Minting Gold Coins: The Monies of ISIS

♠ Posted by Emmanuel in , at 8/31/2015 01:30:00 AM
Coming soon to an antiques dealer near you? Awaiting ISIS currency.
Recent gyrations in global markets have demonstrated to some observers the idea of gold as a safe haven doesn't hold. As investors the world over were gripped in fear, the price of the gold went...precisely nowhere fast. So much for seeking the safety of gold:
Gold is still well above the more than five-year closing low of $1,084 struck August 5 but the safe haven buying amid the panic on markets did not materialize to the extent many bulls had hoped. Georgette Boele of ABN Amro in a Thursday research note argues that gold did not enjoy a stronger rally because the weaker Chinese economic outlook "outweighed safe have demand."
To be fair to gold bugs, the current lack of inflationary pressures in the world economy also works against gold's role as a hedge against inflation. That said, you may be curious to find out that there are also rather more sinister forces out there who believe that precious metals provide a bulwark against the machinations of central bankers and other nefarious characters. For today's latest gold-loving conspiracy theorists, try ISIS:
Forget the printing press. In readying for the rollout of Islamic State’s new money, goldsmiths and silver smelters have been toiling away. The jihadist group on Saturday touted “the return of the gold dinar” in an hour-long video issued by its media wing, al Hayat. Islamic State’s policy-making Shura Council last year tasked its Beit al Mal, or treasury, with minting the coins, which come in several denominations made of gold, silver and copper.
 Death to America! Or is that the Federal Reserve to be precise?
The currency is meant to break the shackles of “the capitalist financial system of enslavement, underpinned by a piece of paper called the Federal Reserve dollar note,” the group said in the video. It didn’t explain where the coins were being minted, nor how they’ll be distributed or replace currencies circulating in the territory the group occupies in parts of Iraq and Syria.

Islamic State first announced its intention to issue its own money in November, five months after it seized the northern Iraqi city of Mosul and its leader Abu Bakr al-Baghdadi announced a caliphate. The move was seen by analysts as part of the group’s efforts to build the institutions of a functioning state.

The jihadists have amassed a war chest of millions of dollars, partly through collecting taxes, and by seizing oil refineries. Bank and jewelry store robberies, extortion, smuggling and kidnapping for ransom are other important sources of revenue for the group, which metes out brutal punishment to anyone who opposes its rule, including beheadings and crucifixions.
So, for weirdo collectors of currency, how do you obtain ISIS gold coins? That's a little trickier. After all, ISIS is classed not as a "state" but as a "terrorist organization" by the United States and others. As such, there are no legitimate "exchange rates" to speak of.
Minting the coins is relatively easy, Jameel said, as goldsmiths in Mosul imported machines from Italy in recent years, each one able to produce about 5,000 coins a day. The metals probably come from banks the group seized, ransoms, the homes of Christians and other minorities who fled, he said...

Each coin bears an inscription that reads, “The Islamic State, a caliphate based on the doctrine of prophecy.” The 1-dinar coin also shows seven stalks of wheat, which the group said is meant to represent “the blessing of spending in the path of Allah.” The five-dinar coin bears the image of a map of the world.

Oil, the group said in the video, will now only be sold for gold.
Ho-hum, add these folks to the very long list of dollar/America-haters. One thing you can be sure of is that ISIS won't be issuing passports, though. Still, there's a lot of (gruesome) novelty value with ISIS currency already...if you can find it.
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Novelty Acts: Western Hedge Funds in China

♠ Posted by Emmanuel in , at 8/28/2015 12:12:00 PM
Cushy whitefella hedge fund types are prolly right in avoiding possible PRC re-education for speculation.
As I write, I am listening to the debut album of Col. Bruce Hampton (Ret.) and the Aquarium Rescue Unit. Pop completists will know about this novelty act, whose musical chops did not get in the way of stage antics like having some guy mini-putt golf throughout the show. Antics aside, this is a well-drilled band, and live numbers such as "Yield Not to Temptation," "Working on a Building," and "Basically Frightened" are oddly apt for today's post. Sample lyrics: I'm basically frightened / Of politicians with no hobbies.

For, in modern-day China, we also find novelty acts. There, they're called "Western hedge funds" [ooh, exotic!] Given the control freak nature of the PRC leadership--nowhere else in the world will you see a government so gung-ho to prop up its stock markets for a military parade--it's odd that these folks would be allowed to operate at all when they will use nearly every tactic to eke out gain even if market stability suffers. China's leaders don't like volatility, nossir--especially at the hands of Western financialist-evildoers.
   
But, like the Aquarium Rescue Unit, the remarkable thing is that Western hedge funds do exist in China--albeit in a hush-hush, uneasy situation. Enter the QDLP scheme:
Almost two years after the Shanghai launch of the Qualified Domestic Limited Partnership – a pilot programme that gives foreign hedge funds access to China – the rules are unclear to many in the industry. Effie Vasilopoulos, a partner at the Hong Kong office of law firm Sidley Austin, said Chinese regulators never officially invited hedge fund managers to participate, and did not release the rules that applied to the QDLP programme or the names of participants.
Who are these guys...and what do they do in China, exactly? You will have to dig deep to find out:
The names of participants did not surface until they had filed applications for feeder hedge funds that raise assets in China for investment into offshore hedge funds, and they were only found by those who knew where to look. Oaktree Capital filed such an application for a feeder hedge fund at the end of July, becoming the fifth one to emerge with a fund. It was one of six that had been hand-picked by Chinese regulators to participate in the first round of QDLP. Canyon Partners, Citadel, Man Group and Och-Ziff Management all launched their products earlier in 2015, leaving only Winton Capital with no fund under the QDLP.
Many question why you should even bother setting up shop in China when there are few potential investors in hedge funds...
Kurt Ersoy, the chief executive of Segantii Capital Management, which is based in Hong Kong and manages one of Asia’s largest hedge funds, the Segantii Asia Pacific Equity Multi-Strategy fund, said he had not considered QDLP for asset raising. “Looking at the headlines, it seems to be the case that assets are harder to raise than expected,” he added.

