Perspectives on the global economic changes

ramana · Post by **ramana** » 08 Jan 2015 21:21

Also the low oil prices is giving fracking hell in the US leading to many oil rigs being shut down.

There is some US company that leases the oil rigs. They shut 11 rigs down and plan to shut 50 more rigs in January 2015. The frackers see the low oil prices as KSA move to drive them out of business.

chanakyaa · Post by **chanakyaa** » 09 Jan 2015 07:49

Are the Chinese about to take control over oil rich Venezuela

BEIJING, January 8. /TASS/. China will make additional investments in the energy, mining and agriculture of Venezuela, spokesperson of China’s Foreign Ministry Hong Lei told a news conference on Thursday.
“Venezuela’s government now undertakes measures to develop and transform the economy, and China supports those measures,” the diplomat said. “Using the working financial mechanisms between our countries, we shall made additional investments in the energy, mining, agriculture and other spheres to provide technology innovations and to organise new infrastructures [in Venezuela].”
“We believe the present visit [of Venezuela’s President Nikolas Maduro] will favour development of mutual trust, practical mutual understanding between the countries and will improve the bilateral relations.”
Earlier on Thursday, Maduro said after a meeting with China’s President Xi Jinping that China planned to invest additional $20 billion in Venezuela’s economy.

panduranghari · Post by **panduranghari** » 09 Jan 2015 13:06

Kunstler's 2015 forecast

Read it all. Its interesting. If no time, then read these excerpts.

The dollar these days represents two kinds of capital. The first is the stuff that the US has built and invested in since, say, the end of World War Two: a wasteland of aging and decrepitating suburban sprawl, that is, the infrastructure of a living arrangement with no future, the greatest entropic sink in human history. It extends to whole cities and their subsystems, e.g. the hell-hole of Las Vegas with Hoover dam and the dwindling reservoir of Lake Mead. Before mid-century, Las Vegas will be as desolate as Egypt’s Valley of the Kings. Try to imagine the money that went into building all that stupid shit in the desert. In another decade, across America, the housing subdivisions and commercial highway strips filled with tilt-up box stores, muffler shops and burger dispensaries will retain less value than the pyramids of Palenque had for the Mayans after their society rolled over and died. The so-called real economy is a New Age serfdom of burger fryers and janitors, indentured to that entropic sink. Below them is a widening slough of methedrine, child abuse, and tattoo art on its way to becoming Soylent Green. To put it bluntly, the dollar is entropy’s algo bitch.

The big story for 2014 was the crash of oil prices. It is yet being celebrated in other blogger’s 2015 forecasts as a boon to America. Wait until they find out that almost all of the “good jobs” added in recent years were associated with the shale drilling industry that is now being put out of business by low oil prices. Wait until they find out how the failure of junk bond financing thunders through the bond markets and the savage wilderness of derivatives — and ultimately into their ruined pension funds. Wait until they discover that it was but a symptom of the compressive deflationary depression now gripping the entire techno-industrialized world.

We succeeded in turning a marginally-bankrupt, marginally-independent nation into a complete basketcase that is going Dark Age as I write — no money, no work, no fuel, no heat, no food, no prospects. Having completely botched the operation, and misplayed the game against Russia’s Putin — and Russia’s legitimate interest in a stable next-door neighbor — the US will now abandon Ukraine. It will be forgotten as surely as the US-sponsored Ukrainian air force’s role in the crash of Malaysian Airlines Flight 17 — the incriminating details of which were buried by the Dutch investigating officials. Eventually, the Russians will have to care for the dying Ukraine. They will not be enthusiastic about it. They will do little and do it slowly.

The blowback of Europe’s foolish partnership with the US campaign to punish Russia can only discredit the ruling parties and boost new right-wing parties such as France’s National Front and Britain’s UK Independence Party, both deeply nationalistic, anti Euro Union, and anti endless immigration.

The Islamic State was another legacy of blowback from American foreign adventurism. It was spawned out of the remnants of Al Qaeda in poor, broken Iraq and its conquests in 2014 ranged clear across northern Syria to several major cities in Iraq (Faluja, Tikrit, Mosul) right up to the suburbs of Baghdad. They made a lot of money off of captured oil wells and ransoming western hostages, and they shocked Western decency with their YouTube decapitations of hostages that the US and UK refused to ransom. The US’s response now is to bomb their installations and bivouacs. That can only drive them, literally, underground. IS will thrive on Western punishment. It has vast potential to recruit the population of idle, under-employed young men all across North Africa and the Middle East, and beyond to Europe and the band of Islamic society that stretches below Russia across mid-Asia. The catch is, if and when they come to actually rule most of these territories, they will be running economies reduced to Dark Age levels.

As I write, King Abdullah of Saudi Arabia has just entered the hospital. At 91, he is closer to the end of his story than the middle. Meanwhile, the tanking of crude oil prices has critically impaired an Arabian economy that depends on oil sales for more than 80 percent of its operating revenue. Much of that revenue goes to a national welfare system that pays just about everybody to not work. There will be a lot less money to go around now and a lot of grievance over it. The population of the Arabian Peninsula is so far beyond critical overshoot that the situation can only get ugly, especially since a large part of that excessive population consists of testosterone-jacked young men under 30 with nothing to occupy their hours but chitchat over tea and religious mummery. Consider also that when King Abdullah goes, there is liable to be a deeply destabilizing fight for the throne among the hordes of princes and competing clans — despite whomever Abdullah has named as his successor. You may be sure the Islamic State will be standing by to add fuel to those fires. That, in and of itself, could bring on a fast end of the oil age. Bear in mind, too, that the eastern side of Saudi Arabia, where most of the oil infrastructure is, contains a majority Shi’ite population. In a conflict between Sunni IS and Iran-backed Arabian Shia, a lot of stuff could just get blown up. At the least, itr could badly interrupt 30 percent of the world’s oil supply.

