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Archive for the ‘European Central Bank’ Category
Europe Isn’t Over Folks
April 24th, 2012 | 
Author:
Anyone smell the smoke yet?
There’s a definite problem over in Euroland that “suddenly” became apparent this morning. Between the French elections (in which Sarkozy appears to be toast) and the Dutch government collapsing over an austerity fight, we now add the ECB and Bundesbank tiff:
Almost a year into his new job as the head of Germany’s Bundesbank, Weidmann, 44, has matured from ChancellorAngela Merkel’s discreet right-hand man at global economic meetings into one of the few European policy makers warning that governments are failing to do what’s needed to rescue the euro.
How do you “rescue” something when you refuse to have an honest conversation about what’s broken? Nobody over in Euroland — or here in the United States — is doing so.
There’s nothing complicated behind the reason our economies have failed to actually recover: We’re still spending more than we make.
What do we have to fix? This:
Since 1980 your earnings power, in real terms, when accounting for monetary inflation has been strongly negative.
We covered up would have otherwise been an outright revolt (really — a decade of 15-20% of annualized loss of purchasing power would have led to exactly that!) with massive credit extension to individuals and corporations. This is the history of the housing bubble — this chart — and it goes back to 1980!
There are those who will argue that this graph is a “distortion” as it includes the credit created specifically as “financial credits.” Fine, I’ll remove that.
Now how are you going to continue to play asset-price inflation games when there is no price-adjusted income growth so you can pass the bag to the next group of people, eh? There is only one way – fraud – and the refusal to address the truth is why we’re here.
This was not an accident. It was and remains a public and intentionally-covered up fraud. The coverups came in the form of the housing bubble, massive offshoring of labor and exploitation of both environment arbitrage and effective slave labor overseas along with currency and interest rate manipulation and bank credit fraud of unprecedented size.
The compounded amount of damage done since 1980 truly boggles the mind. Oh sure, a few people have made out like bandits; look at the escalation in certain asset prices! But it has come through making it utterly impossible for anyone in the current generations to follow in the footsteps of those who “enjoyed” these distortions which guarantees the collapse of these asset prices as there is no way for the current holders to “monetize” them by selling them to someone else who is young and coming up, except through attempts to further extend this scheme.
This is the very definition of a ponzi scheme — and yet we have had no honest discussion of what has happened here or in Europe.
There’s no way out of this box without recognition of both what we did and deflation of those bubbles. The acts of our government and those across Europe have all served to further these frauds rather than expose and excise them.
Those who point to temporary recovery of “asset prices” (e.g. the stock market) are missing the forest for the trees. Attempts to further continue this ponzi scheme are doomed to failure, as the only way one can “maintain” these asset prices is for a new group of people to find ways to continue to take the pass of the “bag” at ever-higher prices.
That, in turn, requires continued credit creation and that requires there be someone who is both willing and able to borrow so that credit can be created!
We ran out of suckers in 2007 folks — we’ve done the Wile-E-Coyote thing since, continuing to pretend that we won’t actually fall having stepped off the cliff.
I’m sorry, but you’re wrong.
Posted in Banks, Corruption, Debt, Deficit Spending, Deficits, Economic Crisis, Economy, EU, Europe, European Central Bank, European Union, Federal Reserve, Financial System, Fraud, GDP, Government, Gross Domestic Product, Money, Sovereign Debt, Sovereign Risk, spending | 
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The Stupid, It Burns MORE (Europe/IMF)
As she closed in on her goal of bolstering the IMF’s crisis-fighting coffers by more than $400 billion, Managing Director Christine Lagarde said the lender serves as an emergency backstop and that Europe must protect itself, boost economic growth and cut debt.Italian and Spanish bonds fell today as the G-20 noted “stress has increased as of late.”
Really Christine? Europe must both boost economic growth and cut debt?
Uh, have you ever looked at the charts I’ve put together for the last five years?
Let’s review.
There has been no economic growth in the United States ex-debt since 1980.
Would someone please ask Christine exactly how she proposes that nations do what she has put forward?
This is the problem – lack of recognition of reality. Reality is that we have a monstrous debt bubble that has not been deflated, and it’s not just here — it’s everywhere in the developed world. That bubble has to deflate before we can have true economic recovery, yet Christine and everyone else is desperately trying to avoid exactly that, because when, not if, it deflates so will the false asset “values” and false “profits” that the banking system has extracted from the public.
But there is no alternative, because exponential expansion can never succeed on a durable basis.
Never.
There is no recovery because there has been no recognition of the truth. And until there is, the lies stop and the covering up of those lies and their consequences ends there will be no “recovery” — because mathematically there can’t be.
