What Is The TPP? A Primer
This article was written by Kimberly Paxton and originally published at The Daily Sheeple
If you keep hearing about the TPP and really only have a general idea of what this is, there is a good reason for that. The negotiations have been kept a closely guarded secret, and those participating don’t want you to know what it is until it’s too late to change it.
Read on for a TPP primer.
What is the TPP?
TPP stands for Trans-Pacific Partnership. The countries involved in this proposed partnership are the US, Japan, Australia, Peru, Malaysia, Vietnam, New Zealand, Chile, Singapore, Canada, Mexico, and Brunei Darussalam. It boils down to being a massive free trade agreement, which would eliminate tariffs on goods and services and harmonize various regulations between the partner countries. If the agreement goes through, it will affect more than 40% of the imports and exports of the United States.
Why are so many people against the TPP?
One of the major issues with the TPP is its effect on Freedom of Speech. Remember how everyone was concerned about the potential ramifications of SOPA and PIPA back when the US government was trying to crack down on “internet piracy”? Well, multiply that times a billion and then don’t run it through Congress, and you have, in a nutshell, the future effects of the TPP on the Internet.
Under the guise of protecting intellectual copyrights, if the TPP goes through, the Internet will change dramatically. It could turn Internet Service Providers into watchdogs, and threaten our ability to communicate unfettered on blogs, forums, websites and social media platforms.
ISPs will be forced to monitor the content of their customers (without warrants) because it is they who will face huge liability if copyrights are “infringed” upon.
“Fair Use” policies will be restricted, existing copyrights will be greatly lengthened, and adopt criminal sanctions against those who infringe on copyrights, even without monetary motivations.
Our own Constitutional checks and balances will no longer apply. There will be no right to privacy and no due process. Webpages can be taken down based on only a complaint – proof will not be required. Innocent until proven guilty will not apply.
So, this will aid Big Businesses like the pharmaceutical industry or the entertainment industry, while it restricts the ability of citizen journalists and every day people to share information. (Learn more HERE)
How does the TPP have the potential to cause tension with China?
Did you notice the major missing participant in the TPP?
All those Asian countries are in like Flynn, but China is notably not playing ball.
When everyone signs this agreement, and no tariffs apply, then Chinese goods will go from the cheapest to the most expensive. Their entire economy is based on exports. Their entire economy is at risk.
The provisions deliberately exclude China. For example, yarn for clothing must come from member countries, and not from China.
This could potentially invite retaliation from China, an economic superpower in their own right.
Why is it all so secret?
And now we come to the scariest part of the TPP. No one really knows what is in it.
All of the information we have comes from documents that were leaked. We know that it has 29 chapters with regulations regarding food safety, who you can buy what product from, financial services, copyrights, and much more.
We must always be suspect of the negotiation of potentially life-altering things that are done in secret. Generally this occurs because those making the plans know that the public will adamantly oppose what they are planning. According to a spokesman from the Office of theUnited States Trade Representative, the general public just isn’t bright enough to grasp the finer points of the TPP, and thus should be kept in the dark until it is fait accompli.
Will you be affected?
This agreement could negatively affect everyone in the United States who works in manufacturing. It will affect those who share information on the Internet. One analysis has said that a small percentage of the wealthy will prosper, while the rest of the population will see their finances dwindle even more. It would ban “Buy American” or “Buy Local” purchasing and marketing practices. It will allow Big Pharma to increase the price of medicine and will disallow the sale of many generic medications. It will override environmental protection laws and policies that have been put in place by member countries.
The list goes on and on.
So yes, you will be affected, and unless you happen to be the owner of a major pharmaceutical company or financial institution, this will not be positive for you.
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Yet another massive nail in the dollar’s coffin
Yet another massive nail in the dollar’s coffin.
On the other side of the world today, a couple of gentlemen that few people have ever heard of signed an agreement that has massive consequences for the global financial system.
It was a Memorandum of Understanding signed by representatives of the Singapore Exchange and Hong Kong Exchange. Their aim– to combine their forces in rolling out more financial products denominated in Chinese renminbi.
This is huge.
Hong Kong and Singapore are THE two dominant financial centers in Asia. For years they’ve been locked in competition with one another, much like New York and London. So their public partnership is a very big deal… indicative of the clear objective they have in front of them.
Bottom line– finance executives in Asia see the writing on the wall. They can see that the dollar is in a period of terminal decline, and it’s clear that the Chinese renminbi is going to take tremendous market share away from the dollar. They want a big piece of the action.
The renminbi has already surpassed the euro to become the #2 most-used currency in the world when it comes to trade settlement, according to a report released yesterday by the Society of Worldwide Interbank Financial Telecommunication (SWIFT).
Right now the renminbi has about an 8.6% share of the global market for trade settlement. Granted, the dollar has the lion’s share of trade settlement at more than 80%.
But just look at how quickly the renminbi has grown; in January 2012, its share of the global market was just 1.9%. So it’s grown by nearly a factor of 5x in less than two years.
With today’s agreement between Hong Kong’s and Singapore’s financial exchanges, that growth will likely accelerate.
As we’ve discussed before, the dollar is in a unique position simply because it is the world’s dominant reserve currency.
This means that when a rice distributor in Vietnam does business with a Brazilian merchant, they’ll close the deal by trading US dollars with each other… even though neither nation actually uses the dollar.
It’s been this way since World War II, simply because there has been such a long tradition of trust in the United States, and a steady supply of dollars throughout the world.
But this confidence is fading rapidly as merchants and banks around the world have been seeking alternatives, primarily the Chinese renminbi.
As the dollar’s market share in international trade decreases, it will mean the end of US financial privilege. No longer will the US be able to print money without repercussions.
And as so many other nations have learned the hard way, when you print money with wanton abandon and indebt your nation to the hilt, there are severe consequences to pay.
Today’s move between Hong Kong and Singapore gives us a glimpse into this future.
We’ll soon see more financial products– oil, gold, Fortune 500 corporate bonds, etc. denominated in renminbi and traded in Asia.
And as trade in these renminbi products grows, the dollar will be closer and closer to its reckoning day.
Years from now when this has played out, it’s going to seem so obvious.
Just like the post-Lehman crash in 2008, people will scratch their heads and wonder– ‘why didn’t I see that coming? Why didn’t I recognize that it was a bad idea to loan millions of dollars to unemployed / dead people?’
Duh. Same thing. People will look back in the future and wonder why they didn’t see the dollar collapse coming… why they didn’t recognize that it was a bad idea for the greatest debtor nation in the history of the world to simultaneously control the global reserve currency…
The warning signs are all in front of us. And today’s agreement between Hong Kong and Singapore is one of the strongest signs yet.
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When economic theory fails the maths exam | Business Spectator
When economic theory fails the maths exam | Business Spectator.
Eight years ago, in December 2005, I began warning of an impending economic crisis that would commence when the rate of growth of private debt started to fall. My warnings hit a popular chord: journalists throughout the world picked it up and publicised my views – as well as similar arguments from Nouriel Roubini, Dean Baker, Ann Pettifor, Michael Hudson, Wynne Godley, and a few others.
But our arguments were ignored by the economics profession because, according to mainstream economic theory, private debt should have no impact on aggregate demand. As Bernanke put it, lending simply transfers spending power from lender to borrower, and “pure redistributions should have no significant macro-economic effects” (Bernanke, Essays on the Great Depression, p. 24).
