pretense and go cold turkey too?

In Spain, Madrid, at least 100,000 according to police estimates (organisers estimated the amount of people was 300,000 people) poured into the streets on the previous Saturday, in a huge show of support for Spain’s new anti-austerity party Podemos. They are riding a wave of popularity after the election success of its Greek hard-left ally Syriza. Supporters carried signs reading “The change is now” as they made their way from Madrid city hall to the central Puerta del Sol square in the first major march called by Podemos.

The Podemos party is another anti-establishment non mainstream political party, which has leapt ahead in recent political polls.
“The wind of change is starting to blow in Europe”, Podemos leader Pablo Iglesias, a pony-tailed former university professor, said in Greek and Spanish as he addressed supporters at the so-called “March for Change”. “We dream but we take our dream seriously. More has been done in Greece in six days than many governments did in years”, the 36-year-old said.

Many in the crowd also waved Greek flags and the red and white flags of Syriza.
The extend and pretend game is going to end up with anti-establishment parties in power.
These parties and the Troika will make an odd bunch when it comes to negotiating debt. Are we on the precipice of a bond collapse?

We live in challenging and extraordinary times.

Tuesday, 10 February 2015

January Effect Indicator

Some traders think that January is a good indicator as to how well a stock market will perform for the entire year. If that’s the case then the January Effect Indicator is pointing to a bear market. The last day of trading in January suddenly tanked 250 points on the Dow which compounded a fall of 3.5 percent for the entire month. The S&P also registered a slightly smaller fall of 3 percent in January.

But don't take the January Effect Indicator as the be all and end all for predicting the stock market trajectory, because for the last two decades the indicator has not been successful in calling the outcome.

Nevertheless, the January Effect Indicator might be accurate this year, as there are a number of fundamental reasons to believe that 2015 might be a bear market, provided that we see no fed intervention. The consensus on the Street is that the US economy will grow by three percent this year and that the Fed is likely to raise rates sometime in the middle of 2015.

But the consensus might be out of kilter with what actually happens going forward.

Last year saw the Fed wind-down its largest trillion dollar fiscal stimulus program in history. The monetary authorities use every tool in their kit, from massive quantitative easing (QE) program to near zero interest rates, yet the needle hardly moved. Despite pumping the system with liquidity and keeping interest rates at historic lows, the US economy only registered a 2.4 percent growth.

We now know the effects of QE. It has very little or no impact on the real economy. What it does do however, is inflate asset prices, inflating equity and bond prices and create real estate bubbles at the expense of everything else.
That has an impact on Gross Domestic Price figures which creates an illusion of a recovery. But it’s a phoney recovery and the reason why the man in the Street doesn't feel better off. 

An inquisitive mind would be looking back at the trillions spent on QE, the purchasing of assets by the Fed and be wondering, with all that money being used to stimulate the economy, (that's what mainstream keep selling) why austerity is necessary. It doesn't make sense, something smells fishy and you don't need to be an economist to understand that.

Let me put some flesh on the bones or the recovery spin story.
Take a look at US GDP, which was marginally better in 2013 to 2014, when it went from 2.2 to 2.4 percent. Considering the Fed threw the kitchen sink at the economy during this period, that really isn't much of an improvement in the growth figure.

However, one good piece of news is that unemployment during that period did indeed plunge, but strangely enough it really didn't do much for GDP (during that same period), which registered only a measly 0.2 percent increase.

So an obvious question you might be pondering is; why didn't that massive reduction in unemployment lift GDP by an equally impressive amount?

What we saw during that period was just a reduction in the unemployment rate. The data doesn't include the long term unemployed, so when people quit looking for a job they don't show up in the unemployment data. Put another way, the long term unemployed have been mathematically eliminated from the system. Furthermore, the jobs being created in the economy were not well paying full time work. If the recovery story was credible, we’d be seeing unemployment fall and a decent GDP rise, but that is not happening.

My question is; how could the consensus view, that the US economy will grow by 3 percent this year, hold water bearing in mind that the massive QE programme and near zero interest rates resulted in a growth rate of 2.4 percent? The very same pundits estimate that interest rates will rise sometime mid-year. Therefore, in a higher interest rate environment with no QE to create an illusion of growth, where will this growth come from?

Moreover, the collapse in the super cycle commodity prices and oil price has resulted in a cut in infrastructure spending around the globe and to top it all off there has been a string of disappointing bellwether earnings.
It wouldn't surprise me if we get US growth downgraded soon.

In view of the economic reality, it would seem unlikely that the Fed would raise rates in 2015.
Perhaps we have more chance of seeing another round of QE, maybe QE4. After all, what else can the Fed do when the illusion wears off and stocks start heading south? With interest rates held already low for an historic period, the only tool left in the kit is QE.

But the monetary authorities will try and find an excuse to bring QE to the rescue, as they can't blame the deteriorating economic prospects on a failed economic policy. So they may blame the problem on a dollar crisis, or problems in Europe, the slowing world economy, or even that inflation is too low.

However, more QE isn't the solution, it may be part of the problem.
Although having said that there is one obvious positive for another round of QE from the fed, that it would depreciate the US dollar and that would be most welcomed by US exporters.

If we did see another round of Fed QE, it would end the US dollar rally and do more of the same, blowing more air into equities and bonds. It might also spur on carry trades and that could boost emerging currencies too.

Time will tell.

Friday, 6 February 2015

Baltic Dry Index

Attempting to predict economic the movement of indicators, such as the likely trajectory of the world's Gross Domestic Product and therefore future demand for commodities such as oil, or the trajectory of currencies, can be daunting. There are, however, clues that can help us gauge the market's trajectory.
For example, the Baltic Dry Index is often overlooked by mainstream but it can be a useful factor in the equation when trying to make an intelligent guesstimate of the trajectory of certain asset prices.