Vasilopoulos said: “It is not a product that the market is familiar with. It took perhaps longer than the government expected for the market to get to know these products, to embrace them.” Hedge fund managers themselves have been reluctant to discuss their progress under the QDLP, and still less has been heard from the authorities in Shenzhen and Qingdao.
...and, this being control freak China, there is a whole lot you can't do whether tacitly or explicitly stated:
But some typical hedge fund tactics might not go down well. Chinese hedge funds, locally known as “sunshine funds”, face restrictions on short selling, margin financing, how they can trade futures and commodities and how they can use derivatives to hedge their exposure. Vasilopoulos said this was still a “major problem” for hedge funds, but added that the arrival of sophisticated foreign hedge funds could prompt Chinese regulators to revise their rules on financial instruments.
The thought of hedge fund managers being sent to prison or, heaven forbid, re-education camps is what comes to mind. After all, what worse enemies of the people can you think of than running dogs of capitalism threatening to undermine China's self-styled harmonious society? If you like financial adventurism, though, there is much to recommend a career being a hedge fund manager in China.
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Hong Kong's Stocks: Now Cheaper Than Pakistan's

♠ Posted by Emmanuel in , at 8/27/2015 12:51:00 PM
Islamabad or bust: HK stocks can now be bought more cheaply than Pakistan's.
Having a powerful economy in your orbit, Big Brother style, has its benefits and drawbacks. For the longest time, the Hong Kong Stock Exchange (HKSE) has benefited from riding China's slipstream: Late last year, mainland China overtook Japan in terms of market capitalization to become the second-largest stock market in the world. Then, with the Chinese stock market gathering momentum, Hong Kong's was poised to become the third largest stock exchange after the mainland's.

However, you know what has transpired since: the PRC-inflated stock market bubble has popped to dramatic effect, causing turmoil in financial markets the world over. Nowhere has this turmoil been felt more than in Hong Kong. After being tipped to overtake Japan, Hong Kong's stock market has dropped so much that its average price-to-earnings (P/E) ratio has fallen below that of, er, Pakistan. You read that right--Pakistan of chronic Taliban insurgency, political instability, and balance of payments crises:
The benchmark gauge for $4.3 trillion of shares was valued at 9.8 times reported earnings on Thursday, a 44 percent discount to the MSCI All-Country World Index. That’s the cheapest level among developed markets worldwide and compares with a multiple of 10.2 for Pakistan’s KSE 100 Index. Russia’s Micex has the lowest valuation among major markets, trading at about 9.5 times profits.
Partly, the low valuations are due to the  HKSE being loaded with financial stocks that don't trade at exceptionally high P/E ratios unlike, say, technology or biotech stocks:
“This is really the time to buy from a long-term investor’s perspective,” said Rahul Chadha, co-chief investment officer at Mirae Asset Global Investments in Hong Kong. “You’re not seeing a hard landing in China. In the next couple of quarters as you see the economy stabilize at lower levels, people will take a fresh look at the market.”

The Hang Seng measure’s 46 percent weighting in financial stocks, which tend to trade at low price-to-earnings ratios, may make the market appear cheaper than it really is. While China Construction Bank Corp. is valued at 5.3 times earnings as of Thursday in Hong Kong, the median multiple of shares on the city’s exchange is 11.5. That’s 17 percent higher than the index.
What more can I add? Mainland China giveth; mainland China taketh away. One day your market capitalization is about to exceed Japan's, stock the next day your stocks are priced more cheaply than Pakistan's.
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You Pretend to Work, Putin Pretends to Pay You

♠ Posted by Emmanuel in , at 8/25/2015 01:30:00 AM
The "resilient" Russian job market.
The self-deprecating joke among the lumpenproletariat in the USSR near its end was that they pretended to work, while the Soviet Union pretended to pay them. I suppose that not much has changed with the supposed end of the Communist era: as oil and commodities prices have fallen, so too have the fortunes of today's Russia. Then, as now, there remains an urge to put on a brave face in front of the [insert your choice of usually foreign villains here] who are blamed for its misfortunes.

Hence the curious case of rosy employment figures in today's Russia amid a commodities bust:
Soviet workers knew they got a raw deal, and they played along. “We pretend to work, and they pretend to pay us,” went a popular saying. About a million job gains into Russia’s recession, the bargain still holds, with salaries plunging at a pace unprecedented under President Vladimir Putin. Data set to be released this week will probably show unemployment holding at less than half the rate in the euro region, which has had nine consecutive quarters of growth. It’s a sign of a tacit deal that has ravaged productivity and limited economic flexibility.
The way to buoy Russian employment figures is to disguise underemployment, abetted by some of the toughest laws for letting workers go:
With Russia in the clutches of an economic crisis as domestic demand implodes after a currency collapse and sanctions over Ukraine, the jobless rate is less than it was before the neighboring country’s conflict erupted last year. Instead of easing the consumer plight, the stretched labor market betrays an economy geared toward ensuring social stability and ill-prepared to meet the challenges of an aging and shrinking workforce, content to punt the issue until the next crisis. “Choosing between radical reforms and stability, the government will favor stability,” said Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow. “That’s a Soviet-like choice--to conserve the current system with its problems, though to provide stability.”

During communism, unemployment was all but outlawed. What Putin has now are some of Europe’s most restrictive labor rules and employers still stinging from the dressing-down received for idling plants during the last recession six year ago. Protections against firing individual workers are among the strictest in Europe, according to the Organization for Economic Cooperation and Development.
The resulting resilience of the labor market is doing little to make up for a plunge in people’s spending power, reinforcing vulnerabilities that include the lowest productivity in Europe. Employers are opting for salary cuts, part-time work and unpaid vacations.

During the crisis in 2008-2009, unemployment peaked at 9.4 percent. While it has now risen from a record low of 4.8 percent a year ago, the effect is less dramatic. The rate grew to 5.5 percent in July from 5.4 percent a month earlier, according to the median of 18 estimates in a Bloomberg survey. The statistics office may report the data on Wednesday.
I guess old habits die hard. The hammer and sickle never really went away. 
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Meet the New S&P 500 Catholic Values Index

♠ Posted by Emmanuel in , at 8/23/2015 09:40:00 PM
Is Catholic capitalism an oxymoron? Let the fund managers and investors decide.
Ah, more of the economics of popery. Lovely stuff to contemplate, methinks. Despite being Catholic, I am not entirely sure what the religion's impact is on the wider world. For instance, Pope Francis' recent economically- and environmentally-focused encyclical has largely fallen upon deaf ears in the United States--even those who are Catholic:
Pope Francis released a 180-page indictment of capitalism and climate change that has fallen, for the most part, on deaf ears in the U.S. Just 31 percent of Americans know that the pope has made fights against global warming and poverty top issues, according to a national poll conducted by the Associated Press, the University of Chicago, and Yale University. Catholics reported familiarity with Pope Francis’s agenda in slightly larger numbers—40 percent—but a majority of the faithful remain unaware of the pontiff’s high-profile issues. His policy on climate change was released with great fanfare in June.

