NO STRINGS ATTACHED NEWS THAT MAINSTREAM JUST WON'T COVER.
Superintendent Eddie T. Johnson appeared on Good Morning America on Monday to defend the Chicago Police Department’s investigation into the attack.
Source: Police say they have more evidence Jussie Smollett is lying
"You Backing The Russians, Boy?" - Illinois Man Charged With Threatening To Murder GOP Congressman
It would appear all the escalating rhetoric from a month of impeachment hearings - including one Democratic congressman asking fellow lawmakers to imagine the teenage daughter of Ukraine’s president tied up in Trump’s basement - have sparked more than just verbal assaults on Republicans (just as Maxine Waters would had suggested previously).
The Hill reports that a man in Illinois has been charged after allegedly threatening to shoot Rep. Rodney Davis (R-Ill.) and accusing the congressman of "backing the Russians."
Rodney Lee Davis
64-year-old Randall Tar of Rochester, Ill. was charged with communicating threats to injure a person and threatening to assault, kidnap or murder a federal official, according to court documents released this week (full release below).
Contacted at his home Thursday, Tarr said he saw a television ad in which Davis, a Republican from Taylorville, claimed that Ukraine, not Russia, was responsible for meddling in the 2016 U.S. elections, and it angered him enough to call.
Prosecutors say Tarr called Davis's district office last month and left a profanity-filled voicemail, saying:
"I just saw you ... on the TV. You backing the Russians, boy?"
"Stupid son of a bitch, you're gonna go against our military and back the Russians?" he allegedly added.
"I'm a sharpshooter. ... I'd like to shoot your f---ing head off you stupid motherf---er."
Tarrlater reportedly told The Associated Press:
“I screwed up,” Tarr said.
“I don’t even have a weapon to do it, is the silliest thing.”
“I wish I could just take it all back and just say he’s a lousy (expletive) for backing the Russian theory.”
Of course, the only problem with all this is that the Democrats' constant spewing of the narrative that Ukraine did not 'meddle' in the 2016 election is entirely false.
So did Democrats' lies cause an unstable person to threaten a Congressman?
* * *
Full Affadvit below:
Tyler Durden Sat, 12/14/2019 - 21:00 Tags Politics Law CrimeEdward Snowden Speaks Out For Julian Assange And Chelsea Manning
Authored by Adam Dick via The Ron Paul Institute for Peace & Prosperity,
Julian Assange of WikiLeaks has been silenced. Assange was prevented from communicating with the outside world in his final 13 months at the Ecuador embassy in London, where he had obtained sanctuary from extradition to the United States. The silencing has continued in a British prison where Assange has been detained pending extradition to the US since British police forcibly removed him from the embassy in April.
Similarly, communication by Chelsea Manning has been much curtailed after Manning reveled United States military secrets. First, Manning served seven years in United States military prison after being convicted for the leak. Released from prison in 2017, Manning has been condemned to jail for most of the time since March of this year for refusing to testify for a grand jury involved in the US government’s effort to prosecute Assange.Manning, a whistleblower, and Assange, a publisher who through WikiLeaks helped make public revelations of government activities provided by Manning and other whistleblowers, are prevented by the US and British governments, respectively, from speaking up on their own behalf. But that does not mean that other individuals cannot speak up for them. In fact, with Assange and Manning’s ability to communicate limited, it is more important than ever that advocates for their freedom speak up on their behalf.
Last week, Edward Snowden, a whistleblower who has since 2013 escaped similar silencing via retaining sanctuary in Russia, spoke up in strong advocacy for Assange and Manning’s freedom. He did so in an interview with Democracy Now host Amy Goodman.
Snowden points out in the interview that the US cases against Assange, Manning, and himself all derive from the Espionage Act, the same Espionage Act that he notes was used against Daniel Ellsberg in the 1970s after Ellsberg leaked the Pentagon Papers to media. Pointing as an example to Ellsberg being prevented from even telling a jury at trial why he leaked the Pentagon Papers that revealed the hidden truth about US actions in the Vietnam War, Snowden emphasizes that the Espionage Act “is a special law that absolutely rules out any kind of fair trial.”