China is obviously struggling to prevent a financial freefall brought on by 20-plus years of extravagant debt creation and a lot mal-investment in the service of a very late entry into the techno-industrial frolic. It can’t be denied that they made a good show of it in a very short time, but they got in at the blow-off stage. Now conditions are changing unfavorably. The global economy that made China the world’s workshop is unwinding in a vortex of currency war, trade friction, territorial dispute, ethnic ill-will, and the disturbances that attend the great background problem of peak cheap oil.

The Chinese will work sedulously to try for a soft landing in the great economic contraction that looms. Chinese banking being non-transparent, overly subject to blundering central control, and deeply corrupt, may not bode well for that project. However, China has many cushions to fall back on short-term in the form of foreign money reserves and stockpiles of raw materials. But sooner or later they have to reckon with their dependence on continued oil imports. That is clearly the basis of China’s current flirtation with Russia — but with Russia arguably past its own oil production peak, that’s not a long-term strategy. China has cranked up the world’s mightiest production line of photovoltaic hardware, but solar won’t replace oil the way things currently run, and whatever they rig up may not last more than one generation if there’s no supporting platform of an oil economy for the manufacture of solar replacement parts.

Japan’s suicidal experiment with hyper-turbo ZIRP and QE is not accomplishing much except exacerbating global currency carry trades and driving down the nation’s standard of living. It may succeed in destroying the Yen and what remains of its economy in 2015. Fukushima remains unresolved and Japan’s energy future looks plain dismal. They have no energy resources of their own whatsoever. Any serious mischief in the Middle East oil fields will finish them off. The nation has been on the fast track to become the first post-industrial neo-medieval society. They could be fortunate to land back there and set up their shop while there are still residual riches in the world to work with. They might also go cuckoo and start a war with China for control over the oil fields of the South China sea. It is hard to see any other outcome from such a conflict other than China kicking Japan’s ass.

Pakistan and Afghanistan both continue to melt down into ungovernability. India is forced to take over administration of Pakistan and remove nukes. America continues to pretend that its mission in Afghanistan has some purpose, but it only remains a black hole of military expenditure and becomes a rancorous issue in the run-up to the 2016 Presidential election.

For one who has been a close observer of the US socio-political-economic scene since the Kennedy era, the nation has gotten itself into a pretty sorry state. The pervasive racketeering that poisons American life from the money-in-politics farce, to the shameless, chiseling medical-pharma cabal, to the SNAP-card and disability rights empire of grift, to the college loan swindle, to the disgusting security state apparatus, to the corporate tyranny of local life and economies, to the delusional techno-narcissism of the media, to the despotic and puerile gender preoccupations of academia — all of it adds up to a society that cares as little for the present as it does for the future. And that’s aside from the pathetic digital device addiction of the generation coming up, and the sheer sordid behavior of the tattooed, drug-saturated, ***** masses of adults now forever foreclosed from a purposeful existence or a decent standard of living.

Even physically America is a sorry-ass spectacle: between our decrepitating cities, abandoned Main Streets, gruesome strip-mall highways, repellent and monotonous suburbs, dreary industrial ruins, profaned countryside, and desecrated coastline, there is little left to actually love about This land is Your Land. We’ve made so many collective bad choices about how we live that one can’t help feeling we are simply a wicked people who deserve to be punished.

chanakyaa · Post by **chanakyaa** » 12 Jan 2015 05:00

That was a nice read above...

In the meantime, the kool-aid drunk meedle-yeastern capitolist has spoken to the queen of misinformation...

$100-a-barrel oil 'never' again

Saudi billionaire businessman Prince Alwaleed bin Talal told me we will not see $100-a-barrel oil again. The plunge in oil prices has been one of the biggest stories of the year. And while cheap gasoline is good for consumers, the negative impact of a 50% decline in oil has been wide and deep, especially for major oil producers such as Saudi Arabia and Russia. Even oil-producing Texas has felt a hit. The astute investor and prince of the Saudi royal family spoke to me exclusively last week as prices spiraled below $50 a barrel. He also predicted the move would dampen what has been one of the big U.S. growth stories: the shale revolution. In fact, in the last two weeks, several major rig operators said they had received early cancellation notices for rig contracts. Companies apparently would rather pay to cancel rig agreements than keep drilling at these prices. His royal highness, who has been critical of Saudi Arabia's policies that have allowed prices to fall, called the theory of a plan to hurt Russian President Putin with cheap oil "baloney" and said the sharp sell-off has put the Saudis "in bed" with the Russians (who will disagree with His royal highness). The interview has been edited for clarity and length (clarity????)

What are the odds that Saudi prince use the word "baloney" (quoting the prince)?
baloney: (foolish words or ideas) or (variant of bologna)

bologna: Bologna sausage, sometimes phonetically spelled as baloney (/bəˈloʊni/),[1] boloney[citation needed] or polony, is a sausage derived from the Italian mortadella, a similar looking finely ground pork sausage containing cubes of lard, originally from the Italian city of Bologna (Source: Wikipedia)

JE Menon · Post by **JE Menon** » 12 Jan 2015 15:13

>>What are the odds that Saudi prince use the word "baloney" (quoting the prince)?

High. The chap is highly westernised and familiar with American usage.

ramana · Post by **ramana** » 16 Jan 2015 04:48

No comments on the Swiss franc de-linking to euro/$ turmoil on markets?

USA Today report on Schlumberger losing 9000 jobs in shale industry oil rigs.

9000 jobs lost at Schlumberger

disha · Post by **disha** » 16 Jan 2015 05:35

ramana wrote:Satya,

Any insight into the Swiss franc de-linking to euro/$? it has caused a $1T loss in US today.

Ramana'ji - a request. Please post your questions - instead of asking out specific BRF members questions.

And I do have half-a-mind to repeat what you posted on the Baki thread to another poster - Please do the research, find it yourself and post it here. Having said that, I realize that I am rather churlish and apologize. My statement was caused to hurt you and I am as much pained in hurting your feelings. And hence a sorry from me.