So what is the Baltic Dry Index (BDI), also known as the "Dry Bulk Index"?

The BDI is a shipping and trade index, created by the London-based Baltic Exchange, that measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea. The Baltic Exchange directly contacts shipping brokers to assess price levels for a given route, product being transported and time to delivery (speed).

BDI is a composite of three sub-indexes that measure different sizes of dry bulk carriers (merchant ships) - Capesize, Supramax and Panamax. Multiple geographic routes are evaluated for each index to give depth to the index's composite measurement.

Changes in the Baltic Dry Index will give you an insight into global supply and demand trends. The change in the BDI is often considered a leading indicator of future economic growth (if the index is rising) or contraction (index is falling) because the goods shipped are raw, per-production material, which is typically an area with very low levels of speculation. 

The supply of large carriers tends to remain very tight, with long lead times and high production costs, so the index can experience high levels of volatility if global demand increases or drops off suddenly. The Baltic Exchange also operates as a maker of markets in freight derivatives, a type of forward contract known as FFAs (forward freight agreements) that are traded over-the-counter. 

BDI gets a moderate rating amongst analysts.
Some consider it a good indicator, especially when looking for hints of economic recovery, while others think investors shouldn't rely on it, suggesting that it's a long shot to count on this investment tool as a crystal ball to foresee the direction of stock markets or the global economy.

The Baltic Dry Index is a barometer for shipping costs of dry bulk commodities.
Global shipping brokers are asked every workday about their pricing by the Baltic Exchange. The Baltic Exchange consists of more than 600 members as of October 2010, including professionals in the international dry shipping industry and maritime lawyers and arbitrators. The exchange calculates the Baltic Dry Index by estimating the average time charter rate of four indexes that represent the vessel types. Each of these vessels makes up 25% of the Baltic Dry Index.

So what does it mean when the BDI fluctuates?

A rise in the BDI is often interpreted as a bullish signal. If the market is demanding more shipping freight space, then that is an indication of a stronger demand for commodities. If producers are buying more materials, it implies that companies are growing. In other words, when the shipments increase, economies are doing well.

Alternatively, BDI that trends downwards is a bearish signal. Less demand for shipping means slowing trade and stagnating consumer demand and an indication that companies are slowing down their production. 

I like the BDI because the data is more difficult to manipulate, you are drinking close to the source. Actions are limited to those involved with the contract: the people with the cargo and those who have the ship for the cargo. Thus, the index can't be manipulated as the amount of ships has been fixed. 

Nevertheless, the index does have it’s shortcomings.
BDI can be very volatile, at times simulating a roller coaster ride on the charts. The recession that began in 2007 illustrated these swings - hitting extreme highs and severe lows. 
By late January, 2008, the BDI dropped 6,052 points, only to reach its all-time high of 11,440 points in June 2008. But as of November 31, 2008, the index was at its lowest level since January of 1987 - 715 points, added the report. 
Some analysts would say that BDI isn't a useful indicator to determine the stockmarket trajectory. In 2009 BDI was negative but stocks rose. I would argue that is because a QE inspired rally fuelled a bull market, but had little impact on the fundamental economics. In other words, we had negative divergence with stocks heading north and the fundamentals deteriorating.

BDI is a good tool for fundamental analysis but it can't determine what the central banks will do.
The dicey business of speculating the trajectory of asset prices requires many tools in your kit, BDI is just one of them. 

What is the BDI today, Jan 30th 2015?
It plunged over 5% today to 632... That is the lowest absolute level for the global shipping rates indicator since August 1986...

Wednesday, 4 February 2015

Forex Turns Red Hot

The 5.3 trillion US dollar a day foreign exchange market (forex) went red hot in January.

Fortunes have been literally made and lost overnight on this market. The first few weeks of 2015 has been like no other. It started on January 15 with the Swiss National Bank (SNB) abandoning the Swiss Franc peg to the euro, which created a seismic shock on the forex. SNB had burned through billions of dollars on foreign exchange, buying euros and selling francs with the aim of giving their exports a heads up. However, they could do no more against the relentless tide so they decided to cut and run. On that day, the man who bravely bet against the Bank of England and walked away with fame and fortune, George Soros, had almost been squashed by the SNB de-peg to the euro. Shorting the Swiss franc was a profitable move before the SNB de-pegged. But somehow, call it premonition, or survival instincts or good “insider contacts”, Soros abandoned his short trade days before the SNB de-peg, then a few weeks later at Davos announced his retirement. Maybe he thought it was better to leave the casino with his boots and pockets full. Easily being amongst the top ten richest men on the planet, he has had a good spin of the wheel.

Although the legend may have bowed out, the trillion dollar casino continues.
Indeed, with such turmoil on the forex, the big punters are staking some mega bets.

Let's look at a few.

Denmark's central bank cut its deposit rate for the third time in two weeks on Thursday. They have joined the club of charging banks more to hold their money. It now costs banks more money to keep cash on deposits at the central bank. The Danish monetary authorities are trying to defend its long-established currency peg against a weakening euro, which has tumbled since last week when the European Central Bank adopted a EUR 1 trillion-plus ($1.129 trillion) stimulus package. Negative interest rates in theory discourage investors and savers from moving their euro cash deposits into the local currency, thereby depreciating the Danish Krone against the euro.

Some punters are wondering whether this is a repeat of the SNB abandoning its peg. Does the Danish Krone offer the next big opportunity?

The peg, which keeps the exchange rate within a defined range, has come under pressure as the ECB's stimulus plan weighs on the euro. The euro has fallen 6.4% against the dollar this year. Furthermore, the cost for investors to insure against volatility in the Danish krone has spiked, which could be an indication that more traders are anticipating a move.