Posted in Banks, Corruption, Debt, Economic Crisis, Economy, EU, Europe, European Central Bank, European Union, Financial System, Government, IMF, Insolvency, International Monetary Fund, Money |
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Get Ready (Europe)
From the 2012 Predictions Ticker:
The fissures — if not outright failure — in the Euro Zone become realized. I fully expect one or more nations to leave the Euro and there is a non-zero chance of an outright collapse. Timing is the problem — I’ll go ahead and stick this in 2012 but may be early a year. We’ll see. Incidentally because of how I worded this Greece leaving is a “score” but I’m not thinking Greece here — try Spain or Italy on for size.
Spain’s surging bad loans are spurring doubt on whether the government can persuade investors that it can clean up the country’s banks without further damaging public finances.
Non-performing loans as a proportion of total lending jumped to 8.16 percent in February, the highest level since 1994, from less than 1 percent in 2007, according to Bank of Spain data published today. The ratio rose from 7.91 percent in January as 3.8 billion euros of loans soured in February, a 110 percent increase from the same month a year ago. That takes the total credit in the economy that the regulator lists as“doubtful” to 143.8 billion euros.
This is bad. Very bad, when one considers that Western Banking Systems all depend on default rates closer to 1%, not 8%.
Why? Because of leverage. If you’re running 30:1 gearing then a 3.3% loss wipes you out. A 1% loss is tolerable, but just barely.
And all western “banking systems” have been run between 10:1 and more than 30:1 for the last couple of decades, with Europe consistently at or above the top end of that scale.
It’s not just private funding either; worse is the government side:
Spanish, Italian and Portuguese banks are loading up on bonds issued by their own governments, a move that shifts more of the risk of sovereign default to European taxpayers from private creditors.
Holdings of Spanish government debt by lenders based in the country jumped 26 percent in two months, to 220 billion euros ($289 billion) at the end of January, data from Spain’s treasuryshow. Italian banks increased ownership of their nation’s sovereign bonds by 31 percent to 267 billion euros in the three months ended in February, according to Bank of Italy data.
This is picking up shiny pennies in front of a steamroller. The banks are doing this because they can borrow from the ECB at 1% and then “buy” Spanish 10 year debt at 6%.
What could possibly go wrong with this, especially when you can count the sovereign debt as all “money good” and thus factor it via a repo and do it again, and again, and again.
That is, it’s not a 5% profit being sought, it’s a 50% profit — by engaging in 10 “turns” of this crank.
Let’s illustrate the problem with this “theory.”
You start with €1 billion in capital. You buy €1 billion in Spanish bonds. On these you expect to earn a 5% profit, because you paid 1% interest but will receive 6%. That is, you will get €50 million in net profit on this transaction.
But that’s not enough. So you pledge the bonds you own into a repo transaction (say, with the ECB) and use that to borrow another €1 billion, with which you do it again.
And again.
And again.
Soon you have €10 billion in bonds. And you have €500 million in annual interest profits!
That’s damn good on €1 billion in capital — it’s a return of 50% annually on your “investment.”
But what happens if you suffer just a 1.5% loss on the capital value of those bonds?
You got a problem don’t you? You lose €150 million which is 15% of your capital. You say “oh but the interest is still ok” and it initially is, except that the impairment will eventually result in a margin call. Now what happens? More selling shows up. And when the decline in the capital value reaches 10%? Oh gee, there’s a billion euro hole which just happens to equal your capital, and now you’re broke.
This is the problem facing Europe. The entire system is levered like this and now, in a desperate attempt to keep the game going the banks are “eating their own tails” by buying up sovereign debt with loans from the ECB. This is a desperate attempt to cover the losses on their property lending and yet all it winds up being is a sop to the governments which are deficit spending like mad to “prop up” their consumption.
This is a mathematical impossibility and everyone knows it, but the market is sticking its fingers in its ears and doing the “la la la la la la” game.
For now.
Posted in Banks, Debt, Economic Crisis, Economy, EU, Europe, European Central Bank, European Union, Financial System, Government, Money |
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El-Erian, Sustainability And Central Banks
PIMpCO’s El-Erian gave a very interesting speech the other day that you should all read. The money shot is right here and thankfully reasonably close to the front:
To crystallize our conversation today, allow me to use a very – and I stress very – clumsy sentence to summarize the current state of affairs: In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!
Now here’s where your personal view of the world and politics intersects with Fed (and other Central Bank) policy: Do you believe that any of the political bodies in power today will do the sustainable?
