Foreign investment in the U.K. at risk if ‘Brexit’ hits, says BOE chief

U.S., Europe largest contributors to FDI, report shows

Reuters

Bank of England Governor Mark Carney speaking to members of Britain's parliament on Tuesday

Britons should expect a drop in foreign direct investment into their country if the U.K. decides to cut membership ties with the European Union, the head of the Bank of England said Tuesday.
Financial markets have been confronting the issue of whether U.K. voters will support the country leaving the European Union, a risk known as “Brexit”. A referendum on the issue will be held on June 23.
“All things being equal, one would expect that on the margin there would be a reduction in foreign direct investment given that level of uncertainty,” said Bank of England Governor Mark Carney, in testimony before the Treasury Select Committee.

Read: Carney warns Brexit is the biggest risk to U.K.’s financial stability
The U.K. logged net FDI inflows of £44 billion ($62 billion) in 2014, according to a U.K. Trade & Investment department report published in June 2015. FDI is investments from overseas entities in a variety of assets, such as property, equipment and stock purchases.

Office for National Statistics

Overseas net stock of assets held in the U.K. and earnings received (2004-2013)

“Uncertainty…including about future trading arrangements could cause institutions, firms to delay investment,” Carney told lawmakers, adding that he couldn’t specify the potential amount of FDI that could be lost.
The U.S. and Europe are the largest investors in the U.K., according to the UKTI. U.S. investors held the largest share of FDI stock at 27%, followed by the Netherlands and France, at 15% and 8%, respectively. FDI stock is an often-used indicator of a foreign investors’s long-term commitment to another country, the report said.
Read: Why U.S. investors should fear a ‘Brexit’
Investment houses have been warning about the potential hit on the U.K. economy and its currency if the country breaks away from the EU. Such scenarios include an abrupt drop in capital inflow. A decline in such inflow could make it harder for the U.K. to fund its current-account deficit as it would need to borrow more money from abroad.

Bank of England says economic factors in play on 'Brexit'

(2:10) Bank of England Governor Mark Carney said the central bank won't be making any recommendation on whether the U.K. should stay in the European Union.
The country has a “still-significant current-account deficit of just over 4% of GDP,” said J.P. Morgan Asset Management in a note this week.
In relation to the financing of current accounts, Carney said the issue is more centered around the net flow of new investments and “not really a question of people selling assets here; they could.”
“But it’s about their incentive to add more or to come to this economy and make large investments at a time of uncertainty,” he added.
Mitigating factor?: But a potential decline in FDI could somewhat be offset, said Carney. A drop may be “compensated by more short-term capital flows which would…be attractive potentially by changes in the level of sterling and changes in the levels of interest rates, in other words, a higher-yielding environment.”
HSBC said in a note last month that if there were “a sudden stop in capital inflows the U.K. might require a larger fall in sterling and a recession (to choke off import demand).”
In that case, “the BOE might need to raise interest rates to stabilize the currency and attract foreign capital inflows.”
Higher interest rates tend to make a country’s currency more attractive.
Separately, a downgrade of the U.K.’s creditworthiness by credit agencies if Brexit were approved could push investors to sell U.K. bonds, which in turn would drive up the yield on such debt.

Will Portugal be next flashpoint in eurozone debt crisis?

Lisbon’s borrowing costs appear set to rise: economist

Portuguese government bond prices have been under pressure, sending yields higher, on worries the country’s sovereign debt could soon lose its last remaining investment-grade rating.
The rise in the government’s borrowing costs reflect fears that such a downgrade would render the European Central Bank unable to purchase Portuguese government debt as part of its asset-buying program. It would also mean that Portuguese banks wouldn’t be able to pledge Portuguese government bonds as collateral in return for cheap loans from the ECB.

All told, expect questions about Portugal at ECB President Mario Draghi’s Thursday news conference following the central bank’s eagerly awaited policy meeting.
See: 5 things to watch for at Thursday’s key ECB meeting.
Borrowing costs did fall back from their February highs after ECB officials indicated they would work to make sure any further cuts to the central bank’s deposit rate, which is already in negative territory, would be structured to protect banks. That was important because Portugal’s banking sector, along with Italy’s, is seen among the region’s most vulnerable. Negative rates can be a burden for banks, who have to pay central banks to hold on to a portion of their excess reserves.
But Portuguese yields are still elevated relative to their peers on the eurozone’s so-called periphery (see chart below). And if DBRS—the only major ratings firm to still rate Portugal as investment grade—cuts its rating next month, things could get ugly, notes Jennifer McKeown, senior European economist at Capital Economics, in a Tuesday note.