Yet the empirical evidence that change in debt does have “significant macro-economic effects” is compelling: the correlations of change in debt to the level of employment (Figure 1), and of acceleration in debt to changes in employment (Figure 2), are overwhelming.
Figure 1: Compelling visual evidence? Not to a mainstream economis
Figure 2:Something else to ignore because it doesn’t pass the a priori test
This visually compelling numerical evidence of what caused the crisis was and still is ignored by mainstream economists, while less numerate journalists latched onto it. Why? You would expect that the more numerate a person is, the more he would take evidence like this seriously.
But that isn’t the case it seems – and a fascinating new study of numeracy and reasoning has indicated why this might be so. It seems that when an issue is politically neutral, a higher level of numeracy does correlate with a higher capacity to interpret numerical data correctly. But when an issue is politically charged – or the numerical data challenges a numerate person’s sense of self – numeracy actually works against understanding the issue. The reason appears to be that numerate people employed their numeracy skills to evade the evidence, rather than to consider it.
The research paper, Motivated Numeracy and Enlightened Self-Government, tested people’s ability to interpret numerically challenging data against their ratings on a numeracy test, and their political allegiances. Precisely the same data was presented as the results of two quite different studies: whether a new skin care product did or did not reduce skin rashes, and whether gun control laws did or did not reduce crime. The hypothetical data was set up so that half of the survey group saw objectively positive results – the skin care product worked, or gun control reduced homicide rates – and the other saw objectively negative results in each case (see Figure 3).
Figure 3: The hypothetical data presented as real data to different segments of the survey group
The “data” was designed to be confusing to those with low numeracy skills: a simple comparison of numbers in the first column would lead to reaching the wrong conclusion – that the skin cream increased rashes when it reduced them, or that gun control laws decreased crime when it increased it. Getting the correct answer involved a comparison of the ratios of the two columns.
The experimenters expected that more numerate people would trump less numerate people in both instances – so that effectively, a higher level of numeracy would lead to a lower level of ideological bias, whether the issue was politically charged or not, and whether the subject was conservative (Republican) or progressive (Democrat). The argument, effectively, was that a higher level of intellectual skill would mean higher cognition in general and a lower level of political bias. As a psychological hypothesis, they termed this the “Science Comprehension Thesis” (SCT).
Mentally, the reason for the expected bias of the less numerate people was that they would use what Kahneman called System 1 or “fast” thinking, which is more instinctive and emotional – the sort of reasoning that stops you becoming a meal for a lion on the Serengeti. More numerate people were expected to also employ System 2 or “slow”, logical reasoning – the sort that enables you to turn the lions into prey rather than predators.
But there was an alternative hypothesis as well, which proposed that more numerate people would use their greater numerical skills to hang on to pre-existing beliefs, in order to preserve their membership of a group that was socially important to them. The researchers termed this hypothesis the “Identity-protective Cognition Thesis” (ICT):
Individuals, on this account, have a large stake – psychically as well as materially – in maintaining the status of, and their personal standing in, affinity groups whose members are bound by their commitment to shared moral understandings. If opposing positions on a policy-relevant fact – e.g., whether human activity is generating dangerous global warming – came to be seen as symbols of membership in and loyalty to competing groups of this kind, individuals can be expected to display a strong tendency to conform their understanding of whatever evidence they encounter to the position that prevails in theirs.
The results are summarised in Figure 4 – and interpreting it might itself be challenging if you’re not American, because red signifies conservative while blue signifies progressive!
The simplest observation is that higher numeracy led to a higher ability to interpret the data in the politically-neutral skin rash data, and that there was no significant difference in ability due to political allegiance.
Figure 4: Correct results by topic versus numeracy level and political allegiance
The more complex result is that higher levels of numeracy led to higher, rather than lower, polarisation on the politically charged issue of gun control. There was no gap between Republicans and Democrats of low numerical skill when interpreting data that found that gun control increased crime: both groups were equally bad at getting the right answer. But there was a very big gap for numerate Republicans and Democrats when the “results” contradicted their pre-existing beliefs. Highly numerate Democrats were little better than innumerate Democrats in correctly interpreting data that showed that gun control increased crime; and equally, highly numerate Republicans were little better than innumerate ones in interpreting data that showed that gun control reduced crime.
The polarisation between Republicans and Democrats also increased as numeracy rose – the opposite of what you would expect if you thought political differences over objective data arose from an inability to interpret that data. There was no difference between innumerate Republicans and Democrats when presented with data that implied that gun control failed, but a very large gap between their numerate brethren. The substantial gap between innumerate Republicans and Democrats when presented with data that implied that gun control worked (we’re talking America, after all) became a chasm between the numerates.
The authors found the implications of their study for democracy rather depressing, since it implies that both evidence and intelligence make precious little difference to how people will vote on contentious issues – which are after all the only ones we do vote on. The need to preserve a sense of identity matters more than the evidence – and this can’t be treated as “irrational” behavior either, because it’s quite rational to want to retain membership of a group that is immediately important to you.
Numeracy can make you blind. Who’d a thought?
Someone who did belatedly reach the same conclusion was one of history’s great numerates,Max Planck – the father of quantum mechanics. He found it near impossible to convince his fellow physicists to accept his new – and empirically far more accurate – characterisation of the nature of energy, and he ultimately concluded that:
A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it. (Max Planck).
Planck’s pessimism might well turn out to be optimism when compared to how economics “evolves”. As John Quiggin put it in his book Zombie Economics (which hands down has the best cover of an economics book that I’ve ever seen), ideas that manifestly conflict with empirical data continue to exist long after reality killed them. The data on private debt and employment should long ago have killed the “Loanable Funds” model of lending that led Bernanke and his tribe to ignore private debt before the crisis hit, but I expect they’ll hang on to their pet theory and find a way to make it appear compatible with the data instead—and Larry Summers may well have given them the means to remain part of The Great Undead with his “secular stagnation” hypothesis.
Kahan and colleagues’ research also has implications for people in the global warming debate – and many other areas of social conflict over empirical issues. Each side tends to deride the other as lacking the ability to interpret the data – thus thinking they are more numerate than their opponents. Those who believe that global warming is happening (guilty as charged Your Honour) tend to think that their opponents are scientifically dumber than they are, and simply can’t process the overwhelming numerical evidence in favour of the hypothesis; those who reject global warming believe their opponents are politically motivated dumbos who are deliberately hoodwinking themselves.
But this research implies that leading lights on both sides of the argument could be just as numerate as each other, and numerical evidence alone will never cause one side to concede defeat. Only reality itself will ultimately end that debate.
Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney and author of Debunking Economics and the blog Debtwatch.
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Gaza Flooding Drives 40,000 From Their Homes » The Epoch Times
Gaza Flooding Drives 40,000 From Their Homes » The Epoch Times.
GAZA CITY, Gaza Strip— Flooding from heavy rains forced some 40,000 Gaza Strip residents from their homes, including thousands who were taken to safety in boats and military trucks, officials said Saturday.
The downpour that began late Wednesday was part of a storm that covered parts of Israel and the West Bank with snow, paralyzed Jerusalem and left thousands in Israel without power. Israeli TV stations showed footage of armored personnel carriers rescuing motorists and said it was the most severe snow storm in decades.
