Monday, July 06, 2015

A Derivatives Nightmare 
Is Going To Send The World 
Into A Full-Blown Panic?
"The derivative position of U.S. banks for Q1 2015 has just been published and the reading is more frightening than ever .. The top 5 U.S. banks have total a derivative exposure of $247 trillion. This is 3.5 times world GDP. Total derivatives for all banks in the world are just over $600 trillion. But these figures are less than half of the real exposure. A few years ago the BIS in Basel changed the basis of valuation of derivatives to 'Value to Maturity.' ..  This basically halved the value of outstanding derivatives overnight. Based on the old and proper valuation, the total outstanding today would probably be at least $1.5 quadrillion. And remember, when a counterparty fails, notional value is the real value that will be lost ... central banks worldwide will print a few quadrillion dollars, euros and yen in their desperate attempt to prevent an unsalvageable tragedy .. "
- Egon von Greyerz
link here to read the entire article
Greece is a Side Show,
China is the Main Show!
In his latest letter, John Mauldin* highlights China's economy & financial markets as being a much bigger factor than Greece in terms of effects on the international economy & financial markets .. "Will China’s economy keep growing at 7% a year or more? No – even Xi can’t sustain those growth rates. He can probably manage 3–4% a year, though, after the economy normalizes. In a country as big as China, that is still mind-boggling growth. Wouldn’t we love to be able to get back to 3 to 4% growth in the U.S.? There is a lot of money still waiting to jump into somebody’s wallet. The last few weeks notwithstanding, China is still a land of investment opportunity .. China is perhaps one of the most important question marks in the economic world today, and so it can’t help but matter to your investments. The mainstream media is focused on Greece, but the reality is that Greece is a sideshow compared to China."
LINK HERE to download the letter in PDF
Click "Mauldin July 4" to download Mauldin's letter (may need to provide your email address), or hit "View Fullscreen" at the bottom next to the Scribd logo to enlarge viewing .. John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to:

How Capital Controls
Could Kill
A look at how financial repression in the form of capital controls could adversely affect health .. 3 minutes
Greece is only 1
of Many Financial &
Economic Challenges
John Rubino* makes some great points & observations on what happening in the financial markets & economy - Greece is only one of the many of the challenges .. points out the Greek vote is not legally binding but it does serve the country's leaders in the direction the people want .. "It’s important to understand that Greece isn’t the issue. It is to the global financial system what who takes out the trash is to an unhappily married couple: Not the big issue but a perfectly acceptable start to a catastrophic conflict. The real problems are in the quadrillion dollar derivatives market, the debt/GDP trends of five or six major countries, income inequality in the U.S. and elsewhere, and the Chinese shadow banking system. Greece might be where it starts but those other places are where it will end."
LINK HERE to the commentary
U.S. Stock Market 1929 =
China Stock Market 2015
Jim Rickards*: "China is printing money to buy stocks. The Fed is printing money to buy bonds. Why do we still use the term 'markets?'"
Mish Shedlock* on China's stock market: "Whether this plays out anything like Lehman or 1929 remains to be seen. Crashes are rare. Regardless, it was idiotic that margin debt got as extreme as it did. It is even more idiotic to bail out speculators burnt by margin. Bailout attempts of this nature will either fail miserably or produce an even bigger moral hazard bubble with more leverage and speculation. That the Chinese central bank and brokerages would act as they did is a sure sign of genuine trouble in China's banking system."
LINK HERE to the commentary
Confidence in 
Financial System Lost
Greg Hunter interviews Gregory Mannarino of  .. Mannarino explains how the days of ever expanding debt are numbered: "The system is ending, and we are going to see a massive correction in bond yields. Debt is going to reprice itself to fair market value, and that is going to change the spectrum of every asset class because every asset class is based off of the bond market. . . . The bond market is going to light up. . . . What do I mean by that? We are going to see a spike in bond yields. The entire system is based on the premise that it will function on confidence. It’s a belief that the system will work. Once that confidence is shaken, then it’s party over, that’s it. So, we have confidence in the financial system now being shaken. We have the credibility of central banks being put on the line by the central bank of central bankers. Once the confidence is lost, it is party over and that is really what the issue is here with Greece." .. 19 minutes
click to enlarge