Portugal’s new left-leaning government has run afoul of the ratings firms, who have expressed doubts over the country’s budget path.
McKeown notes that a junk rating need not necessarily render Portuguese debt ineligible for purchase by the ECB or for use as collateral. After all, the central bank has granted “waivers” before, allowing it to accept debt rated as junk for collateral in Greece, for example. And the ECB could also move to widen the range of assets it buys, which means it could purchase other Portuguese assets that would allow it to support the country’s economy.
But, as McKeown reminds, waivers can only be granted to countries that are participating in a bailout program and complying with its terms. Portugal exited its bailout program in 2014.
She also notes that the ECB suspended Greece’s waiver last February as the battle between Greece’s radical Syriza government and European authorities heated up. There’s little reason to expect the ECB to show Portugal greater sympathy, McKeown said.
In part that’s because earlier purchases of Portuguese government debt under the defunct Securities Markets Program left the ECB holding nearly a third of Portuguese bonds—close to the central bank’s limit. That in itself could offer the bank a convenient excuse to stop buying Portuguese bonds just before the limit is reached.
And even if the ECB does go for buying more private-sector debt, that might not be of much help to the Portuguese, who appear to have few of the very highly-rated assets that would likely be part of the mix, she said.
If the ECB shuts Portuguese debt out of its bond-buying mix—something that the economist sees as likely if DBRS downgrades—it’s likely to cause investors to become more worried about the prospect of default. The result would almost certainly be a further jump in bond yields, possibly even toward the 8% level that forced Portugal into a bailout in 2011, McKeown said.

Trump says he can be more presidential than anyone except Lincoln

Trump tightens grip on Republican nomination

Reuters

Donald Trump says he’d be second only to Abe Lincoln in being presidential

George Washington? Never heard of him. Thomas Jefferson — who’s that?
To Donald Trump, those and other storied American presidents would be less presidential than him if he wins the White House in November.
Fresh off his victories in Michigan and Mississippi on Tuesday night, Trump said he can be more presidential than any other commander-in-chief besides “the great Abe Lincoln.”

Trump’s statement came during a lengthy press conference in which he ripped 2012 Republican nominee Mitt Romney, who criticized him in a speech last week; said he now has “great respect” for House Speaker Paul Ryan (after saying last week Ryan would “pay a big price” if he didn’t get along with Trump); and displayed Trump-brand wine and other products as a rebuttal to Romney’s criticism of his business ventures.

With his wins Tuesday, Trump tightens his grip on the Republican nomination as the race moves to winner-take-all contests in delegate-rich Ohio and Florida next week.

Asian markets fall as wary investors await ECB news

Investors shying away from risk for time being

AFP/Getty Images

Asian investors are taking a breather and waiting for Thursday’s ECB news.

Stocks in Asia were mostly down Wednesday as investors shied away from risk amid a slump in commodities and oil prices.
The Shanghai Composite Index SHCOMP, -1.34%   sank 1.7%, weighed by losses in energy and basic materials shares. Hong Kong’s Hang Seng Index HSI, -0.20%   fell 0.6%, hit by weakness in shares of oil producers.
Elsewhere in the region, Japan’s Nikkei Stock Average NIK, -0.84%   lost 1.4% and Korea’s Kospi SEU, +0.35%   was essentially flat. Australia’s S&P/ASX 200 XJO, +0.96%   rose 0.3%.

Investors were being cautious ahead of the European Central Bank monetary policy meeting Thursday. Analysts largely expect the central bank to ease policy, though some investors are concerned that a stimulus expansion could fall short of expectations.
“We’re seeing tepid trading as people are locking positions in place where they’re ready for tomorrow night,” said Evan Lucas, a market strategist for IG, an Australian brokerage. Such trades include shorting the euro and taking long positions in the yen and U.S. dollar, he added.
Brent crude-oil prices were last trading down 0.2% to $39.55 per barrel.
Write to Dominique Fong at Dominique.Fong@wsj.com

Goldman doubles down on calls to short the euro ahead of ECB

The ECB will aggressively expand stimulus to help weaken the euro, analysts say

Shutterstock/Simone Canino

Goldman is once again calling for the European Central Bank to surprise investors with a larger-than-expected expansion of its stimulus measures.

A team of currency strategists at Goldman Sachs is again calling for the European Central Bank to deliver a surprisingly dovish expansion of its easing regimen on Thursday — despite getting burned by a similar call three months ago.
The team, led by chief currency strategist Robin Brooks, believes the ECB will need to act aggressively on Thursday if it wants to jolt the eurozone out of its deflationary spiral and help push price growth back toward its 2% target. More stimulus measures would indirectly weaken the euro against the dollar and its other rivals, driving up the prices of imported goods.
Core prices grew at an annualized rate of just 0.7% in February, down from 1% a month earlier, and only slightly above its level from January 2015, before the ECB announced its program of monthly asset purchases.