The new poll begins to answer some questions—posed by those paying attention, at least during the yearlong runup to the release of Laudato Si’, or “Praise Be to You,” the pope’s encyclical letter to bishops. Observers have puzzled over how effective, or even willing, the pope’s front-line personnel would be at propagating his message. Would dioceses actually put the document before parishioners? Turns out not many have, at least not yet. Just 37 percent of U.S. Catholics who went to church in late June and July heard the encyclical mentioned, compared with 12 percent of other Christians, according to the poll.
No matter; here's another entry in the mammon 'n' religion sweepstakes. You have undoubtedly heard of socially responsible investing, or putting your hard-earned money to work in companies that treat people, the environment and so on right by prioritizing corporate social responsibility. In the ever-widening market for ethical funds, here comes your latest entry: the S&P Catholic Values Index that evaluates companies by their adherence to the US Conference of Catholic Bishops socially responsible investment guidelines. What follows is the press blurb:

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S&P Dow Jones Indices (S&P DJI), one of the world's leading providers of financial market indices, announced the launch of the S&P 500® Catholic Values Index which is designed to include the companies within the S&P 500 whose business practices adhere to the Socially Responsible Investment Guidelines as outlined by the United States Conference of Catholic Bishops (US CCB) and exclude those that do not. The Index has been licensed to Global X for product development. 
The S&P 500 Catholic Values Index is the first Catholic index based on such a prominent benchmark as the S&P 500. Constituents are screened to exclude companies who are involved in the following activities that are perceived to be inconsistent with Catholic values as set out by the US CCB, such as:
  • Biological weapons, chemical weapons, cluster bombs, landmines
  • Nuclear weapons – any exposure to whole systems and strategic par
  • Conventional Military sales – companies that have their primary business activity as military products
  • Child labor employment in the company's operation or in supply chain
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I am sure that tobacco and (fossil fuel-based) energy also take their lumps. The real questions are, however, [a] whether funds pop up that match their placements to this index and [b] if there are investors out there who would be interested in placing their money in such funds.
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Depreciating Currencies: What Follows Kazakh Tenge?

♠ Posted by Emmanuel in at 8/21/2015 01:30:00 AM
Another commodity currency under pressure: the Kazakh tenge.
Are we having an Asian financial crisis flashback? It certainly seems so to me with emerging markets being rocked on an almost-daily basis. We certainly look to have the ingredients in place: falling stocks, falling currencies, and falling bonds. The Chinese giving in to the temptations of depreciation--something it didn't do during the aforementioned Asian financial crisis--may be exacerbating matters.

So, who's next in line? Of all countries, Kazakhstan devalued  its tenge just yesterday, adding to the negative sentiment on minor currencies.  Or, in foreign exchange-speak, "exotic" currencies which are not traded in large volumes in international markets. For a long time, Kazakhstan tried to limit currency movements in a narrow band--like China. Then, all of a sudden, it gave up and let its currency float freely, subsequently falling 23%. First, a bit more on Kazakhstan's action:
On most days, Kazakhstan finds itself in the backwaters of financial markets. Yet, it’s this central Asian nation that has delivered the latest shock to global currency trading.

Thursday’s 23 percent plunge in the tenge after Kazakhstan abandoned control of its exchange rate revealed a sense of urgency among policy makers: they had tried a managed depreciation just a day earlier. The escalation signaled to investors that it has become too costly for developing nations to defend their currencies. Vietnam also devalued the dong, while freely traded currencies such the South African rand and Turkey’s lira extended losses.
And now for the longer list of candidates--11 to be exact:
  1. Saudi Arabia’s riyal: Armed with $672 billion in foreign reserves, Saudi Arabia, the world’s largest oil exporter, has enough capacity to hold the peg, according to Deutsche Bank AG. Nonetheless, speculators are betting on a break of the currency regime as crude oil tumbled to a seven-year low. The forwards, contracts used by traders to bet on or hedge against future price moves, fell to the weakest since 2003, implying about a 1 percent decline in the riyal over the next 12 months.
  2. Turkmenistan’s manat: This oil-exporting nation with close economic ties to Russia devalued its currency by 19 percent in January. Stockholm-based SEB AB forecasts a further weakening of as much as 20 percent in the next six months.
  3. Tajikistan’s somoni: The nation has close ties with Kazakhstan, which accounts for about 11 percent of trade, and SEB expects a depreciation of 10 to 20 percent.
  4. Armenia’s dram: The currency has lost 15 percent in the past 12 months, compared with a 46 percent drop in the ruble. A quarter of the country’s trade is with Russia.
  5. Kyrgyzstan’s som: The weaker tenge will put pressure the som because of this country’s ties to Kazakhstan, according to BMI Research.
  6. Egypt’s pound: The country has limited investors’ access to foreign currencies amid a shortage since the 2011 Arab Spring protests. Traders are betting the pound will weaken about 22 percent in a year, according to 12-month non-deliverable forwards.
  7. Turkey’s lira: It’s one of the world’s worst-performing currencies since China’s devaluation on Aug. 11. An escalation in political violence and the probability of early elections compound the issues.
  8. Nigeria’s naira: Policy makers in this oil-exporting nation are trying to hold the currency at a level most see as too high. Trading in forwards indicate the currency will fall more than 20 percent against the dollar over the next year.
  9. Ghana’s cedi: Also an oil exporter, though its main problems are mainly fiscal imbalances, rising inflation and increasing debt.
  10. Zambia’s kwacha: The country is heavily exposed to China as copper accounts for about 70 percent of exports.
  11. Malaysia’s ringgit: The currency slid to a 17-year low on Thursday and foreign-exchange reserves fell below the $100 billion mark for the first time since 2010.
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Lose $51B? No Big Deal for Swiss Central Bank

♠ Posted by Emmanuel in , at 8/20/2015 01:30:00 AM
Buy euros (EUR) and sell Swiss francs (CHF): that was what the Swiss National Bank (SNB) was doing until early this year when the cost of keeping Swiss exports competitive vis-a-vis those of Europe by effectively pegging CHF to EUR became unsustainably high. Hence, when Switzerland's central bank stopped pushing down the value of the franc to match the euro, the result was a massive loss on its accumulated foreign exchange--mostly euro--holdings.

But how much was the loss? Try $51B for size. Even for a wealthy--albeit rather small--country like Switzerland, that's nothing to sneeze at. Still, the effects of such a loss on monetary policy are limited since its economic situation remains largely the same: an overly strong CHF would dent export performance compared to its devalued European competition:
Losing 50 billion francs ($51 billion) in half a year might seem like a big deal, unless you're the Swiss National Bank. For the majority of economists in Bloomberg's monthly survey — 15 of 23 — the record shortfall reported last month doesn't matter for SNB policy. That still leaves a sizable group in the other camp; one concern is that such a loss could make it harder for President Thomas Jordan to push back against any market pressure on the franc with interventions.