Now coming to your question:

Background:

Swiss bank had a "brotherly arrangement" with West to cap its Francs - basically to avoid run on the Pound Sterling (and US Dollar or the Euro). Basically PIGS in Europe are broke and so is Bartania and Swiss were artificially propping up their currency. However this "brotherly arrangement" is gone. That is the swiss bank will not be selling anymore Francs and buying say Pound Sterling or ~~US Dollar~~ or Euro to keep a cap on Swiss Franc. Given that, Swiss Franc will only go up and relatively other currencies will start falling.

The questions are several. First is why was this "brotherly arrangement" broken? Second is what are its implications?

Again before we answer the breaking of brotherly arrangement., we should know why Swiss Franc is valued. Basically, it has a very stable financial system and a speedy justice system and is no millitary danger to anybody (relatively). Basically the entire country of Switzerland is one large bank backed by a country as a deposit (something like the bank with a country instead of a country with banks)!! So in times of crisis where hoards are running around grabbing your cash will you park your money - of course in a bank like Switzerland. Through the napoleanic wars, crimean wars, WWI & WWII - Switzerland was an island of relative stability.

Now the for breaking out of the brotherly arrangement is simple., from their own statement:

"The euro has depreciated considerably against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar. In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified."

The swiss are cutting their losses. In effect they are saying that Eurozone is doomed, Euro is doomed and Swiss does not want to be left holding the proverbial can when the dust settles. At the end of the day, Euro was becoming useless and Swiss does not want to be left with useless paper when the dust settles.

Implications:

1. Interest rates in the Euro Zone (including Bartania will go up)

2. However Euro zone is caught in a recessionary cycle - with money to fund growth becoming scarce it may hit into depression!

3. This puts the ECB's quantitative easing (QE) (Oh I like that word!) in jeapordy (note a QE would make the paper which Swiss are holding even more worthless).

4. The emerging Europe (Eastern europe) will see their economies sink further (Poland/Romania/Hungary etc) - for eg. mortgage rates will increase drastically impacting consumption thus impacting growth.

5. For an US Investor, that is a major indication of uncertainity in the Euro Zone (including Bartania). Basically West Europe has caught flu and Bartania is going to catch cold.

If you are a smart investor, you will wait till the flu is contained and the cold is under control before investing - particularly investing in companies which have significant exposure to Europe (all American multi-nationals have significant exposure to Europe and this will impact their profitability).

And of course you will immediately reduce your exposure to euro-centric companies - immediately and that is what investors did. If you notice, the market shot up from a low (due to India's rate cut) and then went down fast (due to Swiss NB cap removal) and was plumbing depths.

This to me is actually good news!

vina · Post by **vina** » 16 Jan 2015 05:49

Swiss bank had a "brotherly arrangement" with West to cap its Francs - basically to avoid run on the Pound Sterling (and US Dollar or the Euro).

..............
Implications:

1. Interest rates in the Euro Zone (including Bartania will go up)

2. However Euro zone is caught in a recessionary cycle - with money to fund growth becoming scarce it may hit into depression!

3. This puts the ECB's quantitative easing (QE) (Oh I like that word!) in jeapordy (note a QE would make the paper which Swiss are holding even more worthless).

Brilliant ! The Swiss, put the cap not to protect their own exporters (Novartis,Roche, Nestle and a long list of world beating multinationals and export powerhouses, Tourism, watchmakers (who alone contribute 10% of Swiss exports), to insulate themselves from the Euro's depreciation (Swiss trade most with Euros) by paying good money to buy depreciating Euros, but to protect "brother" countries. Implication -- Swiss don't act on self interest primarily , but interest of France and UK .

Coming to the points. If anyone can't see that bullet points 1) and 2) are contradictory, they must be nuts.

Finally, the Swiss lifted the cap because they saw Euro QE as imminent and and acted in their own self interest to get out of an unsustainable situation , but lousy, QE is in jeopardy!. Oh. but Kanspeeracy theory says they act on the interest of the Euros! Ok.. Suit yourself. [/quote]

If you are a smart investor, you will wait till the flu is contained and the cold is under control before investing - particularly investing in companies which have significant exposure to Europe (all American multi-nationals have significant exposure to Europe and this will impact their profitability).

I would ignore totally anything that was written by you. If I take a position in the market based on your prognosis of a rising interest rate in Eurozone and tight money policy, I will lose my shirt.

ramana · Post by **ramana** » 16 Jan 2015 06:15

disha, Thanks. My own cursory look at Bloomberg says its good for India.
And I don't mind your remarks as its all taken in stride.

disha · Post by **disha** » 16 Jan 2015 06:23

Yes sir, Euro zone IMVHO is caught in a contradictory cycle! They want to ease - but cannot ease! Since there is no taker on the other side, so they have to raise rates but if they raise rates their anaemic growth will be hurt further.

In short EU is caught in a bind.

Of course Vina'ji - if you see opportunities in the Euro zone - feel free to buy it.

And regarding Swiss acting in self interest - of course anybody will act in self interest. However primarily I saw them as working hard to stabilize the Euro Zone and less to protect their own exporters - and now they have broken ranks. Does not a rising Swiss Franc hurt their tourism industry (which is 3% of their GDP approx.). Funny is that their economy inspite of all the world beating companies you claim off is smaller than Turkey's. So what was their prime motivation?

Anyway - I never asked *you* to invest based on my dukhonomic sense. You are welcome to load up on companies exposed to Eurozone (eventually it will go up).

PS & Disclaimer: If you follow my economic advice you have a sure chance of becoming a Kangaal. So please keep in mind and use my posts as FWIW - my .02 rupees only.

chanakyaa · Post by **chanakyaa** » 16 Jan 2015 07:24

Is Swiss National Bank's decision to remove Euro peg related to ECB QE which is not yet a done deal?