Goldman’s economists have called for a 10 basis-point deposit-rate cut, and for the central bank to increase its monthly asset purchases by €10 billion. But Brooks believes the ECB will go even further — possibly cutting its deposit rate by 20 basis points or more while committing hundreds of billions of additional euros to its program of monthly asset purchases.
The Goldman team has stood by its call for the euro to hit parity with the dollar even as many other strategists have backed away from that view over the past six months.
Goldman’s current forecasts put the euro at 95 cents in 12 months.
Brooks said there was “a compelling case” for shorting the euro EURUSD, -0.2906%  ahead of the ECB’s December meeting even though the shared currency had already shed 3.5% of its value against the dollar during November.
But the ECB underdelivered, sparking a massive short squeeze in the euro. Shortly after, Brooks & Co. admitted that they badly misread the meeting.
But circumstances have changed since December, Brooks said. If the central bank wants to have a shot at reviving inflation, it will need to drastically expand its stimulus efforts.

US:EURUSD

1.0251.0501.0751.1001.1251.1501.175

“There is little doubt in our minds that the ECB wants to surprise this week, not just because of the inflation picture, but also because it disappointed in December, inadvertently tightening financial conditions materially,” Brooks said.
Brooks believes the eurozone’s persistently weak price growth is linked to labor-market reforms adopted by peripheral countries like Italy and Spain, as both sought to make their industries more competitive.
Wages fell as a result of the reforms, weighing on prices.
Brooks believes the ECB’s decision to hold back in December was meant as a repudiation of ECB President Mario Draghi’s “go it alone” style. This time, Brooks expects the governing council to find a consensus more easily.
“We know that rubbed a lot of governing council members the wrong way because they felt like he was trying to push them into another course of action,” Brooks said. “This time [Draghi] has kept a low profile, that way he can build a coalition and have more consensus.”

We’re Slaves to Central Bankers Admitted on Major Media Kudlow Report

Published on Jul 20, 2012

Even on a main stream news media they admit and let it slip by – perhaps because they want you to ACCEPT IT. Accept what? That “we are all slaves to central bankers” but we must only realize we are because we GAVE OUR POWER AWAY TO THEM and we can claim it right back right now. Use this to wake up to it and REMOVE ourselves from it and become change from within. Start first by voting with what you purchase. Take most of your money OUT of the banks and look into alternative community based open source currencies and barter systems. Don’t FEAR this – but feel enlivened that the time for true freedom has come. Central banks are controlling manipulative secret entities use this knowledge for YOUR empowerment! When you know what you don’t want – you know what you WANT.

 

This Is How Corruption Works: A Hillary Clinton Example

Eric Zuesse

Hillary Clinton approved the construction in South Africa of the world’s two largest coal-fired power-plants, and helped them get Export-Import Bank financing (U.S. taxpayer backing); then, some of her friends received construction contracts to build them.

This was revealed by Itai Vardi in a terrific investigative news report at the desmog blog, on March 7th. Here’s an abbreviated version of it, courtesy of that extraordinary fine news-site:

The plants – named Medupi and Kusile – were set to each emit a staggering 25 million tons of CO2 into the atmosphere a year. To help finance the Medupi plant, the South African government turned to The World Bank, requesting a $3.5 billion loan.

South Africa lobbied World Bank officials and sought to gain the support of the US government. A series of diplomatic cables from then-US ambassador to South Africa to Washington reveal a number of quiet efforts to persuade the US government to support the loan. The cables, released by Wikileaks, were written in the latter part of 2009 and early 2010, leading up to the decisive vote on the loan in April 2010. …

In late March 2010, … according to newly released Clinton emails, the South African foreign minister contacted the State Department requesting to speak with the Secretary on the phone. The emails state that the minister was specifically seeking the US government’s ‘support’ for the loan. …

Clinton said: … ‘this project is essential to deliver electricity – which I think our experts agree is right.’ …

Seven days later, The World Bank approved the huge loan. The United States, along with the UK and Holland, abstained during the vote. …

‘I am not going to give them points for abstaining. This was totally the easy way out,’ said Karen Ornstein of Friends of the Earth. ‘If the US were to follow its own clean coal guidance for multilateral development banks it would have had to vote no on this loan.’ …

To construct the Kusile coal plant, South Africa sought a different funding route, now eyeing private capital.

To this end, in 2010 Eskom solicited its main contractor for the plant, Kansas City-based infrastructure engineering and construction company Black & Veatch to apply for financing from the US Export-Import Bank (Ex-Im Bank). As an independent government agency, the bank invests in projects that guarantee the employment of American workers and suppliers.
In April 2011, the Ex-Im Bank approved the $850 million loan for the Kusile plant — again to the great dismay of environmentalists. The decision came despite more than 7,500 public comments in opposition to the project. Activists were baffled as to why the governmental bank approved the loan for the controversial project.