The SNB has already cut its deposit rate far below zero — charging banks to hold their money — and built up hundreds of billions of francs in reserves, by defending a currency cap until January this year and now through occasional forays into the market. If losses mount, investors could start to buy francs to a greater degree if they question the SNB's firepower.
So, it's a market test for Swiss intervention capabilities. That said, there's little choice other than tho pursue open-market operations (AKA intervention) after monetary policy tools have been exhausted:
The loss "limits the credibility of the SNB to pursue a monetary policy that might come with short term financial losses," Bank J. Safra Sarasin Ltd Chief Economist Karsten Junius said. "Unlimited foreign-currency interventions are therefore not credible as markets would regard them as unsustainable..."

According to the survey, the SNB has limited room left on the interest-rate front to keep the franc in check, meaning interventions are likely to retain their importance. The SNB can take its deposit rate, currently at minus 0.75 percent, to minus 1.25 percent, according to the survey...

"From a monetary point of view, the loss does not matter," said Maxime Botteron, economist at Credit Suisse Group AG. "The SNB can still operate with negative equity."
Central banking in an age of deflation may not seem as fun as it seems. I too would like to give negative deposit rates, but a $51B loss remains hard to swallow no matter who you are. 
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The Devil Buys Prada in Brazil Where It's Cheaper

♠ Posted by Emmanuel in , at 8/18/2015 03:44:00 PM
Prada é mais barato em São Paulo.
Arbitrage in buying luxury goods worldwide is something of an interest of mine--and a global hobby for the well-to-do shopper. Where's the least-expensive option for buying the latest in-demand fashion goods? Chinese mainlanders go to Hong Kong to take advantage of cheaper luxury goods there due to lower duties and taxes. How about in the Americas, though? Apparently, something similar is going on right now as discerning American luxury buyers flock to Brazil of all places to take advantage of the latter's weakening economy, which has resulted in cheaper luxury goods.

But wait a minute, you say: Shouldn't a weaker Brazilian real result in more rather than less expensive imported luxury goods? Well, not quite in this case:
Cartier and Louis Vuitton, those global symbols of opulence, suddenly look like bargains in one of the world’s economic trouble spots: Brazil. Because of a plunge in the value of Brazil’s currency, the real, many marquee-name luxury products are now cheaper in Sao Paulo than they are in New York.
The key thing is that luxury item sellers in Brazil are temporarily tolerating smaller profit margins given higher import and sales taxes.They will eat those for now. So, the net result for now is that it's cheaper to buy name-brand luxury items in Brazil than in New York:
The disparity provides another example -- albeit a rarefied one -- of how the collapse in the real is rippling through the nation’s economy. Prices of many imports, from mobile phones to wine, have surged because of the weak real, adding to economic angst as Brazil heads for its worst recession in a quarter century.

But many high-end items have actually gotten cheaper in dollar terms because of a quirk of the luxury-goods industry. Louis Vuitton, Prada and many others don’t adjust prices very often, and many tolerate narrower profit margins in Brazil to partially offset high import levies and sales taxes. “It’s truly a momentary phenomenon,” said Nadya Hamad, the manager of a Louboutin shoe store at the JK Iguatemi mall in Sao Paulo. “We used to get complaints about how much more expensive things were here. Now our customers are coming in saying how much cheaper it is.”
How much cheaper is it in Sao Paolo than in New York? More comparable items come out costing less in the South American megacity:
How much cheaper? A tour of a few malls found that among almost two dozen high-end items, 19 are cheaper here than in New York, based on Thursday’s exchange rate. Savings ranged from a few dollars to about $1,000 on a pair of Louboutin crystal-encrusted New Very Riche Strass stilettos. Other bargains included Ferragamo ties, Tiffany watches, Prada wallets and Louis Vuitton purses.
So, head to Brazil for the beaches, the nightlife, the upcoming Olympics and, if you can't wait until next year, the luxury shopping. Tell the Brazilian boutiques that Emmanuel of the IPE Zone sent you (dahling), although I can only guess what their reaction will be.
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PRC Sells $180B in US Treasuries; Nearly Nobody Notices

♠ Posted by Emmanuel in at 8/16/2015 04:50:00 PM
They have trillions worth of these IOUs out there nowadays.
About a decade ago, there was all this talk about a "balance of financial terror" coined by former US Treasury Secretary Lawrence Summers. According to this story, export-led Asian countries like China and Japan had no choice but to keep buying dollar-denominated assets since doing otherwise would result in the devaluation of their currencies and their loss of competitiveness. What's more, they couldn't readily "dump" US treasuries since doing so would only result in large losses on their existing holdings of $ assets.

Quoting Summers circa 2004 (when the world was young):
It is true and can be argued forcefully that the incentive for Japan or China to dump treasury bills at a rapid rate is not very strong, given the consequences that it would have for their own economies. That is a powerful argument, and it is a reason a prudent person would avoid immediate concern. But it surely cannot be prudent for us as a country to rely on a kind of balance of financial terror to hold back reserve sales that would threaten our stability.
Fast forward to 2015 and we find out that China has sold a hefty $180 billion in the space of a few months--much more than the holdings of all but a few countries--and the financial markets have hardly noticed. Indeed, bond yields have even deceased as of late as their prices have gone up (bond prices and yields move inversely):
To get a sense of how robust demand is for U.S. Treasuries, consider that China has reduced its holdings by about $180 billion and the market barely reacted.

Benchmark 10-year yields fell 0.6 percentage point even though the largest foreign holder of U.S. debt pared its stake between March 2014 and May of this year, based on the most recent data available from the Treasury Department. That’s not the doomsday scenario portrayed by those who said the size of the holdings -- which peaked at $1.65 trillion in 2014 -- would leave the U.S. vulnerable to China’s whims.

Instead, other sources of demand are filling the void. Regulations designed to prevent another financial crisis have caused banks and similar firms to stockpile highly rated assets. Also, mutual funds have been scooping up government debt, flush with cash from savers who are wary of stocks and want an alternative to bank deposits that pay almost nothing.

It all adds up to a market in fine fettle as the Federal Reserve moves closer to raising interest rates as soon as next month. “China may be stepping away, but there is such a deep and broad buyer base for Treasuries, particularly when you have times of uncertainty,” Brandon Swensen, the co-head of U.S. fixed-income at RBC Global Asset Management, which oversees $35 billion, said from Minneapolis.
I am not among those who believe China, and its Treasury holdings, don't matter. To you and me $180B is a colossal sum that boggles the mind. In the larger scheme of things, though, it's less than a seventh or so of the PRC's holdings. What would really cause turmoil is if not only the PRC but also major holders like Japan sold off simultaneously...and folks noticed. As believed so long ago, the trigger would be a massive loss in confidence in the US, most likely by piling on too much debt too rapidly.

