Bond crash dead ahead: tick, tick ... boom!

SAN LUIS OBISPO, Calif. (MarketWatch) – InvestmentNews latest cover is so powerful you can actually hear sirens atop a flashing neon billboard, megawarning in huge bold type: “Tick, Tick ... Boom!”

Yes, they do expect the bond bomb to explode and are publishing “a special report on the impending crisis in the bond market.”A warning: InvestmentNews wants to make damn sure its readers, the 90,000 professional financial advisers who rely on timeliness and accuracy of every INews forecast, understand: “What will your clients’ portfolios look like when the bond bomb goes off?” Get it? Not if but when it happens.

Yes, you heard them. “Tick, Tick ... Boom!” Wake up, it’s an “impending crisis,” dead ahead. And to punctuate their message, InvestmentNews added an alarming photo of an alarm clock with huge bells, wired to rolled-up bonds looking like a stack of dynamite sticks. “Tick, Tick ... Boom!”

InvestmentNews is not staffed by a bunch of alarmists, quite the opposite — conservative, trustworthy and methodical. They know the 90,000 registered investment advisers that rely on them are in turn responsible for advising millions of Americans and managing trillions of retirement assets. Yes, their audience demands reliable forecasts.

So listen closely, we’ll summarize Andrew Osterland’s lead article “Fear Rising With Rates,” along with an interview with Bond King Bill Gross. And INews editorials on “repositioning client money” with “strategies for rising rates.” And a couple of opposing portfolio suggestions: “The case for, and against, stocks.”

The bull says we’re on “the verge of an even bigger run-up. The bear warns, if your “goal is to avoid losses, stay out of equities altogether.”

Either way, the INews report reads like a Stephen King horror story, and in the background you hear the ticking ... ticking ... louder ... louder ... Boom!”

http://www.marketwatch.com/Story/story/print?guid=911B07CE-90C2-11E2-8A9D-002128040CF6

BCG: Wealth Tax in US may be as high as 25%

A Program for the United States

The situation in the U.S. is different from that of the euro zone and, in a way, would be less complicated  to resolve.  The U.S. has all the levers with which to address the crisis and would not need to coordinate 17 countries with divergent interest. But some facts would need to be acknowledged before decisive action could be taken:

• In spite of massive intervention by the Fed and the US government, growth remains anemic
• The deleveraging of private households will have to go on for many years
• The real estate market has not yet stabilized. About 11 million US households suffer from negative equity (their mortgage outstanding is higher than the value of their home). And the supply of homes is still in excess by 1.2 to 3.5 million (depending on the data used to estimate this number).
• The US government deficit is not sustainable and will need to be brought to acceptable levels, which will slow growth and amplify the problems of the private sector.
• In spite of a significant weakening in the dollar, the U.S. is still running a trade deficit that cannot be blamed on China alone. It reflects a lack of competitiveness in some key markets and the low proportion of manufacturing in the U.S. economy compared with countries such as Germany and Japan.
• There is a striking similarity between the US and Japan in the development of stock and real estate prices (See chart below). A correlation does not mean causality, but it is a sobering picture should Ben Bernanke and his team fail to reflate the economy.
• The interventions of the Fed, notably the programs designed to buy financial assets, have created a monetary overhang that could be the basis for sizable inflation in the future.

Addressing the debt overhang.

The US would also  need to reduce the debt overhang of the government, of consumer loans besides mortgages, and of non-financial corporate sector in the same way as in Europe. As exhibit 2 shows, the total debt overhang in the US equals $11.5 trillion or 77% of GDP. In the somewhat unlikely event of the US following the same path that Europe might pursue, a one-time wealth tax of 25% of financial assets would be required. As in Europe, this would also require the following initiatives.

• Cleaning up the banking sector by calculating the losses and recapitalizing as needed – even if it means wiping out existing shareholders.
• Additional taxes on real estate, including an increased capital-gains tax to offset the support for the real-estate market.
• Creating an incentive for corporations to invest in R&D and new machinery by taxing profits not reinvested.
• A commitment by the government to restrict its debt level and to prepare for the increasing costs of an aging population by either limiting benefits or raising the retirement age.

Addressing the fundamental issues of the US Economy.

