In recent months, we could witness many important events. Their number is so big that I divided this article into two parts.

The USA hides debt in developed countries

The Federal Reserve to hide the actual level of their debt acquisitions does so through the use of entities in Western Europe. Why would they do that? The crisis made the emerging markets debt look more attractive to prevent the crash someone has to buy it.

Source: Self-made

As you can see above, small European countries have very good cooperation with the Bank for International Settlements (BIS) in Basel. Thanks to coordinated action US debt still looks attractive enough for the FED not to initiate another round of QE and admit a total failure of their policy. The trend of leaving the dollar is strengthening. It’s not enough anymore to use swaps making the balance look better. Central banks that own US bonds have a negative balance and Washington’s deficit of 30% requires increasing (and not limiting) world currency reserves in USD.

 

We can expect that there will be more countries with exposure to US bonds – adding others to the list of Belgium, Ireland or Luxemburg. How much of American debt will be added? We can only imply from examples above. For the last 5 years, the value of currency reserves of Ireland increased fourfold and is higher than the Irish GDP.

The alternative? Another round of QE but this would be counterproductive if indeed the FED is eyeing the rate hike.

Saudi companies on sale

The Kingdom of Saudi Arabia is having problems. Not only it had to issue bonds for the first time in 20 years but to get more capital it now sells public companies. One of the biggest transactions worth following is the sale of 5% of Aramco (estimated for 100 bn USD) – the biggest oil producer on the globe. According to International Finance institute to balance Riyadh’s budget oil price has to break $100 per barrel.

Saudis have 600 bn USD in currency reserves and 330 tons of gold in London vaults. Why would they take on debt and sell crown jewels (Aramco and others)? Something is stopping them from using their assets – or someone. The US is actively blocking attempts to sell their bonds (9/11 and Saudi interference scandal). Also, it is very much possible that those gold reserves have already been moved to Switzerland, smelted and sold to Chinese.

Why can the West manipulate Saudis like this? Their rule is not stable and dependent on the whim of the US. The royal family has many enemies inside the country and protection of America can help keeping the power in the right hands. If the current state of affairs would present itself as inconvenient for Saudis they may want to leave American auspices but then they would be replaced by new regime or ‘democratically elected authorities’. The Recent leak of Saudi involvement in 9/11 attacks cemented this scenario in case of Arab disobedience.

How German’s interest trumps sanctions

The biggest German dairy company – DMK Deutsches Milchkontor – was allowed to buy four Russian companies in the sector consisting of both dairy factories and specialised cheese factories. Thanks to that move former biggest exporter of cheese to the Russian Federation can resume operations even with sanctions not being lifted. This is not the only example of how German companies are breaking the agreement. Many of them – e.g. Merck, Siemens, GEA, Class – moved their manufacturing units to Russia to exclude their products from the list of exports.

Draghi saves the European banks. Again.

According to unofficial sources – the ECB is using a clearing system of central banks to save insolvent commercial banks in the Eurozone. The amount of risky credits freshly printed by the ECB is worth 820 bn EUR. To save European institutions from bankruptcy (mostly Italian entities), Bundesbank gave them (through the Italian Central bank) 250 bn EUR of credit. Although this sum may seem big it may not be sufficient as the amount of bad debt it tries to cover – belonging to the biggest banks in Italy – amounts to 360 bn EUR.

E-commerce sales on the rise

Traditional retail chain stores are clearly losing to booming online sales which grow on average 15% each year.

The result is seen all around the US with more people losing their jobs in retail. Only last year shares recorded huge drops – Kohl’s Corporation (-47%), Dillard’s (-52%), Macy’s (-53%), Sears (-72%). This grim situation will soon translate into commercial shopping centres. Many shopping malls are getting emptier but their share price holds still – this may be a very good time to profit from shorting entities invested in shopping centres in the US.

The corporate world faces mass redundancies

In 2016, layoffs increased by 24% compared to 2015. Only in the last four months a quarter of million people lost their job. This is the biggest number since 2009 and the IT sector is leading in this classification.

Over 12 thousand people were fired in just one week avoiding a standard procedure as one of Intel’s employees shared. Normally, an operation like this is executed over several months, while carefully picking people that have to go. The form and speed of mass layoffs suggest that Intel must be in real financial troubles.

In my opinion, not many people believed in such a crisis in the high-tech sector. Especially that in 2016 it was the energy sector making headlines with over 150 companies going bankrupt. If bankruptcies of energy companies are viewed as catastrophic then what we see in the IT is definitely an omen of huge problems in the high-tech segment.

Deutsche Bank desperately looks for capital

We knew about DB’s problems for a while. Last year they ended up with 6.7 bn EUR in the red. Another blow came from Moody’s reducing DB’s rating to Baa2 (only 2 steps from ‘junk’). All this made its bonds very risky. If anyone believed in the strength of German bank the last act of desperation should make it clear for everyone. DB offered Belgian clients 3-moth deposit with 5% interest - for 10-15 thousand EUR deposits.

While rates in Belgium are equal to zero, for unknown reasons DB decided that paying 5% interest is a good business. They clearly need more capital and they need it now to prevent liquidity problems. One question is looming – will DB be another Lehman Brothers?

 

Independent Trader Team