I’m going to focus just on the US, because (1) I understand it better than the European and other situations, although when it comes to Europe they’re not that different than we are and (2) the US bears so much responsibility and has so much size in economic terms compared to the rest of the world that without us the rest of the argument is literally a non-event.
European peripheral debt, for example, is a literal non-issue comparatively. If your home is in the middle of an advancing forest fire the car wreck that spills gasoline outside the door and then gets ignited is interesting, but it’s not the proximate cause of your home burning down nor would removing the wreck change the outcome.
Your belief in the avoidance of collapse in the markets and ultimately government services and tax base is founded in one thing — what El-Erian has outlined up above in his one-sentence summary.
You believe that politicians and governments will do the sustainable things.
In the case of the United States this means cutting the deficit and monetary expansion of all forms to zero on a GDP-relative basis. When it comes to government debt it means going even further so as to reduce the government’s debt as a percentage of GDP on a declining basis toward zero.
If you believe in “stability”, “improvement” or anything similar, this is what you believe will happen.
If you don’t believe in that happening then you also don’t believe in stability, improvement or a durable and sound market.
Many have asked why I continue to believe we’re going to see the S&P trade under the early 2009 levels (666), the DOW under 6,000 and the economy and government funding model come apart at the seams.
My answer is simple:
Our government with its present infestation of Democrats and Republicans, and the inability to find a single third party that will stand for the end of the stupid when it comes to the policies they espouse, including the one I’m currently involved in quite-heavily, means that we’re going to go off the cliff Thema and Louise style with the entirely-certain outcome.
That Thelma gets away this time (the markets go up today) doesn’t change the outcome; it just means that this time the odds, however long, resolved in her favor.
In order to believe we will escape the inevitable canyon-diving outcome you must believe that our government will do the right things. That is not “tax the rich” or “drink more when drunk” (e.g. cut taxes even more while increasing spending) or any such thing.
It requires massive structural realignment of:
- The Medical industry. Not Medicare or Medicaid, the medical industry. All of the cost-shifts and other perversities and legal exemptions currently abused by this part of the economy have to go away. There is zero evidence that our government intends to do any of this, but this, standing alone, must be done or we have no chance. From a mathematical point of view it’s that simple.
- Military, foreign policy and energy. They’re inextricably interconnected and we’re going the wrong way with with all three.
- Financial fraud and debt generally. It has to be dramatically reduced in the economy as a whole. This will lead to asset price corrections but if it’s not done you get asset price collapses instead as instead of some leverage being available to buy things you’ll ultimately get none.
None of this is being addressed at all. In fact, every step being taken thus far is making it worse instead of better, across the board.
If you have a thesis that includes the government starting to do the right things, which is necessary to believe in an actual economic recovery, let’s see it.
If not, well….
Posted in Banks, Central Banks, Corruption, Debt, Economic Crisis, Economy, EU, European Central Bank, European Union, Federal Reserve, Financial System, Fraud, Government, Money |
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Heh How Come We’re Not Talking About Europe?
Oh this is getting rich.
Bonds are getting bid hard here in the US and stock are in the toilet.
Why?
Europe, basically.
But it was all fixed, remember?
No, it was not fixed. The LTRO didn’t fix anything. It hide the stinking dead fish under the carpet, which are now growing maggots and have turned into a public health hazard.
Spain has a 20% unemployment rate and cannot solve its problems either. Nor can Italy. Nor can Portugal.
Why?
For the same reason we’re not solving ours. All are refusing to admit that the government cannot spend more than it taxes in current time.
There’s only one solution folks. It’s found there. None of the political candidates or central bankers are talking about it because if they do then they have to recognize that fixing it in the US will cause an immediate deflationary depression as the air comes out of the bubble — the government is borrowing and spending close to 10% of GDP right now. Any act that corrects that will instantly come out of both GDP and cause the liquidity-driven asset-price bubble to deflate. This of course is called “bad” while stock prices going up due to nothing but hot air is called “good.”
That’s backwards, incidentally.
The market is doing what it always does. It will let you pull this crap for a while, lead you on, think everything is ok, suck you back in, have huge rallies that then have every tout in the world on TV telling you how you’re going to miss a huge profit, and of course you’ll be late.
You bought into Apple at $600, the DOW as it crossed 13,000, the S&P as it crossed 1400, with riches dancing in your mind as you drift off to sleep.
What’s actually happening is that you’re chasing profits you believe will be but there will be no profits. The liquidity-driven pump-and-dump game is one of the oldest on Wall Street. As some say, high prices cause even higher prices and this is true when borrowing is free or nearly so — for a while.
