“I don’t have to tell you things are bad, everybody knows things are bad. It’s a depression. Everybody is out or work or scared of losing their job. The dollar buys a nickel’s worth, banks are going bust, shopkeepers keep a gun under the counter. Crime is running wild in the street and there seems no end to it and there’s no end to it. We know the air is unfit to breathe and our food is unfit to eat…I want you to get mad…All I know is that first you’ve got to get mad! You’ve got to say, I’m a human being, god damn it! My life has value….Stick your head out and yell, I’m as mad as hell and I’m not going to take it any more!”
Folks, I’m not going to tell you we’ve in trouble, the wold world is in trouble. Network 1976 was forty years early in the prediction of the events of our world today. It is a film worth revisiting. The world, our world is starting its collapse and CNN, ESPN, CNBC, and MSNBC are all cheer leading the administration’s happy message that all is well, pay no attention to the man behind the curtain. Well, it’s not well at all. That’s a god damn lie! China is self destructing. The military is about to be cut by 300,000 men and they are not happy. What will these men do for work. The largest coal mining company is laying off 100,000, it employs almost a million. It is selling some of its non coal mining units to pay off the extreme debt it has contracted. Unemployment is up everywhere in China. There is so much off the books, unofficial debt in the shadow banking industry with local and regional debt operations that are not public knowledge. The whole country is up to debt way past its eyeballs and that debt is starting to take is toll on the financial industry. Capital outflows from the country which were used to borrow dollars at close to zero interest for speculation in commodities markets and stock markets, where excessive margin debt was permitted and abetted by that same group of shadow banking has been the cause of stock market declines. We forget that China is still something of a centrally planned economy that operates on a mercantile philosophy of economics.
Just another BRIC in the wall, Brazil is the poster child for corruption and economic stupidity. Socialism never learns. So the government decides to appropriate Petrobras from a private company to now a state owned enterprise. Glory be to god, corruption runs rampant in that endeavor. Well, it’s not like government isn’t corrupt, much! With a president who gets re-elected by means less that legal or ethical, she has made her bed and it appears very uncomfortable. People, when will you learn that socialism is about the free shit bought with the money from the better off portion of the population. But when one runs out of their money, the free shit ends. Why is this such a hard lesson to learn? A free ride is only as good as the length of the ride paid for by others. When the money runs out, the ride ends. Money for nothing. A great song. But a lousy strategy for the economically impaired. To make matter worse, China brought expectations of infinite commodity purchases at increasingly higher prices. Oh shit, what happens when commodity prices fall due to lack of demand? And holding all that Chinese currency when it was devalued. Yes, don’t cry for me Argentina, cry for yourself when a third of your current accounts just devalued by 25 percent. People, the World Cup and the Olympics has never brought prosperity to anyone who hosted those events. Never! Why in the hell you your city bid for one of those events if it is such a money loser? The 2016 summer Olympics may be cancelled for a number of reasons.
Russia is another anemic economy. Yes, the sanctions have hurt, but its current accounts really suck big time. Its ability to engage in industrial production to any profitable degree seems to be a challenge. So Putin want to destroy the dollar by selling oil to China in yuan, the Chinese currency. Yeah, that’ll hunt us real bad considering that China’s economy is tanking, the growth in oil use have evaporated, and there will be further currency devaluations. And the Chinese are playing a delusionary game of trying to boost exports to Europe by spending hundreds of billions in upgrading the new Silk Road. Europe is close to that point of bankruptcy and won’t be buying at the pace they formerly were. As it is, Volkswagen shot itself in both feet with discovery that it has been cheating on the EPA smog tests. The question is what to do about all those diesel powered VWs on the road. The heart of the problem is the ERG valve. In order to get more performance from the engine and better fuel milage, the ERG valve must be by-passed. The Exhaust Recovery Gas valve, when working circulates exhaust gases through the intake air flow to reduce the nitrous oxide gases. The problem is that when that valve and it’s filter become clogged over the miles driven, it fails and the engine suffers a great loss of power and starts billowing a trail of unburnt gas, that old black diesel cloud we associated with big trucks and busses. Germany’s GDP will take a serious hit and how goes Germany, so goes Europe. Of course the banking system is still in the mindset of extend and pretend. Portugal’s “bad bank” just blew up. It’s bonds took a bit hit last week. Unemployment is increasing and government debts keep piling up as the social programs are straining the tax payer’s ability to pay for the good life.
