Oct 312013
 October 31, 2013  Posted by at 9:47 am Finance

Dorothea Lange Trunk Show February 1936

“Dust Bowl drought refugees in California”

We can read these days that Spain has come out of its recession. The Bank of Spain reported last week that GDP expanded by 0.1% in Q3. But in a country with 26% unemployment and 55% youth unemployment, such statements are devoid of any real meaning. They’re mere technicality niceties. Because if anything screams recession, it’s those kinds of unemployment numbers. Moreover, where do you think that 0.1%, even it you would take it seriously, came from? It’s really not that hard. Spain’s return to growth is due to a 15% fall in labour costs since the 2008 financial crisis. In other words: the rich side of the economy gets to look good at the expense of the poor side. A global phenomenon.

And economists then get to spin that as the end of a recession. That sort of spin, generated first and foremost by a government’s own spindoctors and spread by its financial media, is not only meaningless gibberish, what makes it worse is that it’s demeaning for those who pay the price for it. Who either lost their jobs altogether or saw 15% or more cut from their often low pay. Who have suffered through multiple years of austerity in the form of higher taxes, severely cut services and diminished savings and often lost their homes too. And who, now they’re at the bottom of the gutter, see their leaders boast the success of the policies that put them there.


Spain exits recession, but jobs outlook tempers enthusiasm


After more than two years of grinding recession and the destruction of 3.8 million jobs, Spain has returned to growth. But the improvement was so weak that the jobless rate is not expected to fall to pre-recession levels for many years.

The Bank of Spain reported Wednesday that gross domestic product expanded by 0.1% in third quarter. In the previous quarter, GDP shrank by the same amount. Still, the improvement delivered a psychological boost to the centre-right government of Prime Minister Mariano Rajoy, who has been under enormous pressure to provide evidence that austerity programs and the sacrifices that go with them are not the route to eternal recession.

Spain’s recovery is all the more fragile because its banks, which received a €40 billion ($57.3 billion) European bailout early this year, are sitting on enormous quantities of dud loans. AFI, a financial and economics consultancy in Madrid, said in a note last week that the non-performing loan rate had edged up to 12.1% of loan portfolios in August. [..]

Spain’s return to growth was in good part due to an export surge fuelled by a sharp fall in labour costs since the 2008 financial crisis. AFI said that unit labour costs are down 15% …


Note the mention of Spain’s banks“sitting on enormous quantities of dud loans“. Makes you wonder what it takes to get rid of those, doesn’t it, after all the tens of billions of euros already handed to these banks. Well, it’s not just Spain: the German edition of Der Spiegel quotes an Ernst&Young report as saying Europe’s banks sit on a record amount in bad loans (my translation).


Eurobanks Sit On Record $1.3 Trillion In Bad Credit


Consulting firm Ernst & Young says banks in the eurozone have amassed €940 billion in bad credit, but are still set to make higher profits this year.

7.8% of all loans are predicted to be either late, or not paid back at all, Ernst&Young claim in their “Eurozone Financial Services Forecast”. That adds up to €940 billion, or €120 billion more than in 2012, and the highest amount in bad loans ever.

Throughout Europe, the number of bank clients who can no longer service their debt has clearly gone up. Most bad loans are in Spain (12%) and Italy (11.5%).


In the US, the Fed once again has delayed shrinking its $85 billion a month QE purchases. The reason given is that the economy is “still too weak”. But, unless everyone at the Fed is very blind, awfully deaf and extremely dumb, QE can never have been aimed at boosting the economy; it was always, just like all the games played with accounting standards, meant to bolster the “outlook” of the major, too big to fail (but failing nevertheless), financial institutions.

And now we know it’s an ongoing affair. Something that is put in a very eery light by a report coming from JPMorgan Chase’s Nikolaos Panigirtzoglou, which describes the “Most Extreme Ever Excess Liquidity” bubble. After all, why throw more QE billions at the too big to fail banks when they’re already drowning in the stuff? That can mean only one thing, I must assume, in the eyes of the Fed: that these banks are in a much worse state than anyone lets on. The point of view of the banks themselves, of course, is that they’re not going to refuse free money handed on a platter, whether they need it or not.