A "Conditional Bazooka": European Top Court Finds ECB's OMT "May Be Legal" But Must Meet Conditions

Almost a year ago, the German top court found that ECB's OMT is "illegal", then promptly washed its hands of the final decision, kicking the ball in the court of the European Court of Justice. Moments ago, the Advocate General Pedro Cruz Villalon of the EU Court of Justice in Luxembourg delivered the non-binding opinion on issue of Mario Draghi's "unconditional" OMT.

The full opinion can be found here. Below are the details from Reuters and Bloomberg:

EU COURT ADVISER SAYS OMT PROGRAMME IN LINE WITH EU LAW SO LONG AS CERTAIN CONDITIONS MET
The conditions:

EU COURT ADVISER SAYS OMT LEGITIMATE SO LONG AS THERE IS NO DIRECT INVOLVEMENT IN FINANCIAL ASSISTANCE PROGRAMME THAT APPLIES TO STATE IN QUESTION

EU COURT ADVISER SAYS ECB MUST OUTLINE REASONS FOR ADOPTING UNCONVENTIONAL MEASURES SUCH AS OMT PROGRAMME
Basically, the court has allowed the ECB to drive down borrowing costs using the OMT but it can't fund bailouts. How the two will be "separated" in a world of fungible money is unclear and will likely be the basis for another court appeal.

......(more in the link above)

nandakumar · Post by **nandakumar** » 16 Jan 2015 11:12

Vina
Companies such as Novartis, Nestle etc do not depend on a weak Swiss currency for the incomes they register as a corporate entity. For instance, roughly 50 per cent of Novartis sales in 2013 came from its US operations. The lowest priced Rolex retails for something like something like 10,000 US Dollars. The uber rich who wants to gift a rolex for his daughter's graduation ceremony isn't going to baulk at slightly more expensive price because the Swiss Franc got a tad more expensive. Ditto for tourism. Bollywood isnt going to stop shooting in Swiss locales because of an appreciating currency. The Swiss economy never really thrived on Value for Money customers.

vina · Post by **vina** » 16 Jan 2015 11:58

Companies such as Novartis, Nestle etc do not depend on a weak Swiss currency for the incomes they register as a corporate entity. For instance, roughly 50 per cent of Novartis sales in 2013 came from its US operations. The lowest priced Rolex retails for something like something like 10,000 US Dollars. The uber rich who wants to gift a rolex for his daughter's graduation ceremony isn't going to baulk at slightly more expensive price because the Swiss Franc got a tad more expensive. Ditto for tourism. Bollywood isnt going to stop shooting in Swiss locales because of an appreciating currency. The Swiss economy never really thrived on Value for Money customers.

All those companies cracked some 10% or so yesterday after the mayhem. It is like saying that Infosys has next to no revenue from India and if the INR crashes or appreciates, INFY stock won't move in the NSE! Of course it will and quite violently.

Yeah, this currency will have serious effect on direct swiss exports and employment. You should listen to what the CEO of Swatch said yesterday .. "Words fail me to describe this" .

The mango Oiero Abdul from Phrance, Germany , Scandinavia and also from places like Soddy Barbaria and Gelf and Asia will see their vacation costs in Switzerland jump some 25% or so. Believe me. Many ski trips are going to be said good bye to and they will be going to Sochi in Russia instead (like many Russians are already doing, saying goodbye to Europe and staying at home after the currency crashed).

nandakumar · Post by **nandakumar** » 16 Jan 2015 15:24

Vina
The market has taken it in the chin alright. the Swiss All Share Index is down another 5.5 per cent in today's trading (1600 hrs IST). Having said that, one can not also discount the fact that the market often tends to exaggerate the impact of a significant price sensitive developments. They either err on the side of exuberance or tend to be overly pessimistic. of adverse developments. take a look at the extract from the Wshington Post news report.
http://washpost.bloomberg.com/Story?doc ... T2OKSF1JI0
Novartis, based in Basel, declined to comment. Roche said that while the company generates significant revenues in the euro zone, it also incurs an important part of its costs in euros, including expenses for research and development, production and personnel, mitigating the effect.

Market Turmoil

Thomas Cueni, secretary-general of Interpharma, Switzerland’s pharmaceutical trade group, said the SNB’s decision had caught the industry by surprise, but it was better positioned to weather the impact than some other parts of the economy because of its geographical diversification.

“There’s a bit of regret because over the last few years, the minimum brought predictability and stability to the industry,” Cueni said by phone. “As you can see from the market reaction, now we have turmoil and volatility.”

Luxury goods makers are also vulnerable after the advance in the franc.

The Swiss watch industry was already reeling from what probably will rank as the second-worst annual performance since 2009. Full-year data isn’t out yet, but exports of Swiss watches rose 2.3 percent in the first 11 months of 2014, decelerating from a growth rate that peaked at 22 percent in 2010.
The watch industry didn't take too long to recover from the impact of the 2008 crisis. In 2010 as the report points out, the watch industry grew by 22 per cent. In other words, it took just a year to shrug off the impact of 2008 which incidentally, was far more serious in its economic implication than the removal of the currency peg.

panduranghari · Post by **panduranghari** » 16 Jan 2015 20:58

As much as Keynesians, monetarists, soft money camp croak, ECB is not doing QE. Now even ECJ said so.
From the ZH link;

I wrote this year ago(March 2014) ;

ECB will make deflation bite more, until people start complaining even more. It will make them restive enough*. I think ECB is desperate to undertake QE. However, this QE would be different from the QE by fed. ECB could devalue EURO by 50%, saying the deflation is biting hard. I doubt Fed or BOE could match this. Devaluing USD by 50% would finish USD as a global reserve currency. And they certainly do not have the option of 50% devaluation as the govt stats of inflation have just got below 2%. Gold would gain immensely but it will need to decouple from the paper gold market. ECB will perhaps actively encourage rising gold price while USFed will supply more gold to suppress it.

Let's watch what happens. But that's my theory.

*Germany would not want the spill over of Ukraine, Latvia to worsen. They would hope for the Russian problem solved without upsetting Russia.