Nevertheless, no two events are identical. Denmark's peg is a long-standing part of the country's policy. It used to keep inflation low and conditions stable for exporters. But the main difference to bear in mind is that, unlike SNB euro floor peg of 120, the Danish peg also has the support of the European Central Bank, which is likely to be defended under the terms of a European Union agreement.

"The peg is a cornerstone of Danish economic policy and has been so since 1982, and there is a very broad commitment throughout Denmark for the fixed exchange rate", said a central bank spokesman. The Danish krone was little changed against the euro on Thursday.

On Thursday, the dollar climbed to an 11-year high against a basket of currencies and is up 15% in the past year against the euro.

Moreover, some are arguing that there’s no guarantee the krone would appreciate if it were forced to abandon the peg. But I disagree. Apply the laws of logic or physics. If an object is being artificially held stationary, think of the handbrake on a vehicle parked down a steep hill. When the handbrake’s disengaged, gravity takes over and the vehicle rolls forward down the hill.

Likewise, if the Krone were de pegged, market forces would send it shooting higher. More “hot money” would flood in and the monetary authorities would be powerless to stop the trend. It would make a mockery of the terms of the EU agreement.

As I mentioned before, the currencies of countries with oil based economies are likely to continue in a downward trajectory. The Saudi Arabian currency and the United Arab Emerites dirham are likely to make profitable short trade opportunities, in this low oil price environment. At the time of writing this piece 1.00 USD 3.67305 AED Emirati Dirham.

Guggenheim Partners LLC, which manages $220 billion, is about to start betting against the currency of the United Arab Emirates, the dirham, said Scott Minerd, chairman of investments and global chief investment officer at the firm. Guggenheim is also considering betting against the Saudi Arabian riyal and on an appreciating Danish krone, he said.

The currencies don't float freely, meaning that officials in each country peg the currency's value to another currency such as the dollar or euro. So whether the bets pay off depends on whether policy makers will change course. The central banks of these countries aren't obviously giving the market any indications that they are planning to abandon their peg. Frankly, nobody knows what will happen. But assuming that Guggenheim Partners LLC hedge fund bets go sweet, the funds could make $1.5 billion of profit, if the trend goes the other way potential losses are capped at about $30 million, Mr. Minerd saIid.

The upside is more than 20 to 50 times the initial investment, based on 12-month options the firm will purchase, assuming the U.A.E. devalues its currency, Mr. Minerd said.

The trillion dollar casino continues. But notice how the old hands play; minimizing their losses and maximizing potential profits.

Tuesday, 3 February 2015

So what have the bulls got to run with?

We know that a Quantitative Easing (QE) inspired rally will eventually lose its lustre. When central banks around the globe buy financial assets such as bonds and sovereign debt, which is known as QE, it has little or no impact on the real economy. Be patient they tell us, but Japan has been patient for the last 20 years… Of course, if you assemble a panel of talking head bankers to discuss QE, they will sell it to the moon. That is no surprise, since they are the recipient of all that “funny money”, which then just gets recycled in the Goldilocks economy for those high-up the food chain. Then, what you get is billion dollar starts ups and rampant speculation in real estate, creating property bubbles and thereby turning would be first time buyers into a class of permanent renters. QE has done wonders for depriving those who have worked hard, saved hard and are now deprived in retirement of a decent return on their savings. It is cheap money for the elites and austerity for everyone else. Never before in history have we witness the largest transfer of wealth from the masses to a tiny few. We’re not not talking 1 percent, it’s more like .0001 percent. Those tiny few are getting intoxicated on an orgy of QE, spending record amounts on superyatchs, supercars, mansions, and millions on decadent parties, while the masses bleed out. The middle class has been turned into a new burgeoning herd of dollar store shoppers. They are worried about how to fund their retirements and whether their children can find work after years of an expensive education and rising health care costs, in a world where public services are dwindling. A scarcity of well paying stable jobs has meant that they’ve forgotten what a pay rise means. Moreover, the Great Recession has depleted middle class household savings and their wealth is withering. A recent Us Federal Reserve Survey comprising of 4,000 adults confirmed the following;

“Savings have been depleted for many households after the recession”, it found. Among those who had savings prior to 2008, 57% said they’d used up some or all of their savings in the Great Recession and its aftermath. What’s more, only 39% of respondents reported having a “rainy day” fund adequate to cover three months of expenses.

So household savings from cheaper oil at the gas pump is more likely to be saved rather than spent. In a climate of stagnating wages, job insecurity and dwindling public services, the trend may be to save rather than spend. The velocity of money is still at a recession level, households and businesses are hoarding cash. The Great Recession had caught so many people off guard that it may have had a psychological impact on household consumption. Perhaps for an entire generation it has become the new trend to hoard cash rather than spend it for fear of what may be around the corner? Recent consumption data doesn't support the view that households are spending the savings from cheaper oil prices.

Meanwhile, the adverse impact that lower oil price is having on the macro economy is no longer speculation, it is regretfully a reality. Billions of dollars of investments, directly and indirectly associated with oil at higher prices, are being slashed. Moreover, many projects that were viable when oil was at 80-100 USD are losing, making businesses such as the entire fracking industry, likely to be tomorrow’s new sub-prime crisis. The recent slump in oil prices, from 110 USD a barrel in the summer to below 50 USD, could see a repeat of the wave of defaults following the 1980’s collapse. In 1986, 7 percent of energy bonds defaulted, compared to around 1 percent at the turn of the decade. Investors might need to brace themselves not only for poor energy stock earnings but also a wave of energy bond defaults.