We have argued for a long time that the US economy needs to address some fundamental issues in order to become globally competitive again. In putting an end to muddling through, the government might also embark on a major restructuring of the economy:

• Reindustrialize and grow the share of the manufacturing sector from the current low of 12% of GDP to 20% of GDP . This might then allow a rebalancing of trade flows.
• Revisit income distribution.  Most U.S. families cannot make up for their income shortfall with increased credit – and 41 million Americans are officially considered to be below the poverty line.
• Take action to reduce dependency on imported oil by investing in new technologies and modernizing existing infrastructure.
• As in Europe, an administration that truly bit the bullet would take a long-term view and invest more in education.

All this is still speculation. But history shows that the US economy, like no other, is capable of adjusting and implementing quite radical changes. And in our view, some of the actions described above might be pursued by the US government if things do not improve soon.

BCG_Back_to_Mesopotamia_Sep_11[2]


http://www.zerohedge.com/news/muddle-through-has-failed-bcg-says-there-may-be-only-painful-ways-out-crisis

National planning Cyprus-style solution for New Zealand

The National Government are pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts, the Green Party said today.

Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.

“Bill English is proposing a Cyprus-style solution for managing bank failure here in New Zealand – a solution that will see small depositors lose some of their savings to fund big bank bailouts,” said Green Party Co-leader Dr Russel Norman.

“The Reserve Bank is in the final stages of implementing a system of managing bank failure called Open Bank Resolution. The scheme will put all bank depositors on the hook for bailing out their bank.

“Depositors will overnight have their savings shaved by the amount needed to keep the bank afloat.

“While the details are still to be finalised, nearly all depositors will see their savings reduced by the same proportions.

“Bill English is wrong to assume everyday people are able to judge the soundness of their bank. Not even sophisticated investors like Merrill Lynch saw the global financial crisis coming.

“If he insists on pushing through this unfair scheme, small depositors can be protected ahead of time with a notified savings threshold below which their savings will be safe from any interference.”

Dr Norman questioned the Government’s insistence on pursuing Open Bank Resolution when virtually no other OECD country uses it.

http://www.scoop.co.nz/stories/PA1303/S00306/national-planning-cyprus-style-solution-for-new-zealand.htm 

US Deposits In Perspective: $25 Billion In Insurance, $9,283 Billion In Deposits; $297,514 Billion In Derivatives

Earlier today [4], the American Banking Association reminded Americans that there is absolutely nothing to worry about when it comes to the sanctity of US deposits: after all there is a whopping $25 billion in the FDIC insurance fund which means "insured depositors are safe and their deposits are protected by a strong FDIC fund....The FDIC insurance fund has over $25 billion in reserves and the banking industry " Obviously supposedly "insured" depositors in Cyprus also though there was nothing to worry about, until they woke up on Saturday with a haircut between 6.75% and 9.9% on their money in the bank. Sadly, it may be the case that the ABA is being just modestly disingenuous in its statement. Why? Instead of explaining it in detail, here is a snapshot that does more than thousands of words ever could.

Chart drawn to scale.

 [5]

The $25 billion in touted deposit insurance is supposed to preserve and protect (granted not in their entirety) some $9,283 billion in total US deposits. A far bigger problem, however, is when one considers the "asset" side of the US banks' ledger: remember deposits are unsecured liabilities. And for US banks, sadly, over the counter derivatives represent the vast majority of "off the books" assets. According to the latest OCC quarterly report [6], the total derivative notional outstanding of the Top 25 holding companies is $297,514 billion, or nearly $300 trillion. In other words there are 32 times more notional derivatives than there are total deposits, while the ratio of gross derivatives to deposit insurance is a concerning 11,900-to-1.

And with that, we hand it back to the ABA to comfort all US depositors that Cyprus could never possibly happen in the US.

Steve Forbes: Here's Why Cyprus Is Bad For All Of Us!

What in the world is going through the minds of European officials with their crazy, destructive demands with Cyprus? Seizing a portion of peoples’ bank deposits is the kind of thing one would expect from Argentina or other kleptocratic third-world governments. It sets an awful precedent shredding the rule of law, which is the bedrock of a free and vibrant society. The fact that Cyprus is small is irrelevant. The germane fact is that it was Western Europe, supposedly a strong believer in the rule of law, that engaged in this Hugo Chavez-like move. Now, it’s not inconceivable that President Obama or somebody with a similar ideology could propose seizing and integrating people’s 401K plans into Social Security. And in a panic, Congress would go along...

http://www.forbes.com/sites/steveforbes/2013/03/18/for-whom-does-the-cyprus-bell-toll-alas-all-of-us/  

Factbox: Cyprus Contagion – Who’s Looking Poorly?

