Feb 112016
 
 February 11, 2016  Posted by at 9:56 am Finance Tagged with: , , , , , , , ,  


Harris&Ewing National Capital digs out after storm Jan 14 1939

Europe Stocks Head for Worst Drop Since August as SocGen Plunges (BBG)
Hong Kong Stocks Fall 4% in Worst Start to Lunar New Year Since ’94 (BBG)
Yellen: Not Sure We Can -Legally- Do Negative Rate (CNBC)
How Low Can Central Banks Go? JPMorgan Reckons Way, Way Lower (BBG)
Kyle Bass Says China Bank Losses May Top 400% of Subprime Crisis (BBG)
Bass: China Banks May Lose 5 Times US Banks’ Subprime Losses (CNBC)
Germany’s DAX Is One Of The World’s Worst-Performing Stock Markets (BBG)
It’s A Bad Time To Be A Bank (Ind.)
European Banks Face More Energy Problems (CNBC)
Energy Debt Fuels Broader Malaise (BBG)
Is The Market In European Coco Bonds About To Pop? (Ind.)
Some Hedge Funds Want to Make Subprime Auto Loans Next Big Short (BBG)
The Mining Industry Makes Oil Giants Look Great (BBG)
Why Does the US Government Pursue Student Debtors in Prison? (BBG)
Notes from the Locked Ward (Jim Kunstler)
When Will the Rest of Europe Want Its Own ‘Brexit’? (BBG)
Will Greece Become a Refugee Bottleneck? (Spiegel)

I’d just written down as a comment on one of the other articles: “Beware French banks, and Santander et al. It’s far too quiet on that front.” And then I see this flash by at the last minute.

Europe Stocks Head for Worst Drop Since August as SocGen Plunges (BBG)

The relief rally of Wednesday stopped short, with European stocks falling for the eighth time in nine days, heading for their lowest levels since September 2013. Financial results missing projections at Societe Generale, Rio Tinto and Zurich Insurance are adding to growing concerns that the global economy is slowing down. Energy producers deepened their slide as oil fell further. The Stoxx Europe 600 Index lost 3.9% at 9:26 a.m. in London, with more than 580 of its shares slumping. Federal Reserve Chair Janet Yellen yesterday said the turbulence had “significantly” tightened financial conditions and that the central bank might delay planned interest-rate increases. That failed to halt a slide in U.S. stocks, which by the end of the day had erased all of their gains.

European shares have dropped 17% this year and reached their lowest levels since October 2013 on Feb. 9, before rebounding on Wednesday 1.9%. This week alone, the Stoxx 600 is heading for a 6.9% plunge, its worst since August 2011. With a valuation of 13.4 times estimated profits, the gauge is near a more than one-year low relative to the Standard & Poor’s 500 Index. At least four of the 10 worst-performing equity gauges among the 93 that Bloomberg tracks are from western Europe, with Germany’s DAX Index down 19% in 2016 and Italy’s FTSE MIB Index sinking 26%. While all industry groups have been suffering, banks have borne the brunt of the selloff – they’ve plunged 28% this year amid disappointing earnings results and worries over bad loans and creditworthiness. They extended their losses on Thursday, plunging 6% as a group.

European lenders are heading for their lowest levels since the beginning of August 2012 – right when they started to rally after European Central Bank President Mario Draghi pledged to save the euro. Now even speculation that he’ll step up support as soon as next month is doing little to calm the market. A measure of volatility expectations for the region’s stocks jumped 17% on Thursday, heading for its highest level since August. Societe Generale tumbled 12%, the most since 2011, after reporting that quarterly profit missed estimates as earnings at the investment bank fell and it set aside provisions for potential legal costs. While Italian and Greek lenders tumbled the most, Deutsche Bank, Credit Suisse and Standard Chartered were among the biggest decliners, down more than 6.5% each. They’re trading at their lowest prices since at least 1998.

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Beijing will need to move before the Monday Shanghai opening.

Hong Kong Stocks Fall 4% in Worst Start to Lunar New Year Since ’94 (BBG)

Hong Kong stocks headed for their worst start to a lunar new year since 1994 as a global equity rout deepened amid concern over the strength of the world economy. The Hang Seng Index slumped 3.9% as of 1:13 p.m. in Hong Kong as markets reopened following a three-day trading closure, during which the MSCI All-Country World Index dropped 2.1%. The last time the gauge fell so much on the first day of the lunar new year, investors were worried about the health of former Chinese leader Deng Xiaoping. Lenovo and energy producers led declines after crude slumped 11% during the holidays, while jeweler Chow Sang Sang slid after riots in the Mong Kok district. Hong Kong’s benchmark equity gauge tumbled 12% this year through Friday amid concern that capital outflows, a slumping property market and China’s economic slowdown will hurt earnings.

Tuesday’s violence in the shopping district of Mong Kok threatens to deter mainland visitors and worsen a drop in retail sales, according to UOB Kay Hian. “You can’t avoid a drop because everywhere has come down so much during this time and the same concerns are still there – oil price, global recession,” said Steven Leung at UOB Kay Hian. “The image of Hong Kong as a metropolitan city has been hurt quite seriously” by the rioting, he said. PetroChina tumbled 5.7%, while Cnooc, China’s largest offshore oil company, dropped 6.4%. HSBC slid 5.2%, heading for a six-year low. The Hang Seng China Enterprises Index retreated 4.8%, poised for its biggest loss since August. Mainland financial markets remain closed for holidays until Monday. Plunges in crude and concerns over the perceived creditworthiness of European banks has fueled uncertainty over the strength of the world economy this week. Oil fell below $27 a barrel in New York, compared with $31.72 a barrel at the close on Feb. 4.