Continuing, Snowden discusses in the interview Manning’s revelations of “torture and war crimes, indefinite detention on the part of the United States government in places like Iraq and Afghanistan and Guantanamo Bay in Cuba” and Snowden’s own “involvement in the revelation of global mass surveillance” as being part of activities by a “new generation” of whistleblowers.
Like Ellsberg, Snowden relates that he and Manning were confronted with the Espionage Act “that forbids the jury to consider” if the leaking activity at issue “was something that did more good for the public to know than it did harm to the government in terms of inconvenience or theoretical risks of investigative journalism in a free society.”
And Snowden makes sure to emphasizes that the victims of this type of persecution over the last few years extend beyond Manning and himself. Indeed, the charging of Julian Assange under the Espionage Act Snowden sees as particularly threatening. States Snowden:
We moved from an individual and exceptional case that was not repeated for decades and decades in the Ellsberg instance to something that under the Obama administration he charged more sources of journalism using this special law than all other presidents in the history of the United States combined. And now, under the Trump administration, we have taken one more step. We have gone from the United States government’s war on whistleblowers to, now, a war on journalism with the indictment of Julian Assange for what even the government itself admits was work related to journalism. And this I think is a dangerous, dangerous thing — not just for us, not just for Julian Assange, but for the world and the future.
Watch Snowden’s complete interview here:
[youtube https://www.youtube.com/watch?v=3xD33J2z6KM]
Tyler Durden Sat, 12/14/2019 - 20:30 Tags Entertainment Culture PoliticsChina's "Moment Of Reckoning" Arrives: $38BN State-Owned Giant Announces Largest Dollar Bond Default In Two Decades
Two weeks ago we previewed what we said would soon be a D-Day for China's bond market, as a massive commodities trader and Global 500 state-owned enterprise was set for an "unprecedented" bond default.
As of last week, this historic default is now in the history books after Tewoo, the closely watched Chinese commodities trader, became the biggest dollar bond defaulter among the nation’s state-owned companies in two decades, in what Bloomberg called a "moment of reckoning" for Beijing as China struggles to contain credit risk in a weakening economy, as bond defaults hit an all time high and are set to keep rising in the coming years.
Last Wednesday, Tewoo Group announced results of its "unprecedented" debt restructuring, which saw a majority of its investors accepting heavy losses, and which according to rating agencies qualifies as an event of default. As a result of the default, until recently seen as virtually impossible for a state-owned company, investors’ perceptions are undergoing a dramatic U-turn about government-owned borrowers whose state-ownership had for years offered an ironclad sense of security.
No more: The fact that a state-owned enterprise such as Tewoo has now defaulted on repaying its dollar bonds in full, confirms that Beijing will no longer bail out troubled SOEs, let alone private firms, perhaps due to the strains imposed by the economy which while growing at just below 6%, is slowing the most in three decades. It also raises concerns over the Chinese province of Tianjin, where Tewoo is based, following a series of rating downgrades and financing difficulties suffered by some of the city’s state-run firms. The metropolis near Beijing also has the highest ratio of local government financing vehicle bonds to GDP in China.
As a reminder, Tewoo ranked 132 in 2018’s Fortune Global 500 list, higher than many other conglomerates including service carrier China Telecommunications Corp. and financial titan Citic Group Corp. It had an annual revenue of $66.6 billion, profits of about $122 million, assets worth $38.3 billion, and more than 17,000 employees as of 2017, according to Fortune’s website. Tewoo is owned by the Tianjin government and operates in a number of industries including infrastructure, logistics, mining, autos and ports, according to its website. It also has footprints in countries including the U.S., Germany, Japan and Singapore.