The Greek Exodus
in 1 Chart
Courtesy of: Visual Capitalist
Mish Shedlock* on Greece:
Overwhelming "No" Vote;
The Way Forward; Congratulations!
"Greeks had virtually nothing to gain by voting 'yes' after German finance minister Wolfgang Schäuble commented that further negotiations would be on a 'completely new basis and under difficult economic conditions' even if Greeks voted 'yes' .. Congratulations are in order. Greece voted against further Troika servitude .. The good news stops with the revolt against servitude. The way forward requires three items, all of which seem rather unlikely with Tsipras and the radical left in charge:
1. Reduced public service sector
2. Free market reforms (pensions, work rules, ease in firing, ease in starting a business, retirement age, etc.)
3. Fair, flat tax system
The only way Greece can quickly recover is if it takes steps along those lines. It's possible, but I highly doubt Greece will come close to doing what needs to be done."
LINK HERE to the commentary
Why This Chinese Bubble 
Is Different 
"Whatever else, the incident demonstrated that China's market remains dominated by liquidity. It also showed how badly the authorities want an overextended stock market. So, to adapt an old market saw, perhaps everyone should buy A-shares on the basis of "don't fight the PBoC". .. Bulls, led by GaveKal Dragonomics, say for global investors, keeping out of China is "the world's most crowded trade". Ever since metals prices turned down four years ago, suggesting slower Chinese growth, western institutions have been wary. They missed out on last year's boom, explaining their reluctance to see A-shares suddenly appear in their benchmarks."
LINK HERE to the article
Judging the Future
at a Speculative Peak
The Financial Markets are Overvalued
In his latest market letter, John Hussman takes a view of the markets from the lessons of a century of history .. "The most historically reliable valuation measures continue to project zero total returns for the S&P 500 over the coming decade, and that conclusion is quite robust to assumptions about interest rates and nominal growth (whose effects on actual subsequent market returns have historically been closely related, and highly offsetting). It’s quite true that the Federal Reserve has encouraged speculative yield-seeking in recent years. It’s also quite true that valuations are not a terribly useful guide to market outcomes over horizons shorter than a complete market cycle. What best distinguishes the advancing portion of the market cycle from the declining portion is the attitude of investors toward risk .. It’s the deterioration in market internals and other risk-sensitive factors, and emphatically not simply elevated valuations alone, that suggests a much different and far more vulnerable environment here than we’ve observed for the majority of the period since the 2009 low. No forecasts are required here. It is enough to align our investment outlook with the market return/risk profile we identify. That outlook will change as the evidence does."
LINK HERE to the essay
Cheap Money Begets Excess Supply
July Triggers Report
for Technical Analysts
Financial Repression in Greece:
You Cannot Take Cash From
A Safety Deposit Box
Reuters reports that Greeks cannot withdraw cash left in safe deposit boxes at Greek banks as long as capital restrictions remain in place, a deputy finance minister told Greek television on Sunday .. "Deputy Finance Minister Nadia Valavani told Alpha TV that, as part of those measures, the government and banks had agreed at the time that people would also not be allowed to withdraw cash from safe deposit boxes."
Financial Repression 
Comes in all Shapes & Sizes,
In The Course Of Decades 
You’ll Be Eaten Alive!
Financial Survival Network interviews Jason Hartman on the antidote to Financial Repression. Jason has been marketing the cure to Financial Repression before he even knew it existed. While you can chase higher yield in various funds, the fact is that the high fees & expenses that you will encounter are just another form of Financial Repression. Over the course of decades you’ll be eaten alive.
LINK HERE to the podcast
[Cliff Note: Be careful of owning many single family homes for rentals - the authorities may impose wealth taxes on these non-prinicipal residences in the future .. it is important to diversify.]
click to enlarge
Deflating China Stock Bubble
Similar to Nasdaq's Dotcom Bubble
The deflating bubble in Chinese stocks is uncannily similar to Nasdaq’s dotcom boom & bust. James Mackintosh, FT investment editor, analyses what we can learn from history, whether desperate efforts by authorities to pump up prices bring any hope .. 5 minutes