The World in some 20 years according to Nassim Taleb. Wonder what will happen to that skew if US defaults, and Taleb is right on his black swans? They must fix that debt ceiling, or?
Paradoxically, one can make long-term predictions on the basis of the prevalence of forecasting errors. A system that is over-reliant on prediction (through leverage, like the banking system before the recent crisis), hence fragile to unforeseen “black swan” events, will eventually break into pieces. Although fragile bridges can take a long time to collapse, 25 years in the 21st century should be sufficient to make hidden risks salient: connectivity and operational leverage are making cultural and economic events cascade faster and deeper. Anything fragile today will be broken by then.
The great top-down nation-state will be only cosmetically alive, weakened by deficits, politicians’ misalignment of interests and the magnification of errors by centralised systems. The pre-modernist robust model of city-states and statelings will prevail, with obsessive fiscal prudence. Currencies might still exist, but, after the disastrous experience of America’s Federal Reserve, they will peg to some currency without a government, such as gold.
Companies that are currently large, debt-laden, listed on an exchange (hence “efficient”) and paying bonuses will be gone. Those that will survive will be the more black swan-resistant—smaller, family-owned, unlisted on exchanges and free of debt. There will be large companies then, but these will be new—and short-lived.
To debt or not to debt. Debt is not “evil”, but to prosper, countries and corporations need growth. With the increasing discussions regarding the debt ceiling, many seem to forget talking about the Economic Growth. The Economy is unfortunately in a new normal where growth will be less than many project. Therefore, debt increases might be very painful long term. El Erian on the debt ceiling;
Some have suggested that all the drama over the debt ceiling will be justified by the long-term benefit of forcing America to embark on medium-term plan for deficit reduction. Yet at this point, the benefits of a deal will be offset by how it was achieved.
I am confident that Washington will find a way, albeit very awkwardly, to compromise on a mini-deal, rather than a grand bargain, that raises the debt ceiling and avoids a debt default. They may even manage to evade a downgrade of the nation’s vaunted AAA credit rating, though this is much more uncertain.
But fiscal solvency is not merely a function of deficits and debt, interest rates and the profile of maturities. It is also highly sensitive to economic growth: The lower an economy’s growth rate, the higher a budget deficit is likely to be, the larger the debt accumulation, and the greater the need for yet another round of fiscal austerity to safeguard solvency. All are components of the much-feared debt trap.
Full article, click here.
Wonder why people are getting nervous?
Have we learnt anything from last crisis, or is it merely another same same situation setting up like 07/08? People’s psychology, and stupidity, remains the same. With leverage once again at high levels, the market could be up for some rock and roll if 1295 is taken out on the SPX.
Although we are long term bearish, we expect the market to hold these levels and expect the big drop later this autumn. For the big move down, everybody needs to be long, and wrong…..
Some points from Gold Core,
Gold is marginally higher against most currencies today and is trading at USD 1,614.40, EUR 1,130.50, GBP 990.08 and CHF 1,294.50 per ounce. Gold is flat against the dollar but remains just less than 1% from the record nominal high reached yesterday ($1,628.05/oz). The euro is under pressure again today and gold is 0.7% higher against the euro and is just less than 1.5% away from the record euro high of EUR 1,144.80/oz reached last Monday.
Early gains in Europe saw gold fix at USD 1617.50/oz in London prior to a bout of selling saw gold fall and then rise again. Volatility has increased but remains low compared to levels seen in the late 1970’s.
Investors were made nervous by comments from chemicals major BASF, which said it saw global economic growth slowing as it posted weaker-than-expected earnings, sending its stock down 4.9%.
Siemens AG, Europe’s largest engineering conglomerate, warned that global economic risks were increasing and posted below forecast results. Its shares fell 1.3%.
As per yesterday, Spanish and particularly Italian bonds are under pressure today with the Spanish 10 year rising to 6.06% and the Italian 10 year rising to 5.94%.
One-year CDS (credit default swap) prices on U.S. debt have moved above five-year CDS prices, signaling that the risk of financial contagion remains real.
Europe’s STOXX bank index has lost about 25 percent since mid-February suggesting jitters regarding the possibility of a second phase to the banking crisis.
The Dow to Gold Ratio has again turned down suggesting gold may continue to outperform U.S. stocks and the DJIA, in particular, in the coming weeks. The long term target of below 2:1 remains viable.
Dow-to-Gold Ratio: Financial Assets vs. Hard Assets
It all sounded so good before Obama joined the White House. He spoke of great words, but delivered no more than bail outs of the banks. Does the charismatic leader lack the skills of a leader? Reich reports,
How did we get into this mess?
