Saturday, August 24, 2013

Repo Market: Shadow Banking=Fullview Crisis...L&C

There are many aspects to every economy that operate differently within it due to culture and other diversified reasons unique to it. One of these is Shadow Banking. Inside the field of shadow banking is another strange contributor called the Repo Market. It provides short-term loans to the banking industry. These are generally over-night loans that institutions use for bond transactions or covering new rule guidelines like the recent Basil Accord which requires banks to have higher capital assets. The new level of safe banking is 5%.
95% at Risk
This means that banks previously had leverage over 95%. They use our money to increase their bonuses and shareholder value. This is not safe in my thinking and the recent situation in Cypress exposes the weakness in the banking industry that is too interrelated. If one gets a cough, the industry catches a virus.
How Affects the Repo Market
In many countries like China, the Repo market is unregulated. In many western nations it is loosely regulated. In addition, Europe is killing the repo market in two ways. One, the EU says banks now need more capital and they have to follow new improved rules. These requirements will cut $883b of assets. The EU has also instituted a new tax called the "FFT(financial transaction tax)". This tax will effect all bonds and derivative trades.
These new rules have caused the spreads on repo loans to jump 72 percentage points to lend money to banks to cover these taxes. This high rate jump will kill the repo market and when, not if,  banks need quick over-night funds, they won't be there. Read trouble and another potential crisis.
There is another aspect to the repo market that is troubling. It is shrinking. In the US it has declined 35% from a peak of $7t in 2008 to $4.6t today. Analysts say the Fed will use it to guide rates higher under the tapering concept of QE.
The Problem
the Fed buys over 60% of treasuries, leaving little investing for the repo market. Richard Comotto of ICMA(International Capital Market Association) says, the new EU tax makes the repo loans unprofitable and this will also effect money market funds. This will surface as rates climb and there won't be a repo market to make the short-term loans that banks will need. Not good.
What I See
there are new rules for capital, but no one is prepared for cyber crime like hacking. There were six major US banks which suffered websites outages in 2012. The KPMG, a UK bank has seen a 12% increase in fraud, especially from hacking. There is at this time the demographic issue. Many older bank executives are retiring and the new, younger replacement hires have no experience. This replacement aspect will effect over 5 large UK banks. Can you say, "I didn't know!"
Liars and Crooks: Obama wins again! His idea to use student loans based on some arbitrary concept of "value" is just a status quo in disguise. The results will be all the established schools getting lower rate loans and all the smaller schools getting screwed. This is very troubling when the student population is shrinking due to demographics.

Sunday, August 18, 2013

Lights Out Arab Spring...SA

There are four stages to civil unrest. It begins with demonstrations, moves to protests, then violence and it ends with riots. This is not good for a society unless life is so untenable that it needs to clean house and try something new. This is how revolutions start. We had one in Libya which is still a work in progress. We have one happening now in Syria.
In the Middle East the global community has seen the Arab Spring movement in many countries. Egypt is the latest example of the third stage and it appears to be entering the final stage. If you recall, Algeria entered this stage and it took a decade to end it. This is not good for Egypt's citizens and world economies. Whether emotions calm down in the historical leading Muslim nation or not, there are other problems looming. The infrastructure within the nation is suffering and it could be the root cause for many problems throughout the world.
Although it hardly receives media attention with all the unrest in Egypt, there have been rolling blackouts within the nation. When it is reported, the tone is that the leaders in government do this to curtail their citizens. This is false. According to Ken Moors of Oil & Energy Investors, it is happening because the utility companies lack the resources to keep the lights on. Electricity production comes from either water, oil, natural gas, nuclear, coal, sun or some hybrid form. With people not paying their bills and a dysfunctional government, utility operators are left to their own devices. Moors estimates that by November under the present conditions, the nation will go dark.
When or if this happens, the global community will see future shock.
In Syria, President Bashar Al-Assad does this as part of his military struggle to defeat the revolutionaries within his nation. He cuts off water, electricity and fuel shipments to areas he deems hostile. The Egyptian military in charge will do the same thing in short order. One, because it is an effective option and the operators in charge of producing electricity will inform them of the current situation. Rolling blackouts will save fuel and time to regain control of their society. It will happen in Egypt and soon wherever people gather to demonstrate against their leaders. These acts will push their societies towards protests and the other two stages. We are in troubling times for world peace.
SPECIAL AWARD: No L&C this week. Instead we have an award recognition. It goes to T. Mark Jones. He did receive $597million from the federal government as a whistle-blower. His story is a life struggle against Big Pharmacy. Jones opened a small clinic in Key West in the 80s to help aid victims. After a few years of success, a big pharmaceutical company came to town. Suddenly, he lost all his business. In fact, he was put out of business. He looked into the reasons. He found out the big company gave kickbacks to all doctors if they used their services. Jones could not prove this, although he kept up the fight and gathering information. He finally was able to prove to the government that after the kickbacks, Big Pharma would pad their prices to Medicare, stealing billions from the government program. It is estimated by government officials that Jones es pose will save Medicare over $15.7b in the next decade. Consider this: this is only one region within the nation. The government watchdogs should be all over these crooks. Maybe we could hire some "old" KGB guys to do the job? Anyway, congrats!