Out of the four emerging economies mentioned above, India is doing average. Not that they don’t have political and financial problems, but it’s economy hasn’t been quite as keen of credit creation. Perhaps they are just backwards. Corruption still runs deep but not to the extent of Brazil and China. They have social welfare programs but not a large as the developed countries. India has always suffered from those dual influences: the British mercantile democracy, and the old USSR centrally planed economy. Few Americans realize that when India and Pakistan went to war against each other, the Russians provided arms to India and we provided arms to Pakistan. You can drive around India and see a lot of the trophies of that war sitting in squares and circles, the M-4 Sherman tank, with holes in it. But all is forgiven, they operate our call centers for us and send thousands of grossly underpaid engineers on work visas to our shores. Now they have opened diplomatic relations with North Korea. I don’t know what for, there is no money in it. Several times a year the NK army has to go work in the fields during harvest just to avert mass starvation of the NK population. As it is, it’s perpetual lean years and hard times for the NK people.
All over the world commodity markets are slowing to a crawl. One thing most individuals do not understand is that a modern economy runs on energy usage. All those people who talk about renewable energy being the savior of the world can’t quite seem to understand that by increasing the cost of energy two things tend to happen. The first is a great surge in inflation, a cost shift. The second is a reduction of production due to that cost shift. With the inflation comes a misallocation of credit and debt. Money flows into the higher yield investments. And as government central banks start committing the ultimate sin of lowering interest rates to zero to cost of borrowing becomes very low. It’s a simple application of math. If I borrow a million dollars at five percent interest, the maintenance on that loan costs me fifty thousand each year. Lower that interest rate to one percent and now I can borrow another four million dollars because that total of five million is only costing me fifty thousand dollars. So as a corporation, maybe my sales has slipped due to reduced demand for my goods and services. That means my profits are weaker. If I can’t improve sales then how do I improve earnings per share to satisfy the shareholders at the next meeting? Money costs almost nothing, so I go into great debt because some fools will lend the money to me, and I’ll buy back millions of shares of my stock at greatly overvalued prices. The magic works, earnings per share are up, I get my bonus, and the price of my stock rises. So what happens when the central banker raises interest rates one percent? The screws get put to my profits because the loan service just went up, I got to pay out more money just to keep the loans good. And if that interest rate goes back to five percent, my company will be bankrupt very soon. You see, when the interest rate is so very near zero I can borrow a lot of money but only for a short time. No one lends five, ten, twenty year terms at one percent. No, we might do it for a year because it is better than the zero rate the central bank is willing to pay. But no longer than that time period. This is why the FED can’t raise rates. How many trillion in assets (what will become bad loans) does it have on its books? If you said over four, good for you. How many of those are repos, on repurchase agreements from banks and other institutions? A hell of a lot. If your banks are over extended or close to it, then how in the hell will they be able to make good on those repo deals? Hell, it’s gotten so bad that corporations are selling bonds to each other so they can borrow more money to buy back more stock at increasingly higher greatly over valued prices just to keep their financials looking good? It’s called a Ponzi scheme and how do you think it will be played out? Remember Bernie Madoff and his investment company? Promised the initial investors very high returns on their money. Kept getting new clients and paid out a little to the old. Truth was, he never invested a dime, he spent most of it on luxury items for himself and family. He bought a lot of over priced condos and houses. This is how government welfare systems work except for one hitch. They never take in all the money they spend and they keep increasing the amount they spend. How will this end? Ask the people in Brazil this time next year. Or better yet, ask the people in Venezuela this year. This is what socialism does, it bankrupts a country both financially and morally. Now look at them yo-yo s that’s the way you do it, you play the guitar on the MTV, that ain’t workin, that’s the way you do it. Money for nothin and the chicks are free.
An update for your amusement. Glencore implodes. This commodity firm was built and enlarged for the purpose of dealing with what was once the insatiable appetite for commodities by China. All that appetite has disappeared and only fond memories are left to pay the extremely heavy debt structure left from that expansion. The GLEN Collateral Default Swap is pushing 600 basis points (6 percent) higher and likely to rise even more. Note that Glencore is the largest commodity counter party. That means it was dealing in derivatives. The amount of the derivatives is measured in the trillions and as its rating goes to junk status, all those derivatives come due, and guess what? No money to pay off the derivatives. People, accounts receivable is not an asset until the money has been paid. It’s a liability. But all this financial engineering makes the wrong assumption that debt to be collected in the future is an asset against which one can borrow. Better known as rehypothecation and the world have been doing that big time. “How did you go bankrupt? At first a little slowly, then all at once.” Ernest Hemingway. So it was with Glencore, a little slowly in March of 2014, now all at once October 2015. Junk bonds are sure to follow by the end of the year.
As an addendum, the other giant commodities traders, Trafigura and Mercuria, are starting to worry the world of financial engineering. It has been reported that Trafigura, the third largest commodities trading house is in deep financial trouble. People, as one or the other goes down the drain, it will pull all the others with it. It will only take a five percent drop in commodity prices to pust these companies over the cliff. Copper, we’re giving it away.