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Hollow: “..we certainly recognize that global market developments bear close watching,..

Yellen: Not Sure We Can -Legally- Do Negative Rate (CNBC)

As whispers mount that the Fed could implement negative interest rates as a way to goose economic activity, Chair Janet Yellen said Wednesday the central bank has not completely researched whether that would be legal. During her semiannual congressional testimony, Yellen said the Federal Open Market Committee discussed charging banks to hold excess reserves at the Fed but never fully researched the issue. “We didn’t fully look at the legal issues around that,” she said. “I would say that remains a question that we still would need to investigate more thoroughly.” Asked whether she foresees the Fed cutting rates after just hiking its interest rate target in December, Yellen said she did not expect that to happen anytime soon as she considers the risk of recession low.

“There would seem to be increased fears of recession risks that is resulting in rising in risk premia. We’ve not yet seen a sharp drop-off in growth, either globally or in the United States, but we certainly recognize that global market developments bear close watching,” she told the House Financial Services Committee. Her testimony comes as speculation grows that the Fed might consider implementing negative rates on what it pays on excess reserves. That would be one option the Fed would have should the current bout of economic softness intensify. “I do not expect the FOMC is going to be soon in the situation where it’s necessary to cut rates,” she said. “Let’s not forget, the labor market is continuing to perform well, to improve. I continue to think many of the factors holding down inflation are transitory. … We want to be careful not to jump to a premature conclusion about what’s in store for the U.S. economy.”

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No, this is no new normal, it’s still beyond crazy.

How Low Can Central Banks Go? JPMorgan Reckons Way, Way Lower (BBG)

There are “no limits” to how far central banks can ease monetary policy. That’s a recent declaration of both ECB President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda, who have joined their counterparts in Denmark, Sweden and Switzerland in embracing interest rates of less than zero. In September 2014, when the ECB’s deposit rate was minus 0.2%, Draghi was saying “now we are at the lower bound.” As recently as December, Kuroda said “we don’t think we should institute” negative rates. The rethink is global, even in places where rates are still positive.

Bank of England Governor Mark Carney conceded in November that his benchmark could fall below the current 0.5% if needed, while Federal Reserve Vice Chair Stanley Fischer said last week that negative rates were “working more than I can say that I expected in 2012.” Citigroup Inc. economist Willem Buiter says even China could shift below zero next year. The worry had been that probing below zero risked hurting the profitability of lenders, forcing them to pass on the cost to borrowers. Other fears included bank and currency runs, the hoarding of cash or gridlocked money markets. Rather than spurring lending and spending as intended, subzero rates would become more a problem than solution. Such a concern could still flare up anew given the recent selloff in global bank stocks and fretting over financial titans such as Deutsche Bank.

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As I’ve repeatedly said: “The nation’s expanding shadow banking system [..] is where the first credit problems are emerging.”

Kyle Bass Says China Bank Losses May Top 400% of Subprime Crisis (BBG)

Kyle Bass, the hedge fund manager who successfully bet against mortgages during the subprime crisis, said China’s banking system may see losses of more than four times those suffered by U.S. banks during the last crisis. Should the Chinese banking system lose 10% of its assets because of nonperforming loans, the nation’s banks will see about $3.5 trillion in equity vanish, Bass, the founder of Hayman Capital Management, wrote in a letter to investors obtained by Bloomberg. The world’s second-biggest economy may end up having to print more than $10 trillion of yuan to recapitalize banks, pressuring the currency to devalue in excess of 30% against the dollar, according to Bass. Bass, 46, scored big after betting against mortgages in 2007, racking up gains as the world’s largest banks wrote off more than $80 billion in subprime losses.

All his calls haven’t been as prescient. He revealed wagering on a collapse in Japan’s government-bond market in 2010, a short position that Bass later acknowledged that other bond investors had nicknamed “the widow maker.” “What we are witnessing is the resetting of the largest macro imbalance the world has ever seen,” he wrote in the letter. “Credit in China has reached its near-term limit, and the Chinese banking system will experience a loss cycle that will have profound implications for the rest of the world.” Bass said his hedge fund has sold most of its riskier assets since the middle of last year to position itself for 18 months of “various events that are likely to transpire along this long road to a Chinese credit and currency reset.” In an e-mail, he said about 85% of his portfolio is invested in China-related trades.

“The problems China faces have no precedent,” Bass wrote in the letter. “They are so large that it will take every ounce of commitment by the Chinese government to rectify the imbalances. Risk assets will not be the place to be while all of this is happening.” [..] Bass estimates the Chinese economy actually expanded last year at a slower pace than reported, about 3.6%, according to the letter. He estimates that of China’s $3.2 trillion in foreign-exchange reserves, about $2.2 trillion are liquid. The banking system, which he estimates swelled 10-fold in assets over the last decade to more than $34.5 trillion, is fraught with risky products used by financial companies to skirt regulations, wrote Bass. The nation’s expanding shadow banking system – which he says has grown almost 600% in the last three years, citing UBS data – “is where the first credit problems are emerging.”