Swiss CB devaluing Franc by eliminating the peg, is IMO, front running the ECB devaluation. Are we truly near the end game as alluded to by Another and his Friend. link

Date: Sat Nov 01 1997 21:35
ANOTHER (THOUGHTS!) ID#60253:

Do you think that value has been lost by holding physical gold all these years?

If the answer is yes, you are wrong! I tell you now, it's all in your perception of what is value and what is real. Gold has been increasing in value since the early 90s and doing it at a rate much higher than any other investment. Cannot see this? Hear me now, what the wealthy and powerful know: "real value does not have to always be stated or converted through out time. It need only be priced once during the experience of life, that will be much more than enough!" Worldwide the oil business is still conducted in dollars. But, an interesting side show is now taking place that will change the way we think about gold and oil! If you wanted to devalue the US$ against other currencies what would be the best way to do it without LOWERING interest rates in the USA? Perhaps you want to cool off an over active stock market without raising rates ? Could a smart CB Chairman kill two birds with one stone ?

disha · Post by **disha** » 16 Jan 2015 21:41

vina wrote: All those companies cracked some 10% or so yesterday after the mayhem.

There is something called "market swings"., market never behaves rationally in the short term. Of course, there is something called "behti ganga mein haath dhona" and all the swiss companies will blame the SCB and clean up their books.

Unless you are a momentum trader or a day market trader and know how to make money off the volatiity, I would not put too much store on such short term swings. Again this swings do not tell much about the fundamentals of economy, it tells more about the trader's herd mentality. This is to see where the herd is moving and a contrarian herd will soon shape up. Again irrespective about the fundamentals of the economy.

Regarding Swiss watches and Swiss alps and Swiss chocolates (hey when did cacao grow in Swiss alps) - anyway - all of them are aspirational items. People will buy it even after they have to sell their kidney just to prove that they have arrived. More difficult/costly it is to get, more it will be in demand. That is true for all luxury goods and services. It is not the utility, it is the luxury.

Have you ever had Patek Phillips or Chopard? Heck you wear a Chopard as your cherished possession and show up besides say a Vacherin Constantin or Piguet wearing bimbo - you will be looked down upon as a tramp. Get it?

panduranghari · Post by **panduranghari** » 17 Jan 2015 03:44

I believe SNB was running short on gold. SNB Vice President Thomas Jordan founded the spectacular step with the growing divergence in the international "currency policies". Surely he must have thought about Soros's run on BOE in 1992.

The US Federal Reserve (Fed) wants to raise interest rates and thus indicate that the dollar again has a value.

The ECB, however, wants to flood the markets massively to devalue the euro.

The SNB has been crushed in between the US and the ECB's dilemma: on the outlook that the euro continues to get cheaper, the SNB would have been forced to buy more Euros, to maintain the minimum exchange rate (Peg). That would have lifted the roof of the SNB's FX risk.

Jordan may have thought If the euro-zone really does disintegrate, the Swiss would have been sitting on a mountain of worthless paper. Therefore, it was decided: "Better a terrible end than unending terror."

So the SNB's announcement (and I believe in agreement with the Bundesbank, Russia, India and China) to leave the PEG was delayed after the swiss gold initiative and not communicated to the IMF and the US knowing that
a) it would kill a lot of confidence in unbacked currencies
b) hit and weaken the US entirely unexpected
c) it would create the need for bailouts and QE in the US (again) thus diminishing the divergence of international currency policies
d) render the US influenced IMF irrelevant as an arbiter and deciding factor
e) give the FG proponents an entirely different standing in Davos.

Rajan was felicitated as best central banker by BIS which is based in Basel. He himself is a board member of BIS. For the uninitiated - BIS is central bank of the central banks. So rajan is perhaps in the know. We could say, if it was not for this possibility ( action of SNB), Rajan may have still remained hawkish and left rates unchanged. Nothing changed between December and January from indian perspective- except drop in price of oil.

Conclusion:

Now we are waiting for Davos to happen and the world's undecided statesmen have a fresh memory of what can happen with a FIAT currency out of control. If only there was a savior?

vina · Post by **vina** » 17 Jan 2015 04:54

ramana wrote:There seem to be some sort of co-ordination between Central Banks , notice the timing of RBI & SNB .Possibly its a co-ordinated effort to deflate the financial market bubble without hitting the panic button

Yes. There is always central bank coordination now (Rajan especially has been pushing for it and called for a global response long back etc..), but the effects are not to DEFLATE the financial market, but rather INFLATE.

See, the tip that SNB and RBI would have got is that the ECB is going to go on a rumored $1T bond buying binge. That is not deflationary at all, but inflationary. If the ECB was going to go SELLING bonds, or raise interest rates (ie crimp money supply), the SNB would have held pat and danced with joy.

In addition to removing the cap, he SNB moved rates such that the real interest rates in Switzerland is a NEGATIVE 0.75% .

That is why this Kanspeeracy artiste Dishman is so wrong when he says Euro is going to do tight money policy ! You will lose your shirt, pant, chaddies and banian if you try betting against that oncoming freight train.

As for "volatility", it is easy to talk for guys who have never invested their own money AND have never had a fiduciary responsibility for other's money. If you lose 5% (like the what happened in the Swiss markets), you will not be sanguine. The other move can be ANOTHER 5% or even 10% down and not a move up! You might be sitting on losses which might take an indeterminate amount of time to recover, 5 days, 5 months , 5 years or maybe NEVER, no one knows. Talk is cheap, but being a professional who does this and takes risks and bears fiduciary responsibility is a totally different ball game.

disha · Post by **disha** » 17 Jan 2015 05:42

vina wrote: That is why this Kanspeeracy artiste Dishman is so wrong when he says Euro is going to do tight money policy ! You will lose your shirt, pant, chaddies and banian if you try betting against that oncoming freight train.

No sir, I did not say ~~Euro~~ europe is going to do tight money policy. You want to read me wrong way and then blame your loss of shirt, pant, chaddies and banian on me - what a kanspeeracy!

