How Short on Cash Are European Banks? By Jason Galanis

By Jason Galanis

As European Central Bank leader Mario Draghi drags his feet over QE in the EU, analysts are coming to a consensus about the state of Europe’s lenders: they’re coming up short. I, Jason Galanis, am worried about this prospect.

Let’s be clear: many of Europe’s banks are loaded with cash, having amassed a hoard of it during the aftermath of the financial crisis. Even with all that extra “dry powder,” Europe’s banks are still not able to cover all the bad debts left on their books. The ECB has been investigating the over-extension of European bank capital since late 2013, and is set to publish its report cards for Europe’s lenders in mid-October. The report will no doubt make use the so-called “Texas ratio” to judge the health of its subjects.

Jason Galanis

Jason Galanis: “How short on cash are European banks?”

The Texas ratio was invented after the collapse of many of the Lone Star state’s lenders in the late 1980s and early 1980s after the weight of bad mortgage loans. The ratio tests whether banks have sufficient capital to cover bad loans and continue making new loans, and is a pretty effective determinant of success or failure in the long-run.

Draghi has fought hard against quantitative easing in the EU, saying that it is a weapon of last resort to prevent deflation. The ECB president has already taken some extreme measures to encourage lending, to no avail.

Europe’s banks seem to be preparing for a reckoning of bad debt. The first bank to start lending again could be the first taken under by bad old debts and capital shortfall. No matter what Mario Draghi does, no bank manager wants to be the first penguin to leap into an uncertain and frothy lending environment. Following October’s report, Draghi will either order the first round of QE, central bank purchases of bad assets, or new regulations and capital requirements to weed out the weak penguins. Let’s hope it won’t be a Red October.

England’s Rate Troubles by Jason Galanis

By Jason Galanis

England’s central bank is staring down an imminent increase in its rates after two leading Bank of England policymakers broke with their bosses and vote for an immediate rate hike. I, Jason Galanis, do not think this is a good sign.

Two members of the BoE’s Monetary Policy Committee, which meets every month to decide interest rates on the isle, voted for a .50% increase in the central bank’s interest rate. The vote sent waves of discontent through British stocks, with retailers and gold mining companies, which have benefited from an overvalued pound, taking the brunt of the hit. Bank stocks were up on the news, showing investors’ belief that Britain’s financial sector remains a good bet during uncertain times.

Jason Galanis

Jason Galanis: “Is the UK in the middle of a rate disaster?”

The British housing market has been heating up recently, lending weight to calls for a rate increase. Homeware manufacturers like Aga Rangemaster have seen their earning soar thanks to a roaring housing market, but once new homebuyers have settled in that sales run will likely taper sharply. Barclays Bank downgraded its outlook for the British retail sector following the defection of the two central bankers. A rate increase would exert downward pressure on consumer spending, which has become the foothold of the entire British economy. The forecast for wage growth in England is dismal, with some central bankers saying that stagnant wages are the way of the future. At the Jackson Hole conference of monetary policymakers, the Bank of England’s deputy governor Ben Broadbent warned that low wage growth was the new “established norm” for Britain.

Britain is starting down the same path the US has been on for the last three decades: zero wage-growth, low-interest rates spurring boom-and-bust credit cycles, and constant upwards pressure on prices while wage stay stagnant. Britons are understandably upset about this state of affairs, and some of the MPC’s more coherent members have signaled the alarm.

The Music Never Stops, the Pound Just Keeps Getting Stronger by Jason Galanis

By Jason Galanis

In the last year alone the British pound gained as much as 12% on the US dollar. While, I, Jason Galanis, believe a strong pound is great for consumers—important when services and retail account for 70% of the British economy—but the overvalued pound could be a sign of troubles ahead.

The UK economy is among the fastest-growing in the world, according to the IMF. England’s most recent growth spurt is largely thanks to a housing boom that has seen hundreds of thousands of new homeowners take on overpriced homes. An expected increase from the Bank of England has new homebuyers desperate to “lock-in” present rates, no matter the price tag on the doorknob.

Jason Galanis

Jason Galanis: “Is a strong British pound a cause for concern?”

Why is the pound appreciating? It’s certainly not due to exports, which account for a slim margin of the UK economy. And it’s definitely not interest rates, which have been held at record-low level of .5% for the last three years. The cracks are showing, however: at the most recent meeting of the Monetary Policy Committee, which sets the rates for Britain’s banks, two members voted for an increase, the first time the committee has failed to reach a unanimous consensus.