Even Gaza with its milder coastal climate saw some snow, though lower-lying areas were mainly hit by flooding.
Rescue efforts were hampered by fuel shortages and rolling power cuts that have become more severe in recent months, since Egypt tightened a border blockade of the territory, ruled by the Islamic militant Hamas since 2007.
Israel has also restricted access to Gaza since the Hamas takeover, though it sent diesel fuel for heating and four water pumps during the weekend storm.
Once the storm is over, “the world community needs to bring effective pressure to end the blockade of Gaza,” said Chris Gunness, a spokesman for the main U.N aid agency in the territory. Gaza residents “must be freed from these man-made constraints to deal with the impact of a natural calamity such as this,” he added.
In the low-lying areas of Gaza, water has been rising since heavy rains began late Wednesday, flooding streets and homes.
One of the hardest hit areas was Nafak Street in Gaza City’s Sheik Radwan neighborhood, close to a rainwater reservoir.
Said Halawa, an area resident, said the reservoir overflowed Wednesday evening. By Thursday, water had poured into the ground floor of his two-story home where he and he and 41 other members of his extended family live, Halawa said.
The family called for help and was evacuated by boat from the upper floor. Halawa said he and his family were taken to a makeshift shelter in a neighborhood school. “We got some assistance, some blankets and some food, but I didn’t save any of my belongings,” said the 52-year-old taxi driver.
At another neighbor school, 30 families found shelter. Children slept on desks and on mattresses on the floor. Some of those at the shelter huddled around wood fires in open-air walkways outside the classrooms to stay warm.
In all, the flooding forced about 40,000 people from their homes, including more than 5,200 who were taken to safety in boats, military trucks or heavy construction vehicles, government officials said.
Another hard-hit area was the refugee camp of Jebaliya in northern Gaza. The local Al Aqsa TV station, run by Hamas, showed Prime Minister Ismail Haniyeh and Interior Minister Fathi Hamad, both of Hamas, touring Jebaliya in a boat.
Housing Minister Yousef Jhariz, who headed the government’s crisis team, said the storm caused at least $64 million in damages. One man died from smoke inhalation after burning coal for warmth in his house, health officials said.
By Saturday afternoon, teams were fixing downed power lines and piled up sandbags in some areas to protect homes from flooding.
The storm hit Gaza at a time when it is buckling under the tightened border closure by Egypt. Over the summer, Egypt’s military intensified its blockade after ousting Egypt’s Islamist president, Mohammed Morsi, a Hamas ally.
Jerusalem and several West Bank towns, meanwhile, were crippled by snow for a third day Saturday. About 28,000 homes in Israel were still without electricity on Saturday, officials said.
Soldiers moved from house to house in some areas of Jerusalem to check on residents. Highways in and out of Jerusalem remained closed to private cars and residents were advised to stay off the roads.
The only way out of Jerusalem on Saturday was by train.
Sietvanit Tzirnishki had boarded the train headed from Jerusalem to snow-free Tel Aviv, Israel’s coastal metropolis.
“I’ve been stuck here in Jerusalem for two days at my sister’s apartment that did not have electricity,” she said. “We have been going from one apartment to the other to get some heat and some food and I’m glad to get back to Tel Aviv now.”
Schools in Jerusalem and the West Bank were to remain closed Sunday, the start of the work week in the region.
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Retail Big Brother – Mannequins Are Now Using Facial Recognition Technology | A Lightning War for Liberty
When it comes to shipping coal, it looks like the Vancouver Port Authority is taking a page out of the U.S. coal lobby’s books. In an effort to combat negative public opinion about coal and the proposed expansion of coal exports through Fraser Surrey Docks, the port authority has hired public relations firm Edelman Vancouver to revamp its image.
Edelman is the largest public relations firm in B.C. and the company has a history of both pushing coal exports and disregarding public opinion. Until recently, the firm represented the pro-coal organizationNorthwest Alliance for Jobs and Exports, one of the largest groups in Washington state pushing for an increase in coal exports.
Edelman was fired by the Northwest Alliance after Lauri Hennessey, Edelman vice-president and spokesperson for the alliance, was recorded at an industry conference disparaging the people of the Pacific Northwest and calling the opposition “wacky” and “weird.” At the same conference, Hennessey acknowledged climate change in her address, but argued that the coal mined in the Powder River Basin in Montana and Wyoming — the source of the coal that would be shipped through Fraser Surrey Docks — wouldn’t have any adverse effects on the climate.
Edelman has now designed an ad campaign called Port Stories on behalf of Port Metro Vancouver. The ads have got it all: hardworking Canadians, poignant family moments and sweeping statements about how the port has shaped Vancouver as a city. There’s only one thing missing: any mention of coal.
Public documents also show that in April of 2012, the Port Authority hired American law firm McKenna Long & Aldrige to lobby on its behalf south of the border. The registration form, which indicates Port Metro Vancouver has been taken on as a client, says McKenna Long & Aldridge will push for “any regulations or inquiry of the U.S. Maritime Commission regarding possible cargo diversion from U.S. ports to Canadian or Mexican ports.”
Tightening regulations on greenhouse gas emissions in the U.S. mean coal producers south of the border are looking for the quickest way to get their product to market. With fierce opposition to proposals for new coal shipping facilities in the U.S., producers are turning north to Vancouver.
This means that, while purporting to take public opinion into account when making the final decision on the port expansion, the Vancouver port authority has powerful lobbyists working in Washington to push for the very thing many citizens are opposed to in B.C.
The port of Metro Vancouver is the largest port in Canada, trading more than $53 billion per year in goods. According to a company statement, the port would like to be “embraced as a member of the community,” but its conduct around proposals to ship U.S. coal through Vancouver has proven a thorny matter.
Laura Benson, coal campaigner with the Dogwood Initiative, says that until the conflict of interest between the port’s role as a regulator and its position as a proponent of coal export is resolved, the public is facing an uphill battle.
“If the port were truly a corporation, then it would be fair game for them to be hiring PR companies and the biggest and best lobbyists.”
But because the port is also responsible for deciding on the proposed expansion of the Fraser Surrey Docks, Benson says, the conflict is essentially written into its mandate. She says it doesn’t have to be this way.
“There are all sort of models of ports around the world run in a much more responsible way.”
In order to put a stop to dirty coal use for good, port reform needs to be on the agenda, Benson argues.
Benson also stressed the need to continue to build a cross-border movement to oppose coal exports.
“I do think that we’re looking at a desperate industry,” she said. “Their window of opportunity is closing, and if we are successful in blocking thermal coal out of our port, this could be a turning point.”
Image Credit: Wikimedia Commons
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Port Metro Vancouver Hires Disgraced Edelman PR Firm, American Lobby Group to Push Coal Exports | DeSmog Canada
When it comes to shipping coal, it looks like the Vancouver Port Authority is taking a page out of the U.S. coal lobby’s books. In an effort to combat negative public opinion about coal and the proposed expansion of coal exports through Fraser Surrey Docks, the port authority has hired public relations firm Edelman Vancouver to revamp its image.
Edelman is the largest public relations firm in B.C. and the company has a history of both pushing coal exports and disregarding public opinion. Until recently, the firm represented the pro-coal organizationNorthwest Alliance for Jobs and Exports, one of the largest groups in Washington state pushing for an increase in coal exports.