But what does it mean when we see the records in credit gone sour in Europe, and at the same time “Most Extreme Ever Excess Liquidity” in the global economy? Why is that liquidity not used to restructure those bad loans? Again, the only reasonable answer seems to be that banks are in much worse shape than we are led to believe.


JP Morgan sees ‘most extreme excess’ of global liquidity ever


If you think there is far too much money sloshing through the global financial system and causing unstable asset booms, you are not alone.

A new report by JP Morgan says the bank’s measure of excess global money supply has reached an all-time high. “The current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude,” said the report, written by Nikolaos Panigirtzoglu and Matthew Lehmann from the bank’s global asset allocation team.

They said the latest surge is far beyond anything seen in the last three episodes of excess liquidity: 1993-1995, 2001-2006, and during the Lehman emergency response from October 2008 to September 2010, all of which set off a blistering rise in asset prices.

The bank says there is enough juice to keep the boom going for several more months, but it stores up bigger problems for later. “It could be a warning if fundamentals are out of whack. Markets could be vulnerable next year if that liquidity starts to disappear… “ The bank says there is enough juice to keep the boom going for several more months, but it stores up bigger problems for later. “It could be a warning if fundamentals are out of whack. Markets could be vulnerable next year if that liquidity starts to disappear… “


Which is why the Fed has pledged to keep it coming ….


They argue that the global M2 money supply has risen by $3 trillion this year, up 4.6% in just nine months to $66 trillion. Roughly $1 trillion is showing up in the G4 bloc of the US, eurozone, Japan, and the UK.

The lion’s share, some $2 trillion, is showing up in emerging markets where credit continued to surge at $170 billion a month in July and August despite the Fed Taper scare earlier that hit the Fragile Five (Brazil, India, Indonesia, South Africa, and Turkey). Mr Panigirtzoglu said there is an internal credit boom in emerging markets that is running in parallel to QE in the West. [..]

JP Morgan measures “broad liquidity” held by firms, pension funds, households (etc) as well as banks. They say correctly (a crucial point often missed) that QE bond purchases from banks do not necessarily boost the broad money supply. You have to buy outside the banks.

In very crude terms, excess liquidity is the gap between “money demand and money supply”. When confidence returns, demand for money falls, so it finds a home elsewhere in stocks, property, and such.

If JP Morgan is right, you can see why the BIS, the IMF, and Fed hawks are biting their fingernails worrying about the next train wreck. There is clearly a huge problem with the way QE has been conducted.


Turns out, we have yet another moniker to remember thanks to Ambrose: the Fragile Five. Oh, well, one more or less … By the way, did you see that S&P declared Greece an emerging market? Can it still be a PIIG now?

Tyler Durden also read the JPM report:


JPM Sees “Most Extreme Ever Excess Liquidity” Bubble After $3 Trillion “Created” In First 9 Months Of 2013


JPM’s Nikolaos Panigirtzoglou, editor of the “Flows and Liquidity” weekly research piece, is one of the greater experts on, not surprisingly, global monetary flows and liquidity. Which as we noted back in 2009, is all that matters in a world in which the micro, and recently the macro, have all been made obsolete by one simple thing: credit-money creation by the monetary authorities.

Excess money supply is currently at record high positive territory. The residual of the regression turned positive in May 2012 and has risen steadily since then. This is both because of real money supply increasing and money demand decreasing due to lower uncertainty (Figure 3). In particular, global M2 is up $3 trillion or 4.6% since the beginning of the year (to September), outperforming the Global CPI inflation index which is up by only 2% since then. Global M2 reached $66 trillion in September this year.