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A few more details.

Bass: China Banks May Lose 5 Times US Banks’ Subprime Losses (CNBC)

“China’s [banking] system is even more precarious when we realize that, even at the biggest banks, loans are not made to borrowers based on their ability to repay,” he wrote. “Instead, load decisions are political decisions made by the state.” Add to this the danger posed by China’s shadow banking system – made up of instruments Bass claimed the country’s banks used to subvert restrictions on lending – and the upshot was there were “ticking time bombs” in China’s banking system, the hedge fund manager explained. “Chinese banks will lose approximately $3.5 trillion of equity if China’s banking system loses 10% of assets,” Bass wrote. “Historically, China has lost far in excess of 10% of assets during a non-performing loan cycle.”

He noted that U.S. banks lost about $650 billion of their equity throughout the global financial crisis. The letter said that the Bank for International Settlements (BIS) estimated that Chinese banking system losses from the 1998-2001 non-performing loan cycle exceeded 30% of GDP. “We expect losses in this cycle to exceed prior cycles. Remember, 30% of Chinese GDP approaches $3.6 trillion today,” he warned. Bass wrote that he expected the massive losses to force Beijing to recapitalize Chinese banks and sharply devalue the yuan. “China will likely have to print in excess of $10 trillion worth of yuan to recapitalize its banking system,” he said. “By the time the loss cycle has peaked, we believe the renminbi will have depreciated in excess of 30% versus the U.S. dollar.”

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Is you have the likes of VW and Deutsche listed….

Germany’s DAX Is One Of The World’s Worst-Performing Stock Markets (BBG)

A one-day rebound in German shares is doing little to extinguish concerns in what has become one of the world’s worst-performing stock markets. The DAX Index has tumbled 16% this year through Wednesday, posting a loss that exceeds declines in France, the U.K. and Switzerland by as much as seven %age points. It plunged another 3.1% at 9:40 a.m. in Frankfurt. Investors are taking money out of an exchange-traded fund tracking German shares at the fastest pace since August. Fears about Deutsche Bank’s creditworthiness this week added to growing worries over a slowing global economy. Because of Germany’s close ties to China, its biggest trade partner outside of Europe, the nation stands to lose more than others in the region.

Carmakers such as BMW, Volkswagen and Daimler have already tumbled more than 23% this year on weakening demand there. “Oil and China are still on fire and a cause for concern, but we’ve got other, more broad-based fires to be watching now, and Deutsche Bank is just one of them,” said Alex Neil, EFG Bank’s head of equity and derivatives trading in Geneva. “Whichever way you look at the global economy in the next few months, there are more attractive markets than Germany.” While only about a dozen out of 93 equity gauges tracked by Bloomberg have risen this year, Germany stands out for the extent of its losses. After being some of investor’s favorites in 2015, none of the 30 DAX shares rose this year. The gauge closed 27% below its April peak on Wednesday.

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Or a shareholder. A pension fund that holds ‘secure’ stocks.

It’s A Bad Time To Be A Bank (Ind.)

It’s a bad time to be a bank. Banking stocks have lost around a quarter of their value since the start of the year. Some are now trading around lows not seen since the financial crisis. Shares in Deutsche Bank and Unicredit have been particularly hard hit as investors have lost confidence. It took reports that Deutsche Bank was considering buying back some of its own bonds on Wednesday to scrape its share price off the floor. But the extent of the losses suggests that something much bigger than a loss of confidence in one or two banks is going on.

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Beware French banks, and Santander et al. It’s far too quiet on that front.

European Banks Face More Energy Problems (CNBC)

European banks appear to face greater long-term exposure to problems in the energy sector compared to U.S. banks, many of which have already shored up capital reserves for half of their energy debt portfolio. Numerous European banks have not yet seen their borrowers draw down much of the credit that has been allotted for them, or, even more perplexing to analysts and investors, aren’t saying what their exposure to commodity-sensitive credit is, or what has already been committed. At the Credit Suisse Financial Services Conference this week in Florida, several bank executives highlighted the total exposure of their balance sheets to energy debt, but also explained what%age of that exposure is made up of outstanding paper.

Wells Fargo CFO John Shrewsberry highlighted the bank’s $42 billion in total oil and gas credit in his presentation at the conference; 41% ($17.4 billion) is already outstanding. The lender already has prepared for losses in outstanding paper by setting aside $1.2 billion to offset credit losses. The difference between Wells’ energy exposure and many of its competitors is that much of the California-based bank’s paper is non-investment grade. But the finance chief doesn’t sound like he’s sweating it. “This is not new for Wells Fargo,” Shrewsberry said at the event, and he noted “most of these loans are senior secured credit facilities.” However, European banks may have an even greater need to shore up capital. Many have billions in energy credit still waiting to be drawn down, which in turn could impact how much reserves must be set aside to bolster against defaults.

Credit Suisse CEO Tidjane Thiam spoke at the conference run by his bank Wednesday, and explained that while the company’s total energy exposure represents $9.1 billion, only $2.4 billion (about a quarter) of that had been drawn down by borrowers. In a JPMorgan report, analysts highlighted energy exposure for banks including Barclays, Standard Chartered, Royal Bank of Scotland and BNP Paribas. All told, the banks’ commodity exposure represented nearly $150 billion, much of which is yet to be drawn down, according to the report. Deutsche Bank didn’t quantify what its full energy exposure is in its fourth-quarter results, although, according to S&P Global Market Intelligence analyst Julien Jarmoszko, the lender has a lower exposure than its bigger competitors.