Edelman was fired by the Northwest Alliance after Lauri Hennessey, Edelman vice-president and spokesperson for the alliance, was recorded at an industry conference disparaging the people of the Pacific Northwest and calling the opposition “wacky” and “weird.” At the same conference, Hennessey acknowledged climate change in her address, but argued that the coal mined in the Powder River Basin in Montana and Wyoming — the source of the coal that would be shipped through Fraser Surrey Docks — wouldn’t have any adverse effects on the climate.
Edelman has now designed an ad campaign called Port Stories on behalf of Port Metro Vancouver. The ads have got it all: hardworking Canadians, poignant family moments and sweeping statements about how the port has shaped Vancouver as a city. There’s only one thing missing: any mention of coal.
Public documents also show that in April of 2012, the Port Authority hired American law firm McKenna Long & Aldrige to lobby on its behalf south of the border. The registration form, which indicates Port Metro Vancouver has been taken on as a client, says McKenna Long & Aldridge will push for “any regulations or inquiry of the U.S. Maritime Commission regarding possible cargo diversion from U.S. ports to Canadian or Mexican ports.”
Tightening regulations on greenhouse gas emissions in the U.S. mean coal producers south of the border are looking for the quickest way to get their product to market. With fierce opposition to proposals for new coal shipping facilities in the U.S., producers are turning north to Vancouver.
This means that, while purporting to take public opinion into account when making the final decision on the port expansion, the Vancouver port authority has powerful lobbyists working in Washington to push for the very thing many citizens are opposed to in B.C.
The port of Metro Vancouver is the largest port in Canada, trading more than $53 billion per year in goods. According to a company statement, the port would like to be “embraced as a member of the community,” but its conduct around proposals to ship U.S. coal through Vancouver has proven a thorny matter.
Laura Benson, coal campaigner with the Dogwood Initiative, says that until the conflict of interest between the port’s role as a regulator and its position as a proponent of coal export is resolved, the public is facing an uphill battle.
“If the port were truly a corporation, then it would be fair game for them to be hiring PR companies and the biggest and best lobbyists.”
But because the port is also responsible for deciding on the proposed expansion of the Fraser Surrey Docks, Benson says, the conflict is essentially written into its mandate. She says it doesn’t have to be this way.
“There are all sort of models of ports around the world run in a much more responsible way.”
In order to put a stop to dirty coal use for good, port reform needs to be on the agenda, Benson argues.
Benson also stressed the need to continue to build a cross-border movement to oppose coal exports.
“I do think that we’re looking at a desperate industry,” she said. “Their window of opportunity is closing, and if we are successful in blocking thermal coal out of our port, this could be a turning point.”
Image Credit: Wikimedia Commons
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Inexpensive oil vanishing at alarming rate | Peak Oil News and Message Boards
Inexpensive oil vanishing at alarming rate | Peak Oil News and Message Boards.
Inexpensive oil vanishing at alarming rate
The United States is awash in shale oil. Iran, once OPEC’s second-largest producer, is slowly ramping up output. Oil consumption growth in the Western world has been somewhere between negative and flat since the 2008 financial crisis. The “peak oil” theory has pretty much vanished, along with The Oil Drum, the bible of peak oil believers. Rest in peace.
Or turn in your grave, for the oil price charts tell a different story.
On the New York Mercantile Exchange, crude oil futures are up 13 per cent over one year. Since 2009, they have climbed every year except 2012. In Europe, the Brent crude futures are flat over the year after rising three years on the trot. Brent, the de facto global benchmark, trades at about $108 (U.S.) a barrel; West Texas Intermediate, the North American benchmark, is at $97. For the sake of argument, let’s say the world is valuing oil at $100. You would think the price would be far less as the United States challenges Saudi Arabia for top producer status.
While the oil forecasters were pumping out bearish calls, the market itself has stuck to its triple-digit price outlook. Oil buyers apparently know the Western world’s economic recovery will boost consumption, since growth and oil use are aligned. That’s not all. They also know that the math doesn’t work: Prices can’t go into gradual, long-term decline, or even stay flat, when the world’s conventional oil fields are in fairly rapid decline.
Exotic production – oil sands, biofuels, natural gas liquids – are supposed to fill the gap. But this so-called unconventional production is highly expensive and quite possibly insufficient to cover the drop off in cheap, conventional production. Prices will rise to the point that demand will have to level off or fall. The “peak oil” and “peak demand” theories are really opposite sides of the same coin.
A few days ago, Richard Miller, the former BP geochemist turned independent oil consultant, delivered a sobering lecture at University College London that laid out the case for dwindling future oil supply. His talk was based on published data from the U.S. Energy Information Agency, the International Energy Agency, the International Monetary Fund and other official sources.
The data leave no doubt that the inexpensive oil is vanishing quickly. Conventional oil production peaked in 2008 at about 70 million barrels a day and is declining by about 3.3 million barrels a day, every year. Saudi Arabia pumps about 10 million barrels a day. The math says a new Saudi Arabia has to be found every three years to offset the conventional oil drop off. Good luck. Now you know why Russians, Canadians and Americans are so keen to lock up the Arctic, the alleged keeper of vast new reserves.
About one-quarter of conventional production comes from the 20 biggest fields and most of them are in decline, some precipitously. North Sea oil production peaked at 4.5-million barrels a day in 1999. This year’s production is forecast at between 1.2 million and 1.4 million barrels a day. The so-called Forties field, the North Sea’s biggest, has been losing 9 per cent a year for more than 20 years. Ditto two other North Sea biggies – Brent and Ninian.
Great Britain shed its status as an energy powerhouse about a decade ago, when it became a net energy importer. Its energy import bill is horrendous. Last year, Britain spent almost £22-billion ($38-billion) buying foreign oil, natural gas and coal.
Repeat all over the world, from Mexico to Indonesia. Indonesia’s oil production has been in steady decline since the mid-1990s, and the country has gone from oil exporter to importer, at which point it got kicked out of the Organization of Petroleum Exporting Countries. While new exploration and technologies will extend the life of some of the gasping old fields, the long-term downward trend is intact.
The conventional fields are running out of puff just as world demand is climbing again, which can only put upward pressure on prices. This week, the IEA estimated that oil demand will rise by 1.2 million barrels a day in 2014, or 1.3 per cent, to 92.4 million barrels.
The increase is driven by economic recovery and ever-rising demand in China and elsewhere in the developing world. China is willing to pay almost any price for oil because oil drives growth more than it does in the West, where energy use is less intensive per unit of economic output. China has also developed a love affair with traffic jams. The number of cars and motorbikes in China increased twentyfold between 2000 and 2010. It is forecast to double again in the next 20 years.
The oil shills, the tech geeks and most, but not all, oil companies would have you believe that non-conventional energy will fill the gap as the cheap, easy-to-pump oil heads gently into the night. It might, but at what price and cost to the environment? Or it might not at any price.
Deep-sea production is monstrously expensive and risky, as BP found out when its Macondo well in the Gulf of Mexico blew up. The Alberta oil sands also spew out more carbon dioxide than conventional production. Most biofuels, such as U.S. corn-based ethanol, are taxpayer-subsidized economic horror shows with dubious environmental benefits.