Although many are sanguine that won't happen, another financial crisis on the same scale as the last one may just do the trick.
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The World Map According to Market Capitalization

♠ Posted by Emmanuel in at 8/14/2015 05:02:00 PM
The world according to shares market capitalization.

There's good stuff at MarketWatch on how the world would look like if countries were re-sized according to their total stock market capitalization. As with most things, though, there are measurement issues involved with the presentation above. China's A-shares or those which cannot be owned by foreigners are not included, making the mainland appear far smaller than its actual market capitalization if these local-only shares were to be considered as well:
Bank of America Merrill Lynch this month published a report transforming many of their investment themes into maps. One of note is what the world would look like if sized by market capitalization. The U.S. is still looking like the U.S. — and Japan is pretty hefty — but where did China go? And how is Hong Kong bigger than the mainland?

Some readers have noted that China looks unusually small — that’s because the methodology here is to use MSCI’s numbers. The index provider still keeps out the so-called A-shares from inclusion in its indexes, for reasons including capital mobility. Were the A-shares included, even after the rout in that country, the market cap of China would swell by tenfold...

The U.S. market capitalization is $19.8 trillion, or 52% of world market cap, which the brokerage says is the highest since the 1980s.
In financial markets at least, the United States remains the preponderant power. It's something to think about in the year 2015. 
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If Yuan Blood, You Got Yuan Devaluation

♠ Posted by Emmanuel in , at 8/12/2015 08:50:00 PM
1978-vintage AC/DC explains PRC currency moves.
Similar to the Swiss unpegging the franc from the euro earlier this year, the Chinese have surprised world markets by allowing their currency the yuan to devalue against the dollar after limiting its movements in recent years.  Yes, the Chinese economy has been moribund as demonstrated by the 8.1% drop in July exports, but market participants did not really expect such a drastic move since the PRC wanted to make the yuan more of an international reserve currency, and such drastic moves would generally discourage holding it. After all, why hold a depreciating yuan be considered a reserve asset? The PRC had stood by while others adopted easy money policies.

The initial move was announced on Tuesday. What's odd to me about that move is that stock markets around the world reacted so violently to China confirming what we already knew: its economy was slowing significantly and needed a boost of some sort. It devalued by nearly 2% and the People's Bank of China (PBoC) characterized it as a "one-off" that was to be followed anyway by more market determination of exchange rates--a "pro-market" move. But, surprise! Wednesday was greeted by a move of nearly similar magnitude pushing yuan depreciation to nearly 4% over two days.

Hence the AC-DC reference: yuan blood, you got...yuan devaluation. Asian stocks fell because business prospects in China where they do an ever-increasing amount of business were confirmed to be getting worse by the PBoC's action. European stocks have fallen the most since their recovery was increasingly dependent on China an an export market. US stocks have also fallen in sympathy, albeit with some recovery as I write.

It just goes to show how China is increasingly becoming important in the global economy--even in the equity markets that are frequently disconnected from reality. It is the world's second largest economy, after all. Since the start of the year (or slightly before), its slowing growth has had marked effects on commodity exports the world over. We are now finding out that it is an important export market for others' manufactured goods as well.

Hence, world markets are anxious to see what PRC authorities do with regard to currency. If the yuan slides more, well, I think you know what happens to world stock markets in the coming days.
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Stockmarket Crash Clash: PRC vs US 'Market Manipulators'

♠ Posted by Emmanuel in , at 8/11/2015 01:30:00 AM
Dazed and confused by PRC stocks...must be those Westerners doing evil things.
Here's another news flash from the clash: To no one's real surprise, foreign devils [gweilo] stand accused of dastardly market machinations to profit at the expense of Chinese investors by shorting shares. Nevermind that (a) foreigners are quite limited in their abilities to trade locally-issued shares and (b) Chinese officialdom has implemented the very mechanisms that make it possible to short shares. At any rate, onto these acts of evil:
A crackdown on traders in China that included Chicago-based Citadel LLC has shone a light on the few foreign investors to have set up shop in a country long wary of outside influence. An account trading the firm’s own money was one of more than three dozen accounts suspended from trading over the past week after Chinese authorities launched a probe into automated trading and possible stock-price manipulation.

“We continue to otherwise operate normally from our offices, and we continue to comply with all local laws and regulations,” a Citadel spokesman said this week. Not many foreign firms have penetrated China’s massive mainland markets with a local trading outfit as Citadel has. Instead, most rely on the limited routes that have been opened to foreigners, such as a stock-trading link formed with Hong Kong last year that allowed overseas investors to freely trade some Shanghai-listed shares for the first time. 
Still, it's a head-scratching leap to blame foreigners when the volumes they can trade are so limited on the mainland:
With their investment capped at less than 5% of the market, foreign investors outside of China continue to make up a only small sliver of China’s $8 trillion stock market. Some traders say they have been spooked by the crackdown on Citadel and others. “Even Chinese fund managers don’t want to sell stocks right now,” said one foreign investor in China.

Citadel founder Kenneth Griffin recently expressed a positive outlook for his firm in the country. “When I think about the next 10 years, we are going to have a very meaningful business in China,” Mr. Griffin said in one of several interviews conducted before the suspension for a page-one article in The Wall Street Journal.
Blaming the foreigner is ever-so-easy to do when, most of the time, the failings lie with oneself.
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Did Obama Kill Coal Industry...or Did (post)Modern Times?

♠ Posted by Emmanuel in , at 8/10/2015 01:30:00 AM
There has been a series of informative articles and op-eds in Bloomberg discussing the plight of the American coal industry [RIP...sort of...read on]. Big Coal is fighting wars on two fronts. The first, obviously, is the environmental one: burning coal generates more carbon dioxide than most other energy sources for the equivalent amount of energy. Speaking of which, natural gas is rapidly supplanting coal as an energy source that's not only cleaner but also cheaper. So, the initial article concerns how coal firms have stopped paying dividends to stockholders, which makes perfect sense in that you need to have earnings in order to pay out dividends. Needless to say, coal firms aren't making that much nowadays.
When Peabody Energy Corp. announced it was suspending quarterly payments to shareholders to save cash, it marked the end of an era for traditional U.S. coal miners. Coal, for decades viewed as a stable investment, is now fighting for its life. Earlier this year, Arch Coal Inc. halted its dividend and has been warned by the New York Stock Exchange it could be delisted if shares stay below $1. Walter Energy Inc., which also suspended its payout, and Alpha Natural Resources Inc. have been dropped by the exchange. Walter filed for bankruptcy earlier this month.

