lunedì 26 settembre 2016
Is This Why Deutsche Bank Is Crashing (Again)?
September 26th, 2016
Deutsche's dead-bank-bounce is over. The last few days have seen shares of the 'most systemically dangerous bank in the world' plunge almost 20%, back to record lows as the DoJ fine demands reawoken reality that the €42 trillion-dollar-derivative-book bank is severely under-capitalized no matter how you spin asset values.
Deutsche Bank closes at an all-time record low close...
More questions about DB are appearing, however, as MishTalk.com's Michael Shedlock asks -
Is Deutsche Bank cooking its derivatives book to hide huge losses...
Deutsche Bank's notional derivatives book had huge swings in notional value between its year-end 2014 report and its "passion to perform" year-end 2015 report.
Deutsche Bank did not list the notional value of its derivatives book in its 2016 Quarterly Report.
The bank would like us to take it on faith, that the positive value of its derivatives book is €615 billion while the net positive value of its book is around around €18 billion.
There's just one little problem: the market believes something is wrong. What is it? Derivatives or something else?
Reader Lars writes
Hello Mish,
I'm investigating changes in Deutsche Bank's derivatives book.
At 2014 year end, DB had derivatives which notional value was €52 trillion. The positive value was around €630 billion.
At 2015 year end, DB had derivatives which notional value was €42 trillion. The positive value was around €515 billion on total assets of €1.629 trillion.
So during 2015 derivatives exposure (notional) was reduced by €10 trillion or 19%.
As of June 30th 2016, DB does not give a number for notional value but the positive value has again increased to €615 billion. Total assets are €1.8 trillion.
Meanwhile the the net positive value of DBs derivatives portfolio is stable around €18 billion.
What's Happening?
It is possible that DBs derivatives portfolio has increased in value by €100 billion, roughly 19% in 6 months without the notional amount going up correspondingly?
Did DB offload €10 trillion worth of notional derivatives before year end 2015 only to pad it back later?
Book equity is €67 billion but it's trading at a 75% discount. The market values DB at €16.5 billion.
Tier 1 bond holders say pretty much the same thing. Bonds sell at a 22% discount to par.
Lars
Comments from Matterhorn Asset Management
I was involved in a three-way email conversation on Deutsche Bank with Lars and Egon von Greyerz at Matterhorn Asset Management AG.
Von Greyerz chimed in with …
Thank for this Lars.
I would not be surprised if they are moving balance sheet risk to derivatives. This is a very common trick to reduce official exposure. Greece did this with the help of Goldman Sachs.
Share price confirms something is seriously wrong.
I saw the "Big Short" for the second time on Saturday. It's a great film. I told my wife that what happened in 2007-2009 is a walk in the park compared to what we will see next. It's only a question of when.
Still only 0.5% of world financial assets are insured in the form of physical gold. Investors think that trees will continue to grow to heaven. What a shock they will get.
Kind regards
Egon von Greyerz
Founder & Managing Partner
Matterhorn Asset Management AG
GoldSwitzerland
Accounting Methodology Change
I dove into Deutsche Bank's 4Q/FY2015 Presentation which contained these statements on various pages.
Continued strong de-leveraging in the quarter of EUR 44 billion on an FX neutral basis, principally in derivatives.
Full year 2015 de-leveraging of EUR ~130 billion on an FX neutral basis.
Equity Derivatives significantly lower y-o-y driven by lower client activity exacerbated by challenging risk management in certain areas.
Lower loan loss provisions reflecting portfolio quality and the benign economic environment.
Despite adverse FX impact, non-interest expenses decreased mainly due to lower litigation and performance-related expenses.
De-risking activity was the main driver of Balance Sheet reductions in 4Q2015.
Consolidation & Adjustments
Income before income taxes (IBIT) does not look pretty, to say the least. And what's with these accounting methodology changes?
Deutsche Bank: The BoJ is running out of options
September 26th, 2016
The Bank of Japan's recent policy evolution clearly shows that policymakers are running out of options. The BoJ's decision to raise its inflation target beyond 2% and shift from targeting the quantity to the price of money all along the yield curve, reflects a seismic shift in policy at the bank. Unfortunately, this policy change has sent a signal to the markets that the BoJ is running out of options, rather than a proactive shift to new easing — a signal the bank would have preferred to send to financial markets.
The BoJ's shrinking influence and lack of options will lead to further yen strength for three key reasons:
The Bank of Japan is giving up on driving real rates down
By specifically targeting nominal yields the bank is prioritizing financial stability and bank profitability over real rates. In today's world of record low interest rates, central banks have two opposing constraints: keeping real yields low to help the real economy but keeping nominal yields from falling further because they are damaging banks and credit creation.
Policy could lead to a self-fulfilling tightening
The Bank of Japan is relinquishing control of real rates by targeting nominal rates, creating a highly pro-cyclical policy asymmetry. A negative demand shock could raise demand for Japanese government bonds and depresses inflation expectations. In this scenario, the BoJ will end up reducing the amount of JGBs it buys and raising real rates. However, on the other hand, if a huge fiscal stimulus from the government put upward pressure on yields the BoJ would effectively monetize the debt raising inflation expectations even further.