The peak oil crowd has thinned out, to be sure, but it won’t disappear. Gushing U.S. shale oil doesn’t mean oil is about to become cheap and plentiful. The fall off in conventional oil production is real, and scary.
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Welcome to the Third World, Part 12: Your Pension is an “Unsecured Obligation”
Welcome to the Third World, Part 12: Your Pension is an “Unsecured Obligation”.
by John Rubino on December 8, 2013 · 26 comments
The main difference between well-run and badly-run countries is certainty. In well-run countries, money is worth pretty much the same from one year to the next, the police come when called and protect rather than prey on the caller, and contracts, including pensions and other retirement plans, behave as advertised. In badly-run countries, not so much.
With the contract part of this story, Americans have been living in two different countries, depending on whether they’re in the private or public sectors. Private sector workers discovered years ago that things like pensions and employment contracts are just so much scrap paper. But until recently the public sector had been spared such nasty surprises. Baby boomer teachers, firefighters and college professors have spent lifetimes doing their jobs and watching their pensions accrue. They’ve known for decades that when they retire they’ll get X amount per year for life and have X amount of their health care covered. This certainty makes them perhaps the last segment of US society to retain a belief that the system works.
But that changed earlier this month, when Detroit’s bankruptcy judge declared that pensions can be cut along with everything else:
Pensions Aren’t Sacred and Art Isn’t Priceless: What the Detroit Bankruptcy Ruling Means
A federal judge’s ruling clears the way for Detroit to proceed with the largest municipal bankruptcy in U.S. history
For 90 minutes Tuesday, as snow fell on protesters outside, Judge Steven Rhodes laid out his rationale for allowing Detroit to seek the biggest municipal bankruptcy in American history.“This is indeed a momentous day,” Rhodes told the hushed courtroom. “We have a finding that this proud and once prosperous city cannot pay its debts.”
By the time the soft-spoken federal judge had finished, it was clear that from worker pensions to the city’s art treasures, nothing in Detroit is completely safe in Chapter 9 bankruptcy.
The effect of his ruling is likely to touch all corners of the city and could serve as a legal precedent for other municipalities reckoning with unsustainable debt. Here are three of the most important takeaways:
Pensions Aren’t Sacred. Lawyers for the city’s 48 organized-labor groups argued strenuously that Michigan law protected state employees’ pensions. Rhodes disagreed, noting that the state’s constitution classified pensions as a contractual obligation on cities’ part, not something requiring special treatment.
That means the city can treat pensions like any other potentially voidable contract. Expect it to do so. On Tuesday afternoon Detroit’s emergency manager, Kevyn Orr, said he couldn’t fix the city’s financial problems simply by restructuring the debt owed to banks. “It can’t be done without impacting pensions,” Orr said.
“For the image of labor, Detroit is a catastrophe,” said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass. “The aristocrats of labor have become the paupers of labor. What affected yesterday’s manufacturing workers is now affecting policemen and firefighters. Nobody is safe.”
Detroit is just the first of many. Pension plans across the country have failed to put away enough to cover their obligations while hiding that fact from beneficiaries and bondholders:
Playing Pension Games
Pity the municipal bondholder. Between Detroit’s bankruptcy and the rising concerns over unfunded pensions in Illinois and elsewhere, it has been a rough year for many muni bond investors. While the Standard & Poor’s municipal bond index has recovered from its September lows, it is still off 2.7 percent for the year.
A big problem for investors in this $3.7 trillion municipal market — mostly individuals — is that financial disclosures by states, cities and other issuers of tax-exempt debt can be decidedly inadequate.
Securities laws require issuers of municipal debt to provide the information investors need to make informed decisions when buying or selling these instruments. But lax disclosure practices remain, making it hard to spot signs of problems like those hobbling some states and cities. Disclosures about the soundness of public pensions, for example, can be essential to weighing the health of municipal bond issuers that are responsible for funding them.
Investors aren’t the only ones who need more information. This was on full display last week, when a judge in Detroit suggested in a groundbreaking ruling that the city’s pensioners would not get priority in the city’s bankruptcy, and their retirement pay could be considered an unsecured obligation.
John R. Mousseau, executive vice president and director of fixed income at Cumberland Advisers, a money management firm in Sarasota, Fla., said: “Detroit’s pensioners may be as eligible to take a haircut as the city’s bondholders or vendors. This development should demand more disclosure.”
But better disclosure practices among tax-exempt issuers are slow in coming, investors say.
If issuers make material misstatements or omit information, they can face civil or criminal penalties. The Securities and Exchange Commission has brought eight cases contending disclosure failings by municipal issuers this year.
A large case last March involved accusations that the state of Illinois misled investors about its unfunded pension. From 2005 to 2009, a period when the state issued $2.2 billion in bonds, the S.E.C. said Illinois failed to warn investors about the pension system’s woes and “the resulting risks to the state’s financial condition.”
Among the details missing from the state’s offering statements and filings, the commission said, were those relating to the contributions made by the state to its various pension funds. The commission said investors were not told that the state was contributing far less to the pensions than was required each year. Last week, the Illinois Legislature voted to shore up the pensions by raising the retirement age for some workers and lowering cost-of-living adjustments. The state is facing a pension shortfall of $97 billion.
Illinois settled with the S.E.C., but the agency did not impose fines or penalties. The S.E.C. doesn’t typically exact penalties in such cases, its officials said, because the money would come out of a state or city budget, making matters worse.
A crucial metric that should be found in issuers’ offering statements and filings is one cited by the S.E.C. in the Illinois case: the shortfall in annual contributions that are needed to keep a pension fully funded. Known as annual required contributions, or ARC, many states fail to meet them.
This has the effect of masking an issuer’s financial troubles, Mr. Tobe said. “There almost needs to be a bold statement saying the state is not paying 100 percent of its ARC payments,” he said.
He cites a December 2011 offering statement for $72 million of bonds issued by the University of Illinois. Nowhere does it detail the shortfalls in state contributions to the university system’s pension fund in recent years. Investors seeking this information must go to the Illinois State Universities Retirement System website.
Some thoughts
It has been generally understood for a while that pension plans use unrealistic return assumptions to hide the fact that their governments aren’t contributing enough each year. But it’s interesting that even with a raging bull market in equities – which have of late returned a lot more than the typical pension target of 8% – many plans are becoming even more underfunded. Part of this is due to the fact that the bonds in pension fund portfolios have gone down in the past year, offsetting gains in equities. And part is due to governments failing to contribute as much as they’ve promised they would.
Stocks, based on most historical measures, are ripe for a correction, and bonds, even after a recent uptick in rates, yield next-to-nothing. So the average pension fund, instead of making its optimistic 8% return target, might actually lose money in the next couple of years. In that case, their underfunding would be too horrendous to hide.
With a growing number of cities (and some states) devoting unsustainable portions of their operating budgets to paying former rather than current workers, Detroit might become the template for dozens of other cities in 2014 and beyond. And millions of people who thought they’d nailed down a middle class retirement in a well-run country will find out they’re not in that country any more.
Tagged as: Detroit, muni bonds, municipal default, pension underfunding, public sector workers, third world
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Speculation & Investor Behaviour ~ The Idiot Tax
Speculation & Investor Behaviour ~ The Idiot Tax.