With US oil inventories at their highest level in 80 years and the global economy showing signs of slowing down, if the Saudi don't cut output, it can only mean further falls in the oil price going forward. Oil is current trading at 44 USD per barrel, at the time of writing, and if we don't hear news from Saudis about an output cut, we can expect prices to go even lower.

Banks with investment portfolios weighted heavily in energy, wind, solar, oil, fracking and commodities may be ripe for shorting. Also, auxiliary companies supporting the industry either with machinery, heavy earth moving equipment, oil drilling and rigs or services, or related banking and insurance are likely to be hit going forward.

Standard Chartered is heavily exposed to the commodities downturn than many other banks, with such loans making up 15percent of its book. Commodity loans are estimated to have increased at roughly 20 percent a year between 2007 and 2014.

As I said previously, I wouldn't be surprised to soon hear about some major investor in commodities, be it a hedge fund or a commercial bank, going belly up. You don't get such movements in oil and commodities without casualties.

I also envisage liquidity becoming tighter, particularly in the secondary market as energy bonds start to default, although that might be mitigated with QE.

There really isn't much to give the bulls a good run going forward. I can hear the bears growling in the background. It might be prudent to bug out into safe havens for a while.

The Ultra-Rich Are Planning To "Bug Out"

The ultra-rich are planning to “bug out” when the time comes.

“Bug out” isn't a financial term, it originates from British army slang which means to move away from current location very quickly.

One obvious question comes to mind, what do the ultra-rich know that the rest of us don't?

The type of assets they are buying really gives a new meaning to rotating into safe haven assets.

So what’s been a popular buy for the 0.01% over the last 12 months? Apparently they’re snapping up survival properties, such as farms in far flung places and deep underground bunkers. In fact, a prominent insider at the Robert Johnson World Economic Forum in Davos, Switzerland says that “very powerful people are telling us they’re scared”. What was even more surprising is what he revealed about hedge fund managers who “all over the world are buying airstrips and farms in places like New Zealand”. What do these ultra-wealthy and, more often than not, ultra-connected know that is driving them to make ‘bug out’ plans, preparing ‘bug out’ locations?

When the world's elite start preparing for doomsday, it’s more than just a flashing warning light on the dashboard, it really is a very troubling sign. Type in the words billionaire's craze for building elaborate subterranean extensions into ‘google’ and you'll get a list as long as your arm. If you had the financial means to live anywhere in the world would you want to live a hundred meters below ground? Unless you were preparing for a disaster and right now the elite appear to be quietly preparing for a disaster like never before.

It seems that the folks with the means are also noticing the growing inequality and how wealth is being skewed to the very top. They are mindful of the civil unrest from Ferguson and the Occupy protests and it appears they are preparing for the consequences. At a packed session in Davos, Robert Johnson revealed that worried hedge fund managers were already planning their escapes. “I know hedge fund managers all over the world who are buying airstrips and farms in places like New Zealand because they think they need a getaway”, he said.

In a separate interview, Johnson admitted that “very powerful people are telling us they’re scared” and that the elite “see increasing evidence of social instability and violence”.

This prominent Davos insider is not the only saying that the elites are planning to bug out.

His comments were backed up by Stewart Wallis, executive director of the New Economics Foundation, who when asked about the comments told CNBC Africa: “Getaway cars, the airstrips in New Zealand and all that sort of thing, so basically a way to get off. If they can get off, onto another planet, some of them would.”

I guess Virgin Galatic have done their market research, knowing there would be demand from people with heavy wallets queuing up to be blasted into space to get away from it all.

But while some of the elites would be happy to find another planet to bug out, others prefer to dig in very deep when it hits the proverbial fan.

For example, there is an underground decommissioned missile silo in Kansas that has been transformed into luxury survival condos by a real estate developer. The following is from the Wall Street Journal article about those condos.

“The so-called Survival Condo complex boasts full and half-floor units that cost $1.5 million to $3 million each. The building can accommodate up to 75 people, and buyers include doctors, scientists and entrepreneurs, says developer Larry Hall.”

It sounds like they are creating an exclusive ecosystem hundreds of feet underground.

Mr. Hall, who lives in a Denver suburb, bought his first missile-silo site in Kansas in 2008 and completed construction in December 2012. A year later, he says, the development had sold out. Work on the second security compound—the one where Mr. Allen bought a unit—is under way, and Mr. Hall says he is considering additional sites in Texas and elsewhere.

As former nuclear missile sites, built under the supervision of the Army Corps of Engineers, the structures were originally designed to withstand a direct hit by a nuclear bomb. At ground level, they can be sealed up by two armoured doors weighing 16,000 pounds each. Mr. Hall added sophisticated water and air-treatment facilities, state-of-the-art computer network technology and several alternate power generation capabilities. Other wealthy individuals are turning their current homes into high tech security fortresses.

Those involved in home security and providing futuristic gadgets, costly bunkers, passageways, panic rooms and recognition software are seeing business boom. .
But perhaps we are seeing ultra-rich paranoid eccentrics with so much money that they don't know what to do with it and are going loopy, or do they really know that something big is around the corner?

Who knows, human behaviour is very odd, meanwhile the doomsday businesses are cashing in on the doom trend.

Monday, 2 February 2015

Chinks in The Armour of The Recovery Story

There are a few of chinks in the armour of the recovery story that are beginning to emerge.

A few earnings from a number of bellwether companies could be indicating to us that there are problems lying ahead with the macro economy.

Indeed, Caterpillar has just added to the growing list of US blue chip companies which have reported dismal earnings. They have just added to the growing number of Q4 earnings misses.