But then someone realizes that what you’ve really seen is nothing more than multiple expansion. One or two companies, or maybe three or four, or even a hundred that are going up a lot in their alleged “earnings power” and driving the stock market higher.
Then one of those “someones” has an “accident.” In 2000 it was MicroStrategy, a little company that had gone up like a rocket ship and then announced an accounting problem. Their stock tanked. But shortly thereafter, people started to ask questions.
Lots of questions.
Inconvenient questions.
Questions like, “Is there really any actual earnings power behind these stocks or are we all selling to a new bagholder at ever-higher prices? And by the way, are there any more bagholders around?”
The result was a horrifying crash.
I will note for everyone that we were at 1422 in the SPX just a few days ago. Now we’re at 1366. You do the math.
Is this a “big dip”?
No, not really.
Not yet.
Just wait until Apple cracks. Take $50, $100, $200 off Apple and tell me where the Nasdaq 100 trades. Sit down first.
Oh I know, it can’t happen. It certainly can’t happen before the election because Ben won’t let it, right? Except that it not only can, it always does. It did in 2000 and it did in 2008. You got warnings in 2008 too, just like we did this time. Last summer and early fall were your warning, but you had to jump back in, right? You bought all the way up — straight up, without any meaningful correction or consolidation, because trees grow to the sky.
I have one question for you:
How’s your base-jumping skillset look like, and oh by the way, is that a parachute or a knapsack on your back?
Posted in Banks, Debt, Deficits, Economic Crisis, Economy, EU, Europe, European Central Bank, European Union, Financial System, GDP, Government, Gross Domestic Product, Money, Sovereign Debt, Sovereign Risk, Sovereigns |
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The Suffocation Of Unsustainable Global Debt
The suffocation of unsustainable global debt – Total global debt is now over $190 trillion and more than three times global GDP. Contagion with European Union.
The biggest market in the world is the European Union and debt problems are still rippling through the global markets. It is apparent with the financial crisis that the global markets are tied together by large banks and interconnected trade. A problem in the largest market should be unsettling and the unemployment rate in the European Union is now at a 15 year high. The global debt problem was never really solved but papered over with extensions and banking trickery. The US has dealt with much of the debt issues by suspending major accounting rules and stuffing bad loans into the Federal Reserve like a Christmas stocking. The European Union is facing some challenges ahead and all eyes will be watching given the impact of contagion impacts. Greece was only a tiny sliver of the debt issues compared to the major debt restructuring that will be necessary for a large economy like Spain.
Unemployment in the European Union rising to higher levels
The European Union is facing a very problematic recession. The unemployment rate continues to climb:
The unemployment rate now stands at 10.8 percent. Countries like Spain have an astounding 23.6 percent headline unemployment rate. The young in Spain are facing an unemployment rate above 50 percent which is stunning for a developed market economy. These kinds of structural issues cannot be peppered over with more debt. The issues facing the global markets are based on peak debt situations. Central banks like the Fed and the ECB are dealing with the crisis as if it were based on short-term liquidity issues. Like someone asking you for rent in the middle of the month when your paycheck will not come in until the end of the month. In this case, you know the income is forthcoming and will cover the requested payment. That is not what is impacting the global economy today.
Peak debt has been reached in many cases and when it hits markets are forced to deleverage and price discovery unfortunately is a necessary and painful process. To think that the European issues will stay isolated is unrealistic. If we take a look at our biggest trading partners we will find some familiar names:
Three of our top ten trading partners are in Europe. Not only is this the case, China’s two largest markets for selling goods are the US and Europe. If you look above, China is also a major trade partner with the US. If the crisis deepens further in Europe the rippling impact will be felt throughout the world just like when the crisis caught momentum in 2007.
Total global debt continues to grow
In 2002 total global debt was above $80 trillion. In 2010 that figure more than doubled to over $190 trillion. Looking at the below chart is stunning given that GDP is unlikely to support this amount of global debt:
Source: Business Insider
Today the global debt to GDP ratio is over 300 percent. You will notice that as the crisis hit in 2007 GDP actually fell but total debt kept going up. Even as GDP recovered global debt continued to expand. It is hard to moderate the appetite of central banks seeking to transfer toxic assets from banking associates and removing any opportunity for real price discovery. Much of the price discovery is being shouldered by the citizens of each of these countries. The financial sector especially with the too big to fail has been sheltered at all costs.
Read the rest at My Budget 360
Posted in Banks, Debt, Deficit Spending, Deficits, Economic Crisis, Economy, EU, Europe, European Central Bank, European Union, Financial System, GDP, Government, Gross Domestic Product, Money |
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