I’d been watching the stock for at least a month. A small time oil & gas company in Africa. It managed to secure a huge land position for a company of its size. Looked very promising, well funded for some time. Management previously had success putting together a similar land position with another company before it was swallowed early. But, still highly speculative.This one wouldn’t be dropping a drill on dirt until late 2014. Maybe 2015.
Being a stingy bugger and without a catalyst in the market, I kept sniffing around for a while before I finally slid my buy order in at 18.5 cents – this dude wasn’t going to pay the current market price of 20 cents! Maybe even 18.5 was too much. When it dropped to 19.5, I began to believe my order would get filled, but then when it hit 19 cents my mind started to desert me.
“I could get this for 18 cents.”
Volume. There wasn’t a great deal of it. In fact it was being pushed down on mild trades. Someone needed a new flatscreen or wanted to get their kid Optimus Prime for Christmas. There was no prospect that enough shares would be dumped and I’d get my fill at 18 cents. The holding was tight and the sell side was thin. Regardless, I hit the amend button and my order dropped down the queue to 18 cents.
I assume you know where this story is going. You’re probably wondering why I’m telling it when it inevitably makes me look like an idiot. So why tell? I’ve read countless explanations of investor psychology in a general sense, but rarely does anyone put their name to a calamity, or at least their nom de plume.
Everyone can recognise these paragraphs by Heidi Lefer and Ildiko Mohacsy, in Journal of the American Academy of Psychoanalysis and Dynamic Psychiatry, but there’s little personality to it and no experience.
Economic bubbles and crashes have occurred regularly through history-from Holland’s 17th century tulip mania, to America’s 19th century railway mania, to the 1990s high-tech obsession. Though most investors regard themselves as investing rationally, few do. Instead they react collectively, buying high and selling low in crowds. Being subject to the illusion of control, they follow regressive behavior patterns and irrational, wishful thinking. They are victimized by their own emotions of hope, fear, and uncertainty.
When people feel doubt and panic, they regress to an earlier stage either individually or en masse. Under stress, they revert to affect (Mohacsy & Silver, 1980). Such mobbing has an obvious psychological counterpart in the market. Here, crowds are governed by wishful thinking. “Investors are coached to believe that a stock is a better buy when the price rises, that it’s ‘safer’ to join the crowd in betting the price up and ‘riskier’ to buy a stock declining in price” (Vick, 1999, p. 7). Investors also join a crowd to minimize regret. If something goes wrong, they know others behaved the same way.
We recognise it when exuberance makes charts go vertically up or when stone cold fear pushes them ruthlessly down, but our ego inevitably makes us shy away admitting that we take part in any function of it – “that’s those other sheep”. We’re merely unemotional observers, until we aren’t. Is anyone going to admit they were buying in the final moments before the last bitcoin crash?
It was inevitable that a few short days after Wall Street lovingly embraced Bitcoin as their own, with analysts from Bank of America, Citigroup and others, not to mention the clueless momentum-chasing, peanut gallery vocally flip-flopping on the “currency” after hating it at $200 only to love it at $1200 that Bitcoin… would promptly crash. And crash it did: overnight, following previously reported news that China’s Baidu would follow the PBOC in halting acceptance of Bitcoin payment, Bitcoin tumbled from a recent high of $1155 to an almost electronically destined “half-off” touching $576 hours ago, exactly 50% lower, on very heave volume, before a dead cat bounce levitated the currency back to the $800 range, where it may or may not stay much longer, especially if all those who jumped on the bandwagon at over $1000 on “get rich quick” hopes and dreams, only to see massive losses in their P&Ls decide they have had enough.
There will be a strange irony, in that anyone you talk to with a bitcoin experience will have left the building at $1100 – “it was looking bubbly, so I took a profit.” Hmmm. The drip that bought at $1155 will be cloaked in anonymity, unless $2200 is later smoked.
Back to me, and the price my mind had agreed pay – 18.5 cents was hit. But where was I? Yeah, I’d cooly (or so I told myself ) shifted another gear down and was expecting to get my happy ending at 17.5 cents. As the share price firmed again, juddering between 19.5 and 20 cents I meekly snuck back to 18.5. At 20 I snuck up to 19, as I wondered whether it might go to 20.5. Of course it did, before coming back to 19.5, at which point I had enough steel to leave my order at 19.
In the midst of this circus, late on a Friday, the buy side appeared to firm considerably and immediately it looked a better buy again – “buy now and I’m with the crowd.” After a fortnight of courting and several times being left with my frank in my hand, maybe it was time to make the move and just get my fill at 19.5. But, but, but, this was Friday afternoon and anything could happen over the weekend. Rating agency downgrades, terrorist attack, tsunami, nuclear disaster, alien invasion, apocalypse. And I’d still have to settle on Wednesday!
And something did happen. First it was a market announcement after the close on Friday that their seismic program had shown positive results. Damn, I assumed this was going to cost me another half cent! Then on Monday – TRADING HALT.
11 minutes before open on Monday morning. I spent most of Monday cursing my stupidity while muttering F-U under my breath. On Wednesday morning the announcement came out – an unsolicited equity placement at an 18% premium to the previous close. A significantly rare and positive event. And on open, the share begins trading at 23.5 cents.
Where’s my order? Oh I’d moved it to 22 cents now. Sigh. Yeah it was happening all over again. Though a few price bumps up to 24 and 24.5 cents during the day had me edgy. Now the urge is to get ahead of the game because this is surely going higher.
What didn’t help throughout this brain mincing was my constant contact with a share trading forum. Those great analogies that describe a share price ready for take off (see, I just used one then!) were flying into my eyes like poison darts. Common sense is blinded and it further makes me think I gotta get in!
Toot! Toot! Buckle up your seatbelts! The floor is in! A couple of cents will be meaningless soon!
Then there’s also talk of the big boys buying, holidays (not just theme parks, your own private island), early retirement and Ferraris. Sitting on the sidelines and kicking yourself while reading this is a little unnerving, but a slap to the face and you quickly regain perspective. The real issue becomes the now moving share price. Even if you block out the chat room noise, with every half cent it’s somehow a better investment – or speculation as it were. Yet last week every half cent movement downward made it waft like sun-baking salmon. Someone’s selling, something must be wrong. Drag that order down so you won’t overpay!
After again playing tag and miss with the price for most of the day, a gap opened up at 22.5 towards closing time. That was the entry point. No more mental gymnastics trying to second guess the next movement – if I got hit, I got hit. I placed my order. It sat near the top of the queue and with one foul swoop at 3:51pm I became a shareholder. A few minutes later the price went back to 23 cents and that’s where it closed for the day. After two weeks of games, and being led around by my nose, it was a very painless exercise. Yet I had little control until I pinched my brain in those final moments. There was some satisfaction that I paid less than the premium placement that instigated the jump in price, but I still paid 21% more than if I’d just left my initial order 18.5 cents.
Again, from Heidi Lefer and Ildiko Mohacsy, in Journal of the American Academy of Psychoanalysis and Dynamic Psychiatry – I’m guilty as charged.