Of the $3 trillion increase in global M2 money supply in the first three quarters of the year, around $1 trillion is due to G4 countries, i.e. US, Euro area, UK and Japan. The remaining $2 trillion is due to Emerging Markets countries, driven by strong bank lending growth in EM. As we highlighted last week, EM bank loan credit creation has been unaffected by the EM selloff in the summer and was running in July/August at a $170 billion per month pace. So strong credit growth in EM economies continues to boost our measure of excess liquidity.

Conclusion: The rise in excess liquidity, i.e. the residual in the model of Figure 4, is supportive for risky assets especially when we compare the past nine months with the period between the end of 2010 and the beginning of 2012 when excess money supply was negative. Looking further back in Figure 4, we can see three major episodes of excess liquidity (i.e. positive residual): 1993-1995, 2001-2006 and Oct 2008-Sep 2010. These were periods of strong asset price inflation suggesting that excess liquidity could have been a factor supporting markets at the time. The current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude.

To summarize:

• In just the first 9 months of 2013, Developed Markets countries have injected $1 trillion in liquidity sourced exclusively by central banks; EMs have injected another $2 trillion driven by bank loan demand.

• The total global M2 is over $66 trillion, growing at an annualized pace of over 6%.

• The amount of excess liquidity, i.e. the infamous “liquidity bubble” in the global fungible system is “the most extreme ever in terms of its magnitude”

And that’s really all there is to know: the music is playing and everyone has to dance… just don’t ask what happens when the music ends.


I guess the conclusion must indeed be that the banks, certainly in Europe, but just as certainly not only there, after receiving all those trillions of dollars, euros, yen and yuan, are still in terrible shape. There is no trust in the banking sector, there is a temporary faith in central banks injecting liquidity into the banks. That’s what holds our financial system together. And as long as accounting standards, or the lack thereof, allow for banks to not restructure their credit gone sour, and they at the same time receive all the liquidity they need and more, which enables them to prop up assets, nothing will change: they will be in just as bad a shape a year from now, or two.

Unless the music stops playing before that, i.e. one of the central banks no longer sloshes out more excess liquidity, or this liquidity turns on itself. Not an uncommon phenomenon among zombies. Because that of course is what we’re describing here: zombies. The Undead. Halloween.

And it’s not just the banks either. What do you think drives the world stock exchanges to new record highs? How can Spain claim it’s out of its recession when record numbers of its people are unemployed and its banks set new records for bad loans? It’s all zombies all the way down, as far as you can see. And at the bottom there’s you.



Home Forums How Can We Have Record Bad Loans And Record Excess Liquidity At The Same Time?

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    Dorothea Lange Trunk Show February 1936 “Dust Bowl drought refugees in California”We can read these days that Spain has come out of its recession. The
    [See the full post at: How Can We Have Record Bad Loans And Record Excess Liquidity At The Same Time?]

    Golden Oxen

    Water Water everywhere but not a drop to drink.

    Money Money everywhere but not a dime for me.

    Perhaps someone is going to whisper in the dear Banksters ears; lend it out the back door, OR ELSE! ??????


    We knew Bernanke was lying when he said the latest QE round is supposed to help the jobs economy. That was almost a year ago and it is now fully mainstream that QE doesn’t do that. However nobody in the mainstream says he was and is lying, the never do when a persons job demands they lie and really everyone with a good executive position job in the world has to lie.

    Everyone has to speak the company line, the Party line, the government line. Not doing so is the essence of a whistle blower. The stupendous majority of people climbing the rungs of any organization have internalized this. They accept it and celebrate it. They hold loyalty to the organization as the highest standard. They self select.

    Everyone expects these persons to lie. So they lie even though they know we know they are lying. It’s their job after all. I always like to go back to the famous tobacco executive hearing. Everyone remembers this.


    Note the congressman asks “if they believe nicotine is addictive”. He probably didn’t quite know it but by asking the question that way, instead of just asking as a point of fact if it is he was giving them permission to lie. Once ‘belief’ is made part of it then no lie can ever be proven. Still, we knew they were lying but could not be convicted of it.

    At any rate most probably don’t remember that they knew the executives were lying because they had to lie as part of their job. And some part of everyone understood this and forgave it. It’s just how the world works.