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Chesapeake looks done.

Energy Debt Fuels Broader Malaise (BBG)

This will most likely go down as the year of the Great Energy Debt Crisis, a spiral that exacerbated an economic funk that roiled the world. Companies are starting to go bankrupt. Banks are preparing for losses tied to oil and gas loans. And bond markets have all but closed to energy companies, especially the lowest-ranked ones. Borrowing costs for U.S. junk-rated energy companies have soared to records, with yields on their bonds surging past 20% for the first time, exceeding the past peak of about 17% in 2008, Bank of America Merrill Lynch index data show. Moody’s expects the U.S. default rate to reach the highest in six years in 2016, and a growing pool of investment-grade energy debt will most likely be downgraded to junk in the near future.

Chesapeake Energy is fast heading toward default, with Standard & Poor’s calling its debt “unsustainable.” Bonds of California Resources, Linn Energy, Energy XXI, Chesapeake and EP Energy have all lost more than 75% since the end of July. Without a doubt, the relentless carnage in energy debt is spilling over into the broader market, especially as prices continue to plunge, with Goldman Sachs seeing the possibility of crude prices dropping below $20 a barrel after rising as high as $107 in 2014.An estimated $75.7 billion in value has been eliminated from the pool of U.S. energy-related junk bonds since the end of June. Those losses are reverberating through mutual funds and hedge funds, which enabled an unprecedented borrowing spree by these companies just years earlier and are now suffering the consequences.

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Financial innovation.

Is The Market In European Coco Bonds About To Pop? (Ind.)

In May last year Martin Taylor, the former chief executive of Barclays Bank, addressed a crowd of high-powered financiers in the ballroom of the InterContinental Park Lane hotel in London. Mr Taylor, an adviser to the Bank of England’s Financial Policy Committee and an influential voice on market risk, spoke darkly about his fears for Coco bonds, a quirky-sounding debt instrument launched in the wake of the financial crisis. “I talk to a group like this about credit matters with the greatest timidity. I am sure you are good citizens and desire to exercise exemplary scrutiny. But I wonder whether you will flip – like the holders of European sovereign bonds before 2010 – from believing all issuers equally safe to thinking many equally precarious when the sky next darkens,” he said.

Skies have not only darkened this week, but Mr Taylor’s words have a prophetic rings: investors have indeed flipped out with concern about Cocos after the German lender Deutsche Bank was forced to reassure investors it could meet interest, or coupon, payments on its Coco bonds. The move has stoked fears that something is rotten at the heart of the European banking sector and led many to question why Cocos – considered a silver bullet solution – have melted like their chocolate breakfast cereal namesake in the face of market turmoil. Cocos, formally known as contingent convertible bonds, were born out of the 2008 financial crisis as a solution for stricken banks without the need for a state bail-out.

They work quite simply on the surface: banks issue them to finance their business like normal bonds but they morph into equity if a bank’s capital falls below a certain threshold. This automatically reduces a bank’s debt and boosts its capital buffers at a time when external investors could be reluctant to inject new money. The flexibility removes some of the risk inherent in loading up bank balance sheets with debt. But herein lies the rub: how can a bank be flexible on debt obligations without spooking the market into thinking it is in trouble?

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Long overdue.

Some Hedge Funds Want to Make Subprime Auto Loans Next Big Short (BBG)

A group of hedge funds, convinced they have found the next Big Short, are looking to bet against bonds backed by subprime auto loans. Good luck finding a bank willing to do the trade. Money managers have looked at betting that subprime auto securities will tank for many of the same reasons that investors wagered against risky mortgage bonds in the run-up to the financial crisis: Loan volume has mushroomed in the last few years, lending terms have become looser and delinquencies are ticking higher. Mary Kane, an asset-backed securities analyst at Citigroup Inc., wrote in a note late last month that the bank has received “an explosion of calls” in recent weeks, after the movie “The Big Short” portrayed a group of traders that wagered against subprime bonds.

The demand now is coming from hedge funds that trade everything from stocks to bonds, analysts said. But many banks, including Bank of America and Morgan Stanley, are not interested in making the bet happen for clients, according to representatives of the firms. Some said they fear that helping clients wager against car loans would be bad for their reputation, and that new capital rules and other post-crisis regulations would make the transactions difficult or even impossible to put together. “Most trading desks just don’t take that kind of risk now,” said Mike Edman, a former Morgan Stanley executive who helped invent credit derivatives that helped Wall Street banks bet against subprime mortgage bonds.

At least one trading desk has done this sort of trade. Etai Friedman, who runs hedge fund Crestwood Advisors, said he was able to work with a salesman he had known for years to buy an option that performed well if a custom-made index of subprime auto bonds fell. Friedman declined to identify the bank that did the trade, on which he earned a 36% return, but said finding a dealer was hard. “A trade like this is just taboo now,” Friedman said. Banks’ reluctance to help investors bet against subprime auto loans signals that may be paying more attention to how their trades will play with regulators and in the media, after having been criticized for crisis-era transactions.

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They’re all still thinking in terms of short term cycles only.