Government invitation for helicopter money
In the past, yield targets have been put in place on sovereign bonds to help finance excessive, one-off spending plans such as wars. By adopting a yield target, the central bank is indirectly funding Treasuries, another form of "helicopter money." By targeting a specific JGB yield, the BoJ is indirectly shifting the onus of a "helicopter drop" to the government. Although Deutsche's analyst believes that until we see more convincing signs of a substantial and credible fiscal easing from the government, the BoJ's inflation target will lack credibility.
The BoJ's policy shift surprised the market initially, but the bank is beginning to lose credibility. Soon after the policy change announcement, the yen gave up most of its gains and started to strengthen, which really shows how little the market trusts the BoJ to hit its targets or reverse the economic stagnation that has plagued Japan for the last two decades.
Monetary policy is at the end of the line
Monday, September 26th, 2016
The last few days have made clear that monetary policy is having less and less impact as time goes along.In particular, the latest salvos from the Bank of Japan smack of desperation, as if BOJ Governor Kuroda has decided to throw everything but the kitchen sink into his grab bag of unorthodox monetary policy. Because the Bank of Japan is so far along the curve toward both secular stagnation and unorthodox policy to counteract that slowing, we should pay attention to how their experiments go. I do not expect good results.
How central banks operate
Let me start off with a baseline on how I think about monetary policy. I apologize if this is a bit wonkish. But I think it's important in understanding why central banks' unorthodox policy tool kits are limited.
The first and main tool in the arsenal of any central bank is interest rate policy. And this is because the central bank is a monopolist. In Japan, for example, the Japanese government is the monopoly issuer of Japanese currency, and has given the Bank of Japan monopoly power as its agent to control the reserve monetary base. The Bank of Japan exercises its monopoly power by targeting the overnight rate for money, currently at zero percent with an added tax on excess reserves to boot.
This is how all modern central banks operate. They have explicit targets or target ranges for the overnight interest rate and act within the reserve market that they control to ensure they hit their targets. The point of course is that modern central banks use a price or interest rate target, not a quantity target like targeting reserves or monetary aggregates. And since a monopolist can only control either price or quantity, not both simultaneously, central banks have to pick one or the other. The Volcker experiment at the Fed in the late 1970s and early 1980s made clear that quantity targets don't work. So central banks target interest rates i.e. price.
Now central banks can't do that unless they supply their banks with all the reserves that those banks desire to make loans at the target interest rate — meaning central banks must be committed to supplying as many reserves as banks want or need in accordance with the lending that they do. Failure to supply the reserves means failure to hit the interest rate target, since banks would bid up the price of reserves above the target.
The transmission mechanism
So how does this help or hurt the economy? First, when an economy is in distress — in recession or headed there — lower interest rates decrease interest payments and help reduce financial distress for the most precarious borrowers. Moreover, other borrowers benefit from lower rates too and are more likely to increase spending because of the increased disposable income. We see that with mortgage refinancing activity in the United States or lower mortgage payments on variable rate loans in the UK, for example.
Moreover, when an economy is in distress, lower base rates help banks by increasing net interest margins through steepening the yield curve. A lower overnight rate means that short-term interest rates are lower relative to long-term interest rates. And that's good for bank net interest margins. That affords banks the chance to build capital buffers. And since banks experience larger loan losses when an economy is in distress and must reserve against those losses, building those buffers is important to banks' willingness to lend as loan loss reserves affect the banks' capital position, which they use as the buffer between assets and liabilities to not only remain solvent but also to make loans. (As an aside, I should also point out that banks are never reserve constrained because the central bank supplies all the reserves banks need in order to hit the overnight interest rate target. They are capital constrained because they can't make loans unless they have enough capital to do so and remain a safe and sound financial institution.)
That's all fine and good. But then economists take it a step further and say that when the central bank lowers or raises interest rates, it raises or lowers demand for borrowing for investment by firms. But this simply isn't true. There is no empirical evidence that lower rates spur capital investment. Even studies by the Federal Reserve note this fact. In fact, as former UBS chief economist George Magnus recently pointed out regarding the Bank of Japan, what really happens with investment as central banks lower rates is that it creates a skew toward high risk investment due to investor's search for higher yield. It's not more investment that we see, but skewed investment toward projects with longer lead times and higher risk. As George puts it, "zombie companies are kept alive perpetuating a misallocation of capital, and retardingnew investment opportunities" (underlining for emphasis added).
What happens when rates are at zero
When the central bank has cut as much as it can i.e. to zero, you've got a big problem. First of all, the central bank can't lower interest rates further to help debtors in distress. It's already as low as it can go. Second, it can't lower them any more to help banks pad their net interest margins because – again – they're at zero. Basically the central bank is stuck. And that's where we landed everywhere during the most recent financial crisis: in Europe, in Japan, and in the US. The central banks, thus in order to prove their potency, fabricated a bunch of unconventional policy tools they told us were just as good as interest rate policy. And they're using them.
We're talking about:
- Forward guidance: where the central bank tells you they will keep rates at zero for longer as a way of keeping long-term rates down too
- Quantitative easing (QE): where the central bank buys up financial assets with printed reserve money in order to boost asset prices and maintain lower interest rates. The Bank of Japan is even getting exchange-traded equity funds created to invest in.
- Negative interest rate policy (NIRP): where the central bank taxes the excess reserves it has created through quantitative easing in an attempt to make it onerous to have excess reserves in the first place, thinking banks might make more loans than otherwise.