    Now around places like this, dusty corners of the internet, where non company, non party, non government people roam and protecting their organization and thus themselves is not part of the equation ideas run free. However they carry no weight. If anyone here would by chance enter into an organization with a mind to advance, oblivious to the necessities of being a ‘company’ man they will soon be weeded out.

    I’m not sure why Bernake lied about the reason for QE. It doesn’t really matter.


    Remember the punch line to that old joke, “ya can’t get there from here.”

    We have gotten ourselves onto that dead end road when we were burdened with a debt-money monetary system back in 1913… I needn’t go into any further detail about that with this audience.

    And even though I’ve seen increasing references to the pyramid scheme that is our money system, never have I seen enumerated the consequences of such a system… nor will I list them here, ya’ll are surely aware of them.

    This knowledge should clarify the actions of our political and monetary authorities. Where there is no solution the law of survival takes over. Those with the ability to steal and the knowledge of our impending collapse are gathering for themselves all they can. Nothing makes sense if you’re still under the delusion that anyone is trying to solve our many problems… they’re not.

    It’s every man for himself. Bunkers are being built, redoubts being stocked, armies aligned. Should be quite a show, too bad we’ll be in the middle of it.


    …and when that tsunami of liquidity finally hit’s the streets, these articles will be about the masses being forced to eat dog food because that’s all their food stamps will afford. There will be shortages of everything when it happens, even labor, as the astute buy forward, cleaning out the shelves, and re-suppliers hire in a futile attempt to meet demand and keep supply chains open.

    By the time the “inflation” word is mainstream, the Crack Up boom will be in full swing, destroying the currency. And that’s also when the above photo will be transposed onto the present day. Blue Chinese tarps replace white canvas, SUV’s substitute for ’29 Fords and Chryslers. Tar Paper will again come into vogue.

    And the good that will be derived is “The long run” will have finally arrived and the Keynesian dream will be dead.

    When? Could start tomorrow or in 5 years.


    People will go to great lengths trying to squeeze inflation into their story. It’s the bogeyman.

    Viscount St. Albans

    Growth stopped but only the poor have been forced to pay.

    The rich must pay as well.

    That’s when it gets interesting — when the 0.01% begins to cannibalize the 0.1%. Gloves off.

    Turtles all the way down.


    RE 8195 “and when that tsunami of liquidity finally hit’s the streets, “

    There appears to me no way for those bank deposits to ‘hit the street’. Unless people go on a borrowing binge and that isn’t going to happen.

    Let’s follow the money. The Fed buys Treasury paper and MBS from those that have them. The sellers in turn buy mostly other financial assets from those who have them and so on and so forth and the money is every step along the way is a bank deposit. So note that for the most part it is assets which inflate and the money stays in the financial economy.

    Now some of the money is being put closer to the real jobs economy via increased mortgage lending but there again the main effect is the increase in prices of real estate and we can be almost certain the sellers are plowing the sale proceeds back into RE.

    The level of government borrowing is no effected by QE, only their cost of borrowing. Government borrowing and the previously gigantic but now shrinking deficits were a way for the Feds purchases to be intermediated, ie. put out into the real people real jobs economy. The deficit shrunk more than 40% last year.

    I’m open to suggestions on how Fed ‘printed money’ is going to find it’s way into the non financial economy because I don’t see it now.

    As a side note if the prices of the assets inflated by Fed ‘printed money’ falls then the ‘money’ would disappear, as the assets deflated.


    Looking at the numbers, all I see are declining money and credit, in the form of eurozone-wide bank loans outstanding. The current deflation rate: 7% year over year.

    My guess is that if loans were actually marked to market and/or processed through foreclosure as they should be, the deflation would be dramatically higher.

    I’m not sure how people get inflation out of declining money & credit, but there you go. As someone who is strictly data driven, its tough for me to see general monetary inflation anywhere. But believe me, when it appears, I’ll see it. With all due respect to Professor Hyperinflation, the data will tell me.

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