Tuesday’s announcement from Peabody, the largest U.S. coal producer, came minutes after Consol Energy Inc., a company increasingly focused on producing natural gas, cut its dividend to 1 cent from 6.25 cents.
So America's largest coal firm has stopped paying dividends like everyone else. Another controversy concerns Obama's "Clean Power Plan" meant to rein in carbon emissions specifically. This law would supposedly put lots of coal miners out of business. In fact, the second-largest US coal firm declared bankruptcy right before Obama made his speech:
As the White House puts its cards on the table, the second-largest U.S. coal producer is folding its current hand and reshuffling. Alpha Natural Resources declared bankruptcy this morning to get out from under $3.3 billion in debt accumulated over the past several years. The specific timing of its filing—hours before the EPA publishes its rules—may be coincidental. That it has happened at all is not.

Several factors converged to bring about coal's collapse, of which Obama is only the easiest for coal industry leaders to blame. There's the U.S. natural gas boom, which gave power producers a cheaper, less-polluting alternative. Coal companies took on debt around 2011, when Chinese demand pushed prices up globally, according to Bloomberg. That binge has wound down since then, taking coal prices with it, and coal companies like Alpha Natural Resources are left holding the bill.
Michael Bloomberg being a green activist, it is no surprise that he says it's not Obama's fault that coal is going the way of the dodo Stateside. Rather, then market is responsible for this turn of events:
Critics of the Environmental Protection Agency’s new Clean Power Plan are describing it in apocalyptic terms. But much of what they believe about the plan -- that it will destroy the coal industry, kill jobs and raise costs for consumers -- is wrong. And it’s important to understand why.

The overblown political rhetoric about the plan tends to obscure the market reality that the coal industry has been in steady decline for a decade, partly as a result of the natural gas boom, but mostly because consumers are demanding cleaner air and action on climate change. Communities across the U.S. have led the way in persuading utilities to close dirty old coal plants and transition to cleaner forms of energy. The Sierra Club’s grass-roots Beyond Coal campaign (which Bloomberg Philanthropies funds) has helped close or phase out more than 200 coal plants over the past five years.

The primary reason for the public revolt against coal is simple: It causes death, disease and debilitating respiratory problems. A decade ago, coal pollution was killing 13,000 people a year. Today, the number is down to 7,500, which means that more than 5,000 Americans are living longer, healthier lives each year thanks to cleaner power. 
From an environmental standpoint it would be easy to follow what Bloomberg says, but then again, he's a Noo Yawker not attuned to the sensitivities in the coal belt states. My first reaction when reading these stories was "huh, they still have coal companies in America?" Nevertheless, it is entirely possible for an upcoming battle royale to emerge pitting the administration against the coal miners and their allies. In mid-Eighties Britain, it was an epoch-making fight. I don't foresee that same amount of divisiveness repeating itself in the US, but I think that fancy boys like Bloomberg will be surprised at how much opposition a "sunset" industry and its allies will be able to put up.
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TPP: 5 Sticking Points That Remain

♠ Posted by Emmanuel at 8/08/2015 06:31:00 PM
Negotiators, rather than protesters, will actually be more likely to waylay TPP.
TIME has an easy-to-read list of issues that remain in order for the Trans-Pacific Partnership (TPP) agreement to be concluded at the international level. Earlier this month, efforts to conclude it came to naught. It's hardly a done deal; I'll believe it when I see a deal. With traditionally FTA-averse countries like Japan in the mix--TPP would be its first plutilateral instead of bilateral arrangement outside the WTO--there are reasons to doubt. Among them are the following:
--------------------------

1. US Big Pharma

At issue in TPP negotiations is when cheaper generic forms of new drugs can come to market, or when that exclusivity ends. In the U.S., that timeframe is about 12 years, but most countries involved in negotiations want it to be shorter—eight years or less, though Australia is insisting on five. It makes sense that the U.S. wants the longest period of exclusivity; of the ten largest pharmaceutical companies in the world, six are based in the US.

2.  Canadian dairy farmers

Dairy accounts for more than 25 percent of New Zealand’s exports (and 7 percent of its overall economy), so the country is driving for greater market access for its dairy products, with help from Australia. It might come as a surprise that cows are so contentious, but Canada is having none of it. Their government is facing a tight election this fall, and dairy farmers hold disproportionate clout in Ottawa. How much clout? Enough that dairy imports in Canada currently face a 248.95 percent tariff.

3. Japanese "auto protectionism" (see my earlier commentary as well)

Japan’s auto sector is the most closed-off of all industrialized countries, ranking 30 out of 30 across all OECD nations. It’s import penetration rate in 2012 was 5.9%, compared to an OECD average of 58% and a U.S. import penetration rate of 47.9%. Tokyo has made it quite difficult for foreign countries to sell in Japan by throwing up “nontariff barriers,” or indirect costs.

4. Textiles

Only clothing that is wholly sourced and assembled within TPP countries will qualify for duty-free sales. This poses particular problems for Vietnam, currently the second-largest exporter of apparel and footwear to the U.S., with more than $13 billion in sales last year. In order to manufacture all those items, however, Vietnam had to buy $4.7 billion worth of fabric from China, about half of its total annual imports. By itself, Vietnam is only able to produce a fifth of the fabric that it needs to sell on world markets. Companies in countries like Vietnam have spent decades building up diversified and extensive supply chains.

5. America's "currency manipulation" schtick

But tougher currency manipulation regulations were never going to be a part of the TPP. Control over individual currencies and monetary policies are key issues of sovereignty, and countries are understandably wary of signing away that kind of control. Introducing stringent currency manipulation requirements would blow up the entire TPP on the spot. But it will make it tougher to get the deal passed. With anti-TPP Senators in the U.S. threatening to repeal Obama’s “fast-track” authority for TPP if the administration doesn’t address currency manipulation in the final agreement, Obama still has significant domestic battles ahead of him.

Japan's agricultural protectionism remains unresolved as well, though these negotiations have hardly been the most transparent as many observers have noted.
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The United States' Huge Trade Deficit...with Europe [!]

♠ Posted by Emmanuel in , at 8/06/2015 01:17:00 PM
More US-bound goods than US-originated ones: at the Port of Rotterdam.
Unbeknownst to many, the United States is now running a gargantuan trade deficit with yet another trading partner that's quite relaxed about competitive devaluation at the moment with its own version of quantitative easing--Europe. The US running an enormous trade deficit with China and some other Asian nations is old hat. What's weird is that opportunist politicians courting the American labor union vote haven't engaged in more demagoguery against the vile, er, Europeans.
The United States in June posted a record trade deficit in goods with the European Union, a sign of the sharp divergence in fortunes between the two regions.

