The decision by Austria and nine Balkan states to unilaterally choke off the flow of migrants across their borders has prompted fury in Berlin, which fears it could torpedo Chancellor Merkel’s drive for an EU-wide solution to the refugee crisis. The countries all restrict the number of refugees they will take. Merkel is furious but there is not a damn thing she can do about it.

….read more HERE

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.

Mark Leibovit: What the Smartest People Are Doing

When the financial system crashes either by its own weight or perhaps by actions of Russia, China or Islamic terrorism, think about what assets you want to own – a bank account? – a brokerage account? What if you are locked out? I’m holding my gold and adding all the way down. I would also suggest keeping a generous amount of cash, food, and firearms under the mattress as insurance. That is what the smartest people I know are doing.

….continue reading HERE

Jim Rogers Warns Its Time To Be Prepared

Eventually the market is just going to say to these central bankers, ‘enough is enough – we don’t want your garbage paper anymore.’

Then we’re going to have the real crisis.

….continue reading HERE

Kiss the Euro Goodbye …

It’s the grand experiments of harebrained politicians that are always the root cause of discontent. They endlessly tinker with the likes of you and me, with the economy, with things they don’t have a clue about …

Until the whole house of cards comes crashing down.

….continue reading HERE

Societe Generale is out with its latest quarterly chart of so-called swan risks that threaten to rock the global financial markets. For the most part, the risks remain unchanged from November.

SocGen analysts reiterated that the two highest-probability risks were a British exit from the eurozone, or Brexit, (45%) and an economic hard landing in China (30%). And with the Brexit specifically, there’s the potential economic ripple effect into the rest of Europe, which is already more politically divided than it has been in ages.

The one change from the firm’s most recent black swan chart is that the risk of a new global recession has increased to 20% from 10% in late 2015.

Notably, the size of the swan indicates how big of an impact a given risk would have should it come to be. So although out of the listed risks, SocGen thinks that a Brexit is the most likely to happen, it would not be the most impactful.

“Common to all these risks is the financial conditions component that has the potential to act as an amplifier, both in terms of the individual risks and in linking them together, making each more likely,” the SocGen team wrote.

It’s worth noting that, technically speaking, black-swan risks are by definition extremely unlikely and nearly impossible to predict. So it’s a bit of a contradiction to assign such high probabilities to any of these events. Nevertheless, when these events do materialize, it’s bad. SocGen’s swan chart is just trying to show that major economic and geopolitical risks are brewing that could cause serious problems should they ever come into fruition.

On the positive end, SocGen also points to three upside risks: stronger investment and trade; more fiscal accommodation; and the possibility of fast-track reform.

Check out all the stewing swans below.

The president of the German secret service, Hans-Georg Maassen, has come out and warned that the uncontrolled immigration has created a serious safety risk to Germany because the authorities no longer know who is in the country. If people think U.S. politics are going in the gutter, look at Germany where politicians have created a clash between polarized left and right-wing extremism. Maassen warned that an Islamist or right-wing attack in Germany could lead to an explosion of social unrest. Maassen has virtually shown that Merkel’s decisions have placed Germany at serious risk, but has also fueled the movement to end the Eurozone.

Merkel’s decision happened at the worst possible timing. As the European economy turns down further, the cost of the refugees will send taxes even higher. The civil unrest our model has been predicting is on schedule. It is linked to the economy and when that turns down, this cycle will turn up.