I thought I’d seen Washington at its worst. I was there just after Watergate. I was there when Jimmy Carter imploded. I was there during the government shut-down of 1995.
But I hadn’t seen the worst. This is the worst.
How can it be that with over 9 percent unemployment, essentially no job growth, widening inequality, falling real wages, and an economy that’s almost dead in the water — we’re locked in a battle over how to cut the budget deficit?
Part of the answer is a Republican Party that’s the most irresponsible and rigidly ideological I’ve ever witnessed.
Part of the answer is the continuing gravitational pull of the Great Recession.
But another part of the answer lies with the President — and his inability or unwillingness to use the bully pulpit to tell Americans the truth, and mobilize them for what must be done.
Full article, click here.
For all news continue below,
Diageo, the world’s largest spirits company, has agreed to pay $16m to resolve US allegations that it bribed government officials in India, Thailand and South Korea to boost sales and receive favourable tax treatment. http://ftalphaville.ft.com/thecut/2011/07/28/636686/diageo-to-settle-with-sec-over-bribery/
Ford plans to invest $1bn to build a factory in western India in a drive to gain a greater share of one of the fastest-growing car markets, the FT reports. The factory in Gujarat, which should be in production by 2014 employing 5,000 people, http://ftalphaville.ft.com/thecut/2011/07/28/636671/ford-to-build-1bn-indian-factory/
Visa, the world’s largest electronic payments company, exceeded Wall Street’s expectations by reporting a 40 per cent surge in quarterly profit as more consumers turned to credit cards and other forms of electronic transaction, http://ftalphaville.ft.com/thecut/2011/07/28/636646/visa-results-beat-expectations/
Royal Bank of Scotland has been ordered by the US Federal Reserve board to improve compliance and governance in its US operations, the WSJ reports. The Fed issued similar cease-and-desist orders to HSBC and Barclays in 2010. http://ftalphaville.ft.com/thecut/2011/07/28/636566/fed-demands-rbs-improve-compliance/
Standard & Poor’s president told a US House of Representatives panel that the country is unlikely to default on its debt obligations but its credit rating could still be lowered if it doesn’t come up with an adequate plan to address spending and its soaring budget deficit Representatives of leading emerging market countries at the International Monetary Fund have warned the fund’s management against pouring more large sums of money into another Greek bail-out with uncertain prospects http://ftalphaville.ft.com/thecut/2011/07/28/636591/emerging-markets-warn-imf-over-greek-loan/
The cost of buying insurance against a default by the US rose to a record on Wednesday, the FT reports, in a sign of growing unease that gridlock in Washington over raising the federal debt ceiling may result in the Treasury failing to pay interest to bondholders. Premiums for one-year US sovereign CDS rose sharply this week and traded at about 90 basis points in London on Wednesday, http://ftalphaville.ft.com/thecut/2011/07/28/636576/treasury-cds-reach-record-highs/
The Brazilian real tumbled on Wednesday after the country introduced measures to curb foreign exchange speculation in a bid to bring down the currency from a 12-year high against the dollar and protect its manufacturers http://ftalphaville.ft.com/thecut/2011/07/27/636521/real-tumbles-as-brazil-imposes-fx-curbs/
As much as half US companies’ record $1,240bn in cash balances is being held overseas, according to Moody’s research, with groups wary of incurring a 35 per cent repatriation tax, writes the FT. While debates rages in Washington about the state of public finances, http://ftalphaville.ft.com/thecut/2011/07/27/636511/us-firms-keep-cash-abroad-away-from-tax/
We “saved” Greece, but the country will still need to default. The focus has shifted back to the US and the debt ceiling soap opera, but do you remember Spain at all?The country where unemployment is more than twice the figure of the great America. Spain is where youth unemployment is north of 40%. The mass protests are back. BBC reports,
Spanish activists, known as “the Indignants”, have set off from Madrid on a long march to Brussels.
They are protesting against what they see as governments bowing to financial markets and ignoring the needs of their own people in the economic crisis.
As they head north, the protesters plan to hold meetings, collecting complaints and proposals as they go.
Since the movement began in Madrid two months ago, similar groups have sprung up across Europe.
The Indignants have added a new chant to their repertoire: “To Brussels!” they sing.
It will have to keep their spirits up for fully 1,000 miles (more than 1,500k), as they march across three countries.
Many of them have already spent weeks on the road, walking across Spain to Madrid, says the BBC’s Sarah Rainsford in the Spanish capital.