The overall U.S. trade deficit, which includes services, climbed 7.1% to a seasonally adjusted $43.8 billion in June, the government said Wednesday. The upturn largely reflected an all-time high in imports such as autos, drugs and commercial aircraft from Europe, whose goods are cheaper to buy because of a weakened currency [my emphasis].

The goods deficit with the EU jumped nearly 16% in June to an unadjusted $14.5 billion. Earlier in the summer the continent was wracked by another crisis involving heavily indebted Greece that was only resolved, at least for now, by a controversial “rescue” plan after the EU came to the very brink of losing its first member. The latest flareup in Greece cast another cloud of uncertainty over Europe.
The upturn in the US trade deficit has been attributed to the aforementioned sliding euro which makes American exports dearer and European imports cheaper:
The flip side of a stronger U.S. economy compared to the rest of the world is a sharp increase in the value of the dollar that’s made American goods and services more expensive in Europe and elsewhere, cutting into exports. Sales of U.S.-made goods and service abroad fell 0.1% in June to a seasonally adjusted $188.6 billion.

With the Federal Reserve on the cusp of the first interest-rate increase since 2006, the dollar could remain strong for months to come.
From a sociological standpoint, I've always been fascinated with Americans' willingness to bash non-white people, especially Asians, for trade transgressions and so on. What if the main offenders though are Westerners like themselves, i.e., Western Europeans? It's certainly harder to demagogue against them than "foreign" Japanese, Chinese, etc. So, even if the former are largely to "blame" for the rising US trade deficit, it doesn't really get that much press.

If I were an opportunistic American politicians, though, I'd be blasting Europeans right about now to score easy points with the anti-trade crowd in the run-up to the 2016 elections.
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IMF: RMB Not Yet Ready as SDR Currency

♠ Posted by Emmanuel in ,, at 8/05/2015 02:46:00 PM
IMF says...wait a while longer for RMB SDR inclusion.
The PRC has been strongly pushing for the inclusion of the Chinese yuan in the basket of currencies which constitutes the IMF's Special Drawing Rights (SDRs). After all, shouldn't the currency of the world's second-largest economy be included in such as a basket? Unfortunately, just as with Chinese stocks not being included in the MSCI index of emerging market equities, the IMF has deemed China and its currency not quite ready for the primetime. Ho-hum, we've seen this movie before:
The International Monetary Fund should put off any move to add the yuan to its benchmark currency basket until after September 2016, IMF staff said in a report which showed a mixed performance of the renminbi on meeting key financial norms.
The report, published on Tuesday, comes after Beijing launched a major diplomatic push for the yuan to be added to the IMF's Special Drawing Rights basket as part of its long-term strategic goal of reducing dependence on the dollar. 
The pushback against yuan inclusion mainly concerns the lack of yuan use outside of Asia. Aside from the widespread use of RMB as a store of value, medium of exchange, and a unit of account, another concern is that IMF members may not have enough time to adjust to its inclusion in the SDR if accomplished this November. The latter is a technical concern over timing and the mechanics of SDR allotment, whereas the former is a fundamental one as to whether the yuan deserves inclusion:
The IMF board is scheduled to make a decision in November on whether to include the yuan in a basket of currencies comprising dollars, euros, pounds and yen, although the decision could be pushed back if policymakers decide they need more information.

Delaying any change in the basket for nine months through September 2016 would avoid disrupting financial market trading on the first day of the new year, the staff report said. A senior IMF official said reserve asset managers would need about six months notice to adjust to a change.
The yuan, also known as the renminbi, meets the requirements as a significant currency in terms of international trade, but also has to be judged to be "freely usable", or widely used to make international payments and readily traded on foreign exchange markets.

The report shows a mixed performance on financial criteria. Although the currency is increasingly used in cross-border transactions and heavily traded in Asia, it is only thinly traded in North America and is not commonly used in international debt securities. Data was missing for some variables, the report said.
Since this is the IPE Zone, we should also take note of the geopolitics behind yuan inclusion in the SDR. To no one's surprise, the United States and its regional ally, Japan, are discouraging such inclusion at the earliest opportunity (November this year). Meanwhile, Western European countries wishing to cotton up to the rising power indicate they are ready to get the RMB on board the SDR ASAP:
European members of the Group of Seven major industrialized economies - Germany, Britain, France and Italy - favor adding the yuan to the basket quickly. Japan, like the United States, is more cautious, officials have said...

Chinese Premier Li Keqiang in March asked Lagarde to push for inclusion, saying Beijing would speed up the convertibility of the yuan on the capital account and open domestic individual cross-border investment and foreign institutional investment in China's capital market.
Still, as IMF Managing Director Christine Lagarde has noted, it's only a matter of time until the yuan is included in the basket--just as its stocks will be in the MSCI emerging markets index.  Just not now.

The quoted report is downloadable from the IMF site.
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The $483B Mystery Man Out to Save PRC Stock Markets

♠ Posted by Emmanuel in , at 8/04/2015 01:30:00 AM
The only picture on file of Nie Qingping, the $483B Man.
When I was a wee lad (a young boy in British-speak), I used to watch episodes of The Six Million Dollar Man about an astronaut crippled during a test flight who is subsequently reinvigorated using--you guessed it--$6M worth of bionic implants. They say truth is stranger than fiction, and the Chinese government have their modern-day equivalent: Nie Qingping, an academic largely unknown outside of China, has been given the unenviable task of shoring up the PRC's continuously free-falling stock exchanges, which have shed something on the order of $3.5 trillion since reaching their peak just a few weeks ago.

Who is this guy? Again, most are in the dark except for the sketchiest of biographical details:
Nie, the 53-year-old chairman, hasn’t given interviews on his emergency role, and the government hasn’t spelled out exactly what discretion Nie and his agency have when executing orders from above. Four weeks into the new role, the picture emerging from Nie’s published books and commentaries, as well as interviews with fellow academics, is of a professor with 25 years of experience watching stock manias -- who still got blindsided by China’s latest crisis...