Putting last week's "unprecedented" event in context, since the first SOE bond default emerged in China’s domestic market four years ago, 22 such firms have failed to make good on a combined 48.4 billion yuan ($6.9 billion) onshore bonds as of the end of October, according to Guosheng Securities. However, despite periodic scares such as late repayment, Chinese SOEs had yet to suffer any high-profile default in the dollar bond market since the collapse of Guangdong International Trust and Investment Corp. in 1998.
Tewoo is precisely that default.
Furthermore, Tewoo's exchange offer, which has bondholders accepting a major haircut on their bonds, is seen as a road-map for resolving similar debt crises in the future as the prospect of more failures by state-backed firms looms. 2019 has already seen over 20 billion in SOE bond defaults, nearly triple 2018's total and the highest on record.
Specifically, the former Fortune Global 500 company from the northern port city of Tianjin said dollar bond investors representing 57% of the the total $1.25 billion have agreed to be paid just 37 to 67 cents on the dollar, depending on the maturity of the bonds. Additionally, bondholders representing 22.6% of these bonds voted to exchange their debt for new bonds with sharply lower coupons to be issued by Tewoo’s offshore debt manager, a state asset manager from Tianjin.
"This is one form of default based on our definition," said Moody's analyst Ivan Chung, pointing out that the debt restructuring has resulted in losses for investors.
The distressed exchange offer which concluded hastily last week represents a "first of its kind" debt restructuring plan for the relatively immature Chinese bond market and for a state-run enterprise in the dollar bond market. It was rushed ahead of $300 million dollar bond maturity on Dec. 16, one of the four notes covered by Tewoo’s debt restructuring plan.
To be sure, the market was not surprised: late last month, Tianjin State-owned Capital Investment and Management, Tewoo's offshore debt manager, said on an investor call that Tewoo is very likely to default on this paper. That explains why Tewoo's bond prices were largely unchanged after the exchange offer.
Meanwhile, investors who turned down the company's forced exchanges face even steeper losses; their dollar bonds will be grouped into a comprehensive debt plan involving Tewoo’s onshore debt, according to Tianjin State-owned Capital.
Tewoo said settlement of the debt restructuring offers are expected to be on or about Dec. 17.
As Bloomberg summarizes, "Tewoo’s failure in the dollar bond market, the biggest for a Chinese SOE since the collapse of Guangdong International Trust and Investment Corp. in 1998, is a sign that the worst economic slowdown in three decades is limiting Beijing’s capacity to bail out its weaker state firms. As a result, the authorities appear increasingly willing to use a more market-oriented approach to clean up the mess."
"Tewoo’s default is a landmark case, and demonstrates a growing tolerance for defaults by distressed SOEs,” Cindy Huang, an S&P Global Ratings credit analyst said in a note.
Needless to say, Tewoo’s crisis comes as a wake-up call for investors, many of whom had expected to never incur losses in China's offshore (dollar) bond market where until now, moral hazard had been the only game in town. Alas, that game is now changing.
“This is a poor outcome for investors that bought the bonds at par. That said, there is now some track record as to the severity of loss for an SOE-related entity,” said Charles Macgregor, head of Asia at Lucror Analytics. "Hopefully, these types of restructures will bring more discipline to the market and result in investors properly pricing for the apparent risk," he added hopefully, although with developed nation central banks engaging in precisely the kind of moral hazard boosting activity that China is now desperately seeking to distance itself from, we doubt that any investors will learn any lessons, and if anything, creditors will only demand even bigger bailouts in the future.
* * *
What is perhaps just as concerning is that as we noted last month, the Tewoo default is a harbinger of the crisis facing China's insovent local governments themselves. Tianjin “is not an exception” and other local governments with deteriorating fiscal conditions might also see eroding support for their less competitive SOEs, S&P warned.
It all started with the bankruptcy of Bohai Steel Group in 2018 which triggered systemic risk in Tianjin’s financial market. The incident involved a large number of local companies and financial institutions, which recorded huge amounts of bad debt. Financial institutions became more conservative in their lending standards, and this resulted in liquidity issues for a number of Tianjin enterprises.
