Monday, December 12, 2016

Will Italy kill the European Union?

The only real impact of Italy's referendum was the resignation of Italy's Prime Minister -- The Democratic party was the ONLY pro-European party left in parliament and with the departure of Renzi, it too may decide that Europe is not worth the trouble.

Europe could easily live without Greece, the Greek rescue plan really was the European banks and insurance company rescue plan, over the past 60 months, virtually all the debt that was owned to European banks, pension funds and insurance companies have been repaid at par with new loans from the European Central Bank -- quietly, the Europeans have nationalize a private debt burden at par, considering the health of Europe's bank this was the least the could do.

Italy is another problem entirely, nearly 12% of Europe's GDP, the second largest bond market it is a large economy that sits at the heart of Europe.

The Prime Minister's resignation means that elections will soon follow, and the topic of "interference in Italy's domestic affaires" is certain to be a topic during such elections, while the country tries to save its crumbling banking system.  Therefore the result of Italy's referendum pauses a grave threat to Europe survival as a political and economic entity;  The only solutions for Europe/Italy are the following 5 points (directly from the FT'sWolfgang Münchau)

He lists five ways the Eurozone can stay intact. However, none of them stands up to close scrutiny.


  1. Italy and Germany could converge. To do this, Italy would need to undertake economic reforms to clean up the justice system and the public administration, cut taxes and invest in productivity-increasing technologies. Germany would need to run a higher fiscal deficit.
  2. The northern European states accept large fiscal transfers to the south.
  3. The EU creates a federal political authority with powers to raise taxes in order to transfer income from high to low-income earners.
  4. The ECB finds a way to bankroll Italian public and private debt indefinitely.
  5. Italy’s government will forever continue to support euro membership.

Only one of those five conditions may be sufficient for Italy to remain a member of the euro. The problem is that each one is extremely improbable. And I cannot think of a sixth one,” says Münchau.

Mike Shedolck (He thought that Trump was going to win for months -- he was right and his comments are usually very good) said the following about "Point 5" [...] the consensus opinion is that Italy will not leave the Eurozone because the deck is stacked against that event.

The Italy won’t leave rationale looks like this:


  1. The Five Star Movement (M5S) would have to get into power, but the new technocrat government’s first mission is to rig the rules so that does not happen.
  2. Even if M5S wins the lower parliament, it still may not control the senate.
  3. Even if M5S takes complete control of parliament, it would have to change the constitution.
  4. Changing the constitution without a super majority would require a vote.
  5. The problem with the above thesis is there is only one party that wants to keep the Euro and coalitions will form if for no other reason than people are fed up.
According to Münchau:

"The next Italian prime minister will need to explain to the next German chancellor, presumably Angela Merkel, that her choice will not be between a political union or no political union, but between a political union or Italy’s withdrawal from the euro."
I am relatively certain that Germany is not ready for such a loss of power -- however, stranger things have happened in the past, the implication would be to make Europe's national parliaments subordinate the Brussel's will!  I find that hard to believe that ALL of Europe's members would agree to such a situation (something similar to what happened to Greece BTW)


As Shedlock once said:

"Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the “bail out” debt foisted on their country to be null and void. That person will be elected."

I've been told off a number of times for being too gloomy on Europe, Shedlock's last statement was written in 2011 -- he's still not right, but more an more of the problems surrounding the survival of the EU are becoming too large to simply ignore -- the death of Italy's banking system is a perfect example of this situation.  The solution require the approval of 27 National governments -- in some case (such as Canada's trade treaty with Europe) a small contingent within a nation can derail the agreement for completely unrelated reasons -- there are 27 countries here, each with their electorate, their politicians and their objectives.  Compare to this, hearding a 100 cats would be easy

Anyway, this is the last commentary until after the Christmas break -- so to all a Merry Christmas and a Happy New Year.


India's crazy solution to graft & Trump's cabinet picks

A few weeks ago, the Indian government decided that it would withdrawn all Rs500 and Rs 1,000 (respectively $7 and $15) as a means of combating graft in the country -- it turns out that that Modis' government had neither consulted the Ministry of Finance or the Central bBank of India.  The plan was to remove cash from society, the impact has been brutal.  There is simply no cash available in India!  Business are failing because nobody can pay, the idea would be that everyone would use electronic transfer for payment ensuring that graft cannot occur (as if!).  However, India's problem is somewhat different; nearly 600 million Indians don't have a bank account -- their entire life is cash based with little savings (a cow here and there).

BTW its the kind of crazy off the cuff solution I expect from Trump.  Last week he blasted the replacement of Air Force One -- already at 17 year old aircraft, getting on in age -- because its built of the frame of a B747-200 parts are increasingly hard to find.  This morning Trump discovered the F35 -- again this is a man who thinks the ultimate weapon is a $200 riffle (no don't think about it, riffles are a lot more expensive than that).  Modi's government was run by professional but still politicians who like to shoot from the hip.

Trump loves to shoot from the hip, this could be a problem.  He's manage the scare Europe and Germany in particular, piss of the Chinese, scare the Japanese and Korean that America will no longer be there for them to stop any madness from North Korea.