[PHOTO] Black & Veatch Director Parties with Hillary Clinton.

One of Black & Veatch’s directors, Harold (‘H.P.’) Goldfield, wears several other important hats.

A veteran Washington insider, Goldfield is a former Reagan-era administrator and ex-director at the Ex-Im Bank. He is currently the vice chair of Albright Stonebridge, the lobbying and advising firm of longtime Clintonite and former Secretary of State, Madeleine Albright. Goldfield is also a Senior International Affairs Advisor at the international law firm Hogan Lovells. One of the firm’s Partners, Howard Topaz, is Bill and Hillary Clinton’s personal tax advisor.
Seven months after the Ex-Im Bank approved Black & Veatch’s financing for the project, Hillary Clinton attended an exclusive 60^th birthday party thrown for H.P. Goldfield at the posh Hamptons home of investor George Hornig. In a photo from the party Clinton is seen in extremely good spirits, glowingly hugging a group that included Goldfield and former US ambassador and State Department official, Richard Haass. [Richard Haas subsequently became appointed to head the Wall-Street-funded Council on Foreign Relations.]

[PHOTO] “Image credit: Hamptons Magazine

The Albright Stonebridge Connection 

During the time Ex-Im Bank considered Black & Veatch’s request, Madeleine Albright’s daughter, Alice Albright served as the bank’s Executive Vice President and Chief Operating Officer.

The released Clinton emails show that at the time the bank was considering the Kusile loan, Clinton and Madeleine Albright maintained a close relationship. …

Two weeks prior to the bank’s deliberations, Albright sent a direct email to Clinton, suggesting she hire ‘Wendy.’

This presumably refers to Wendy Sherman, then Vice Chair at Albright Stonebridge – a title she shared at the firm with H.P. Goldfield – who later that year was appointed by Clinton to serve as Under Secretary for Political Affairs. Albright ended the message with ‘I’m off to Prague to research new book but always ready to talk. Love, Madeleine.’

According to an email from December 2011, Clinton and Albright met again, this time in Prague. Albright wrote, ‘Happy to help on whatever you need wherever and whenever.’ Six months later, Clinton’s schedule reveals she attended Madeleine Albright’s 75th birthday party at Alice Albright’s house.

Since the approval of the coal plants, several figures involved in the matter landed positions at Albright Stonebrige. Upon retiring form the Foreign Service in 2013, former Ambassador Don Gips was hired as Senior Counselor. Former State Department official Johnnie Carson, who was part of the Clinton team during South Africa’s lobbying for the World Bank loan, also became Senior Counselor for the firm.

Ex-Im Bank’s Ties to Hillary Clinton 

The Ex-Im Bank is headed by Fred Hochberg, a longtime Clinton family associate, financial contributor, and campaign bundler. Hochberg’s partner, Tom Healy, was nominated during Clinton’s tenure as Secretary to the Fulbright Foreign Scholarship Board, a State Department body. Between 2012-2014 Healy served as Chair of the Board.

Hillary’s emails during these years reveal her close connection to both Hochberg and Healy. In February 2012, one of Clinton’s daily schedules includes attending Hochberg’s 60th birthday party at the upscale DC dining spot, Sidra’s Home Restaurant.
A few months later Hochberg extended a personal invitation to Clinton to attend a friend’s book launch. Hochberg then sent a happy birthday wish to Hillary, signing with ‘Much love, Fred.’ Tom Healy sent his own personal birthday note that year, adding ‘I didn’t get to say hello in Haiti on Monday because the rain started and we rushed to the airport.’
In 2014, The Ex-Im Bank announced the appointment of new members to its Sub-Saharan Africa Advisory Committee. Former ambassador Gips, and Shahid Qadri, Black & Veatch’s Vice President and Regional Director Africa, were among them.

That carefully researched news-report, which was headlined “Hillary Clinton Showed Support, Associates Profited from Ex-Im Bank Financing World’s Largest Coal Plants in South Africa”, isn’t unusual for the best of all news-sources on environmental matters, the desmog blog. Vardi’s report there provides an indication as to why Secretary of State Clinton, unlike any other Secretary of State before or since, refused to use the government’s authorized and secure email system and its predecessors, the systems that were for official U.S. Government business (which was what has been disclosed here from her private email server all of this clearly was, though Hillary Clinton has stated many times she never used her private server for government business).

That reason is: she didn’t want voters (nor prosecutors) to be able to know how she transacts her corruption.

No wonder Wall Street loves her.

—————

Investigative historian Eric Zuesse is the author, most recently, of  They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of  CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.