Our brains are hard-wired to get us into investing trouble; humans are pattern-seeking animals . . . .Our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row . . . the anterior cingulate and nucleus accumbens automatically anticipate that it will happen again. If it does repeat . . . dopamine is released . . . .Thus, if a stock goes up a few times in a row, you can reflexively expect it to keep going up . . . .Brain chemistry changes as the stock rises, giving . . . a “natural high.” You effectively become addicted to your own predictions.
At last close the share price sat at 31.5 cents. I’m in, I’m ahead and I’m finally calm. But I still can’t believe how ridiculous my mental gymnastics became. I’ve got no clue how many trades I’ve completed over the years, but any time I’m buying a new company this farce reappears.
The share forums have gone wild over the company. Just by reading them the brain could start firing with thoughts of short changing your future family tree by not taking a position. I felt similar insanity that day I realised I’d be paying 21% more than I’d initially intended.
It went up remarkably quickly after I bought, then came a sharp pullback. The sentiment around the company has snapped from “gotta get in” to “maybe I can get it cheaper”. A sharp change in the direction of the share price invokes that mental game for any potential new entrant. Now, as a shareholder, I’m less concerned if it goes up or not. I just don’t have to worry about being left behind if it does.
My terror now? The prospect of fighting that uncontrollable and irrational part of my mind when it comes time to sell. Sometime down the line will I play chicken for two weeks in the attempt to get an extra three cents? Or will I chase the price down two cents if it turns on me?
If I can ruthlessly control my saving and spending, surely the same control can be applied to investing (or speculating).
Sooner or later I’ll find out.
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The 9 Key Considerations To Protect Deposits From Bail-Ins
The 9 Key Considerations To Protect Deposits From Bail-Ins.
The 9 Key Considerations To Protect Deposits From Bail-Ins
Published in Market Update Precious Metals on 13 December 2013
By Mark O’Byrne
Today’s AM fix was USD 1,222.75, EUR 891.22 and GBP 750.89 per ounce.
Yesterday’s AM fix was USD 1,243.50, EUR 902.79 and GBP 758.51 per ounce.
Gold fell $26.40 or 2.11% yesterday, closing at $1,226.50/oz. Silver slid $0.79 or 3.89% closing at $19.52/oz. Platinum dropped $19.01, or 1.4%, to $1,360.74/oz and palladium fell $20 or 2.7%, to $715.25/oz.
Gold has spiked higher in late morning trade in London and is 0.6% higher on the day and 0.35% higher for the week. A higher weekly close this week will be positive from a technical perspective.
What Should Depositors Do To Protect Against Bail-In? 9 Key Considerations
Gold saw a sharp move lower by over 2% yesterday, despite little market moving data or news and other assets seeing less price movement. The price fall could have been due to heightened speculation of a Fed taper as soon as next week. However, if that was the case, one would have expected stocks to have seen similar price falls. Rather stocks were only marginally lower and remain near record highs.
Gold in U.S. Dollars, 10 Day – (Bloomberg)
Peculiar gold price falls have been common in recent weeks and months and have contributed to the 25% price fall we have seen this year.
Therefore, those who have diversified into gold in order to protect their wealth will welcome the move by the German financial regulator Bafin to widen their investigation into manipulation by banks of benchmark gold and silver prices.
The FT reports on the front page today that German banking regulator Bafin has demanded documents from Germany’s largest bank, Deutsche Bank, as part of a probe into suspected manipulation the gold and silver markets by banks.
Gold Prices / Fixes / Rates / Volumes – (Bloomberg)
Currently, gold fixing happens twice a day by teleconference with five banks: Deutsche Bank, Bank of Nova Scotia-ScotiaMocatta, Barclays Bank Plc, HSBC Bank USA, NA and Société Générale. The fixings are used to determine prices globally. Deutsche Bank is also one of three banks that take part in the equivalent process for silver.
The German regulator has been interrogating the bank’s staff over the past several months. Since November, when the probe was first mentioned similar audits in the U.S. and UK are also commencing.
Premiums in China and India remained robust overnight and way over western premiums. Gold on the Shanghai Gold Exchange closed at $1,258.38 at 0700 GMT – a premium of $29.18 per ounce over spot.
Bullion premiums in western markets have seen little movement again this week. One ounce gold bars are trading at $1,276.44/oz or premiums of between 3.75% and 4.5%, and larger 1 kilo gold bars are trading at $40,832/oz or premiums of between 3% and 3.5%.
Indian demand declined yesterday but remains robust as dealers were not able to source gold.
Premiums remained steady at $120 per ounce over London prices. Last week, Indian premiums hit a record high of $160/oz. Imports into India have dropped off sharply this year after the Indian government raised the import duty to 10% earlier this year and tied imports volumes to exports, in a bid to curb a rising trade gap and the rush to gold by Indians concerned about the continuing devaluation of their rupee.
If the Fed defer a taper, we should see gold bounce from oversold levels which could help it test $1,300/oz again.
We do not believe the Fed will ‘taper’ next week as the U.S. economy remains very fragile and any reduction on bond purchases could lead to turbulence in financial markets, a rise in bond yields and affect the wider economy.
But if the Fed does reduce its massive bond buying programme marginally next week, gold will likely fall to test strong support at $1,200/oz again.
Gold looks likely to bounce back next year and the positive drivers for gold are strong store of wealth physical demand, particularly in China, due to macroeconomic, systemic and monetary risk.
The eurozone debt crisis is far from resolved and sovereign debt issues in Japan, the UK and the U.S. will likely rear their ugly heads again leading to safe haven demand for gold.
U.S. Treasury Amount of Outstanding Debt – Price/Billion – (Bloomberg)
We pointed out yesterday why it is important to remember that the Federal Reserve is printing nearly $20 billion every single week. The U.S. National Debt is now over $17.2 trillion and continuing to rise and the U.S. has unfunded liabilities (Social Security, Medicare and Medicaid) of between $100 trillion and $200 trillion.
Staggering numbers which suggest alas that the U.S. politicians are rearranging chairs on the titanic.
What Should Depositors Do To Protect Against Bail-In?
Depositors in G20 or FSB regulated countries should examine the financial health of their existing bank or banks.
Some issues to watch would include institutions with legacy issues such as a high level of non-performing loans, a possible need for recapitalisation and low credit ratings. These banks should be avoided, as they have a higher chance of needing restructuring and hence a higher chance of a bail-in.
Deposits are insured for up to €100,000, £85,000 and $100,000 per person, per account in the EU, the UK and the U.S. respectively. Although there is no guarantee that an insolvent government will be able to fund its deposit insurance scheme, it is uninsured deposits which are more at risk of a bail-in.
Therefore, it would be prudent for depositors not to hold bank deposits in excess of these figures in any one financial institution since –
a) they are not insured, and
b) deposits in excess of those arbitrary figures are more likely to be bailed in
There is an assumption that in the event of bail-in, only bank deposits of over these arbitrary figures would be vulnerable. However, there is no guarantee that this would be the case. Should a government be under severe financial pressure, it may opt to only protect deposits over a lower amount (e.g. €50,000, £50,000, $50,000).
Since capital controls have already been imposed on one Eurozone country, Cyprus, it seems quite likely that they will be imposed in other countries in the event of new banking crises or a new global systemic crisis.
Cypriot authorities imposed restrictions on bank money transfers and withdrawals, including a daily cash withdrawal limit of €300 per day. Many banks had to restrict withdrawals to €100 per customer per day in order to prevent them running out of euros. Electronic wire transfers were suspended for a number of days, prior to being allowed but with a low maximum daily limit.