1. Cyprus bailout sets levy on bank deposits. Should euro zone depositors be worried? 2. How big is the levy? 9.9% on deposits over €100k; 6.75% on smaller deposits; Deposits under €20k may be exempted; Levy intended to raise €5.8bln 3. News sent euro zone bank stocks as much as 4% lower as investors fear precedent is set... 4. So how exposed are the euro zone strugglers? Total Bank Deposits: Italy: €2,437.1bln. Spain: €2,297bln. Greece: €252.5bln.

Why Cyprus matters to US Investors

Wall Street is heavily invested in bank debt across the European Union. If banks begin falling as a result of the Cyprus 'bailout,' investors in the U.S. will feel the loss.

By Cyrus Sanati

FORTUNE -- The terms of the Cypriot "bailout" announced late Friday are simply atrocious and should be revised to protect small depositors to avoid potentially crippling bank runs from popping up across Europe. Forcing bank losses on account holders who believed their money was protected by government-backed deposit insurance violates one of the most sacred of trusts between a bank and its customers. As such, the agreement, if it stands, threatens to crash the entire Cypriot banking system, which could have dangerous effects for banks across the European Union, as well as for investors on Wall Street, who have bet billions of dollars backing EU banks and sovereign notes.

End of Systemic Trust - the beginning of the end of financial system

How about in the US?  Could the US declare a bank holiday and unilaterally devalue the currency in one swift move?  I will get over 9,000 responses saying this could never happen in the good ol’ US of A but of course it could.  In fact it has already been done before during FDR’s first 100 days in office.  The template already exists.  Electronic banking only makes the process that much easier.

Technically, since the Fed has been running a policy of monetary inflation since about 1920, the government here already has been quietly taxing the savings accounts of its citizens without their permission for decades.  The subtle difference between what Europe is doing in Cyprus and what the Fed does every day to American citizens is that the Cyprus theft is happening in one discrete event while the Fed’s theft drips in slowly over years.

But no matter which way you look at the situation, expect things to deteriorate from here.
Did you or your firm stash a bunch of money off-shore in some tax-friendly haven that probably has a favorable relationship to the British Crown?  Best of luck with that.  Tax havens are nothing more than legal arbitrages.  With the value of law moving to zero, the value of your account approaches the same.

http://www.zerohedge.com/print/471569 

The Botching of the Cyprus Bailout: Worse Than Lehman Brothers

Everyone now agrees that Treasury Secretary Hank Paulson badly botched the Lehman Brothers crisis of 2009. But at least he had an excuse. Panicked by the speed of Lehman’s meltdown, he had no time for second thoughts. By comparison the German-led group of EU officials who  engineered this weekend’s Cyprus bank bailout don’t have a leg to stand on. Although they had years to consider their options (Cyprus’s problems are closely related to those of Greece and have long been almost as obvious), they have opted for a “solution” that amounts to probably the single most inexplicably irresponsible decision in banking supervision in the advanced world since the 1930s.

As my colleague Tim Worstall has pointed out in a well argued contributionyesterday, they have weakened – perhaps catastrophically – the principal pillar supporting modern banking. This pillar is deposit insurance. Ordinary savers who had received a solemn assurance that deposits up to 100,000 euros were safe are now being asked to take a haircut. This raises questions about deposit insurance throughout the EU and invites runs on banks not only in the most “financially-challenged” nations such as Greece and Spainbut even in Italy and France.

http://www.forbes.com/sites/eamonnfingleton/2013/03/17/the-botching-of-the-cyprus-bailout-worse-than-lehman-brothers/ 

EU plan to seize bank accounts causes markets to sell off

NEW EU PLAN: STEAL BANK ACCOUNTS...
Island set to seize personal savings...
Plan moves ahead as vote delayed...
Putin: 'Unfair,' 'Dangerous'...
FT: Here come bank runs...
Germany: Not our idea...
Italy to follow?
Markets rattled...
Euro tumbles...
Dow drops...
LIVE...

Cyprus deal shock sends shares tumbling, gold up

LONDON (Reuters) - The surprise decision by euro zone leaders to part-fund a bailout of Cyprus by taxing bank deposits sent shockwaves through financial markets on Monday, with shares and the bonds of struggling euro zone governments tumbling.