At the same time, Beijing’s deleveraging and capacity reduction reforms made it difficult for a traditionally highly-leveraged company like Tewoo to raise financing. The default in May 2018 by Hsin Chong Group Holdings Limited, a company controlled by Tewoo, showed further signs of financial problems at Tewoo Group.
While normally such a critical company as Tewoo would be quietly bailed out by either Beijing or the local province, investors told Bloomberg that the company's excessive debt levels would limit Tianjin authorities’ ability to lend support to the city’s troubled firms. They were right, and in July, Tianjin Binhai New Area Construction & Investment Group postponed plans to sell a three-year dollar bond offering amid such concern.
Tewoo’s debt issues that had surfaced from its current crisis may be only the tip of the iceberg. Tianjin’s economic growth has slowed down sharply since the beginning of 2016. GDP growth dropped to 1.9% in the first quarter of 2018. Even as it started to rebound thereafter, the outlook is still pessimistic, with GDP growth in 2018 less than 4%, which ranked last in the country according to iFast.
On the other hand, according to a 2016 report released by ratings agency Moody’s, state-owned enterprises in Tianjin recorded an aggregate liability-to-fiscal revenue ratio of more than 600%, which was the highest in the country.
At the same time, as shown in Tianjin municipal government’s most recent three-year revenue and debt data, Tianjin government’s fiscal revenue has declined significantly since 2017. Fiscal revenue fell by close to RMB40 billion in 2017, while government borrowings rose rapidly. By the end of 2018, debt owed by the Tianjin government was almost double its fiscal revenue.
The bankruptcy of Bohai Steel, a Tianjin SOE, in 2018 may also be a sign that the Tianjin government has lost control over the local debt crisis. Other than Bohai Steel and Tewoo, there have been a number of state-owned companies in Tianjin that are fighting to stave off insolvencies, such as Tianjin Real Estate Group Co. Limited, which owes RMB200 billion in debt. From the above observations, we think that in the event of a default by Tewoo, the company is likely to go into bankruptcy reorganization in a similar way as Bohai Steel, which has brought in capital from the private sector for its corporate restructuring. But for bondholders, recovery of their investments may be difficult, and potential loss heavy.
With Tianjin failing - or simply unable to step up, in the aftermath of Tewoo’s debt restructuring which confirms that Beijing will no longer bail out even SOEs, investors’ skepticism about state support for such state-linked firms will collapse, and the default will have wide, and dire, implications on how investors assess and price their bonds in the future, said Judy Kwok-Cheung, director of fixed-income research at Bank of Singapore. It will certainly have a chilling effect on demand for Chinese bond issuers as investors will actually have to perform due diligence to find out just what they are buying.
"Investors would be going back to basics in assessing credit risk in that the company’s stand-alone ability to repay is the first line of defense when it comes to non-repayment risk," said Kwok-Cheung.
In short, "investors" would be reacquainted with a thing called "fundamentals." The horror, the horror.
* * *
It gets worse: should Tewoo's default spread to provincial-backed debt, an already ugly situation could quickly turn catastrophic as Tianjin has the highest debt burden among mega-cities and provinces in China according to S&P. Earlier this year, Fitch cut ratings on several government-related entities from the city, which is reliant on heavy industry and commodities trading. As a result of having the highest debt, Tianjin also has to slowest growth - Tianjin’s local economy grew by just 3.6% last year, the slowest in China; at the end of last year, Tianjin’s government had 407.9 billion yuan worth of debt outstanding, or about 22% of the size of its economy, said the Chinese credit risk assessor.
And just in case the Tewoo default isn't troubling enough, Moody's said that it expected the number of Chinese defaults to jump further in 2020 as economic growth sputters and the government attempts to rein in support to indebted companies. Specifically, Moody's expects 40-50 new defaults in 2020, up from 35 this year, according to Ivan Chung, which will make next year another all time high.