Therefore, having some of one’s savings outside of the banking system makes sense. It should be held in a form that is highly liquid, such as gold, and can be converted back into cash in the event of cash withdrawal restrictions. Cypriots who owned gold were less affected by the deposit confiscation or ‘haircut’ as they could sell their gold in order to get much needed euros.
In the coming years, the role of gold in an investment portfolio will become more important due to its academically and historically proven safe haven qualities. Now, with the risk of bail-ins, savers and corporate treasurers should consider diversifying their savings portfolio and allocate 5% to 10% of the overall savings portfolio to gold.
However, it will not be enough to simply allocate funds to some form of gold investment. In the same way that certain banks are more risky than others, so too are many forms of gold speculation and investment more risky than others.
It is vitally important that those tasked with diversifying deposits do not jump out of the frying pan and into the fire.
An allocation to actual physical gold owned with the safest counterparties in the world will help depositors hedge the not insignificant risk of keeping money on deposit in many banks today.
It is important that one owns physical gold and not paper gold which could be subject to bail-ins.
Physical gold, held in allocated accounts conferring outright legal ownership through bailment
remains the safest way to own gold. Many gold investment vehicles result in the buyers having very significant, unappreciated exposure and very high counterparty risk.
Owning a form of paper gold and derivative gold such as an exchange traded fund (ETF) in which one is an unsecured creditor of a large number of custodians, who are banks which potentially could be bailed in, defeats the purpose of owning gold.
Potentially, many forms of gold investment themselves could be bailed in and the FSB’s inclusion of Financial Market Infrastructures in potential bail-ins including “central counterparties, insurers, and the client assets held by prime brokers, custodians and others” underlines the importance of owning unencumbered assets that are owned directly.
Extensive research shows that owning gold in an investment portfolio enhances returns and reduces the entire portfolio’s volatility over the long term. In the coming years, a diversified savings portfolio with an allocation to gold, will reduce counterparty risk and compensate for very low yields.
The wise old Wall Street adage to always keep 10% of one’s wealth in gold served investors well in recent years. It will serve those attempting to safeguard deposits very well in the coming years.
In general, people should avoid holding euros or other cash outside of their bank accounts, however there is now a case to be made that holding a small amount of cash outside of vulnerable banks would be prudent. Just enough cash to provide for you and your family’s needs for a few weeks.
However, this should never be done unless the cash is held in a very secure way, such as a well hidden safe or safety deposit box. It would be safer not to keep assets in a safety deposit box in a bank.
Overall, diversification of deposits now has to be considered.
This means diversification across financial institutions and across countries or jurisdictions globally.
Safest Banks
Financial institutions should be chosen on the basis of the strength of the institution. Jurisdictions should be chosen on the basis of political and economic stability. A culture and tradition of respecting private property and property rights is also pertinent.
While depositors need to do their own due diligence in which banks globally they may wish to open a bank account, Table 1 (see From Bail-Outs to Bail-Ins: Risks and Ramifications) illustrates that there are numerous banks globally which are still perceived to be financially strong. The banks in table 1 have been ranked by taking the average long term issuer credit rating applied to the bank by the main global credit rating companies, Moody’s, S&P and Fitch.
A credit rating is an assessment of the solvency or creditworthiness of debtors or bond issuers according to established credit review procedures. These ratings and associated research help investors analyse the credit risks associated with fixed income securities by providing detailed information of the ability of issuers to meet their obligations. A rating is continuously monitored. It enables investors and savers to measure their investment risk.
Long term credit ratings of the major agencies take into account factors such as financial fundamentals, operating environment, regulatory environment, corporate governance, franchise value of the business, and risk management, as well as the potential financial support available to the bank from a parent group, or a local or national government.
While credit ratings express an opinion on a bank’s vulnerability of defaulting, they don’t quantify the probability of default. However, credit ratings are still widely used and are one of the most commonly used ways of ranking the relative financial strength of banks.
The credit rating reflects the credit risk or general paying ability of the issuer, and so reflects the solvency or creditworthiness of the issuer from the point of view of investors who, along with depositors, are the main creditors of the bank. Certain countries host more financially strong banks than others as can be graphically seen in the table.
Notice that many of the safest banks in the world are in Switzerland and Germany.
Indeed, it is interesting to note that despite the Eurozone debt crisis, many of the safest banks in the
world are in the EU or wider Europe. These include banks in the Netherlands, Luxembourg and France – despite many French banks being very vulnerable as is the French sovereign.
Outside of Europe, Singapore has some very strong banks, as does Norway, Australia, Canada and Sweden.
There are only a few UK and U.S. banks on the list of global top banks that should give pause for thought.
There are a number of institutions in jurisdictions such as Hong Kong, Chile, Japan and some Middle Eastern countries. As of yet, banks in the large emerging markets have not made their mark but we would expect banks in China, Russia, Brazil and in India to begin moving up the table in the coming years. The sounder sovereign position and lack of public and private debt in these countries will help in this regard.
There are no banks from problem European economies on the list for good reason. Their banks do not have high enough credit ratings. In fact, banks from Cyprus, Greece, Portugal, Spain, Italy and Ireland consistently had relatively low long term ratings from the ratings agencies. In terms of ratings, they rank nowhere near the top 20 banks in the world and most are ranked between 200 and 400.
Besides considering the relative safety of different banks, with interest rates so low on bank deposits and increasing taxes on interest earned on deposits leading to negative real interest rates – depositors are not being rewarded with adequate yields to compensate for the risk to which they are exposed.
Thus, as is often the case, savers need to consider alternatives to protect their wealth
Without a clearly thought out plan, many will be prey for the financial services sales machine and brokers and their array of more risky investment and savings products – including so called “capital guaranteed” products – many of which are high risk due to significant and unappreciated counterparty risk.
It is vitally important that investors have independent custodians and trustees. This greatly reduces counterparty risk should a broker, financial adviser, insurance company or other financial institution become insolvent.
9 Key Considerations
Depositors internationally should examine the financial health of their existing bank or banks. Overall, diversification of deposits now has to be considered. However, it is vitally important that those tasked with diversifying deposits do not jump out of the frying pan and into the fire. This means diversification across financial institutions and across countries or jurisdictions globally.
Financial institutions should be chosen on the basis of the strength of the institution. Jurisdictions should be chosen on the basis of political and economic stability. A culture and tradition of respecting private property and property rights is also important.
1. Diversify savings across banks and in different countries
2. Consider counterparty risk and the health of the deposit-taking bank
3. Attempt to own assets outright and reduce risk to custodians and trustees
4. Own physical gold in allocated accounts with outright legal ownership
5. Avoid investments where there is significant counterparty risk, such as exchange traded
funds and many structured products
6. Avoid banks with large derivative books and large mortgage books
7. Monitor banks’ and institutions’ financial stability
8. Monitor deposit and savings accounts’ terms and conditions
9. Monitor government policy pertaining to banks and bank deposits
Download Protecting your Savings In The Coming Bail-In Era (11 pages)
Download From Bail-Outs to Bail-Ins: Risks and Ramifications – Includes 60 Safest Banks In World (51 pages)
Olduvaiblog: Musings on the coming collapse 