The US has used the first two tools and Japan and Europe have employed all three. Yet growth remains slow, especially in Japan, which has been wracked by deflation for years. So the BOJ has upped the ante this week with two new policies
- A higher inflation target: where it has said it would permit inflation to go above its long-term inflation target, in order to get markets to expect higher inflation and, therefore, faster nominal GDP growth
- An explicit long-term rate target: where it says explicitly it will not allow the long-term 10-year interest rate to rise above zero, hoping the lower rates in the economy will increase borrowing for investment
It won't work
All of this is destined to fail. And it's clear from the framework I set out to begin with why.
- Forward guidance and explicit long-term interest rate targets flatten the yield curve and reduce bank net interest margins. That's anti-stimulus. Moreover, lower interest rates reduce savings interest. And since the private sector in every advanced economy is a net receiver of interest, in a normal, growing, non-distressed economic situation, this factor swamps the benefits from relieving financial distress. When the economy is not distressed, net-net lower rates are not stimulative since the private sector is a net receiver of interest. They make it harder to save and could induce more savings and less spending.
- Quantitative easing is based on quantity target thinking. And we already know that quantity targets don't work.
- Negative interest rate policy is based on the flawed assumption that banks are reserve constrained when they're not. Nowhere where they have been implemented have negative interest rates resulted in increased lending. They are a tax. And as time goes on, this tax is likely to be passed on to bank customers, reducing aggregate demand.
- Finally, there's the higher inflation target the Bank of Japan has just set. This won't work either. Just because the Bank of Japan says it is willing to accept higher inflation doesn't mean they will get higher inflation. And higher inflation doesn't mean higher real GDP growth, it could just mean an erosion of purchasing power, which would cause people to retrench.
All of these unconventional policies are poor substitutes for interest rate policy. And the only reason they are being tried is because policy rates around the world are at or near zero. If central banks could cut interest rates and steepen the yield curve, they would. But they can't and they have fallen back on this increasingly desperate set of alternative policy tools.
My view is that in the absence of increases in median wages in advanced economies, we are unlikely to see a meaningful and durable increase in growth in those economies. And the result is going to be not just low short-term interest rates, but low long-term interest rates. When recession hits, yield curves will flatten instead of steepen, since we are at the zero lower bound. And the full measure of loan loss distress will come to bear on bank balance sheets, restricting credit and deepening the downturn. At that point, we will just have to see when and whether we get a fiscal response and how effective that response is. Monetary policy is out of bullets.
sabato 27 agosto 2016
The Stock Market 2015-2016: Ugly Chopfest with an Equally Ugly Megaphone
There's something fishy about this "new all-time highs" rally of 2016.
It's interesting to take a longer-term view of the S&P 500 (SPX). Looking at a 10-year chart, the decline from almost 1,600 to 667 in the Global Financial Meltdown of 2007-2009 doesn't look like that big a deal, given the incredible 6-year uptrend since March 2009.
The boost phase of the rally lasted over 2 years, from 3/09 to 6/11, when the Greek debt crisis caused a temporary swoon in global markets.
Once central banks rescued markets (again), the rally resumed, but beneath the trend line.
This rally ran out of steam in early 2015. The marginal new highs in May 2015 and July-August 2016 are not even visible on this chart.
What is visible is a giant megaphone pattern that targets the old all-time high from 2007 around 1,600. A 600-point drop from 2,200 to 1,600 is of course "impossible" due to the Yellen/Kuroda/Draghi Put, i.e. central banks will buy "whatever it takes" to keep markets elevated forever.
Despite the visible "impossibility" of the SPX ever declining 600 points, that's what the pattern targets.
Even the casual observer is struck by the market's wild yo-yo'ing since early 2015--rather than trace out a definable uptrend, it's been a chopfest of dizzying declines and furious rallies.
This is not characteristic of a powerful Bull market. Rather, it is evidence of a Bull market faltering, eroding and being saved by increasingly outsized and visibly desperate central bank interventions.
$180 billion a month of additional stimulus is now required from the major central banks to keep the market afloat. Yet the returns continue to diminish.
What we have is a Red Queen's Market. The Red Queen's race refers to running fast just to stay in the same place. In a Red Queen's Market, central banks must continually increase their level of stimulus, intervention, jawboning, etc. just to keep the markets in the same place.
There's something fishy about this "new all-time highs" rally of 2016; the declines are deep but the new highs are modest. This is a tired Bull, and a spear tossed from somewhere in the restive crowd could bring it down all too easily.
mercoledì 24 agosto 2016
50% Near Term Correction in Stocks
Volatility is the name of the game. Stocks are acting up, but standing strong. Oil is propelling higher and the US dollar is falling. Turmoil around the world has never been higher and an ominous shadow is lurking in the background, ready to strike.
The situation that we now face is ultimately going to end in a collapse of epic proportion. The financial world is now a ticking bomb that is just waiting to explode - I know this, you know this and even if the masses don't, they can feel it in their bones.
The only ones that don't seem to be aware of this dangerous situation are the elites who are currently profiting off of this heightened turmoil and their mainstream media mouthpieces who couldn't be more happy to assist in the destruction of the Western financial world. After all, it would make for a good story, right?