“The regulators’ intention is to reduce moral hazard” while at the same time ensuring any defaults “won’t undermine socioeconomic stability or trigger systemic risks,” Chung said on Wednesday, who added that whereas state support may be available for companies engaged in social welfare projects, for those that are more commercial in nature, "government support may not be so forthcoming," he said.
So what happens next?
Now that a Tewoo event of default is in the history books, the next question is what will bondholders of China's other SOE's - those who bought bonds on the assumption that China will always bail them out - do next? A flurry of aggressively selling may be just the catalyst that cracks the market if it emerges in the extremely illiquid days just before Christmas.
Tyler Durden Sat, 12/14/2019 - 20:00 Tags Business FinanceRepo-Market Turmoil: Are We Staring Into The Financial Abyss?
Authored by Tuomas Malinen via GnSEconomics.com,
One thing has been bothering us for six years. How can so many economists and economic commentators dismiss the ever-increasing market meddling of central banks so lightly?
The first time we warned about this possible threat to financial markets was in December 2013. In the report, we wrote:
There is a serious possibility that the measures taken by the central banks have already created a situation in which their actions increase rather than decrease financial instability. This is due to the fact that if the actual price of an asset does not meet its market–based value, the true level of risk is not properly revealed.
The continuing turmoil in the repo-market, first triggered on 16 September, is the most recent and probably the most worrying example of this.
There has been a lot of speculation about its origins. In this post we explain why we consider the repo-problems to be the first sign, a symptom, of the financial calamity we’re about to face.
The failed clean-upThe global financial crisis (GFC) or “Panic of 2008” was a shock not just to bankers, but also to economists—not to speak of ordinary citizens. It was a massive failure of risk-hedging in the financial sector, combined with both regulatory failures and dangerous and deeply-embedded incentives. We summarized the factors leading to the crisis in our blog: 10 years from Lehman and nothing has been fixed.
While the extraordinary measures used to stop the crisis from mutating into a systemic meltdown can be considered appropriate, the fact these measures were continued cannot. In retrospect, the U.S. did recapitalize, merge and permit the failure of some banks, but Europe choose the exact opposite approach: undercapitalized and ailing banks were left standing.
However, the most crucial mistakes were made after the GFC on both sides of the Atlantic. The hidden virtue of crises and recessions is that they remove both unproductive firms and financial excess, creating space for more productive firms and fresh financial investment. This was not allowed to happen post-GFC. This also explains why the economic recovery from the crisis was so weak.
But the financial sector got the worst treatment. One major central bank after another enacted zero or negative interest rate policies and started asset purchase (QE) programs run through the commercial banks. In the U.S., the Fed purchased securities from authorized Primary Dealer banks by crediting reserve balances to the Fed accounts associated with each dealer counterparty.
These intermediary banks paid the sellers of bonds (households, funds, banks, etc.) and the Fed compensated the banks with reserves. In practice, the Fed forced excess reserves onto the balance sheets of banks far beyond levels they would have acquired independently.
Because of the higher supply of reserves system-wide, their marginal benefit decreased, bidding-up the prices of various securities. This led the banks to issue additional and often riskier loans until the balance of the marginal benefits was restored. Also, because QE and low policy rates depressed long-term rates, many of the securities that the commercial banks held had no yield advantage over reserves, making the banks more likely to substitute less-liquid securities with more credit risk.
The Never-Never (financial) land of post-GFCQE created overdemand for investment-grade assets and excess liquidity in the financial markets by introducing central banks as a persistent buyer. This overdemand led to a relentless hunt for yield, to spread compression, and to artificially-inflated prices across the entire spectrum of the asset universe (see Figure 1).
Quantitative tightening, or QT, attempted globally for the first time from August to November of 2018, created an oversupply of investment-grade bonds which lead to a flight to quality, to spread dispersion and to asset price deflation. It also removed the excess liquidity from the financial markets created by QE by introducing a persistent seller.