Caterpillar's Q4 earnings really don't give the bulls much to run about. The market was expecting Earnings Per Share (EPS) of $1.55, instead what we got was $1.35 in Q4 Adjusted EPS (and $1.23 on a GAAP basis). But if we were look to the future for guidance, which markets tend to do, then we start hearing the bears roar. 2015 sales and profit outlook has been slashed as follows:

“We expect world economic growth to only improve modestly in 2015. The relatively slow growth in the world economy and continued weakness in commodity prices—particularly oil, copper, coal and iron ore—are expected to be negative for our sales.” This reconciles with the World Banks recent estimate on world GDP which it forecasts will slow. Bearing this in mind, a further slide in commodity prices and the currency of commodity based economies is likely to continue its downward trajectory as we move forward.

It’s the last part of the statement that is concerning because it underscores the link between week commodity and oil prices and the negative impact this has on Caterpillar's sales

How could the two be linked?

Caterpillar offers heavy earth moving equipment, so when mining and construction falls, demand for the companies machines also drops. Falling commodity prices makes mining activities less profitable, it may even make some mines uneconomical to continue their activity. Moreover, with mining activity downsized, that means less demand for not only labour, but also mining machinery, the very kind that Caterpiller offers.

Similarly, the falling price of oil means less revenue for oil exporting economies, now means infrastructure and construction projects have been scaled back. Again this is having a negative impact on the sales for Caterpiller in those regions.

"The recent dramatic decline in the price of oil is the most significant reason for the year-over-year decline in our sales and revenues outlook. Current oil prices are a significant headwind for Energy & Transportation and negative for our construction business in the oil producing regions of the world. In addition, with lower prices for copper, coal and iron ore, we've reduced our expectations for sales of mining equipment. We've also lowered our expectations for construction equipment sales in China. While our market position in China has improved, 2015 expectations for the construction industry in China are lower," said Doug Oberhelman, Caterpiller's Chairman and CEO.

So we are now starting to see the secondary impact of the collapse in the super commodity cycle and oil deflation. This rationale would support the view that construction companies in the region are likely to miss their sales target going forward. That could offer traders with a short trade opportunity in construction companies in the region or any other business offering auxiliary services, such as the well drilling companies, engineering companies making the rigs and heavy moving equipment makers.

Procter and Gamble also highlights another macro-economic concern, but this time it’s a strong dollar story and how it’s creating headwinds on sales and reducing revenue and profit.

Procter and Gamble's recent results stood out with it missing revenue of $20.16Bn (est. $20.67Bn) and EPS of $1.06 (est. $1.13).

"The October - December 2014 quarter was a challenging one with unprecedented currency devaluations. Virtually every currency in the world devalued versus the U.S. dollar, with the Russian Ruble leading the way.”

"The outlook for the year will remain challenging. Foreign exchange will reduce fiscal 2015 sales by 5% and net earnings by 12%, or at least $1.4 billion after tax. We have and will continue to offset as much of this currency impact as we can through productivity driven cost savings. And we will continue to invest in our businesses, brands and product innovation, because it is the right thing to do for the mid- and long-term, while we deliver another year of strong cash returns to shareholders. We are adjusting fiscal year earnings targets accordingly,” said P&G CEO. When a CEO uses the words “challenging”, that means he envisages stormy waters ahead, which could trigger a string of lay-offs.

P&G highlights a macro-economic story, that the appreciation in the US dollar is hitting US company sales and revenue.

Bearing in mind the fall in global infrastructure investments, spurred on by low commodity and oil prices, coupled with a strong US dollar, which is choking US exports, I would not be surprised to see more poor US earnings going forward. That could pull US markets down further, unless of course we get QE4 to the rescue. Not an impossibility…

The Greek Troika Deal

There’s an old banking proverb: “If you owe the bank thousands (a small amount), you have a problem. If you owe the bank millions (a large amount), the bank has a problem.

So who do you think is really worried about Greece not paying back its 360 billion euro debt; the newly elected Greek left-wing Syriza party or the lenders, consisting of the European Central Bank (ECB), the International Monetary Fund (IMF)Troika?

Obviously the Troika are rattled over the prospects of a Greek default. After all, a 360 billion euro default is no small issue. In fact, a Greek sovereign debt default would be catastrophic for the financial markets.

Assuming that negotiation breaks down with the Troika and Greece were to default on all or part of the 360 billion euros of loans, while that would be bad enough, the problem wouldn't end just there. As I explained previously, in an article entitled “Fire Back Stage”, sovereign debt is used as collateral to raise finance to make more loans (debts). Just like households pledge physical assets (a house as collateral against a bank loan), higher up the financial food chain, the commercial banks pledge intangible assets, such as sovereign debts, as collateral to raise finance on the secondary market.

But what happens when the holders of those intangible assets realise they have made loans on worthless Greek paper? Throw fractional reserve lending into the equation and you can see how the problem becomes magnified many times. Unlike Argentina's recent credit default, Greek debt hasn't been ring-fenced from the system. So a Greek credit default would have massive implications on the secondary market western financial system. If you are not technically minded then look at it this way, if the US sub-prime mortgage crisis created the financial crisis of 2008, what would happen when a western country defaults on its sovereign debts? It would make the last financial crisis of 2008 look like a picnic.

But that is unlikely to happen because the Troika and the newly elected Greek government want the same thing, for Greece to stay in the European Union.

Initially, in the early stage of negotiations both sides flex their muscles, then they end up making a compromise and reach an agreement midway.

The Greeks want to restore a “sense of rationality in the Greek debt program,” according to Greek Finance Minister Yanis Varoufakis who was a professor at the University of Athens.

So what happened when the Greek state became insolvent back in 2010?

“The ECB addressed the problem by unloading the largest loan in human history to the most insolvent of European states”, said Varoufakis.