Unfortunately, I am not alone in this assessment of the current global situation. Marc Faber, a prominent voice in the financial community and the editor of the Gloom, Boom and Doom report has taken an ultra bearish view of the current economy.
A recent CNBC article, highlights a recent interview they had with Marc Faber this past week, and states the following:
The notoriously bearish Marc Faber is doubling down on his dire market view.
The editor and publisher of the Gloom, Boom & Doom Report said Monday on CNBC’s “Trading Nation” that stocks are likely to endure a gut-wrenching drop that would rival the greatest crashes in stock market history.
“I think we can easily give back five years of capital gains, which would take the market down to around 1,100,” Faber said, referring to a level 50 percent below Monday’s closing on the S&P 500.
The S&P 500 is sitting at 2,184.29 at the time of writing! This would be a truly stunning collapse of the markets. One that would send the financial world plummeting out of control. Contagion would spread and the credit markets would utterly and completely seize up.
What is equally as shocking as this claim of monumental collapse is the fact that Marc Faber believes this will happen in the near term future! This isn't some far fetched 5-10 year prediction that no one will remember he made down the road. No, this is a bold statement from a man who accurately predicted the 2008 crisis and many of the drastic events that have unfolded in modern times.
Marc Faber is just one more expert that is ringing the alarm bells. Sadly, the mainstream media continue to dismiss the experts who are trying to warn the masses, stating that we are conspiracy theorist and nothing more. Even though we have been proven right in our predictions time and time again, causing the trash can to nearly overflow with tin foil hats.
I don't know if the collapse is in the near term such as Marc Faber believes, but I know that it could occur at anytime. Whether it be a week, a month, or years from now, wouldn't you rather be prepared? The risk is simply too great to not be.
sabato 20 agosto 2016
Secret Fed Minutes "Revealed"
Aug 20, 2016 8:56 AM
This week, The Federal Reserve released the minutes from its July meeting a few weeks ago in which they decided to NOT raise interest rates.
These minutes are the official archive of the meeting, providing details about the presentations, debates, and discussions that took place.
They contain very formal sounding language, referring to their near-zero interest rates as "accommodation" in the same way that my high school health teacher preferred to use the more clinical term "copulation" instead of "sex".
As an example, the most recent Fed minutes state:
"members agreed to indicate that they would continue to closely monitor global economic and financial developments."
What in the world does that even mean?
I really get so tired of their forked-tongue garbage.
Interest rates are at 5,000 year lows. There are now 500 MILLION people around the world, in fact, living under NEGATIVE interest rates.
Remember that money is essentially nothing more than a measurement of economic value, in the same way that a meter or a mile is a measure of distance.
Just imagine the chaos if there were some unelected committee of bureaucrats who got together from time to time to change the value of the mile.
Or imagine if, tomorrow morning, they decided that the mile would be shortened by 20%.
Some people would benefit from that arrangement (taxi drivers). Others would be worse off (taxi passengers). There are always winners and losers.
Similarly, there are always winners and losers with monetary policy.
And these unelected central bankers have made a series of very deliberate decisions to forsake one segment of the population (anyone trying to save money) for the benefit of another (those who are heavily in debt, like, ummmm, governments).
They try to wrap their decisions up with fancy sounding language about "accommodation" and 14 pages of fluff like:
". . . the Committee should wait to take another step in removing accommodation until the data on economic activity provided a greater level of confidence that economic growth was strong enough to withstand a possible downward shock to demand."
But if there were some secret minutes detailing the Fed's inner conscience that were leaked to the public, here's what they would really be saying:
"Nothing terribly catastrophic has happened yet, so we have decided to continue screwing responsible savers with interest rates that are at 5,000 year lows so that this dangerous asset bubble can persist, the federal government can continue indebting future generations, and the commercial banks can keep making tons of money, because we are shit scared that even the tiniest 0.25% increase in interest rates will completely derail this totally fragile economy, and that would be really bad for Barack Obama and Hillary Clinton."
This week, The Federal Reserve released the minutes from its July meeting a few weeks ago in which they decided to NOT raise interest rates.
These minutes are the official archive of the meeting, providing details about the presentations, debates, and discussions that took place.
They contain very formal sounding language, referring to their near-zero interest rates as "accommodation" in the same way that my high school health teacher preferred to use the more clinical term "copulation" instead of "sex".
As an example, the most recent Fed minutes state:
"members agreed to indicate that they would continue to closely monitor global economic and financial developments."
What in the world does that even mean?
I really get so tired of their forked-tongue garbage.
Interest rates are at 5,000 year lows. There are now 500 MILLION people around the world, in fact, living under NEGATIVE interest rates.
Remember that money is essentially nothing more than a measurement of economic value, in the same way that a meter or a mile is a measure of distance.
Just imagine the chaos if there were some unelected committee of bureaucrats who got together from time to time to change the value of the mile.
Or imagine if, tomorrow morning, they decided that the mile would be shortened by 20%.
Some people would benefit from that arrangement (taxi drivers). Others would be worse off (taxi passengers). There are always winners and losers.
Similarly, there are always winners and losers with monetary policy.
And these unelected central bankers have made a series of very deliberate decisions to forsake one segment of the population (anyone trying to save money) for the benefit of another (those who are heavily in debt, like, ummmm, governments).