Inflation seems be under control: the Bank of England has certainly released enough money into the economy to make it a plausible threat, but little of that has trickled down in the form of higher wages. Britain’s growth is being fueled by a self-sustaining circle of debt and consumption in the retail and housing sectors. David Cameron’s government is pushing a manufacturing revival as the buoy of England’s economic future, but it’s hard to see how that rotted-out sector is supposed to make a comeback without a rate increase to make its products competitive abroad. When rates do increase the pound will surely depreciate, much to the relief of Britain’s exporters, who have been dogged by the strength of the pound.

Eurozone Deflation Imminent, EU Bond Yields at Lowest Level by Jason Galanis

By Jason Galanis

Yields on European government bonds have reached their lowest level, driven down by serious concerns about the risk of deflation in the eurozone. I, Jason Galanis, am worried about the impact this may have on the world economy.

European Central Bank President Mario Draghi has been berating Europe’s financial institutions to step up lending to counteract deflation; however, so far they have not complied, hesitant about making large loans while the euro remains overvalued. In June, Draghi cut the overnight deposit rate to negative territory to keep banks from using the ECB as a safety deposit box and to encourage them to lend. That unprecedented move was apparently not enough to stem the hoarding. At the Jackson Hole conference of monetary policymakers, Draghi shifted his focus away from the banks to the governments, endorsing a new round of tax cuts and public spending to beat back deflation.

Jason Galanis

Jason Galanis: “What kind of impact will Eurozone deflation have on the world economy?”

The drop signals investors’ belief that the euro is marked for deflation, and may also indicate a loosening of European corporations purse-strings. European corporations are sitting on a small treasure-trove of “dry powder,” or unused capital, and most of that has been safely stored in the form of European government bonds since the nadir of the financial crisis in 2009. The flight from bonds indicates these companies will either have to invest that “dry powder” or pay it out to their shareholders as dividends.

Economic sanctions on Russia have taken some of the blame for the recent fall in eurozone bonds yields. Sanctions on Russia are expected to reduce the EU’s GDP by nearly half a basis point this year, and more next year. Russian banks and investors are fairly significant holders of European bonds, and the fracas over the fate of eastern Ukraine has got them running for the exit doors of Europe’s economy like a burning building. There’s more to the story than the Russian sanctions: like a lot of other things recently, Russia has been taking the heat for a lot of things lately, but the sharp drop in eurozone bond yields reflects long-term dissatisfaction and a lack of confidence in the European economic recovery.

Digital Currencies In Plain Sight Of Consumer-Finance Regulator by Jason Galanis

By Jason Galanis

Digital currency is any form of currency that’s electronically created and, subsequently, stored, and I, Jason Galanis, believe it will at the center of much scrutiny over the ned few months.

These currencies are distinct from physical currencies like coins and banknotes, in that they’re completely digitized and often don’t have a ‘regulated’ or concrete value like tangible currency. Bitcoin, a popular cryptocurrency, is one of the best known digital currencies in the world.

Jason Galanis

Jason Galanis: ” Will digital currencies survive the new influx of regulation?”

But, even the best known digital currencies aren’t used by everyone around the world. In fact, these currencies are expected to undergo ‘extensive monitoring’ by the Consumer Financial Protection Bureau in light of various complaints made by people who have been subject to scams involving digital currencies.

The Consumer Financial Protection Bureau recently made a statement regarding that matter, which happened to be its first ‘official statement’ regarding the popularity of fledgling digital currencies. They stated that they will ‘use the complaints to help enforce federal consumer financial laws.’ They also said they will take ‘appropriate consumer protection policy steps in cases where they’re most appropriate.’

The CFPB’s recent statement shines a light on a big issue in the virtual currency community. Various companies, often those that offer to convert intangible currencies into tangible assets (like gold), have been scamming customers out of their virtual currencies in transactions. Occurrences like the aforementioned example have left state and federal regulators with the trouble of overseeing these currencies.

Virtual currencies pose various risks to consumers, some of which include a heightened risk of encountering hackers and scammers, volatile exchange rates and a lack of consumer assistance.

Although the CFPB outlined the risks, they do think digital currencies do have benefits, but consumers need to exercise caution when entering in what’s more or less the Wild West when engaging in the digital currency market.

Consumer Financial Protection Bureau and other regulators are currently finding ways to protect consumers in light of the digital currency market’s popularity. Until then, consumers need to exercise caution when using digital currency, such as Bitcoin, to handle transactions.

Are Self-Driving Cars a Risk? By Jason Galanis

By Jason Galanis

Self-driving cars are now a reality and I, Jason Galanis, wonder what a colossal impact the may have on our lives here very shortly.