These Troika loans were based “on conditions of austerity that by mathematical precision shrunk by a quarter Greece national income by which all new loans would have to be repaid,” he said.

Indeed the Greek “rescue package” were a Trojan horse. “A case of extend and pretend implemented at large to a whole nation.” “The Troika were in denial about a bankruptcy problem, instead they treat it as a liquidity problem and dumped more debt on an insolvent entity, deepening bankruptcy and extending it in the future,” said Varoufakis. “Our objective is to end this vicious cycle that has bad repercussion for Europe as a whole,” he added.

So what is the new Greek left-wing Syriza Government's objective?

To reach a “mutually beneficial compromise” that will render the Greek economy sustainable again and to stop eluding the Troika with unrealistic conditions to pay back the debts.

What are the important dates?

The end of February is a political arbitrary date that can be extended. The ECB bond that purchased in 2010 and 2011 expire in June, which gives Greece and the Troika four months breathing space. The parties are likely to come to a mutually acceptable agreement before the ECB bonds expiry date, until then there will be wrangling.

The Greeks will be looking for considerable write downs on the loans with the aim of getting the economy back to life again. They are going to need to find a way to package and sell this idea to the Federal Parliament in Berlin. Also, a development plan that will render the Greek economy sustainable. “Once the debt has been restructured Greece can breathe within the Eurozone again,” said Varoufakis.

What are the Greeks likely to put on the table?

There is talk about a debt swap linked to GDP performance. Whatever haircut proposed is likely to be proportional to GDP performance.
But if Greece could return to a healthy path of economic growth then a haircut may not be necessary.
This might be an acceptable solution since a deal would be done that would be in the interest of both parties, linked to the improved performance of the Greek economy.

“If they manage an investment plan that will lift economic performance that is fine and then we will be able to sell this to our own parliamentarians on the basis that Europe is becoming a partner in Greece's growth and not in Greece's misery which has been the case so far”, said Varoufakis.

The Greek Finance Minister Varoufakis is not a radical Marxist as mainstream likes to make out.

Varoufakis understands that it is a dynamic, innovative and enterprising economy that generates wealth and puts people back to work. He understands that employment based on a public sector that requires public funding won't get people back to work in the long term. “Young entrepreneurs face public enemy number one, which is the state in the form of taxation completely out of kilter and ability of these entrepreneurs to begin putting Greeks back to work, must be a priority.”

So after a few months of wrangling, the parties are likely to reach a mutually beneficial deal.
However, there is one wild card in all this, Russia. If the Russians could lure the Greeks away from the EU, offer them a better deal and get the Greeks to default on Troika, it would be a way of bazookering the western financial system. In financial warfare anything is possible.

Friday, 30 January 2015

Transatlantic Trade Deal - Good or Bad?

The Bureaucrats in Europe and across the pond are currently burning the midnight candle on both ends, they are scrambling to conclude the controversial Transatlantic Trade and Investment Partnership (TTIP) trade deal, which could be worth as much as €100 billion extra to the European Union's (EU's) Gross Domestic Product (GDP) .

With the EU's economy in stagnation and some economists hyperventilating over deflation, why then the controversy? After all, the bilateral trade deal is likely to fortify transatlantic trade. So at a glance, TTIP is likely to mean more sales and profits for businesses, jobs for households and in turn increased consumption. Why then isn't there overwhelming enthusiasm from all quarters, businesses and the public alike, for the trade deal?

The reasons cited by those who are anti TTIP, predictably tending to be drummed up from those on the political left, are as follows;

-Weaken workers’ rights and put millions of jobs at risk. The view is that it is “big business” that will be able to take advantage of economies of scale, undercut their smaller rivals and put them out of business. It is the anti-globalist argument.

-Lead to more privatization of public services like education and our prized National Health Service (NHS), which is perhaps a hot button topic amongst the British electorate. The fear is that the NHS will be sold off and run like a corporation with shareholders. Shareholders' main priority often is higher dividends which may clash with the public needs for a functioning health service. The fear is that this conflict of interests between the two stakeholders would lead to the end of free healthcare in Britain.

-Reduce environmental protection and food safety regulation. This is based on Europe's outright rejection of GM foods and the potential adverse impact that fracking could have on the environment. These are hot topics which cross the political divide.

-Give new powers for corporations to sue European governments, including the UK.

Those against TTIP argue that the world leaders are working alongside major corporations and are rushing to get the deal signed without public transparency. No information is being released to the media about TTIP. However, some information has been leaked, but it is difficult to verify at this stage if it’s accurate or not. There are rumours that what may be on the cards, is a change to the law relating to foreign investors and the state. It is known as the investor to state dispute settlement rules (ISDS), which will enable foreign creditors to sue indebted governments in the event of a sovereign debt default, or debt restructuring, in a court behind closed doors. With little or no transparency, who do you think is going to come out of the disputes better off, the governments or the creditors (commercial banks high up the food chain)? My money would be on the latter, leaving the tax paying public to mop up the mess.

Nevertheless, despite the cons of TTIP it’s hard to argue against the view that free trade ultimately benefits everyone. “It means more jobs, more trade and reduced prices. Reducing regulation will have enormous benefits to both consumers and businesses on both sides of the Atlantic”, said a European Member of Parliament.

As to whether TTIP would lead to the privatization of the NHS, that might be a bit over-done. Apparently there will be no clause in the bilateral trade treaty which dictates how national governments operate their public services.

Both sides of the UK political spectrum, Labour and Conservatives support the principles behind the negotiations and recognise that more and better trade is good for the UK and the rest of the EU.