They try to wrap their decisions up with fancy sounding language about "accommodation" and 14 pages of fluff like:
". . . the Committee should wait to take another step in removing accommodation until the data on economic activity provided a greater level of confidence that economic growth was strong enough to withstand a possible downward shock to demand."
But if there were some secret minutes detailing the Fed's inner conscience that were leaked to the public, here's what they would really be saying:
"Nothing terribly catastrophic has happened yet, so we have decided to continue screwing responsible savers with interest rates that are at 5,000 year lows so that this dangerous asset bubble can persist, the federal government can continue indebting future generations, and the commercial banks can keep making tons of money, because we are shit scared that even the tiniest 0.25% increase in interest rates will completely derail this totally fragile economy, and that would be really bad for Barack Obama and Hillary Clinton."
Are Central Banks Secretly Preparing For Another Crisis?
August 19, 2016
A major crisis warning signal just hit.
It concerns "behind the scenes" liquidity for Central banks.
Here's how it works.
When "all is well" in the financial system, foreign Central Banks like to park money at the Fed overnight. The reason they do this is because the Fed offers a special program that yields more interest than money markets.
So when things are calm in the financial system, foreign Central Banks don't need emergency access to capital and so park significant amounts of money with the Fed overnight.
But when things are bad and foreign Central Banks NEED access to capital, this number falls.
As Worth Way notes, this number is falling… in a big way. In fact, any time it's fallen by this much (5.6% year over year) a crisis hits soon after.
A major crisis warning signal just hit.
It concerns "behind the scenes" liquidity for Central banks.
Here's how it works.
When "all is well" in the financial system, foreign Central Banks like to park money at the Fed overnight. The reason they do this is because the Fed offers a special program that yields more interest than money markets.
So when things are calm in the financial system, foreign Central Banks don't need emergency access to capital and so park significant amounts of money with the Fed overnight.
But when things are bad and foreign Central Banks NEED access to capital, this number falls.
As Worth Way notes, this number is falling… in a big way. In fact, any time it's fallen by this much (5.6% year over year) a crisis hits soon after.
Shocking Government Report Finds $6.5 Trillion In Taxpayer Funds "Unaccounted For"
Aug 19, 2016 4:42 PM
Last week, we first touched on a topic which, in any non-banana republic, would be a far greater scandal than what Ryan Lochte may or may not have been doing in a Rio bathroom: namely, government corruption, falsification and potential fraud and embezzlement, which has resulted in the Pentagon being unable to account for up to $8.5 trillion in taxpayer funding.
Today, Reuters follows up on this disturbing issue, and reveals that the Army's finances are so jumbled it had to make trillions of dollars of improper accounting adjustments to create an illusion that its books are balanced. The Defense Department's Inspector General, in a June report, said the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year. Yet the Army lacked receipts and invoices to support those numbers or simply made them up.
As a result, the Army's financial statements for 2015 were "materially misstated," the report concluded. The "forced" adjustments rendered the statements useless because "DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions."
For those wondering, this is what $1 trillion in $100 bills looks like.
Now multiply by 6.
This is not the first time the DoD has fudged its books: disclosure of the Army's manipulation of numbers is the latest example of the severe accounting problems plaguing the Defense Department for decades. The report affirms a 2013 Reuters series revealing how the Defense Department falsified accounting on a large scale as it scrambled to close its books. As a result, there has been no way to know how the Defense Department – far and away the biggest chunk of Congress' annual budget – spends the public's money.... The Army lost or didn't keep required data, and much of the data it had was inaccurate, the IG said.
In other words, it is effectively impossible to account how the US government has spent trillions in taxpayer funds over the years. It also means that since the money can not be accounted for, a substantial part of it may have been embezzled.
"Where is the money going? Nobody knows," said Franklin Spinney, a retired military analyst for the Pentagon and critic of Defense Department planning, cited by Reuters.
The significance of the accounting problem goes beyond mere concern for balancing books, Spinney said. Both presidential candidates have called for increasing defense spending amid current global tension; the only issue is that more spending may not be necessary - all that is needed is less government corruption and theft.
An accurate accounting could reveal deeper problems in how the Defense Department spends its money. Its 2016 budget is $573 billion, more than half of the annual budget appropriated by Congress. The Army account's errors will likely carry consequences for the entire Defense Department. Congress set a September 30, 2017 deadline for the department to be prepared to undergo an audit.
What's worse is that the "fudging" of the numbers is well known to everyone in the government apparatus. For years, the Inspector General – the Defense Department's official auditor – has inserted a disclaimer on all military annual reports. The accounting is so unreliable that "the basic financial statements may have undetected misstatements that are both material and pervasive."
Not surprisingly, trying to figure out where the adjustments are has proven to be impossible.
Jack Armstrong, a former Defense Inspector General official in charge of auditing the Army General Fund, said the same type of unjustified changes to Army financial statements already were being made when he retired in 2010.
The Army issues two types of reports – a budget report and a financial one. The budget one was completed first. Armstrong said he believes fudged numbers were inserted into the financial report to make the numbers match.
"They don't know what the heck the balances should be," Armstrong said.
Meanwhile, for government employees, such as those at the Defense Finance and Accounting Services (DFAS), which handles a wide range of Defense Department accounting services, the whole issue is one big joke, and they refer to preparation of the Army's year-end statements as "the grand plug," Armstrong said. "Plug", of course, being another name for made-up numbers.