The Mining Industry Makes Oil Giants Look Great (BBG)

When you find yourself in a hole, the saying goes, stop digging. A simple lesson that arguably has bypassed a mining industry that’s wiped out more than $1.4 trillion of shareholder value by digging too many holes around the globe. The industry’s 73% plunge from a 2011 peak is far beyond the oil industry’s 49% loss during the same time. Just how long it will take for the world to erode bulging stockpiles of metals, coal and iron ore was the central debate at the mining industry’s biggest investment conference in Cape Town this week, which attracted more than 6,000 top executives, bankers, brokers, analysts, miners and reporters. This year may be the worst yet with prices trending lower for longer, according to Anglo American CEO Mark Cutifani, who says his company should be better prepared “for the winter that inevitably comes after the summer.”

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Because it sees it as its duty to harass its citizens.

Why Does the US Government Pursue Student Debtors in Prison? (BBG)

For Cecily McMillan, getting mail while incarcerated was a complex project. Any letter that was sent to her went through a metal detector and was opened by correctional officers before landing in the mailroom, where she had a two-hour window to collect it on a good day, she said. McMillan was living in the Rikers Island facility, a city-run jail complex in Queens, N.Y., but that did not stop the clock on her student loan payments. McMillan was serving a 58-day stint for assaulting a police officer, who tried to remove her from Zuccotti Park on the night of March 17, 2012, when people had assembled to mark the Occupy Wall Street protests. Eight months after she was released, McMillan realized she had missed a letter from a government debt collector warning that one of her federal student loans was coming due.

She ended up defaulting on her loan, leading that debt to balloon 35% to more than $7,600. In all, she had more than $100,000 in student debt. Her experience helps to illustrate the persistence of student loans—the only form of consumer debt that can almost never be erased, even if you declare bankruptcy. While collectors for other types of loans also pursue debtors behind bars, federal student loans are different because the government is the collector, which means taxpayer money is spent trying to reach borrowers who cannot easily communicate with the outside world and have few opportunities to earn money to repay the debt. McMillan, for example, said she was making less than a dollar per hour at her job as a suicide-prevention aid worker at Rikers. The average federal prison worker makes about 92 cents per hour, according to the Economic Policy Institute.

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“..whoever occupies the White House in 2017 will preside over a financial debacle like unto nothing in scale that the world has ever seen before..”

Notes from the Locked Ward (Jim Kunstler)

Beyond all the political histrionics, is there not some broad recognition that whoever occupies the White House in 2017 will preside over a financial debacle like unto nothing in scale that the world has ever seen before? With all the reverberating side effects imaginable among the traumatized nations? Something wicked has been creeping through the stock markets since the year began. The velocity and damage are amping up. Credit default swap spreads are yawning like fault lines in a ‘quake. Bankers are watching their share prices collapse. It’s a wonder that panic has not already broken out.

This is not just about Wall Street and its counterparts in London, Shanghai, Tokyo, and Frankfurt. This is the financial world (and underworld) catching up with the Economy of Actual Stuff. In the USA, that economy has bled out like a hapless bystander with a sucking chest wound for the last eight years. Despite all the patriotic sanctimony on view at the Superbowl, the nation appears to be visibly cracking up, along with the fantasy of a permanent global economy. None of the desperate work-arounds since 2008 have worked around the predicaments of our time. Politics will not abide a rational journey out of our fatal hyper-complexity to something simpler and more consistent with the realities at hand. Expect more and greater craziness as the year lurches on.

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I can tell you when: when the economy deteriorates sharply. How does 2016 sound?

When Will the Rest of Europe Want Its Own ‘Brexit’? (BBG)

If David Cameron leaves next week’s European Union summit with a deal to overhaul the terms of Britain’s membership, many of his counterparts will breathe a sigh of relief – and dig out their own wishlists. As populist and anti-EU forces surge across the region, the prime minister’s ultimately successful strategy of issuing demands for change and threatening to leave if they’re not met has left an impression on his fellow leaders, two senior EU officials said. Some see his approach as a template for pushing their own causes, the officials said, asking not to be named because the discussions were private. “The fact David Cameron raised a number of concerns and these concerns have all been addressed is creating a political precedent,” said Vincenzo Scarpetta, policy analyst at the London-based Open Europe think tank.

“The British renegotiation has to be seen as a longer-term path – Cameron has raised existential questions about the future of the EU.” Europe’s economic foundations were fractured by the debt crisis and now over a million refugees are pulling at its social fabric, bolstering populist movements from Madrid to Helsinki and fanning anti-EU feeling in former Soviet-bloc nations. That ensures when Cameron pushes for an accord at the Feb. 18-19 summit diminishing some of the bloc’s influence over the U.K., the shockwaves could resonate far beyond the English Channel. “All eyes are on France,” said John Springford, senior research fellow at London’s Centre for European Reform. EU officials are keen on “sending signals” to National Front leader Marine Le Pen and the wider French electorate “that this trick won’t work,” because “if France goes euro-skeptic, the project is toast.”

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“..it would lead to “downright apocalyptic scenarios”: Greece would collapse within a few weeks..”