I am saying ~~Euro~~ europe wants to do a lose money policy [added later with aid from their apparently independent "ECB" Bank], whatever it means by "quantitative easing", and it will do lot of easing (or try to do lot of easing) but it will be all useless.

I *think* they just have no room to do any more lose money policy - they are running out of runway while trying to fly their spruce goose the second time. ~~They~~ European nations can issue more debt and even more debt and even more debt. What will it lead to? A later struggle with gargantuan public debt - oh wait their public debt is already gargantuan!! Who will finance ~~its~~ Europe's debt? A slowing China? Unless of course you are planning to purchase debt of Latvia or Lithuania or Moldova and consider it attractive!!!

Talk is cheap, but being a professional who does this and takes risks and bears fiduciary responsibility is a totally different ball game.

Utter tripe. Know several with such a fiduciary responsibility bearers - as long as their skin is not in the same game., talk is indeed cheap.

[Added later: The terminology in-exactitude strikes me again and again]

vina · Post by **vina** » 17 Jan 2015 05:54

disha wrote:No sir, I did not say Euro is going to do tight money policy. You want to read me wrong way and then blame your loss of shirt, pant, chaddies and banian on me - what a kanspeeracy!

I am saying Euro wants to do a lose money policy, whatever it means by "quantitative easing", and it will do lot of easing (or try to do lot of easing) but it will be all useless.

I *think* they just have no room to do any more lose money policy - they are running out of runway while trying to fly their spruce goose the second time. They can issue more debt and even more debt and even more debt. What will it lead to? A latter struggle with gargantuan public debt - oh wait their public debt is already gargantuan!! Who will finance its debt? A slowing China? Unless of course you are planning to purchase debt of Latvia or Lithuania or Moldova and consider it attractive!!!

Dish dude, as a central bank you do NOT do loose money policy by ISSUING bonds , but rather by BUYING the bonds . When you issue bonds, you DECREASE the monetary base. What you want to do is INCREASE it for loose money. So you got the basic facts wrong and the rest of your rants make NO sense.

Utter tripe. Know several with such a fiduciary responsibility bearers - as long as their skin is not in the same game., talk is indeed cheap.

Well, those guys with fiduciary responsibility get their businesses closed (if they own it) or get fired (if working somewhere). What do you lose when you shoot off your mouth about "volatility" ? Not a dime. Talk is indeed cheap.

disha · Post by **disha** » 17 Jan 2015 06:01

^^ Vina - read it again - my word of "they" did not mean the bank - "they" meant the countries in the europe. So again you read me wrong. The central bank will of course buy the bonds thus putting more money (lose money).

disha · Post by **disha** » 17 Jan 2015 06:06

A thought experiment:

What happens tomorrow if we wake up to find ECB has credited each and every adult resident of Europe with 10000 Euro in their bank account? Something like a direct cash transfer.

Austin · Post by **Austin** » 17 Jan 2015 16:15

Switzerland Loses Currency War - Swiss Win

ramana · Post by **ramana** » 17 Jan 2015 22:30

Vina, Stop calling disha names. If you have to say something say it with out calling names. You can make your arguement without that.

Disha vice versa.

Thanks,

ramana

ramana · Post by **ramana** » 18 Jan 2015 05:19

We need to better understand the Swiss Franc thing. Something major has happened and we have bickering here.
Essentially Swiss lost confidence in Euro and $ and were losing money supporting them both.

Who else will follow?

chanakyaa · Post by **chanakyaa** » 18 Jan 2015 07:57

Is The BoJ The Next SNB?

Japan's central bankers mull diminishing returns from bond buying

TOKYO -- Some in the Bank of Japan are growing anxious about continuing its massive purchases of government bonds, confronted with the program's negative side effects.

Pressure from the financial industry is strengthening by the day, according to high-ranking officials at the central bank.

The BOJ's buying of huge amounts of Japanese government bonds has pushed long-term interest rates to unprecedented lows. This has made it impossible for insurance companies to generate sufficient returns on JGB investments to pay benefits to policyholders.

Nippon Life Insurance will thus raise premiums on lump-sum whole life policies in February. And Fukoku Mutual Life Insurance is considering halting sales of lump-sum endowment insurance and other products.

The longer ultralow interest rates continue, the more likely other insurers are to take similar steps. Household finances would suffer.

Money reserve funds, used for parking individual stock investors' unused funds, are another financial product hit by ultralow interest rates. MRFs put money into short-term government bonds and other safe investments. Generating positive returns on the bonds is becoming nearly a lost cause because negative yields have become the norm for not only short-term government debt, but also two-year JGBs.

With five-year JGBs at zero for the first time Tuesday, "it could become impossible to offer a positive interest rate any moment now," an MRF manager says.

Pushing on a string

The BOJ has discussed these costs at its policy board. When the board took up additional easing measures in a late-October meeting, some members raised the specter of hurting earnings at financial institutions and giving the impression that the bond-purchasing program is actually a scheme to enable deficit spending. The board decided to step up the program anyway, judging the benefits to outweigh the costs.

But the benefits have started to fade. With loan margins already crushed by ultralow interest rates, banks have little room to cut lending rates even if JGB yields sink further. And yields on corporate bonds "have started decoupling from the continued march toward further lows by government bond yields," a brokerage analyst says.

Even within the central bank, more are now coming to believe that the additional benefits of further easing the interest rate channel are clearly diminishing.

"Since nominal interest rates are already at historically low levels, the marginal impact of more easing aimed at putting upward pressure on consumer prices is not strong," policy board member Takehiro Sato said in a speech last month, explaining why he opposed additional easing in October.

While lower crude oil prices are pushing down consumer prices for now, the BOJ maintains that inflation will pick up again in the second half of fiscal 2015, aided by wage hikes and other factors.