Finally, how on earth can one possibly "not account" for trillions? As Reuters adds, at first glance adjustments totaling trillions may seem impossible. The amounts dwarf the Defense Department's entire budget. However, when making changes to one account also require making changes to multiple levels of sub-accounts. That creates a domino effect where falsifications kept falling down the line. In many instances this daisy-chain was repeated multiple times for the same accounting item.
The IG report also blamed DFAS, saying it too made unjustified changes to numbers. For example, two DFAS computer systems showed different values of supplies for missiles and ammunition, the report noted – but rather than solving the disparity, DFAS personnel inserted a false "correction" to make the numbers match.
DFAS also could not make accurate year-end Army financial statements because more than 16,000 financial data files had vanished from its computer system. Faulty computer programming and employees' inability to detect the flaw were at fault, the IG said.
DFAS is studying the report "and has no comment at this time," a spokesman said. We doubt anyone else will inquire into where potentially trillions in taxpayer funds have disappeared to; meanwhile the two presidential candidates battle it out on the topic of tax rates when the real problem facing America is not how much money it draws in - after all the Fed can and will simply monetize the deficit - but how it spends it. Sadly, we may never know.
Last week, we first touched on a topic which, in any non-banana republic, would be a far greater scandal than what Ryan Lochte may or may not have been doing in a Rio bathroom: namely, government corruption, falsification and potential fraud and embezzlement, which has resulted in the Pentagon being unable to account for up to $8.5 trillion in taxpayer funding.
Today, Reuters follows up on this disturbing issue, and reveals that the Army's finances are so jumbled it had to make trillions of dollars of improper accounting adjustments to create an illusion that its books are balanced. The Defense Department's Inspector General, in a June report, said the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year. Yet the Army lacked receipts and invoices to support those numbers or simply made them up.
As a result, the Army's financial statements for 2015 were "materially misstated," the report concluded. The "forced" adjustments rendered the statements useless because "DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions."
For those wondering, this is what $1 trillion in $100 bills looks like.
Now multiply by 6.
This is not the first time the DoD has fudged its books: disclosure of the Army's manipulation of numbers is the latest example of the severe accounting problems plaguing the Defense Department for decades. The report affirms a 2013 Reuters series revealing how the Defense Department falsified accounting on a large scale as it scrambled to close its books. As a result, there has been no way to know how the Defense Department – far and away the biggest chunk of Congress' annual budget – spends the public's money.... The Army lost or didn't keep required data, and much of the data it had was inaccurate, the IG said.
In other words, it is effectively impossible to account how the US government has spent trillions in taxpayer funds over the years. It also means that since the money can not be accounted for, a substantial part of it may have been embezzled.
"Where is the money going? Nobody knows," said Franklin Spinney, a retired military analyst for the Pentagon and critic of Defense Department planning, cited by Reuters.
The significance of the accounting problem goes beyond mere concern for balancing books, Spinney said. Both presidential candidates have called for increasing defense spending amid current global tension; the only issue is that more spending may not be necessary - all that is needed is less government corruption and theft.
An accurate accounting could reveal deeper problems in how the Defense Department spends its money. Its 2016 budget is $573 billion, more than half of the annual budget appropriated by Congress. The Army account's errors will likely carry consequences for the entire Defense Department. Congress set a September 30, 2017 deadline for the department to be prepared to undergo an audit.
What's worse is that the "fudging" of the numbers is well known to everyone in the government apparatus. For years, the Inspector General – the Defense Department's official auditor – has inserted a disclaimer on all military annual reports. The accounting is so unreliable that "the basic financial statements may have undetected misstatements that are both material and pervasive."
Not surprisingly, trying to figure out where the adjustments are has proven to be impossible.
Jack Armstrong, a former Defense Inspector General official in charge of auditing the Army General Fund, said the same type of unjustified changes to Army financial statements already were being made when he retired in 2010.
The Army issues two types of reports – a budget report and a financial one. The budget one was completed first. Armstrong said he believes fudged numbers were inserted into the financial report to make the numbers match.
"They don't know what the heck the balances should be," Armstrong said.
Meanwhile, for government employees, such as those at the Defense Finance and Accounting Services (DFAS), which handles a wide range of Defense Department accounting services, the whole issue is one big joke, and they refer to preparation of the Army's year-end statements as "the grand plug," Armstrong said. "Plug", of course, being another name for made-up numbers.
Finally, how on earth can one possibly "not account" for trillions? As Reuters adds, at first glance adjustments totaling trillions may seem impossible. The amounts dwarf the Defense Department's entire budget. However, when making changes to one account also require making changes to multiple levels of sub-accounts. That creates a domino effect where falsifications kept falling down the line. In many instances this daisy-chain was repeated multiple times for the same accounting item.
The IG report also blamed DFAS, saying it too made unjustified changes to numbers. For example, two DFAS computer systems showed different values of supplies for missiles and ammunition, the report noted – but rather than solving the disparity, DFAS personnel inserted a false "correction" to make the numbers match.
DFAS also could not make accurate year-end Army financial statements because more than 16,000 financial data files had vanished from its computer system. Faulty computer programming and employees' inability to detect the flaw were at fault, the IG said.