Figure 1. The causative channels of quantitative easing (QE) and quantitative tightening (QT) in the macroeconomy and in financial markets. Source: Q-Review 1/2018
In December 2018, it became clear that the financial markets were unable to tolerate a balance sheet run-off by central banks. Markets declined abruptly and forced the PBoC to inject record amounts of liquidity into the markets, and the Fed to make an immediate 180-degree turn in its monetary policy. Yet, overall, global QT essentially continued through the 2019 until the repo-markets broke in September (see Figure 2).
This time around, central bankers learned their lesson with the Fed and ECB returning to QE programs (although the Fed insistently characterized its T-bill purchase program as “Not QE”). In case you have wondered what a central banker’s panic looks like, it can be seen in the latter part of Figure 2.
Figure 2. The combined balance sheet of the BoJ, ECB, Fed and PBoC from January 2018 till October 2019. Source: GnS Economics, BoJ, ECB, Fed, PBoC
The repo-market as a harbingerOn the 16th of September, rates in the repo markets spiked by 248 basis points to more than double of the overnight rate set by the Fed. Panic was imminent, as the over $4 trillion repo-market is used by big institutional investors to satisfy their short-term demand for liquidity. If rates stay elevated for an extended period of time, highly-leveraged institutions start to fail and trust in financial markets and the banking sector is likely to shatter.
So, what happened? There are a lot of theories, but this is what we know.
The interbank market never recovered from the Panic of 2008. Banks demand collateral for their loans to other banks, which has shifted more of the ‘action’ to the repo-market, increasing its role. During 2018 and 2019, the four big banks of the U.S. became the dominant lenders in the repo-markets. So, any change in their ability or willingness to lend to the repo-market will cause an imminent shortage of funding and sky-rocketing interest rates. Banks have also been hoarding Treasuries, shrinking their availability.
Yet, the main issue is likely to be the fact that QE programs fundamentally altered the balance sheets of banks as well as their money-market activity.
QE accustomed banks to holding large amounts of excess reserves, which provided a reliable source of interest income. When QT started to reduce reserves, they replaced them with another reliable source, Treasuries, which acted as a hedge on their balance sheet against riskier lending practices and securities holdings induced by QE programs. Obtaining a hedge against riskier assets and loans (loan portfolios in particular take a long time to adjust) becomes especially important, if the economic outlook is expected to worsen—as it is presently.
We cannot, of course, be absolutely certain that this is what drove big banks to Treasuries, but it seems plausible. QE has distorted both bank balance sheets specifically and the financial markets more broadly. These factors, combined with decreased money-market activity of banks—explained here in detail by the BIS—has likely made the ‘Big 4’ wary of lending to the repo-market, if even a hint of potential loss exists.
This leads us to another and potentially more worrying development: increased access to the repo-market by hedge funds to increase their leverage. They seem to have been getting short-term funding from the repo-market to buy U.S. T-bills, which they have then re-invested in the repo-market to obtain more short-term funding to buy T-bills, etc. Using this “leverage-loop” they have been able amass very high leverage ratios.
The behavior of hedge funds is also the end-result of massive central bank interference in the global capital markets. When the yields of practically every financial asset class are squeezed to near-zero (or less!) due to artificial liquidity from the central banks, leverage becomes the only way to obtain yield sufficient for fixed-income investors.
Staring at the financial abyssWhen the financial history of this era is written, it is fairly likely that historians will identify the onset of the global economic crisis as 16 September, 2019. It was the first clear sign of the potential for a violent unwinding of the massive speculative financial positions created by central bank meddling.
Thus, in their efforts to “save” the world economy, central banks have created a monster: a dysfunctional, extremely-speculative and highly-leveraged financial sector. All that is needed for it to unravel are rising rates in an some important, if obscure, corner of the capital markets—just like the repo-markets.
The Fed has been engaged in a desperate battle to avert this through its repo and “Not QE” -programs since September. However, even if successful, it’s very likely that these programs, not to speak of an “actual QE”, will just further aggravate the distortions in the financial markets, until they become unbearable.
Then we’ll be staring into the financial abyss. Beware!
