What will it look like next summer when thousands more economic migrants come streaming through the mountain valleys of Austria on their way to Western Europe?
That’s the question my old mate Nick Hubble and I pondered last night over a few whiskies in South London. Nick called me up out of the blue and filled me in on his two week excursion to Austria to visit family and see what’s going on for himself.
Hopefully we can get him on the podcast next week. Nick’s doing a PhD in mortgage fraud down in Australia. There’s a lot of it there, apparently. I suggested he have a good look around London. There’s probably plenty of it here too, where mortgage brokers falsify loan applications in order to write a bigger mortgage and get a larger commission.
That’s commonplace stuff at the end of a credit bubble. But no less grubby and immoral when you get down to the details. Nick is also a circus performer and trapeze artist. He should be good value on the show. Stay tuned.
Tug of War in the Treasury Market
Is there a global power play going on in the bond market at the same time Russian cruise missiles are flying over Syria? A nation’s power is rooted in its geography, its economy, and the liquidity of its bonds. That makes recent events even more intriguing.
Foreign central banks have been net sellers of US Treasury debt to the tune of $123 billion, according to a Deutsche Bank analyst Torsten Slok. His work covered the 12 months ending in July. He says it’s the biggest decline in official Treasury holdings since 1978.
Keep in mind the Treasury market is huge (or deep and liquid as we say). It’s a $12.8 trillion market. It takes a lot for selling in that market to push prices down and yields up. And while the official foreign holdings declined, funds and corporate borrowers were happy to take up the slack. Again, this could be a simple preference for liquidity over yield and NOT a strong desire to own the long-term debt obligations of the US government.
There’s also the liquidation aspect. That is, the big sellers are Russia, China, and Brazil. They may be selling as they liquidate their dollar-denominated FX reserves in an attempt to shore up currency depreciation. That’s what an FX reserve is for.
Still, it’s an odd moment in the bond market. Government debt around the globe has gone up since the worse of the financial crisis six years ago. In the aggregate, the whole leverage in the world economy moved from private balance sheets to public balance sheets. The only institutions large enough to bail out sovereign governments are groups like the IMF and central banks.
And so it goes. National power and sovereignty are slowly eroded and transferred to unelected bankers. Sounds familiar, doesn’t it?
$3 trillion warning
Speaking of the IMF, it released another warning about the build-up in global debt. This time it’s US dollar denominated corporate debt racked up by emerging market corporations, approximately $3 trillion worth of it, if you’re scoring at home.
Early in the credit cycle, you can borrow in countries where interest rates are lower and generate a high return as your own economy benefits from growth. In an expanding world with steady global growth and cheap credit, it’s not a bad strategy. Not so much in a contracting world.
And as you’ve no doubt already guessed, that debt is more expensive to pay back when the dollar is strong and US interest rates rise. That’s the situation corporate borrowers in emerging markets face today.
ECB as a back-door to Federal Europe
Several readers have taken issue with my contention that a European Central Bank is a ‘back door’ to creating a Federal Europe. But it’s a simple idea. When politics and treaties fail, try debt. Just ask the Greeks how it works. Low interest rates and a common currency are all good during the boom. Money is cheap and you can spend it in places you couldn’t before.
But when you have to pay it back and you don’t have it, Brussels will come looking for you. You’ll have to deal with the ‘troika,’ the IMF, the ECB, and the EU. Then the bailouts come with political strings. You’re a puppet now. And your master is a banker or a bureaucrat. More on that tomorrow.
Category: Geopolitics