Revolution on the horizon in the US
During the last decade, we witnessed militarisation of the police force in the United States. All those measures are in line with optional introduction of martial law during next crisis – which will be worse than this from 2008. Police training to pacify violent rioters yields unexpected results.
Statistics of ever growing number of deaths during police interventions in the US made the black community in the US to take matters into their own hands. I am not talking about standard riots but rather operations aimed at killing policemen organised by ordinary citizens. Recent shootout in Dallas is a good example when 5 police officers were killed and 4 others injured. The situation is serious and escalates quickly. If authorities are not able to defuse the tension, this conflict could evolve into a revolution or a civil war.
Politicians and experts occupy both sides of the aisle. Unfortunately, we sometimes find the rhetoric of ‘they deserved it’ which only widens the chasm between opposite viewpoints. The establishment, instead of restoring the rule of law and trust in public institutions, tries to unite society by creating new, internal enemy. I do not think I over exaggerate when expecting a big terrorist attack in the US and/or war bigger than Iraq/Afghanistan.
Pension funds in the US cut the entitlements
Up to 60% cut in the entitlements was announced by the Central States Pension Fund! Pension funds have to pay their obligations to pensioners while not receiving enough interest or dividends on their investments. This is the effect of historically low-interest rates accompanied with falls of many assets hitting balances of the funds very hard. On top of that, we see the growing demographic problem drying out the inflow of money.
At the end of the day, there is no place for politics or sentiments when it comes to business. Money in and money out have to be accounted for. The alternative is a sale of all assets and bankruptcy of the institution. The real crisis has not even started and already there is no money for the elderly.
Commerzbank putting the foot down against the policy of the ECB
German Commerzbank threatens the ECB to pull out their funds from their central bank account. Mario Draghi lowered the interest rate for bank depositors keeping money in the ECB down to -0.4%. This is the result of Draghi’s policy to force banks to lend more money to consumers.
The only problem in the push for more credit is the lack of creditworthy clients making the risk of a loan to be a ‘non-performing’ higher than ever. This is far from being a factor considered for Brussels politicians. They expect banks to use their reserves the moment additional charge on deposited capital is instituted. Ultimately, those in charge of Commerzbank announced to withdraw funds from the ECB and store it in their own safe in cash. During the age of globalisation and digitalisation, this must be quite a surprise. There may be a small hope that banking sector is not unanimous in decision making as thought before and the war on cash may not materialise because of the same greedy bankers that came up with the idea themselves.
The debt is killing economic growth
According to data from the Bureau of Economic Analysis (BEA) in the US, the credit stopped generating sufficient GDP growth. In the first quarter of 2016 additional debt equals 645 bn US and created additional growth of only 65 bn USD. As a result, the ratio of GDP growth to surplus debt is 1:10. Following Keynes theory, taking more debt should increase the GDP growth. This assumption – legitimising constant QE in developed countries – is the foundation of monetary policy of central banks.
The problem is that overly burdensome debt generates extra costs which – even at ZIRP – are outpacing the profit from sales. More and more money is spent only to service the old debt instead of new, productive investments. We are at the moment when the QE/debt-driven GDP growth is finished. The amount of money pumped into the system – officially and unofficially – does not give acceptable results. We have to ask a question: what now? More of the same – cheap money – or a debt reset?
The ECB starts buying corporate debt
On 8th June, Mario Draghi started his CSPP program. On 18th July the ECB publishes the list of companies of which debt was bought during past 6 weeks. Since then this list will be systematically updated. Investors try to predict which company is going to be chosen to buy their debt before ECB traders and then sell it for more.
The CSPP is just another direct intervention in the economy. It is not only a tool promoting power overreach and corruption but also inevitably has to distort corporate debt market. Just like the price of government debt is disconnected from reality the same fate awaits corporate bond market. It will neither create any new investments nor workplaces but rather start a wave of unhealthy speculation. For example – why a company should risk opening new production lines to create goods they may not find clients for when it is easier to be funded by speculation in the financial markets?