The bloc struck a deal on Saturday to hand Cyprus rescue loans worth 10 billion euros ($13 billion), but defied warnings - including from the European Central Bank - and imposed a levy that would see those with cash in the island's banks lose between 6.75 and 9.9 percent of their money.

http://finance.yahoo.com/news/yen-firms-asia-shares-fall-001926588.html

The Botching of the Cyprus Bailout: Worse Than Lehman Brothers

Everyone now agrees that Treasury Secretary Hank Paulson badly botched the Lehman Brothers crisis of 2009. But at least he had an excuse. Panicked by the speed of Lehman’s meltdown, he had no time for second thoughts. By comparison the German-led group of EU officials who  engineered this weekend’s Cyprus bank bailout don’t have a leg to stand on. Although they had years to consider their options (Cyprus’s problems are closely related to those of Greece and have long been almost as obvious), they have opted for a “solution” that amounts to probably the single most inexplicably irresponsible decision in banking supervision in the advanced world since the 1930s.

http://www.forbes.com/sites/eamonnfingleton/2013/03/17/the-botching-of-the-cyprus-bailout-worse-than-lehman-brothers/

ATMs drained as bailout tax triggers run on bank deposits

Panic: people queued to withdraw money after it was determined that part of the Greek bailout would come from the bank accounts of savers. Photo: Reuters

In a move that could set off new fears of contagion across the eurozone, anxious depositors drained cash from ATMs in Cyprus on Saturday, hours after European officials in Brussels required that part of a new €10 billion ($12.6 billion) bailout must be paid for directly from the bank accounts of savers.

The move - a first in the three-year-old European financial crisis - raised questions over whether bank runs could be set off elsewhere.

Jeroen Dijsselbloem, president of the group of euro-area ministers, on Saturday declined to rule out taxes on depositors in countries beyond Cyprus, although he said such a measure was not currently being considered. Although banks placed withdrawal limits of €400 on ATMs, most of them had run out of cash by early evening. People around the country reacted with disbelief and anger.

Read more: http://www.theage.com.au/world/atms-drained-as-bailout-tax-triggers-run-on-bank-deposits-20130317-2g8rx.html#ixzz2Noo2hqwq

Cyprus bank account seizure just the beginning, says report

Today, lots of people woke up in shock and horror to what happened in Cyprus: a forced capital reallocation mandated by political elites under the guise of an "equity investment" in insolvent banks, which is really code for a "coercive, mandatory wealth tax." If less concerned about political correctness, one could say that what just happened was daylight robbery from savers to banks and the status quo. These same people may be even more shocked to learn that today's Cypriot "resolution" is merely the first of many such coercive interventions into personal wealth, first in Europe, and then everywhere else.

For the benefit of those people, we wish to point them to our article from September 2011, "The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis [11]", which predicted and explained all of this and much more. What else did the September BCG study conclude? Simply that such mandatory, coercive wealth tax is merely the beginning for a world in which there was some $21 trillion in excess debt as of 2009, a number which has since ballooned to over $30 trillion. And with inflation woefully late in appearing and "inflating away" said debt overhang, Europe first is finally moving to Plan B, and is using Cyrprus as its Guniea Pig.

For those who missed it the first time, here it is again. Somehow we think many more people will listen this time around:

Restructuring the debt overhang in the euro zone would require financing and would be a daunting task. In order to finance controlled restructuring, politicians could well conclude that it was necessary to tax the existing wealth of the private sector. Many politicians would see taxing financial assets as the fairest way of resolving the problem. Taxing existing financial assets would acknowledge one fact: these investments are not as valuable as their owners think, as the debtors (governments, households, and corporations) will be unable to meet their commitments. Exhibit 3 shows the one-time tax on financial assets required to provide the necessary funds for an orderly restructuring.

http://www.zerohedge.com/print/471520 

BCG Back to Mesopotamia

World Gold Council suggests central banks diversify away from US Dollar

Central banks may start favoring currencies from China, Japan and Australia as the dollar fall out of favor.

NEW YORK (CNNMoney)

The World Gold Council had some words of advice for central banks around the world: It may be time to diversify away from the U.S. dollar.

While the dollar remains the world's main reserve currency, the WGC said in a research report that its "optimal" strategy would involve, what else, but gold.

Along with the dollar and the euro, gold is one of the traditional reserve assets that central banks hold.

But the WGC said central bankers should also consider a number of alternative assets, including those priced in the currencies of Canada, Australia and China.

Central banks in emerging markets have been diversifying away from the U.S. dollar for some time, as the outlook for the currency remains uncertain. According to the International Monetary Fund, the dollar's share of total central bank reserves has decreased to 54% from 62% over the past 12 years.

http://money.cnn.com/2013/03/14/investing/central-banks-dollar/index.html?iid=HP_LN