Tyler Durden Sat, 12/14/2019 - 19:30 Tags Business FinanceHundreds Of Billions In Gold And Cash Are Quietly Disappearing
Something strange is going on: at the same time that central banks are injecting $100 billion each month in electronic money to crush volatility and ramp markets, a similar amount in hard physical currency and precious metals is literally disappearing.
Take gold: as we reported last week, it was none other than Goldman Sachs which recently laid out the case for gold, saying "gold's strategic case still strong." One reason for this is that the same central banks that are "full tilt" printing cash, they have also been splurging on gold, and as a result of "geopolitical uncertainty" there has been a record surge in gold demand by central banks themselves. As Goldman notes, "CBs globally have been buying gold at a very strong pace" and "2019 looks to be a record year for CB gold purchases with our target of 750 tonnes combined purchases likely to be met."
But it was another, even more bizarre discovery by Goldman, that caught our eye: according to the bank there has been a whopping 1,200 tons, or $57 billion, of "unexplained" gold flows in just the 3 years.
As Goldman's Mikhail Sprogis writes, "rising political risk - together with negative European rates - may be an important reason behind the large share of unaccounted gold investment over the past several years. Exhibit 17 shows cumulative unexplained gold demand based on World Gold Council (post 2010) and GFMS (pre 2010) balances data. It surged since 2016. Similar dynamics can be seen when we look at implied vaulted gold stocks built in the UK and Switzerland, which is calculated as implied cumulative total net imports minus transparent ETF gold stocks."
And another remarkable observation, or rather lack thereof: "One can see that since the end of 2016 the implied build in non-transparent gold investment has been much larger than the build in visible gold ETFs (see Exhibit 18). This is consistent with reports that vault demand globally is surging. Political risks, in our view, help explain this because if an individual is trying to minimize the risks of sanctions or wealth taxes, then buying physical gold bars and storing them in a vault, where it is more difficult for governments to reach them, makes sense. Finally, this build can also reflect hedges by global high net worth individuals against tail economic and political risk scenarios in which they do not want to have any financial entity intermediating their gold positions due to the counterparty credit risk involved."
In other words, Goldman points out that just over the past three years, there have been tens of billions in gold flows which have mysteriously and inexplicably disappeared from the official record, yet which are most certainly taking place behind the scenes as the world's "top 1%" brace for a major shock.
But it's not just gold that is disappearing: according to the WSJ, so is the world's cold, hard cash.
Some Australians are burying it. The Swiss might be hiding it. The Germans are probably hoarding.
Indeed, while banks are printing more bank notes than ever and, these seem to be "disappearing off the face of the earth" and nobody knows where or why. or as the WSJ notes, "central banks don’t know where they have gone, or why, and are playing detective, trying to crack the same mystery."
We do know one thing: of the $1.7 trillion in US dollars in cash circulation in 2018 (up from $1.2 trillion 5 years prior), the vast majority is offshore, where it is quickly and quietly disappears as the world's second best physical store of value (after gold of course). A Fed economist, Ruth Judson, wrote in 2017 that about 60% of all U.S. currency, and about 75% of $100 bills, had left the country by the end of 2016 — for a total of about $900 billion in U.S. dollars kept overseas. Socking those bills away "provides some protection against economic turmoil, especially in countries with a record of instability in their own financial systems", the paper said.
Take Australia: there the stock of Australian bank notes on issue relative to the size of the economy is near the highest it has been in 50 years, said Philip Lowe, governor of Australia’s central bank: "He showed off newly printed bank notes to diners at a recent event in Melbourne and estimated that about $2,000 in printed bills exists for every Australian." And just to inspire confidence in his own job, he added: "I, for one, don’t have anywhere near that amount" on hand. In a few years, he will wish he did.
To be sure, there is the criminal element: as anyone who has watched a documentary on Pablo Escobar knows the Colombian drug kingpin buried tens of billions in the ground for "safe keeping" (in fact, as "The Accountant's Story" writes, "Pablo was earning so much that each year we would write off 10% of the money, or about $2.1 billion, because the rats would eat it in storage or it would be damaged by water or lost"). As such, dollar bills are often vital grease for criminal gangs and tax cheats.