But the devil may be in the detail.
The goal for EU Bureaucrats will be to try and strike a deal which will enable business on both sides of the Atlantic to compete on a level playing field.
For example, some US states are currently not covered by the agreement and therefore procurement at state level would not be available to the same extent as EU states. This means that the EU would be at a disadvantage to a significant amount of procurement spending in the US at the state level.
Ironically, the US promotes free trade but it is also fiercely protectionist with respect to foreign players in their market. The “Buy American” rules apply to materials used in contracts inside and outside the United States and especially projects funded by the federal government.

Take for example the UK offshore wind power scandal. It was a bonanza for foreign competitors, who snapped up the juicy contracts while UK companies were left picking up the crumbs.

The way it stands, the playing field may be tipped in US favour.
But it is worthwhile keeping the TTIP deal on your radar. Any news of a breakthrough is likely to jolly the markets on both sides of the Atlantic with maybe the US getting a lot of the froth.

Banking On The Edge

They are bankers, usually in senior positions, well paid, pretty girlfriends/wives, have a nice lifestyle and appear to be content with life. Yet this is a typical profile of a spate of suicides amongst bankers. During the last two years a total of 48 bankers took their lives in a period where financial markets were relatively calm. Already this year three bankers have taken their lives. The list of top level bankers dying under suspicious circumstances has been growing rapidly in recent months.

Who would have thought that a job in banking would be so risky? This is no joke. Banking has become one of the most dangerous industries to be involved in, with an extremely high death per employee ratio.

The causes of death have been rather strange. For example, one banker shot himself eight times with a nail gun, another ran over himself with his own Sport Utility Vehicle.

Nobody doubts that the global financial system has been under enormous strain and perhaps still is. We are in uncharted territory.

But what should we read into this? Have these people just buckled under the strain, reached their breaking point and topped themselves, or have they had a peek into something we cannot see?

Alternatively, is there something more sinister at work?

Below is a list of top level bankers who killed themselves last year in 2014 with a brief description of their cause of death, you make your mind up.

DEAD (48)

July – Julian Knott, 45, JPMorgan Executive Director,Global Tier 3 Network Operations, SELF-INFLICTED GUNSHOT WOUND

June – Richard Gravino, 49, Application Team Lead, JP Morgan, SUDDEN DEATH cause unknown/pending

June – James McDonald – President & CEO of Rockefeller & Co – apparently self-inflicted, GUNSHOT WOUND

May – Thomas Schenkman, 42, Managing Director of Global Infrastructure, JP Morgan, SUDDEN DEATH, cause unknown/pending

May – Naseem Mubeen – Assistant Vice President ZBTL Bank, Islamabad, SUICIDE jumped

May – Daniel Leaf – senior manager at the Bank of Scotland/Saracen Fund Managers, FELL OFF A CLIFF

May – Nigel Sharvin – Senior Relationship Manager Ulster Bank manage portfolio of distressed businesses, ACCIDENTAL DROWNING

April – Lydia (no surname given) 52, France’s Bred-Banque-Populaire, SUICIDE jumped

April – Li Jianhua, 49, Non-bank Financial Institutions Supervision Department of the regulator, HEART ATTACK

April – Benedict Philippens, Director/Manager Bank Ans-Saint-Nicolas, SHOT

April – Tanji Dewberry – Assistant Vice President, Credit Suisse, HOUSE FIRE

April – Amir Kess, co-founder and managing director Markstone Capital Group private equity fund, CYCLIST HIT BY CAR

April – Juergen Frick, Bank Frick & Co. AG, SHOT

April – Jan Peter Schmittmann – former CEO of Dutch Bank ABN Amro, (Possibly suicide, SHOT)

April – Andrew Jarzyk – Assistant Vice President, Commercial Banking at PNC Financial Services Group, MISSING/DEAD

March – Mohamed Hamwi – System Analyst at Trepp, a financial data and analytics firm, SHOT

March – Joseph Giampapa – JP Morgan lawyer, CYCLIST HIT BY MINIVAN

March – Kenneth Bellandro, former JP Morgan, SUICIDE jumped

Feb – John Ruiz – Morgan Stanley Municipal Debt Analyst, died suddenly, NO CAUSE GIVEN

Feb – Jason Alan Salais, 34, Information Technology specialist at JPMorgan, FOUND DEAD outside a Walgreens pharmacy

Feb –  Autumn Radtke, CEO of First Meta, a cyber-currency exchange firm, SUICIDE

Feb – James Stuart Jr, Former National Bank of Commerce CEO, FOUND DEAD

Feb – Edmund (Eddie) Reilly, trader at Midtown’s Vertical Group, SUICIDE

Feb – Li Junjie, JP Morgan, SUICIDE

Feb – Ryan Henry Crane, SUDDEN DEATH cause unknown

Feb – Richard Talley, UNKNOWN CAUSE

Jan – Gabriel Magee, SUICIDE

Jan – William ‘Bill’ Broeksmit, HUNG/POSSIBLE SUICIDE

Jan – Mike Dueker, SUDDEN DEATHcause unknown

Jan – Carl Slym, SUICIDE

Jan – Tim Dickenson, SUDDEN DEATH cause unknown

Dec 2013 – Robert Wilson, a retired hedge fund founder, apparent SUICIDE leaped to his death from his 16th floor residence

Dec 2013 – Joseph M. Ambrosio, age 34, Financial Analyst for J.P. Morgan, died suddenly from Acute Respiratory Syndrome

Dec 2013 – Benjamin Idim, CAR ACCIDENT

Dec 2013 – Susan Hewitt – Deutsche Bank, DROWNING

Nov 2013 – Patrick Sheehan, CAR ACCIDENT

Nov 2013 – Michael Anthony Turner, Career Banker, CAUSE UNKOWN

Nov 2013 – Venera Minakhmetova Former Financial Analyst at Bank of America Merrill Lynch, CYCLIST HIT