"We have caused tremendous trouble for the financial industry," a BOJ official says. "I hope we will be able to scale back monetary easing soon by achieving the price stability target as projected."

chanakyaa · Post by **chanakyaa** » 18 Jan 2015 08:51

Austin · Post by **Austin** » 18 Jan 2015 11:55

objective analysis on Russian debt situation

Russia Credit Rating Downgrade Is Blatantly Political. Here's Why

Suraj · Post by **Suraj** » 18 Jan 2015 12:29

The Swiss action, IMHO, reflects their knowledge that EU will apply another round of QE. Here's where things are now - the EU set interest rates negative (-0.1%) last summer. They again lowered that to -0.2% in fall last year. However, it hasn't really had an effect on EU investment. Rather than compelling banks to invest productively by making people pay to deposit money in banks, they just seek safe haven like US treasuries or German or Swiss government bonds. The Swiss central bank tried to curtail it by setting their interest rates even more punitively to -0.25%.

The fact that they did this soon after setting their rates below ECB suggests that they were aware it was not going to work, and to save their own currency and financial system from a speculative attack, they pre-emptively acted and set their rates down to -0.75% and freed the peg against the EUR .

How can India benefit from this ? Drive a HARD deal. Their productive economy is their problem. We're not going to buy their wares. But we can sell them wares for their cash hoard, and let them invest in our industry via Make In India. There's a lot of cash sloshing around begging for a decent return. The mature economies simply do not have the economic activity base to absorb it. India needs to rapidly focus on manufacturing and industrialization to absorb this pile of credit, enriching us not linearly, but with near exponential growth, while giving them a strong rate of return on the cash they invest in building our economy.

ldev · Post by **ldev** » 18 Jan 2015 21:24

The Swiss National Bank likely cut the floor for the Euro/ceiling for the Swiss Franc of 1.20 as the potential future losses to the Swiss economy from:

1. Interest rate risk on its foreign currency portfolio

2. The eventual foreign exchange loss if it ever had to decouple in the future

were going to exceed the current benefits to Swiss exporters and the tourism economy of Switzerland that were accruing as a result of the 1.20 ceiling.

The foreign exchange holdings of the Swiss National Bank right now are about Euro 500 Billion. It is estimated that they made a Swiss Franc 60 Billion loss on the day they decoupled. Had they not decoupled, the size of their foreign exchange reserves could have doubled to Euro 1 trillion or more once the ECB began its quantitative easing program. The potential loss on the balance sheet of the SNB would have then been proportionately more. As it is the SNB has a balance sheet right now which is equal to 100% of the GDP of Switzerland. Imagine the RBI having a $ 2 trillion balance sheet and the risks to the national economy of an interest rate move with a portfolio that large relative to the real economy.

Furthermore, it was almost certain that a very high percentage of the QE proceeds of the ECB would move straight to Switzerland. The ECB would not be very happy with that as it would defeat the very purpose of launching the QE program. So the ECB and the SNB probably had a quiet conversation before the floor was abolished as this move would benefit both Central Banks.

ramana · Post by **ramana** » 19 Jan 2015 00:04

ldev, so Swiss reduced their risk of holding Euros and $s.

Who else will follow?
China?

Neshant · Post by **Neshant** » 19 Jan 2015 00:30

Swiss have a large stash of euros (approx 500 billion) and feared the EU was going to print money in a big way (devalue the euro) - print away some of the block's debts with the holders of euros eating the loss.

The move to unpeg the franc was a pre-emptive strike to prevent the EU from imposing the above losses onto Switzerland. Though the swiss 500 billion euro hoard lost some value as a result of their sudden move to unpeg, the franc captured the gains.

Had they not done this, the gains would have been captured by the EU which wanted to do the devaluation.

Germany does not want to be paying Greece and other PIGS debt and much rather turn on the printing press and have holders of euros around the world eat the loss. But that plan has gone flying out the window now.

Suraj · Post by **Suraj** » 19 Jan 2015 00:32

Anyone who maintains a fixed peg vs EUR or USD, both of whom have activist QE-friendly central banks. One potential case is HKD , who have a fixed peg against the USD (7.75/$ I think). Competitive devaluation makes is hard for those who maintain pegged currencies. The Swiss could no longer maintain a 1.20 peg against the EUR without an interest rate burden on rising forex reserves due to EUR purchases, that threatened to wreck their budget.

Regarding those affected by EUR devaluation, the Scandinavians would be hurt. The Danes, Swedes and Norwegians all have a peg against the EUR , from what I recall.

panduranghari · Post by **panduranghari** » 19 Jan 2015 02:26

ramana wrote:We need to better understand the Swiss Franc thing. Something major has happened and we have bickering here.
Essentially Swiss lost confidence in Euro and $ and were losing money supporting them both.

Who else will follow?

Better understand? Either you* are one of those who is under a mistaken belief that Modi has, in association with Rajan, worked his magic and economy in India has self corrected itself from the edge of precipice it got to in 2008 or one of those who like an ostrich hid from the problem by burying head into the sand.

*you means who think this SNB devaluation or rouble-yuan free float or Dutch like Germans trying to repatriate their gold held overseas back to their homes etc. news is coming out of the blue.

[/url]

If you had so much debt personally that your income cannot pay for the repayment, you would be bankrupt. Why should be any different for a nation state.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

- Ludwig von Mises - Topics: Debt, Monetary Policy.

panduranghari · Post by **panduranghari** » 19 Jan 2015 03:04

Czech:

http://www.bloomberg.com/news/2015-01-1 ... cmpid=yhoo

chanakyaa · Post by **chanakyaa** » 19 Jan 2015 04:41

And the Danish,

SNB Move Fuels Speculation Danes May Be Next as Krone Gains

ldev · Post by **ldev** » 19 Jan 2015 04:48

ramana wrote:ldev, so Swiss reduced their risk of holding Euros and $s.

Who else will follow?
China?

Ramana,

The Swiss action was in response to a very specific problem i.e. their safe haven status which results in funds inflows resulting in Swiss franc appreciation which will be compounded with ECB quantitative easing.