Will Greece Become a Refugee Bottleneck? (Spiegel)

At five o’clock in the morning last Tuesday: Macedonia has once again closed its border, and just a few hours later, chaos reigns. Eighty buses with 4,000 refugees have been stopped by the Greek police 20 kilometers from the frontier and they are now waiting in a gas-station parking lot. Bus drivers argue, refugees jostle on the overfilled lot and overwhelmed police officers yell orders. “Macedonia, Macedonia,” the people waiting scream, “open the border!” But today, the border remains closed to most people. And if it were up to Brussels and the Germans, it would remain that way – that is, to anyone not from Syria, Iraq or Afghanistan. Since mid-November, Macedonia has tightened its border controls and whoever isn’t from one these three countries is turned away. Now, many people’s dreams of Europe come to an end here, in Idomene.

For it has recently become clear that Turkey is both unable and unwilling to stop the flow of refugees. As a result, the EU is placing its bets on Macedonia, with a plan that has the support of European Commission President Jean-Claude Juncker. Last year, the majority of the over 850,000 refugees traveling along the Balkan route went through Macedonia. If authorities have their way, that will come to an end. “Macedonia is our second line of defense,” says a high-ranking EU official. Several EU states have approved the deployment of 82 officers in Macedonia with the task of improving border protection. Financial support is to follow. If Macedonia reduces the number of people it allows into the country, it will lessen the pressure on Germany and Austria. It will also mean that more people will stay in Greece – and, Brussels hopes, place additional pressure on Greece to better protect its borders.

Idomene is a case study of what would happen were Europe to seal its borders and shut down the Balkan Route, the path most migrants take on their way to Germany and the rest of Europe. The result would be a massive backup of hundreds of thousands of refugees in Greece. And this in a country that is in a deep recession, and where every fourth citizen is unemployed. It is a country where angry farmers, teachers, doctors, lawyers, taxi drivers and ferry workers — actually everyone — is opposed to the government’s austerity measures. And it is a country that is once again in danger of sliding into its next big political crisis. The country will face big problems if Prime Minister Alexis Tsipras can’t find a compromise with the country’s international creditors, who are pushing for tough reforms. Or if Greece is made to bear the burden of the refugee crisis.

[..] According to a report by the Gemeinsames Analyse- und Strategiezentrum illegale Migration (Joint Analysis and Strategy Center on Illegal Immigration), many refugees in Greece live on the streets, even children and neo-nazis periodically hunt them down. The conditions for many refugees in Greece are described by the German authorities as “inhumane.” And still, the country is potentially being turned into a giant refugee camp. According to a confidential memo from the German Foreign Office, a backup of refugees would “inevitably lead to uncontrollable humanitarian conditions and security problems within days.” Migration researcher Franck Düvell from Oxford University warns that it would lead to “downright apocalyptic scenarios”: Greece would collapse within a few weeks, he believes.

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Jun 082014
 
 June 8, 2014  Posted by at 10:11 am Finance Tagged with: , , ,  


Office of War Information Watching D Day news line on New York Times building June 6, 1944

Much ado about nothing. That about sums up the real story behind the heated headlines on the “historic” decision by the ECB to lower its deposit rate into negative territory, from 0% to -0.1%. Because without any actual deposits, the move is empty, meaningless, showmanship, sleight of hand. There was a time when it made sense for banks to park reserves at the central bank, but that time is long gone, since banks don’t have to be afraid of each other’s hidden debts anymore. Not because those debts have disappeared , but because governments and central banks are now on the hook for them.

First, in November 2011, the Financial Stability Board published its initial official list of SIFIs or “Systemically Important Financial Institutions”, another way of saying Too Big To Fail. Being on the list may come with a few requirements, reserve ratios etc., but much more importantly it cemented the coup by the banking world in the wake of the financial crisis. Other than those few requirements, they could now act with impunity: any losses would be covered first by the people of the countries the banks had their headquarters in, but in the case of Europe also by other EU citizens.

What risks remained in the system, such as smaller banks and peripheral bonds, were taken away on July 26 2012 by Mario Draghi’s infamous “whatever it takes” speech. From there on in it’s been smooth sailing. For the banks that is, not for the various economies. To wit: yields on PIIGS bonds are now about on par with US Treasuries, even as Spanish, Italian and Greek unemployment numbers have stayed absurdly high for years now. That’s the kind of distortion you can only get through the promise of unlimited spending from central banks.

I picked up the graph below from Dutch business channel RTLZ and adapted it a little. It needs precious few further comments. From the $800 billion in deposits in early 2012, perhaps $10 billion or so is left. Chump change. The negative deposit rate has neither meaning nor impact. The Systemically Important Financial Institutions are in full control of the game. And that cannot bode well for the man and woman in the street.

Banks Are Digging Into China Metal-Backed Loans (WSJ)

As many as a half-dozen banks are trying to determine whether the collateral for loans they made to commodities traders was used fraudulently by a third party to obtain other loans, according to people with knowledge of the matter. The banks, including Citigroup and Standard Chartered, provided loans to trading firms that were backed by metals such as copper and aluminum stored at one of China’s biggest ports, the people said. The trading firms hold the deed to the metal, which can be used to secure financing, but the metal stays in a warehouse. Banks fear a private Chinese company may have used the metal as collateral to get multiple loans, potentially defrauding the lenders and trading firms. Two of the people with knowledge of the matter estimated the value of the loans and collateral at several hundred million dollars.