Oct 2013 – Michael Burdin, SUICIDE

Oct 2013 – Ezdehar Husainat – former JP Morgan banker, killed in FREAK ACCIDENT when her SUV crushed her to death

Sept 2013 – Guy Ratovondrahona -Madagascar central bank, Sudden death – cause not confirmed

Aug 2013 – Pierre Wauthier, SUICIDE

Aug 2013 – Moritz Erhardt, SUICIDE

July 2013 Hussain Najadi CEO of merchant bank AIAK Group, SHOT

July 2013 Carsten Schloter, SUICIDE

July 2013 Sascha Schornstein – RBS in its commodity finance, MISSING

April 2013 David William Waygood, SUICIDE

Mar 2013 – David Rossi – communications director of troubled Italian bank Monte dei Paschi di Siena (MPS), SUICIDE

Now the latest, Chris Van Eeghen, described as a cheerful Dutch banker, the head of ABN's corporate finance and capital markets. He "had a great reputation" at work, came from an "illustrious family", and enjoyed national fame briefly as the boyfriend of a famous actress/model. As one colleague noted, "he was always cheerful, good mood, and apparently he had everything your heart desired. He never sat in the pit, never was down, so I was extremely surprised. I cannot understand."

There is a familiar thread that goes through all these cases, that being that none of those who committed suicide gave an indication that they were planning to take their lives. But in Chris Van Eeghens there was something even more eerie. Apparently, a colleague had noticed that he had recently changed his job status on Facebook to "former".

This one has got to be for Sherlock Holmes.

Thursday, 29 January 2015

Russia's Red Line?

It would be akin to poking a wounded bear in the eye with a stick; booting Russia out of SWIFT. The likely outcome might be unnerving for the markets, since it would almost certainly cut US and Russian diplomatic relations, which could be the pretext to war.
Commenting on the issue Andrey Kostin, chairman of the Russian state bank VTB, said, "If that happens it will be a huge worsening relations between East and West".
"Ambassadors in Moscow in Washington might as well go home the next day. We would be on the verge of war and it would be a very dangerous situation, going far beyond the banking sector", added Kostin, who is a close friend of President Vladimir Putin and a member of the board of Rosneft, Gazprom’s smaller but powerful rival. Mr. Kostin is part of Mr. Putin's “inner circle” and the second most prominent politician in Russia, according to a respected Russian newspaper Vedomosti.
So what is SWIFT?
It is the economy's windpipe, enabling it to trade internationally in hard currency. SWIFT payments are a type of international transfer sent via the SWIFT international payment network. It is the largest financial messaging system in the world. Russia’s banks rely heavily on the Belgium-based payments system for both domestic and international payments. Russia does have a local equivalent for payments but it still relies heavily on the SWIFT payment network for international payments.
Most international trades are facilitated with SWIFT in hard currency, US dollars. So if Russia were to be kicked out of SWIFT, facilitating payments for such things as machine parts or consumer toiletries will be difficult. Obtaining hard currency to buy imports will become challenging, oil rich Venezuela is currently experiencing this problem.
“If there is no Swift, there is no banking. . . relationship, it means that the countries are on the verge of war, or they are definitely in a cold war”, said Mr. Kostin.

The move to exclude Russia from the International SWIFT payment system had been discussed by western diplomats last summer as a punitive measure against Russia's alleged military involvement in supporting pro-Russian separatist in Ukraine. But at the time it was considered too punitive by some western diplomats, describing it as “the nuclear option”.

Nevertheless, the Ukrainian war, which started in April shows no signs of abating with each side pointing the blame at each other. Already 5,100 people have been killed in the conflict. Fighting this week was the most intensive since a cease-fire deal was signed in September. Russian Foreign Minister Sergey Lavrov told journalists that rocket shelling Saturday in the city of Mariupol, which left at least 30 people dead, was a tragedy that was being manipulated to "whip up anti-Russian hysteria" in the West. President Vladimir Putin's spokesman, Dmitry Peskov, told Russian news agencies that Ukraine was responsible for the "barbarous shelling" and said that the crisis could only be resolved if there was "firm political will on the part of Kiev".

Western diplomats are now mulling over whether to exclude Russia from the International SWIFT payment system yet again. Is “the nuclear option” real being considered by the West?

Russia believes that their annexation of Crimea, and its support of separatist fighters in East Ukraine are a pretext for tough economic sanctions. “If all this had never happened, any other excuse would have been created” as a result of the “policy of containment [of Russia] which was invented not yesterday, but has been held against our country for decades, if not centuries.” said Mr. Kostin.

Russia also suspects that the US and Saudi Arabia are behind the fall in the oil prices, which has depleted it of export earnings. Oil and gas were worth 68 percent of Russia's total export revenues in 2013.

So what is the end game, war with Russia?

Why not trade our way out of this mess? If a system needs to destroy every now and then to survive, is it worth saving? Admittedly, WWII did help get the US out of a Depression but at what cost? More than 20 million people dead, Europe was left smouldering with half its infrastructure in ruination and most of Germany's adult males were dead. Create, destroy, create, aaand destroy. what is the point?

The market's response to Russia being excluded from SWIFT would obviously be negative, particularly for European companies trading consumer goods and machine parts. Airline stocks might also be adversely affected with air-route diversions in retaliation. If we start seeing Russian and American diplomats being sent home, it would be a clear sign of a deteriorating and concerning situation. A worsening in East-West relations would have a negative impact on equity markets, and probably boost precious metals.

But assuming that East-West relations deteriorate to a point where diplomatic relations are cut, the crisis could have the potential of being very serious. Bear in mind that while the Russian economy has taken a beating through western imposed sanctions it still has teeth and claws… and an arsenal of nuclear weapons.

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