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There's a 'gathering storm' in the global economy and central banks are running out of options

The Bank for International Settlements (BIS) — known as the central banks' central bank — is warning there's a "gathering storm" in the global economy, in part caused by governments around the world running out of monetary policy options.
In two separate notes, published March 6, BIS economists highlighted the fragile global economic backdrop and said negative interest rates could become a reality for many more countries as central banks search for ways to stoke real growth and battle issues like tumbling oil prices hitting the economy.
"The tension between the markets’ tranquility and the underlying economic vulnerabilities had to be resolved at some point," said BIS chief Claudio Borio. "In the recent quarter, we may have been witnessing the beginning of its resolution."
Related: You won't believe which countries will rule the world by 2030
"We may not be seeing isolated bolts from the blue, but the signs of a gathering storm that has been building for a long time."
© Rohan Kelly / Storm Front on Bondi BeachIn a report entitled "Uneasy calm gives way to turbulence," Borio warns that 2016 is off to a terrible start and it's really freaking out the central banks (emphasis ours):
The Federal Reserve's interest rate lift-off in December did little to disturb the uneasy calm that had reigned in financial markets in late 2015. But the new year had a turbulent start, featuring one of the worst stock market sell-offs since the financial crisis of 2008.
At first, markets focused on slowing growth in China and vulnerabilities in emerging market economies (EMEs) more broadly. Increased anxiety about global growth drove the price of oil and EME exchange rates sharply lower and fed a flight to safety into core bond markets. The turbulence spilled over to advanced economies (AEs), as flattening yield curves and widening credit spreads made investors ponder recessionary scenarios.
In a second phase, the deteriorating global backdrop and central bank actions nurtured market expectations of further reductions in interest rates and fuelled concerns over bank profitability. In late January, the Bank of Japan (BoJ) surprised markets with the introduction of negative interest rates, after the ECB had announced a possible review of its monetary policy stance and the Federal Reserve issued stress test guidance allowing for negative interest rates. On the back of poor bank earnings results, banks' equity prices fell well below the broader market, especially in Japan and the euro area. Credit spreads widened to a point where markets fretted about a first-time cancellation of coupon payments on contingent convertible bonds (CoCos) at major global banks.
Underlying some of the turbulence was market participants' growing concern over the dwindling options for policy support in the face of the weakening growth outlook. With fiscal space tight and structural policies largely dormant, central bank measures were seen to be approaching their limits.
The below chart from BIS neatly sums up just how bad 2016 is shaping up to be for the global economy.
© BIS 3charts3 The idea of "dwindling options" for central bankers is picked up by BIS economists Morten Linnemann Bech and Aytek Malkhozov who look at the effects of negative interest rate policies adopted by central banks recently — once seen as unthinkable but now necessary as the armory of monetary policy weapons gets sparser.
In a separate review entitled "How have central banks implemented negative policy rates?", the pair write that:
Since mid-2014, four central banks in Europe have moved their policy rates into negative territory.
These unconventional moves were by and large implemented within existing operational frameworks. Yet the modalities of implementation have important implications for the costs of holding central bank reserves.
The experience so far suggests that modestly negative policy rates transmit through to money markets and other interest rates for the most part in the same way that positive rates do. A key exception is retail deposit rates, which have remained insulated so far, and some mortgage rates, which have perversely increased. Looking ahead, there is great uncertainty about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period.
Negative interest rates are intended to encourage borrowing, discourage upward pressure on currencies, and help trade.
A handful of countries have already said goodbye to ZIRP (zero interest rate policies) and hello to NIRP (negative interest rate policies). The goal of negative rates is to deter institutions from storing cash in banks and to flush that cash out into alternative investments, spurring the economy, growth, and inflation.
© BIS negintrate2 However, while the Swedish government’s massive experiment with negative interest rates seems to actually be doing what it’s supposed to, according to the Riksbank monthly inflation report, which dropped on February 18, negative rates are having a much broader impact around the world.
© BIS BISnegintrate My colleague Ben Moshinsky pointed out in his analysis, "evidence that negative interest rates aren't working to stimulate global growth is getting hard to ignore."Bank of England Governor Mark Carney warned at a G20 meeting in Shanghai that, while negative rates might be an attractive way for an individual country to weaken their currency and boost exports, the world economy will suffer as a whole.
They help to push economic activity around the globe, but do nothing to boost it.

China plans to build more bases in several countries after Djibouti

The Chinese Defense Ministry said in last month that Beijing had started construction on the base in Djibouti.

On Tuesday, Chinese Foreign Minister Wang Yi says that China is planning to construct global “support facilities” in more countries, after starting to construct a logistics center in the African country of Djibouti.
He made the announcement during a news conference on the sidelines of an annual parliament meeting.