As a junior official, Nie received training at the London Stock Exchange before he was dispatched by the People’s Bank of China to help investigate a bout of stock “mania” in Shenzhen in 1990, which ultimately led to the creation of a formal stock market. People had stopped working to speculate on shares, according to his book “The Long on China,” a history of the stock market. Investigators determined the causes were high dividend payouts, a lack of limits on daily share-price moves, and a limited supply of stocks, he wrote. Nie headed China’s task force that designed the rules for short-selling and margin financing, which China began allowing in 2010.
Instead of $6M worth of (admittedly non-inflation-adjusted) implants, Nie Qingping comes equipped with an estimated $483B in dosh (cast in British-speak, once more). Where did this money come from? From the People's Bank of China (PBoC) and major state-owned financial enterprises' forced contributions. That much we know. What he's doing and what the China Securities Regulatory Commission (CSRC) he now heads are doing with the money are not quite clear. Then again, we're dealing with China here where a purported "regulator" is busy pumping up rather than calming animal spirits:
China Securities Finance was set up in 2011 to provide liquidity for brokerages offering margin financing. Housed on the 15th floor of a building in Beijing’s financial district, in an office where water trickles over traditional Chinese rock sculptures, Nie and his 70-odd staff got access to between 2.5 trillion yuan and 3 trillion yuan ($403 billion to $483 billion) for the rescue, according to people familiar with the matter...

“The role of stock bailout most certainly wasn’t their mandate when they started China Securities Finance,” said Fraser Howie, a co-author of “Red Capitalism,” a book on China’s financial system. “It was set up to do one job, and clearly has been co-opted or coerced -- you can choose your verb -- to go and do another job.”
If anything else, government intervention has markedly increased rather than put a limit to market volatility:
The money on tap is in the form of credit from commercial lenders and from the People’s Bank of China, which has its headquarters about a mile away, as well as from the proceeds of bond sales. It’s designated for buying shares and mutual funds, as well as the agency’s usual role of liquidity for margin finance.

Since China Securities Finance started buying on July 6, a measure of volatility in stocks has surged to nearly a 20-year high. On July 27, the Shanghai Composite Index plunged 8.5 percent, the most since February 2007, as investors feared that the government was pulling back from its rescue efforts. On Monday the index lost another 1.1 percent, extending the loss from its June 12 peak to 30 percent.

Details of how China Securities Finance now operates, how much liquidity remains at its disposal, and how it chooses which stocks and mutual funds to buy haven’t been released officially. Neither Nie nor the agency responded to requests for comment. The agency first bought blue-chip companies before also targeting mid- and smaller-sized companies on July 8, according to statements by the China Securities Regulatory Commission, which oversees the agency.

“Its opacity has already led to extreme volatility and confusion in the stock market,” said CASS’s Liu, who also works for brokerage GF Securities Co. “Investors deserve to know more about it.” 
Asking for PRC transparency in capital markets is like asking Dick Cheney for a pro-peace stance with Iran: get outta here! I'm afraid we will have little idea of what this CSRC does, so we will consequently know little about which actions are effective and ineffective. What can I say? Chinese stock markets are the world's largest casinos, and the government adds to the "excitement" by increasing uncertainty and volatility.

Shuffle up and deal, PRC.
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Weak Euro? Europe as a Retirement Destination

♠ Posted by Emmanuel in , at 8/03/2015 01:30:00 AM
Affordable living and scenic beauty--the promise of European retirement destinations.
With the euro commanding $1.10 as opposed to, say, $1.54 right before the global financial crisis hit, many things European have become affordable. Consider retirement: not so long ago retiring in Europe was thought to be prohibitive by most Americans. Nowadays, it's within reach thanks to the slumping euro. MarketWatch has a neat feature on this new possibility. Yes, we know--the United States' landscape full of fatsos 'n' strip malls is hardly the most attractive place to retire. So, why not go to where the culture is higher (and real)?

Consider France--at least outside of traditional tourist traps:
“Outside of high-glamor zones like Paris, Provence, and the sun-soaked towns of the Riviera, the cost of living and real estate in France can be surprisingly reasonable,” says InternationalLiving.com’s France correspondent Barbara Diggs. “Yet the quality of life remains very high.”

But there’s another reason France makes life easy to enjoy: The country treats people as if they matter. France offers universal health care to its citizens and legal residents who qualify (it takes five years of permanent residence to become eligible). Pre-existing medical conditions are irrelevant to your ability to be covered and out-of-pocket costs are extremely low.

Even if you aren’t a part of the national system, reasonably-priced private health insurance is available. For example, at the Association of American Residents Overseas, 50- to 59-year-olds can buy gold-standard medical coverage for about $5,000 a year. Diggs says expats in France she’s spoken to report paying $6 for medications that would cost $180 in the U.S.
Spain, too is looking good. Never a big-ticket destination, it's even more affordable now:
Spain has long been one of the least-expensive countries in Europe and today, with real-estate prices at their lowest in decades and the euro weaker than in years, this country is a bargain for full- or part-time living. Along many of Spain’s coasts, one-bedroom apartments sell for under $100,000. More spacious one- and two-bedrooms go for $150,000 or so. Comfortable, furnished, long-term apartment rentals run as little as $550 a month.

Day-to-day expenses are low, too. In season, many fruits and vegetables now sell for a paltry 50 cents a pound and the quality is superb. Spain’s fixed-price lunch specials — the menú del día — are famous for their good value. Two filling courses, plus beverage and sometimes dessert, a menú generally runs about $10 to $17. If you plan to live in Spain full-time, you’ll need private health insurance to get your residence visa; plans start at under $200 a month. Once you’re a resident, you can apply to join Spain’s public health care system.
Italy too is affordable as long as you stay away from the usual tourist traps:
“Leaving aside hot spots like Capri and Sorrento, the farther south you go, the more prices fall,” says InternationalLiving.com’s Europe editor Steenie Harvey. “The average monthly rent for a one-bedroom apartment in Lecce, a flamboyantly baroque city in the Apulia region of Italy’s deep south is $436,” Harvey notes. Utility bills are low is this area of the country too, thanks to its long summers and milder winters, averaging around $76 a month. Apulia is the stiletto heel of Italy’s elegant “boot,” a place of rustic beauty. With around 500 miles of coastline, the area is washed by the Adriatic as well as the Ionian Sea.
Potugal is cheaper yet, with an old-world flair to it:
Portugal is the last true bastion of Old World living in Western Europe. It’s small (no bigger than Indiana) but diverse, with each region distinct. You can loll about an olive grove burrowing your toes into daisy-strewn grass, linger in southern beach towns or travel on clattering trains into medieval towns.

In the whitewashed villages and walled towns of the southern Alentejo region, time is still measured in church bells. That’s not to say Portugal is backward. You can get free Wi-Fi in public places and you’ll find a glitzy mall or two. English is widely spoken. International Living’s Eoin Bassett says: Think of Portugal as life with modern convenience and none of the hassles, stress and traffic.

If you have $1,600 to $1,700 a month, you’ll live well. That includes rent, which can be as little as $300 a month for a centrally-located apartment in a pleasant provincial city.
It's never too late to flee America since retirees are spoiled for choice nowadays with Southeast Asia also making a strong case.
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