China has been very methodical since 2003 in their approach in managing the gradual opening of their financial markets. The approach they have taken is very guarded and designed to protect their currency and markets from speculative attacks. While they cannot afford to get rid of the US $ soft peg right away, they have plateaued out their holdings of US Treasury debt in the last 12-15 months i.e. no further exposure. The figure has been holding steady at about $1.2 trillion inspite of trade surpluses of over $500 Billion in the last 2 years cumulative.

At the same time they have entered into bilateral currency swaps with about 30 countries so far and more are on the way. They have also established offshore renminbi clearing and settlement in banks in Asia (Singapore, Hong Kong), Europe (Frankfurt) and Toronto, Canada and they are negotiating to have renminbi clearing and settlement in San Francisco in the US. All of this is designed to ensure that China's trade can be settled directly bypassing the US dollar. For the first time in 2014 the renminbi surpassed the Euro as the 2nd most used currency in purely trade transactions after the USD. These measure are being taken by the Chinese IMO, firstly to ensure that they are insulated from the US dollar in case of a dollar crisis or in the event of US financial sanctions and secondly to ultimately have the renminbi as an international reserve currency. However their primary objective now and in the forseeable future is to ensure that their trade flows are not disrupted because of either deliberate or inadvertent US $ actions.

chanakyaa · Post by **chanakyaa** » 19 Jan 2015 07:45

A different perspective..(article is from Dec 2014)

The Swiss are now at a negative interest

The SNB’s negative interest rate surprise is bigger news than it seems. Switzerland has strong reasons to turn to new monetary policy tools. The lackluster economic growth Switzerland has had since the Financial Crisis in late 2008–visible in the graph of Switzerland’s real GDP in the chart above–has brought inflation down until now it hovers around zero

The Swiss economy is heavily dependent on exports to the eurozone, which hasn’t fared well lately. And the Swiss economy has had troubles of its own. This past September, BBC News ran the headline “Swiss economy fails to grow as EU stagnates,” accompanied by this quotation from Maxime Botteron Credit Suisse’s Maxime Botterton:

The trend in exports is not a big surprise. Trade data so far already pointed to a rather weak contribution of exports. What is a bit more surprising is the weak investment spending, especially in the construction sector.
The main tool the central bank has had for preventing the Swiss franc from appreciating is buying up enough foreign assets with Swiss francs to guarantee there are enough Swiss francs available in the world for anyone to buy one for .833 euros. The trouble with relying on that approach alone is that Switzerland winds up with a lot of foreign assets that are less safe than Swiss assets would be (especially when the effect of possible future exchange rate changes on those foreign assets are taken into account).

The world is used to positive interest rates: a borrower pays a lender for the use of money. Negative interest rates mean that the lender has to pay the borrower to keep money safe. Negative interest rates are a way for Switzerland to get paid for the safety it provides in a financially dangerous world. Then, if Switzerland ends up with risky foreign assets while foreigners end up with safe Swiss assets, at least Switzerland is getting paid for the difference between the safe assets it provides and the riskier assets it is buying.

A good question to ask now would be: Why is the SNB confident that it can go down to deeper negative rates? Most central banks are afraid that if they cut their target rates or interest rates on reserves too far into negative territory, people will start piling up paper currency, which may be inconvenient to store, but otherwise pays an interest rate of 0%, which might start looking very good, compared to, say -.75%.

The answer, which most observers don’t realize, is that the SNB can actually inflict a negative interest rate on paper currency as well. In a principle that the underappreciated polymath (art and cultural historian, Biblical scholar and monetary theorist) Robert Eisler groped towards back in 1932, there’s an easy way to exact a negative interest rate: Charge customers an exchange rate between paper currency and money in the bank. More recent economists, notably Willem Buiter (now Chief Economist of Citigroup) further elaborated on this idea.

On July 15, 2014, I gave a presentation at the SNB explaining how to use a fee on paper currency deposited at the SNB by private banks to generate a negative interest rate on paper currency. This was a variant on Robert Eisler’s approach. To generate a negative paper currency interest rate, the paper currency deposit fee has to gradually increase in size. But as soon as interest rates are positive again, the paper currency deposit fee can gradually shrink in size until it finally disappears, and things go back to the way things work now. So the SNB has the idea of a paper currency deposit fee to implement negative interest rates on paper currency in its back pocket.

There is a world of difference between a central bank that cuts some of its interest rates, but keeps its paper currency interest rate at zero and a central bank that cuts all of its interest rates, including the paper currency interest rate. If a central bank cuts all of its interest rates, including that paper rate, negative interest rates are a much fiercer animal.
....

nandakumar · Post by **nandakumar** » 19 Jan 2015 08:17

Actually, a fee on paper currency holdings is not something really new. When Chidambaram was the finance minister in one of his earlier avatars, he introduced what is known as Banking Cash Transactions tax. In terms of this, customers will have to pay a small fee, at a small fraction of a percentage point, on their cash withdrawal. It was introduced in the budget of 2005 as an anti-tax avoidance measure. There was a lot of opposition, yes you guessed it, from the political class and the rich. It was eventually withdrawn in the 2008 budget. The ostensible reason was that the purpose for which it was introduced has been fulfilled! If the FM was to be believed Black Money had been abolished in India. Incidentally, Brazil too, in the 90s, had its own version of such a tax. Except that it was a hybrid of cash and inter bank transactions tax. For instance, it taxed securities transactions which is analogous to India's Securities Transactions Tax.

vina · Post by **vina** » 19 Jan 2015 08:45

If you had so much debt personally that your income cannot pay for the repayment, you would be bankrupt. Why should be any different for a nation state.

Because that is precisely the difference between you and a nation state with it's own currency ? A nation state can print it's own currency , while you can't!

The trouble is when you put in a peg or go to a common currency like Euro, you lose the flexibility of monetary policy. Your business cycle has to coincide with that of the most powerful member of the Euro. If you are in deep do-doo (like Greece and the other PIGS) and Germany is doing fine, too bad, you won't get accommodative monetary policy. On the other hand if you are doing great and Germany is doing badly, you will get easy monetary policy, even if that will hurt you at that point in the business cycle!