In a future where cars drive us, individuals read daily papers again and ladies in red lipstick drive colossal SUVs, what will spare us from ourselves? Are self driving cars a risk or are they something that can actually help us through what we need them to do, or are we going to be better off if we can drive the cars on our own? What will the insurance for these look like, and will you need special coverage in order to get what you need in order to stay safe in a self-driving vehicle?

Jason Galanis

Jason Galanis: “How much impact will self-driving cars have on our daily lives in the next 2 years?”

There are, of course, a number of companies that are out there that are starting to ask these questions as well. One of the most amusing things that has come out of this is a commercial from a Dutch insurance company, where they ask “what will save us from ourselves?” once the self driving car becomes the standard instead of an oddity. You’ll have to check out the commercial to see exactly how witty they were with the whole thing, but it’s something that we all need to think about when it comes to this whole movement in technology.

It does raise the inquiry of how human drivers will respond to these cars. If they have been designed to drive safely, can humans interfere with that at all or are you stuck at the mercy of the self driving vehicle while you are in it? All the more essentially, by what means will they affect protection claims and premiums? If, for some reason, you ended up in an accident with another vehicle while in the self-driving vehicle, would the maker have the capacity to influence information against you in court, faulting everything for human error instead of the way that the car was made? All of these things are important to think about.

WTO’s Only Success in Twenty Years… Fails by Jason Galanis

By Jason Galanis

The World Trade Organization may have failed for the last time. I, Jason Galanis, believe that major political powers will not continue to deal with this level of failure.

Founded in 1995 with the goal of liberalizing world trade, the 160-member organization has become a vipers’ nest of divergent interests and thinly-veiled protectionism. The Trade Facilitation Agreement would have been the WTO’s first comprehensive initiative after twenty years of high-minded talk, now it is little more than paper following an Indian veto over concessions on farm subsidies and food stockpiles. The trade regulatory body is without purpose or power, and the United States, at least, is preparing to do business in a post-WTO world.

Jason Galanis

Jason Galanis: “How many more WTO failures will the international community put up with?”

American and European negotiators met in Brussels early this year to set the groundwork for the Trans-Atlantic Trade and Investment Partnership (TTIP), a comprehensive free-trade deal that would create common standards for everything from cars to kitchen tiles between the US and EU. Washington is also negotiating a Trans-Pacific Partnership (TTP) with a dozen countries along the Pacific Rim—just not China, which remains America’s largest trading partner. The US and China have been engaged in tit-for-tat exchange of tariffs and appeals to the WTO “courts” for the last three years, with no result except damaged relations.

Now, in the aftermath of the failed WTO agreement, the US is looking to cut its own trade deal with India on terms favorable to both. The American private sector is loathe to jump into the Indian market largely because of its culture of copyright infringement and lack of respect for intellectual property. By some estimates over 60% of the software running on Indian computers is pirated, and most of that was developed in the US. India, for its part, wants to protect its farmers and keep food prices low with subsidies and stockpiles which the WTO says are illegal under its rules. The make-believe of “global free trade” is over, and the world’s major economies are returning to one-on-one trade agreements that adequately reflect their interests.

Argentina Defaults ahead of a Global Credit Crunch by Jason Galanis

By Jason Galanis

The old adage says that the only sure thing in life is death and taxes. Well, I, Jason Galanis, believe you can also add Argentine defaulting on its debt obligation to that saying. History definitely has a way of repeating itself.

Argentina has failed to pay the interest on over $500 million of bonds, thanks to a US court ruling that the Latin American country must first pay off debt owed to US hedge funds which Argentina defaulted on back in 2001. Argentina has essentially defaulted, becoming the first nation to do so since Greece defaulted in 2012, triggering the Eurozone debt crisis. Standard & Poor’s and Moody’s gave Argentina’s bonds a negative rating on the news, raising the spectre of a run of claims by Argentina’s other creditors eager to get out while they still can.

Jason Galanis

Jason Galanis: “History definitely has a way of repeating itself, especially when it comes to Argentina’s debt woes.”

Now Argentina’s nearly half a billion dollars worth of bonds will be sold at auction, and trigger over a billion dollars worth of credit-default swaps, financial instruments meant to indemnify creditors in the event of a default. The value of the swaps exceeds the value of the debt itself, and Argentina’s finance minister is calling foul on “vicious speculators” seeking to make a profit by destroying Argentina’s credit standing. Argentina’s default could trigger additional claims by other bondholders and wreck its economy.