“We are willing to, in accordance with objective needs, respond to the wishes of host nations and in regions where China’s interests are concentrated, try out the construction of some infrastructure facilities and support abilities,” Wang Yi said.

The Chinese Defense Ministry said in last month that Beijing had started construction on the base in Djibouti, which is the southern entrance of the Red Sea on the route to the Suez Canal, also hosts American and French bases.
In his Tuesday remarks, Wang also described the South China Sea as one of the world’s safest and freest shipping lanes, which according to Beijing,  was the first to “explore, name, develop, and administer” islands in the region.
However, the South China Sea has become a source of tension between China, the US, and some regional countries seeking control of trade routes and mineral deposits.

The Total Collapse of Saudi Arabia is Fast Approaching

To the casual observer, Saudi Arabia might seem like an emboldened nation that is asserting itself. They’ve been challenging Iran, fighting rebels in Yemen, threatening to invade Syria, and if some rumors are to be believed, they are currently trying to attain nuclear missiles from Pakistan. However, these aren’t the actions of a stable nation that is asserting its dominance in the region. These are the flailing death throes of a nation that is struggling to hang on.
Ever since global oil prices started to plummet, Saudi Arabia just hasn’t been the same. That’s no surprise. Since prices fell, other oil rich nations have been hurting as well. Russia’s economy has been on the ropes, Canada is plummeting into a recession, and Venezuela is on the verge of total collapse. However, there probably isn’t any nation on Earth that is more reliant on oil than Saudi Arabia. If anyone is going to be destroyed by low oil prices, it’s the Saudis.
The crux of the matter is that this country is running out of money. It doesn’t look like it at first glance. They’ve only recently started to dip into their enormous savings, and their debt to GDP ratio is remarkably low. However, they are hemorrhaging money at an alarming rate. They’ve been flooding the market with cheap oil to drown out their competition (a dangerous gambit for a government that receives 80% of its revenue from oil) , and they’ve been fighting several expensive proxy wars with Iran, which are not going so well. The situation is so dire that the IMF expects them to run out of money within 5 years.
For most countries this wouldn’t be such a big deal. They would just go into debt and kick the can down the road until their financial system crumbled after many years. But the Saudi’s can’t do that. Their government and their society is structured in such a way that they can’t maintain anything with debt. The reason why is that they are not a traditional nation-state.

In fact, Saudi Arabia is no state at all. There are two ways to describe it: as a political enterprise with a clever but ultimately unsustainable business model, or so corrupt as to resemble in its functioning a vertically and horizontally integrated criminal organization. Either way, it can’t last. It’s past time U.S.decision-makers began planning for the collapse of the Saudi kingdom.
In recent conversations with military and other government personnel, we were startled at how startled they seemed at this prospect. Here’s the analysis they should be working through.
Understood one way, the Saudi king is CEO of a family business that converts oil into payoffs that buy political loyalty. They take two forms: cash handouts or commercial concessions for the increasingly numerous scions of the royal clan, and a modicum of public goods and employment opportunities for commoners.

Essentially, Saudi Arabia runs on institutionalized bribery. They need cold hard cash to keep the population in line, to keep the ever-growing royal family rich and happy, and to make sure everyone is doing their job. It’s not like what you see in most Western nations, where much of the population has a misplaced sense of civic duty. This system needs cash, and can’t survive on IOUs.
The elites in this society demand a life of perpetual luxury, and government handouts are the only thing keeping the oppressed masses from rebelling. Once they run out of money, everything will fall apart from the bottom up.
But the financial situation isn’t the only problem with the Saudi kingdom. Much of their budget is being burned up from fighting their war in Yemen, which they are losing badly. Dozens of their Blackwater Mercenaries were killed in a missile attack last month, the Yemeni rebels captured one of their military bases two weeks ago (within Saudi territory no less), and last week Yemeni forces managed to capture over a hundred Saudi soldiers.
This is a regime that rules with fear and oppression. How can they do that when their own military can’t beat an insurgency in their own backyard? When the handouts and bribes grind to a halt, and their population is sick and tired of being dominated by the Saudi family, how long do you suppose it will take for them to rebel?
And on top of all that, Saudi Arabia is faced with a severe water crisis. They’re heavily reliant on underground aquifers that aren’t renewable, and they use more water per person than in many Western nations (in fact, twice as much as the average person in the EU). They could run out of water in as little as 13 years. This has prompted the Saudi regime to start taxing water for the first time, partly due to the water crisis, and partly due to falling oil revenues.
As you can see, there are a lot of existential threats bearing down on Saudi Arabia. Their proxy wars with Iran are bleeding their coffers dry just as oil revenues have reached record lows, their oppressed population is restless, they can’t meet the demands of their gluttonous elites, and they’re facing a nationwide environmental disaster that could grind everything to a halt.
In short, one of America’s strongest allies in the Middle East and the linchpin of the petrodollar, is facing a complete collapse, and it may happen within a decade. This could lead to chaos in the Middle East, and would have huge ramifications for the global economy. And at the end of the day, there really isn’t anything that can be done to stop it.