DFAS is studying the report "and has no comment at this time," a spokesman said. We doubt anyone else will inquire into where potentially trillions in taxpayer funds have disappeared to; meanwhile the two presidential candidates battle it out on the topic of tax rates when the real problem facing America is not how much money it draws in - after all the Fed can and will simply monetize the deficit - but how it spends it. Sadly, we may never know.
martedì 16 agosto 2016
The good news is there is a way to avoid failure and stagnation: avoid the mainstream like the plague.
Now, the mainstream has failed. Mainstream career advice now leads to crushing debts and career stagnation, mainstream financial planning generates high risks, mainstream government regulations are costly and burdensome, and the mainstream media is little more than a corporate-owned mouthpiece of propaganda and distributor of infotainment that is sold as "news."
Does anyone actually believe the mainstream political process isn't broken? Those who claim it isn't broken are either well-paid shills just doing their job or they're delusional.
The mainstream American diet now leads to chronic disease and early death. Supersized portions, large amounts of sugar and/or salt in virtually every packaged food item, heavy doses of low-quality fats in almost all mainstream fast foods--these have become mainstream at a very high cost in diminished health and reduced years of life free of chronic disease and pain.
The mainstream level of fitness contributes to chronic disease and early death. The mainstream lifestyle is one in which people passively watch a few daredevils pursue extreme sports on a variety of digital screens, passively "consume" music rather than learning to play music themselves, passively consume "news" rather than being engaged in community activities that make news, and so on.
The mainstream healthcare system is structured so it is incapable of promoting health. As my longtime friend GFB recently asked, "Who is happy with the current healthcare system?" Certainly not the doctors and nurses or the patients. Perhaps Big Pharma is happy as a result of their enormous profits (more of which is spent on marketing the latest marginally useful and often dangerous drug than on R&D), but even Big Pharma has legitimate complaints about the cost and time required to get a potentially life-changing drug (such as immunotherapy drugs) through the pipeline.
But the real problem is the soaring costs of the system will eventually collapse the entire economy. The same can be said of the soaring costs of increasingly marginal higher education, the soaring costs of increasingly marginal weapons systems, and so on.
domenica 14 agosto 2016
Stunning Admission From Deutsche Bank Why A Shock Is Needed To Collapse The Market, And Force A Real Panic
Aug 13, 2016 9:59 PM
In what may be some of the best, and most lucid, writing on everyone's favorite topic, namely "what happens next" in the evolution of the financial system, Deutsche Bank's Dominic Konstam, takes a look at the current dead-end monetary situation, and concludes that in order for the system to transition from the current state of financial repression, which has made a mockery of all asset values due to central bank intervention, to a semi-credible system driven by fiscal stimulus, there will have to be a crash, one which jolts policymakers out of their stupor that all is well simply because stocks are at all time highs.
And since a legitimate fiscal stimulus is what is needed to re-ignite the economy, US and global GDP will continue declining, even as stocks keep rising to new all time highs, not on fundamentals (which are all pointing in the opposite direction), but due to even more central bank intervention and financial repression, thus a Catch 22, which ultimately - according to DB - ends in the only possible way: with a major crash.
As Konstam puts it, "the status quo could continue for several years yet – if nothing "breaks" in the system" but "without an external economic shock it is hard to see policymakers being prepared to take dramatic, fiscal action to jumpstart the global economy and bounce it out of a financial repression defined by low and falling real yields to one that at least initially is defined by rising nominal yields through higher inflation expectations."
As for the conclusion, or why a financial shock is long overdue, KOnstam says that "ironically the shock that is needed would require a collapse in risk assets for policymakers to then really panic and attempt dramatic fiscal stimulus. "
This is critical - and inevitable - as only a shock can lead to an "unwind of the falling yield/rising equity market where all financial assets trade badly."
the end of financial repression will see price levels fall so that yields once again look attractive, or said otherwise, there will be a demand for Treasuries, even without the perpetual implicit backstop of central bank purchases.
For such a move to be sustainable itself requires the economic fundamentals to shift – inflation needs to be more secure against an underlying backdrop of robust real growth. Most people now understand that this is not a job for monetary policy alone. Yet the current reach for yield simply prolongs the status quo for policy disappointment.
Which brings us full circle: recall that over the past few months virtually every prominent investment bank, from JPMorgan to Goldman Sachs have warned clients that a selloff is coming. Now, Deutsche Bank has taken it to a whole new level, explaining why a financial crash has to happen to purge the system from the toxic aftereffects of 7 years of financial repression, and to kickstart a fiscal stimulus that will not happen unless markets tumble in the first place.
And while Konstam's line of reasoning is absolutely correct, we doubt just how his employer would look upon a market plunge that wipes out 30%, 40%, or even 50% of global equity values: would Deutsche Bank even survive such a crash? As such we doubt that the strategist's analysis and forecast, correct as it may be, will be endorsed by his employer, even if by now it is clear to all that only a major crash, i.e. a global reset, can kick start the world out of its zombie-like, centrally-planned existence, into the long overdue phase of whatever it is that comes next.
the end of financial repression will see price levels fall so that yields once again look attractive, or said otherwise, there will be a demand for Treasuries, even without the perpetual implicit backstop of central bank purchases.