The Argentinian debt crisis highlights the fact that emerging markets are deeply in hock to US and European bondholders, and as US interest rates look to rise over the next year, the smart money is getting out of the subprime bond markets while the getting is good. The US Federal Reserve’s low interest rates have made it very easy for emerging markets to get hold of dollar-based credit over the last five years, and Argentina’s default may be a case of chickens coming home to roost. There will be more defaults and more credit-default swaps to come as bondholders seek to avoid getting “locked in” to low-interest rate bonds in an increasing interest-rate world. The end of easy credit is bad enough. Bondholders playing rough in order to collect while they can will make the looming credit crunch even worse for emerging markets.

Walls Start Closing In on US Tech Giants in China by Jason Galanis

By Jason Galanis

There is spy war budding between the US and China that is affecting commerce and threatening China’s place as the “factory of the world.” I, Jason Galanis, believe both sides are becoming more and more aggressive by the minute.

Apple and Microsoft have both felt Beijing’s wrath recently. Government officials raided Microsoft’s offices in China in late July, accusing the Redmond-based tech giant of anti-trust violations. It would be funny that a state-run dictatorship like China is accusing Microsoft of running a monopoly—that is, if the raids weren’t so ominous.

Jason Galanis

Jason Galanis: “The China & US trade war continues to evolve among top tech companies.”

At the root of the issue is China’s concern that technologies designed by US firms are being used by American intelligence agencies as backdoors into China’s network fortress. The “Great Firewall” of China censors internet traffic, muzzling critics of the regime and keeping the prying eyes of foreign spies off of much of what passes through Chinese computer networks. But within those walls are hundreds of millions of devices embedded with software that can easily be compromised by the NSA.

China is fighting back against the threat of US-designed devices. In 2012, the Chinese mobile phone manufacturer ZTE admitted to installing a backdoor on Android-based phones allowing anyone with a hardcoded password to seize control of the device.

The Chinese switch-and-router maker Huawei lost a huge chunk of its US market in 2013, following whispers by the NSA that its products were equipped with special backdoors for China’s security services. In June of this year, eBay and Amazon both simultaneously dropped their inventories of the mysterious Star N9500, a Chinese-made smartphone that sold for half the price of an iPhone, and relayed users’ personal data to servers in China, according to German computer security analysts. Just who manufactured the rooted phone was never discovered, but the Star N9500 was probably the brainchild of China’s infamous Ministry of Public Security.

As the European Union and United States seek to streamline trade and homogenize standards for cars and gadgets, China looks to be drifting away, creating it own private technological domain to match its great private internet. There is already a Chinese internet: why not a Chinese operating system and a Chinese smartphone to complete the set and close the country off from American surveillance for good? These are some the questions PSB officials appear to asking lately.

On the other side of the pond, the question is how far will American companies go to appease Beijing’s narrow political interests. The “Made in China” brand has been severely tarnished recently, and users cannot really trust that their Chinese-made gadgets haven’t been tampered with in some way or another. For the moment, at least, major US technology firms are too enamored with the vast Chinese market to take a stand against Beijing interfering with their products, which in the long run could very well cost them market share back at home.

Investing In Gold (Part 2) by Jason Galanis

By Jason Galanis

In the 1st Part of this investing in gold series, I, Jason Galanis, went into some of the merits of investing in gold. However, there is also a darker side.

A changing market and ‘gold standards’ have evolved the gold market. While it used to be relatively straightforward, it’s now a market subject to rising demand, somewhat rising supply and decreasing prices. As they say, the more something enters the market, the lower its prices get to meet demand.

One of the woes of gold investment is dealing with lower than usual prices. And, it also involves the woes of dealing with higher than usual prices. As you can see, the gold market is always changing to meet the demands of investors and speculators.

Recently, the gold market has changed to meet the demands of investors who want to hedge their funds and investments in light of recent events across Europe and Asia. In that context, gold would protect (hedge) those investments and funds from being affected from market depreciation and depletion in light of those events.

Jason Galanis

Jason Galanis: “Despite its appeal, there are many negative aspects of investing in gold.”

The more those investors traded and bought gold, the higher the price rose. As those investors sought ways to hedge their funds and investments, gold’s price rose to meet that demand. In other words, the value of gold rose to accommodate those market demands.

Of course, the price of gold also drops. It’ll probably drop again later this year, after all. Gold prices typically drop when there’s a surplus of gold around. That gold is usually utilized to meet a demand for gold products, especially in countries where gold products are revered. Though, in a world where gold mining is more or less winding down as a resource, gold prices realistically stabilize and don’t rise as much in value during ‘down’ periods.

The volatility of gold as an investment vehicle might not make the precious metal a sound investment choice. Though, if you do just want to reap short term returns, there’s nothing wrong with trying.