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Contributed by Joshua Krause of The Daily Sheeple.
Joshua Krause is a reporter, writer and researcher at The Daily Sheeple. He was born and raised in the Bay Area and is a freelance writer and author. You can follow Joshua’s reports at Facebook or on his personal Twitter. Joshua’s website is Strange Danger .

Investors Buy Gold ETFs at Record Pace

by James Quinn

Courtesy of: Visual Capitalist

What were the three most popular investments over the last month?
If we’re judging by ETF inflows, the three areas that investors piled into were precious metals, government bonds, and low-volatility equities.
Notably, it was gold ETFs that set a new record with their highest monthly inflows in eight years, as investors bought $7.9 billion of securities in February. This is according to the latest from market data company Markit, that also noted that inflows relative to assets under management (AUM) were equally as impressive.
More specifically, last month’s buying represented an increase of 14.6% in terms of AUM. This is a level only surpassed once before during the heat of the Financial Crisis, when inflows relative to AUM hit 17.7% in February 2009.

Miners Get Some Love

Gold mining companies have also received some appreciation so far in 2016, with the Gold Miners (GDX) and Junior Gold Miners (GDXJ) benchmarks up 40.7% and 38.2% respectively YTD.
Despite outperforming gold so far on the year, the GDX hasn’t seen the same kind of inflows as the physical commodity. In fact, February saw $25 million of net outflows to the gold mining ETF.
This phenomenon isn’t uncommon in the gold sector, as the performance of the metal and the return on miners isn’t always congruent.
Here’s the latest GDX/Gold ratio, which essentially tracks the price of the major gold miners relative to the metal itself:

If the gold rally continues, there will be no shortage of opportunity for mining stock speculators. That’s why we gave you three reasons to consider gold in 2016 last month.

Federal Reserve Governor Has Made Three Separate Donations To Hillary Clinton

For the record.

According to Bloomberg, current Fed Governor Lael Brainard gave $750 in three contributions to Hillary Clinton’s campaign between November and January, according to Federal Election Commission records.

Notes Bloomberg, "Donations to a presidential candidate by a senior policy maker are unusual."

No other Fed governor has donated to a presidential candidate in this election cycle.

Brainard was an Obama administration appointee to a top Treasury post before she joined the Fed. She worked as the principal policy advisor to Treasury Secretary Geithner on international economic matters.

Brainard also was for a time Associate Professor of Applied Economics at the MIT Sloan School of Management,.She is a member of the Council on Foreign Relations, and Aspen Strategy Group.

Brainard's husband, Kurt Campbell, was formerly a top adviser to Clinton when she was secretary of state, serving as assistant secretary for east Asian and Pacific affairs.  He is the chairman and CEO of The Asia Group, LLC, which he founded in February 2013.

  -RW

Craig Hemke TFMetals Report: Demand For Physical Gold/Silver Will Break The System

 

The Speed With Which Cash, Safes And Guns Are Being Accumulated — And The Simultaneous Intensification Of The War On Cash — Imply That The Stress Is Building Rapidly, And That The Third Act May Be Coming Soon.

by John Rubino

The Bank For International Settlements just released a report stating that the spread of negative interest rates hasn’t caused the world to end. From this morning’s Bloomberg:

Negative Interest Rates Are Working Just Fine So Far: BIS

Negative interest-rate policies currently in use by central banks around the world have worked through their respective systems in much the same way as positive rates, though it’s not known how far below zero that would continue to be the case, the Bank for International Settlements said.In its quarterly report published Sunday, the Basel-based “central bank for central banks” said that “so far, zero has not proved to be a technically binding lower limit for central bank policy rates.”
The BIS’s verdict on negative rates gives backing to the European Central Bank, the Bank of Japan and others at a time when such unconventional methods are facing increasing criticism for their potential impact on the financial industry and currency markets. A sell-off in European bank stocks this year was partly driven by fears that further rate cuts by the ECB would damage profitability in a sector still recovering from the debt crisis.
“The experience so far suggests that modestly negative policy rates are transmitted to money-market rates in very much the same way as positive rates are,” report authors Morten Bech and Aytek Malkhozov said. “Anecdotal evidence suggests banks seek to avoid negative rates by either extending maturities or lending to riskier counterparties.”
The report also presented calculations of the average effective rate that banks pay on cash above the minimum requirements or exemptions at the ECB, the Swiss National Bank, the Riksbank and the Danish central bank, showing that a lower negative policy rate doesn’t necessarily translate into a more expensive proposition for lenders.