For such a move to be sustainable itself requires the economic fundamentals to shift – inflation needs to be more secure against an underlying backdrop of robust real growth. Most people now understand that this is not a job for monetary policy alone. Yet the current reach for yield simply prolongs the status quo for policy disappointment.
Which brings us full circle: recall that over the past few months virtually every prominent investment bank, from JPMorgan to Goldman Sachs have warned clients that a selloff is coming. Now, Deutsche Bank has taken it to a whole new level, explaining why a financial crash has to happen to purge the system from the toxic aftereffects of 7 years of financial repression, and to kickstart a fiscal stimulus that will not happen unless markets tumble in the first place.
And while Konstam's line of reasoning is absolutely correct, we doubt just how his employer would look upon a market plunge that wipes out 30%, 40%, or even 50% of global equity values: would Deutsche Bank even survive such a crash? As such we doubt that the strategist's analysis and forecast, correct as it may be, will be endorsed by his employer, even if by now it is clear to all that only a major crash, i.e. a global reset, can kick start the world out of its zombie-like, centrally-planned existence, into the long overdue phase of whatever it is that comes next.
Below is Konstam's full must read analysis:
Stocks must fall for yields to rise – but unlikely to happen anytime soon
It is pretty much understood that we are in full on financial repression mode, as witnessed by super benign core yields lead by lower real yields with more recently the further downward drift in euro peripheral yields, including the UK. The new high in equities is consistent with our view of financial repression that necessarily has yield returns on all assets being incrementally replaced by price returns – stretched relative valuations follow already increasingly stretched absolute valuations. The last round of economic data does little to suggest any change in this dynamic. As we highlighted last week the conundrum for the US is how an overly strong labor market without meaningful wage inflation resolves itself against markedly weak productivity data with a GDP cake that if anything seems to be stagnating.
With the current status quo, it is clear to us that US yields if anything are still too high – we think they are near the upper bound of a range that pivots closer to 1.25 percent with real yields in particular too high. This probably still reflects a reluctance of investors to get meaningfully long the market although much of the short base has been covered and this in turn reflects a still fairly strong consensus on the economics front that the labor market strength can still resolve itself through higher wages and a virtuous circle of rising demand and productivity – a scenario we would not rule out but not our central view.
More importantly however are what prospects there may be to jolt us out of this financial repression and to what extent regardless of proactive policy, is there a natural end to financial repression – at some point does something have to break in the system. On the former the most likely candidate is obviously some form of global fiscal stimulus. Despite optimism around this in early July we have not exactly had the green light on either helicopter money in Japan or Italian bank bailout. It is still too early to call the US election and stimulus prospects here but the general sense is that it is still difficult to sense the urgency when equities make new highs. Policymakers aren't used to dealing with financial repression and that unfortunately is one of the defining characteristics of stagnation.
We suspect the fall will be defined by markets looking for dramatic policy news that somehow "responds" to super low bond yields and underwrites rising risk asset prices but only to be disappointed precisely because policymakers don't bide the urgency. The result is that yields can fall still further even with risk assets still trading well – hanging onto their relative valuation rationale.
The failure of a policy response allows for more financial repression. We are anyway already beyond the point of preemptive policy since preemption is supposed to recognize and avoid looming problems beforehand. It is clear that the nature of those problems are already material including squeezed interest margins for banks, insurance solvency issues etc. But to be fair, the lack of a fiscal response itself bears witness to the perceived fiscal stress during the 2008 crisis and the need to insulate taxpayers. Additional fiscal burdens can be thought of as a variant of financial repression where future inflation and negative real rates do the redistribution as opposed to the structure of the fiscal regime. Helicopter money fuses financial repression from the money side with the fiscal response in a potentially dramatic way whereby the would be spenders get to spend a lot more directly at the expense of the ongoing savers. And while it may have its own political hurdles that ultimately are insurmountable, it offers a perfectly reasonable alternative equilibrium option where the goal is to raise the price level as well as improve the real growth outlook by overcoming excess savings. The fusion of fiscal with monetary policy can also be appreciated in the context of the fiscal theory of price where monetary policy can offer infinite paths for money growth and potential nominal growth but fiscal policy effectively selects which path is realized based on an equilibrium condition that the NPV of all future budget deficits needs to sum to zero.
The status quo could continue for several years yet – if nothing "breaks" in the system. There are ways of course for either avoiding breaks or at least patching them – mitigating the impact of negative rates on banks is now in vogue with subsidized bank loans for on lending. And we may yet see soft forms of bank bailout still being allowed. This is similar to the use of alternative yield curves for discounting insurance liabilities.
The conclusion is that without an external economic shock it is hard to see policymakers being prepared to take dramatic, fiscal action to jumpstart the global economy and bounce it out of a financial repression defined by low and falling real yields to one that at least initially is defined by rising nominal yields through higher inflation expectations. Ironically the shock that is needed would require a collapse in risk assets for policymakers to then really panic and attempt dramatic fiscal stimulus.
The logic would also fit with the same correlation structure for financial assets - an unwind of the falling yield/rising equity market where all financial assets trade badly. In other words the end of financial repression will see price levels fall so that yields once again look attractive. For such a move to be sustainable itself requires the economic fundamentals to shift – inflation needs to be more secure against an underlying backdrop of robust real growth. Most people now understand that this is not a job for monetary policy alone. Yet the current reach for yield simply prolongs the status quo for policy disappointment.
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