The banks are frustrated because they haven’t been able to get access to the collateral, the people said. The metals are stored at Qingdao Port, which administers the warehouses. An executive at one of the banks said the title documents from the warehouses may have been photocopied and used to secure the loans. Police in Qingdao, a city of nearly nine million people in eastern Shandong province, are scrutinizing paperwork between a domestic company and the port, according to another person familiar with the matter. In one suspected instance, five receipts involving one stockpile were found, even as the port claimed to have only issued one, this person said. [..]

The potential fraud raises questions about the integrity of commodities warehouses in China, one of the world’s largest users of commodities, and how trading is financed. There has been concern among policy makers that commodities in China are being used to get financing for cash-strapped companies. As credit tightens and the nation’s economy slows, some investors worry that the commodities will be dumped onto the market as banks seize collateral, potentially knocking down prices. There is also concern that demand in China will collapse because so much of the metal had been stockpiled in warehouses.

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Maybe the courts can do what regulators won’t. But that’s still a big maybe.

US Exchanges Face Class Action Suit Over High-Frequency Trading (Guardian)

The American lawyer who orchestrated a successful class action suit against the tobacco industry 20 years ago has turned his sights on the stock exchanges caught up in the controversy over high-frequency trading. HFT is the process by which professional traders are able to put orders in to the stock market more quickly than the majority of investors. Putting in these earlier bets on the market, it is alleged, allows professionals to make quick profits at the expense of savers and investors in pension funds. The practice is being tested in a class action suit filed in a New York court last month by a number of US legal firms including Michael Lewis, the lawyer who led a class action suit brought by the state of Mississippi in 1994. The team of lawyers he assembled at that time led to $368.5 billion being paid out by 13 tobacco companies to cover the cost of treating illnesses related to smoking in almost 40 US states.

In an interview in Weekend magazine, Lewis – who is not related to the author of the same name whose book Flash Boys exposed high-frequency trading to the public – describes his court action as “a small skirmish against the larger backdrop of the vast accumulation of wealth and political power”. The case in the Southern District of New York is filed against 13 stock exchanges and subsidiaries on behalf of Harold Lanier “individually, and on behalf of all others similarly situated”. “This is a case about broken promises,” the 40-page document begins. It is signed by eight legal firms. In the interview, Lewis says that the information being provided by exchanges “was not timely or accurate, and wasn’t fairly distributed”, and alleges that they were in breach of contract. “The illusory market – the market that the investor sees when he looks at his monitor – is anywhere from 1,500 to 900 milliseconds old. That doesn’t sound like much, because the blink of an eye is 300 milliseconds. But that’s a long, long time in the world of HFT.”

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Interesting way to look at the numbers.

BLS Employment Surveys Diverge (Alhambra)

It’s payroll day again, which means we get to watch the straight-line march of the Establishment Survey “confirm” whatever the observer wishes to infer because a straight line is both uninteresting and mostly not useful. This happens, of course, regardless of what other parts of the survey or other surveys show. The most prominent disagreement continues to be with the Household Survey, diverging conspicuously in October 2012. We can also add the labor force, which flattened out also in October 2012, as well as one other data point. The headline numbers were all exactly in line with previous months, which should stand out as something askew more than act in confirmation. The economy certainly doesn’t move in a straight line so it stands to reason there should be more than a little lumpiness to payroll changes even including adjustments. Ever since the start of 2013, the Establishment Survey has become more of a straight line than at any time in its history.

Going back a few months before, it was there that the Household Survey began to “undercount” employment, at least by comparison. While the mainstream position places far greater faith (which is what it is) in the more quoted Establishment Survey, the other parts of the payroll report disagree – and some vehemently. As I have shown in previous months, prior divergences between the two surveys were typically small and never endured for very long. The last 20 months have been highly unusual to say the least. However, the somewhat healthy increases in the official labor force flattened out right around that same month. In fact, the labor force in October 2012 was 155.5 million, and is estimated to be 155.6 million in today’s release. Measuring from January 2013, when the Establishment Survey’s straight line grew straighter, the labor force is actually 86k fewer in number.

This is highly irregular as well except during periods of open contraction. It is not just the labor force that shows this trend, either, as I noted earlier this week household formation has dropped significantly in the past year or so. Adding that data point to the mix reinforces this interpretation, particularly as the change in trend dates once again to about October 2012. This is beyond random coincidence and mere population characteristics. How can it be related to population when the Household Survey, an alternate measure of employment, picked up the same exact inflection at the same exact time? The only way to tie these factors together and maintain logical consistency is to look to the macro economy as something other than what the mainstream indication is being used for. Putting household formation together with the unadjusted Establishment Survey shows this divergence perhaps even clearer.

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As forests disappear, so do languages. Let’s all switch to Mandarin, shall we?

Loss Of Biodiversity Linked To Loss Of Human Diversity (Guardian)

New Guinea has around 1,000 languages, but as the politics change and deforestation accelerates, the natural barriers that once allowed so many languages to develop there in isolation are broken down. This is part of a process that has seen languages decline as biodiversity decreases. Researchers have established a correlation between changes in local environments – including the extinction of species – and the disappearance of languages spoken by communities who had inhabited them. “The forests are being cut down. Many languages are being lost. Migrants come and people leave to find work in the lowlands and cities. The Indonesian government stops us speaking our languages in schools,” says Wenda.