Physical cash is also popular with preppers and "collectors" who worry about a future collapse of the financial system.
But these two groups are far too small to explain the wholesale loss of cash as central bankers scramble to "follow the money" and glean how society's saving and spending patterns change in a time of zero and negative interest rates. As the WSJ notes, bankers aren’t just hunting down cash to satisfy their own curiosity. If central banks don’t know how much cash is out there, they could print too much currency and risk inflation.
Then there are bizarre incidents such as these:
Construction workers recently dug up an estimated $140,000 buried in packages at a site on Australia’s Gold Coast, prompting a police search to find the trove’s owner.
In September, a court in Germany ruled on a case brought by a man who stuffed more than 500,000 euros in a faulty boiler only to see it incinerated when a friend made a fix on a cold day while he was on vacation. The man sued his friend for the value of the lost bank notes plus interest. He lost.
“People hide their money everywhere,” said Sven Bertelmann, head of the Bundesbank’s National Analysis Centre in Mainz, Germany. Sometimes bank notes are buried in the garden, where they start decomposing, or hidden in attics, where they are used by mice for building nests. “It happens again and again that people keep money in an envelope and then they shred it by mistake,” Mr. Bertelmann said. “We pick up the bank notes with tweezers and then start to put them together, like a jigsaw puzzle.”
Few are as perplexed by the fate of the missing cash as the German central bank: according to the Bundesbank more than 150 billion euros are being hoarded in Germany.
This has led the European Central Bank, and others, to ask the public for help.
“Everyone says that they are not hoarding cash but the money is clearly somewhere,” said Henk Esselink, head of the issue and circulation section in the ECB’s currency management division.
Some stunning facts: Australia’s central bank says its best guess is that only around a quarter of the bank notes in circulation are used for everyday transactions. Up to 8% of cash is used in the shadow economy—tax avoidance or illegal payments—while as much as 10% could have been lost. That is $7.6 billion Australian dollars ($5.2 billion) missing at the beach or in couch cushions... Or simply lost in a "boating accident" to avoid the taxman until the rainy days arrive.
The biggest use of cash is as a store of wealth “in safes, under beds and at the back of cupboards, both here in Australia and elsewhere around the world,” Mr. Lowe, the RBA governor, said.
Officials at the Swiss National Bank came up with another theory: hoarded bank notes should wear out less because they aren’t being used for everyday transactions. Demand for high-denomination bank notes tends to rise when interest rates are low, households feel distrustful of the banking system or people want to make transactions anonymously.
Sure enough, SNB officials found that hoarding of Swiss francs jumped around the year 2000, likely motivated by fear of the Y2K bug infecting computer systems, the bursting of the dot-com bubble, the September 11 terrorist attacks and introduction of the euro. The financial crisis that began in 2007 encouraged people to stash even more.
Meanwhile, with a financial crisis looming - and getting closer by the day - for some countries, such as New Zealand, making money disappear is becoming a national pastime.
Christian Hawkesby, of the Reserve Bank of New Zealand, wonders where all the cash has gone.
As the WSJ concludes, around a third of New Zealand’s new bank notes headed overseas in 2017, up from 6% four years earlier. That happened around the time that tourism overtook dairy as the country’s main export money-spinner, leading officials to speculate on the role played by currency exchanges, especially in Asia.
The trail mostly ran cold after that. The bank could only identify the whereabouts of around 25% of New Zealand’s cash. The rest, of about 75%, has disappeared.
"Our sense is that we’re in the same boat as a lot of other central banks out there,” said Christian Hawkesby, assistant governor at the RBNZ. “We can’t fully explain why holdings of cash are rising and where they are going."
Well, Christian, the answer to where all that cash is going is simple and is shown on the image below...
Unfortunate boating accident.
Tyler Durden Sat, 12/14/2019 - 19:00 Tags Business Finance
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