The new head of the NSA strongly believes in conspiracy theory -- including one where Clinton was running a pedofile ring out of DC pizzeria... the kind of guy who will se conspiracy everywhere and with a trigger fingered President.  Dr Strangelove is among us!

So far Congress is having a ball (wet dream actually) about their ability to repeal every social program that exists so that their paymaster can reduce federal taxes.  its already worked well at state level where some universities have seen their budget cut by 70% (Nevada).  America was already mean now its about to get dangerous, because people with no way out will strike out!

Congress' priority after January 20th:

1) Repeal Obamacare
2) Terminate Medicare Part D
3)  Replace Medicare with voucher system pegged to inflation
4)  Privatize Social Security
5)  Eliminate EPA/HUD and Department of Labour & Education
6)  Increase pressure on illegals to get out -- either through coercion of their employers or via stricter implementation of "crime" laws

The on reason "5" is there is that the guys who have been nominated run these departments have long said they should be eliminated -- they will see it as their mission to seem them all gone.

The one area where Trump will find conflict with Congress will be free trade -- The GOP's paymasters are not about to get that changed, they gain too much.  The other is the military that the GOP wants strengthen -- Trump bulks at the cost of F35s -- yet he wants to boost the navy back to 500 vessels (how much does he think these suckers cost?




The New New Economy -- Where theory goes to die!

Increasingly we are hearing stories about using big data into comprehensive working tools especially with the idea of AI (granted its more intelligent systems that the AI of Scify) will contribute to the world economy.

Already big data and intelligent systems are crowding out trading rooms at an unprecedented rates; why have expensive traders when a computer can do the job 24/7 at little cost. Bond desk have been decimated over the past decade, the same for F/x desk, and virtually all trading that is trough ETF is done via computer systems.

That's the easy part, now come the doctors and the lawyers -- already we are seeing the medical profession being overwhelmed with data, diagnosis was easier when the doctor had only 10/20 data points, but medical technology has come a long way, already the number of data points has increased by nearly an order of magnitude than what was available 10 years ago, lets assume you suddenly have 400 data-points, the human mind is unequipped to deal with so many variables. Suddenly the doctors are only used to write prescription and follow the computer's advise.

Lawyers are already in trouble drafting offering memorandums can be largely done by computer -- if you've ever tried to read these documents you know that 95% of these things are boilerplate -- with a few page of data.  How easy would it be to replace such high cost producers, the same for investment bankers.  Its not like these guys re-invent the wheel every day, they use tried and tested ideas.

Already, we have seen, via robotization, that blue collar jobs are disappearing at an alarming rate, new jobs are being created but at much lower salary points -- they require next to no skills because it has proven valuable for company to automatize the "skilled" portion of their production process.  Don't believe me, what do you think Carrier will be using the US$ 7 million windfall from the Indiana?  You got it, they will automatize process!

The world Western economic model is built on wealth creation, ideally where there's not too much disparity between all segments of the population (very rich people don't consume very much of their income), but now as the AI take over the world, lawyers and doctors and engineers will also face employment issues -- after-all designing a bridge is a simple process for a computer.  what happens as more and more of these profession disappear?

As an example the displacement of taxi drivers and of truck drivers that will certainly occur with the arrival of self driving cars, what about the car industry?  Currently the US consumes about 14 million new cars per annum, and most of these vehicle spend 90% of their life parked, you have self driving cars and the number of cars sold will fall, increasing car utilization from 10% to 40% should lead to a reduction in the sale of new cars by 75% -- its math!  Taxi will no longer require drivers and truckers will no longer be needed.

These all speak of major labor displacement and massive change in the economic system, because since the US system is based on consumption (70% of GDP) what will be left once people's income disappear?  All these doctors, lawyers, taxi and truck drivers will have no employment prospects -- obviously those at the top of the system will reap the benefit of the labor cost cuts, but for how long?

Some would say that the economy will adapt, probably true but for every new economic activity there will be an AI available that will doit better and more cheaply than a human.

The world's economy is simply not ready for this!  This is also true of economic theory...





Friday, December 2, 2016

Trump, Carrier and Tax breaks!

And so it has started!

Those in the know, now have a blueprint for getting government tax breaks -- with a bit of publicity added to the mix!

Of the 1,300 jobs that were saved the real number apparently is far lower.  The official number is now in the region of 600 -- once you remove the jobs that were never going to leave anyway.  Now I am very happy for the 600 who actually kept their job, the cost to Indiana's tax payers is at least $7 million -- and I understand that there are further goodies such as lower corporate taxes.

The blueprint is now for a company that wants to shift 5,000 jobs to Mexico/Vietnam (you get the picture) to announce 10,000 jobs being cut, and then wait for the government to give you your goodies bag, and then cut the 5,000 jobs you were going to eliminate anyway.  If you do it right you can even get a undertaking from Trump that he will not impose tariffs on your imported production.  The only looser is the tax payer, and considering Trump's objective of cutting off ACA, medicare and privatizing Social Security -- the blue collar guy who just kept his job just got a tax increase in his income, while taxes on dividends are slashed...

What a great country!