China making entrance into the microchips market
China aims at being independent from the US in the area of microchips import. Until today the value of microchip imports is bigger than oil imports. This change affects one of the last sectors of the US economy that still creates well-paid jobs. China as the biggest exporting powerhouse uses a huge number of microchips not only for electronic widgets but also to produce high-tech weaponry.
In the beginning, overall investment spending on firms manufacturing key elements of electronic systems will equal 161 bn USD. The sum of 47 bn USD will be spent on Tsinghua Unigroup – public company. In 5 years it wants to take place among top 3 microchip producers in the world. Additionally, acquisition of German Aixtron for 670 million is planned. Chinese wanted to buy some American companies but those transactions were stopped through political channels. The US defends their market stopping Micron Tech and Xeon processors to be taken over by Chinese for their supercomputers.
Actions of Beijing are logical as with more tensions between the US and China, authorities cannot let one of the main computer components (e.g. for ballistic missiles – key fragment of territorial defence system) to be produced by the biggest enemy.
Western companies ignore sanctions against Russia
Recently during an economic conference in St. Petersburg approximately 330 trade deals worth 16 bn USD were signed. Sanctions are being blatantly ignored by growing number of Western companies. Next to Vladimir Putin the list of keynote speakers consisted of Jean-Claude Juncker and Matteo Renzi.
This is definitely a good sign. It is clear that big corporations exert enough pressure on politics to soften trade barriers between the EU and Russia also slowing down or even reversing any attempt to escalate conflict towards military confrontation.
Russia is becoming food production superpower
Sanctions against Russia disrupted the agricultural market and halved the value of the ruble. With new circumstances, Kremlin decided to become self-sufficient in the food sector before 2020. Putin does not give false promises – Russia is already the top exporter of wheat. In 2015 the volume of food exports rose by 33% compared with previous year.
Russian industry’s dependency on fuel export caused huge areas of farmland not being utilised. This is why the black earth spanning from Southern Russia to Siberia and sources of high-quality drinkable water are still mostly free from toxic fertilizers, pesticides and GMO farming (unlike the US or Europe). Those factors coupled with cheap ruble made Russian farming cheaper, very efficient and of higher quality.
Sanctions created brilliant investment opportunity when it comes to ecological food production. This market grows 3 times faster than traditional farming, at 12% each year. Understanding climate factors and political circumstances the right selection of assets can yield very decent profit in the upcoming decade.
Sino-Russian alternative to Airbus
Deal worth 13 bn USD aims at designing and creating a Sukhoi Superjet – the equivalent of Dreamliner and Airbus. The aircraft’s technicalities should be similar to competition with 270 seats and range of 12 000 km. Boeing and Airbus profit in 2015 was respectively 125 and 92 bn USD, making it a very attractive market to enter.
Singapore diversifying their currency reserves – CNY
Authorities of Singapore and China signed a deal on mutual financial market access enabling Singapore to add Chinese debt into their currency reserves. This deal has a significance with regard to the stability of American debt because it enables entrepreneurs registered in Singapore to deal in the CNY. This young country is already one of the most important trade hubs in the world. This deal furthers internationalisation of the CNY and marginalisation of the USD.
More banks in trouble
German Bremer Landesbank joined the list of troubled institutions. The bank has a big exposure to debt of maritime transport companies. Only in one week, a number of write-offs due to unpaid loans rose to 400 million EUR. The number of potential non-performing loans is big and solvency of Bremer Landesbank – with assets worth 29 bn EUR – is threatened.
South Korea seems to follow a bad example. Two banks – Korea Development Bank and Export-Import Bank of Korea – received 9.5 bn USD in rescue help. Problems started after the bankruptcy of Sungdong Shipbuilding & Marine Engineering – a shipbuilding company. This company is undergoing financial restructuring and debt has been written off. This is not the end. South Korean banks have exposure of around 70 bn USD to debt of maritime trade companies. The volume of global trade is battered and the bad performance of the whole sector will affect Korean banks.
I have to highlight this again: stay away from equities of banks. The bankruptcy of one big institution can easily push other dominoes in a chain reaction. The entity which today looks healthy may be the cause of tomorrow’s causal nexus leading to a huge crisis.
Independent Trader Team