The BIS report does include some caveats along the lines of “it’s early in the process and there’s no way to know if more deeply negative rates will cause trouble.” Still, the idea that the system isn’t being stressed by today’s negative rates is belied by some trends that have gotten a fair bit of press lately. Consider:

The New Cash Hoarders

(Wall Street Journal) – Negative interest rates have the law-abiding scrambling for bills.Are Japan and Switzerland havens for terrorists and drug lords? High-denomination bills are in high demand in both places, a trend that some politicians claim is a sign of nefarious behavior. Yet the two countries boast some of the lowest crime rates in the world. The cash hoarders are ordinary citizens responding rationally to monetary policy.
The Swiss National Bank introduced negative interest rates in December 2014. The aim was to drive money out of banks and into the economy, but that only works to the extent that savers find attractive places to spend or invest their money.
With economic growth an anemic 1%, many Swiss withdrew cash from the bank and stashed it at home or in safe-deposit boxes. High-denomination notes are naturally preferred for this purpose, so circulation of 1,000-franc notes (worth about $1,010) rose 17% last year. They now account for 60% of all bills in circulation and are worth almost as much as Serbia’s GDP.
Japan, where banks pay infinitesimally low interest on deposits, is a similar story. Demand for the highest-denomination 10,000-yen notes rose 6.2% last year, the largest jump since 2002. But 10,000-yen notes are worth only about $88, so hiding places fill up fast. That explains why Japanese went on a safe-buying spree last month after the Bank of Japan announced negative interest rates on some reserves. Stores reported that sales of safes rose as much as 250%, and shares of safe-maker Secom spiked 5.3% in one week.

That academics and bureaucrats have responded by calling for the partial elimination of cash isn’t helping calm the masses. From the above Wall Street Journal article:

“In certain circles the 500 euro note is known as the ‘ Bin Laden,’” former U.S. Treasury SecretaryLarry Summers wrote last month in calling for a global ban on notes worth more than $50 or $100. He noted interest from European Central Bank President Mario Draghi and said that “if Europe moved, pressure could likely be brought on others, notably Switzerland.”
Fellow Harvard economist Kenneth Rogoff wants to retire cash altogether, primarily because “a significant fraction, particularly of large-denomination notes, appears to be used to facilitate tax evasion and illegal activity.” But he doesn’t hide the additional monetary-policy motive: “Getting rid of physical currency and replacing it with electronic money,” he wrote in 2014, would allow central bankers to set negative interest rates without people “bailing out into cash.”

On a different but related note, gun sales are up along with cash and safes. See Gun Sales Soar After Obama Calls for New Restrictions, which includes this fairly striking chart of Americans’ shift from rifles to handguns. The red line is handgun sales as a percentage of total sales. We’re clearly envisioning more up close and personal uses for our guns these days:

Similar trends are taking hold in Europe, where gun culture is not traditonally part of the mainstream.

German Gun Sales and Permit Applications Soar After Cologne Sex Attacks

(Breitbart) – Gun sales and gun permit applications have soared in Germany in the wake of the sex attacks in Cologne on New Years Eve. Cologne, Düsseldorf and Frankfurt are all reporting an influx of requests for permits with Cologne police estimating at least 304 applications since the attacks. In 2015 the entire year saw only 408 applications total in the city.Spokesman Andre Hartwich of the Düsseldorf police estimates at least eight to ten application requests per day, which if continued throughout the year would dwarf the previous year’s requests total of 1,500.
Ralph Pipe of the Frankfurt Police procedural office has said, “We have been beginning every day with at least 13 applications,” in comparison to last year in which there were only one or two applications per day.
Cologne police also mentioned that pepper spray is not covered under the Arms Act and does not require a permit or license. Sales of pepper spray in Germany have likewise increased and, as Breitbart London has reported, many vendors are even sold out.

This is all part of the same process, in which fiat currency printing presses lead to excessive debt and unwise foreign adventures, which lead to slowing growth, greater wealth inequality and geopolitical blowback, culminating in the kind of generalized mess that we see today.
People react to these uncertainties by trying to protect themselves with cash and guns, and governments respond by trying to limit citizens’ ability to do so.
If this play has a third act, it will involve the abolition of cash in some major countries, the rise of various kinds of black markets (silver coins, private-label cash, cryptocurrencies like bitcoin) that bypass traditional banking systems, and a surge in civil unrest, as all those guns are put to use.
The speed with which cash, safes and guns are being accumulated — and the simultaneous intensification of the war on cash — imply that the stress is building rapidly, and that the third act may be coming soon.