According to a report by researchers Jonathan Loh at the Zoological Society of London and David Harmon at the George Wright Society, the steep declines in both languages and nature mirror each other. One in four of the world’s 7,000 languages are now threatened with extinction, and linguistic diversity is declining as fast as biodiversity – about 30% since 1970, they say. While around 21% of all mammals, 13% of birds, 15% of reptiles and 30% of amphibians are threatened, around 400 languages are thought to have become extinct in the same time. New Guinea, the second-largest island in the world, is not just the world’s most linguistically diverse place, it is also one of the most biologically abundant, with tree-climbing kangaroos, birds of paradise, carnivorous mice, giant pigeons, rats bigger than domestic cats and more orchid species than any other place on the planet.

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A timely warning. Complacency is never a good driver.

A Hawk Stirs as Weber’s UBS Sees U.S. Inflation Set to Take Off (Bloomberg)

Leave it to Axel Weber to sound the inflation alarm while most of the world is focused on the threat of deflation. A stalwart advocate of tight money at the European Central Bank, where he helped to set interest rates from 2004 to 2011, Weber says U.S. price gains and the subsequent response of the Federal Reserve will outpace investor expectations. “I see more potential ahead for nervousness in the market,” Weber, chairman of UBS since 2012, told a London conference of the Institute of International Finance yesterday. “The whole driver is going to be the inflation rate by the end of the year in the U.S.” The boss’s concerns are shared inside Switzerland’s largest bank.

In a May 27 study, New York-based economist Maury Harris and colleagues outlined what they called a non-consensus view that the personal consumption expenditures price index excluding fuel and food will reach 2% by the end of this year. It rose 1.4% in April. The Fed’s benchmark rate will jump to 1.25% by the end of next year and 3.25 by the end of 2016, UBS predicts. By contrast, the median estimate of economists in a May survey was for a 0.75% rate by the end of next year. The UBS analysis points to tightening labor and rental markets, a less-disinflationary impact from imports and price gains at the factory gate. Such an environment sets the stage for a surge in bond yields by the end of the year, forcing the Fed to retreat from its low-interest rate commitment, in UBS’s view.

The 10-year Treasury yield will rise to 3.25% in December from 2.57% today and touch 4% by the end of 2015, it says. That would surprise many, with the median forecast of analysts in another Bloomberg poll suggesting the yield will be 3.14 percent in the fourth quarter of this year. A year since emerging markets were roiled by the fear the U.S. central bank was readying to withdraw stimulus, Weber now says investors worldwide must brace themselves anew for international fallout from the Fed. “Every U.S. tightening cycle has been associated with repercussions in the global economy,” he said. “I don’t have the hope it will be different this time around.”

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The US government may be facing a credibility problem.

The Two Key Numbers That Shadow The Jobs Numbers (WaPo)

The monthly jobs report is comprised of two numbers, calculated using two different methods. In May, the economy added an estimated 217,000 jobs and the unemployment rate stayed at 6.3%. But looking at those two numbers outside of the context of two other numbers means you’re not seeing the full picture.

Jobs numbers and population Earlier, we noted that the economy hit a post-recession milestone: The number of people employed in the United States has finally passed the level of January 2008, the previous peak. (There are a number of footnotes that could be applied to “number of people employed,” but we’re going to skip those for now.) Thanks to those 217,000 more jobs, there are about 98,000 more people employed than in that month. But you can’t look at those job gains without looking at another number: population. Below is a graph of the number of people employed in the economy relative to January 2008 (“JOBS”) with another set of data, the noninstitutional population of the country relative to the same month (“POPULATION”).That’s the shadow. And it shows that job additions since 2010 have essentially kept pace with the growth of the number of people in that same time period.

Unemployment rate and participation Likewise, you can’t just look at the unemployment rate by itself. The unemployment rate is a simple fraction: the number of people employed divided by the number of people in the workforce. If a million people are in the workforce and 800,000 are employed, 80% of them are employed and the unemployment rate is 20%. Simple enough. But the size of the workforce fluctuates. People retire, people graduate from college, people go on disability, people just give up on finding work. So if the workforce suddenly drops to 900,000 in our previous example, eight out of nine people are working, instead of eight out of 10. The unemployment rate goes from 20% to 11% in a snap, with no one getting a job. The government counts the percentage of people participating in the workforce, too. And it tracks neatly with the unemployment rate, as you can see in the graph below, which shows the change in percentage rate since January 2008. Participation is the unemployment rate’s shadow.

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” … go easy on the hallelujahs”

Most US Workers “Running Up The Down Escalator” (AP)

The U.S. economy has finally regained the jobs lost to the Great Recession. But go easy on the hallelujahs. The comeback is far from complete. Friday’s report from the government revealed an economy healing yet marked by deep and lasting scars. The downturn that began 6Ω years ago accelerated wrenching changes that have left many Americans feeling worse off than they did the last time the economy had roughly the same number of jobs it does now. Employers added 217,000 workers in May, more than enough to surpass the 138.4 million jobs that existed when the recession began in December 2007. But even as the unemployment rate has slipped to 6.3% from 10% at the depth of the recession, the economy still lacks its former firepower.

To many economists, the job figures are both proof of the sustained recovery and evidence of a painful transformation in how Americans earn a living. “The labor market recovery has been disappointing,” said Stuart Hoffman, chief economist at PNC Financial Services. “Even with the new peak, there is still a great deal of slack.” There are still 1.49 million construction jobs missing. Factories have 1.65 million fewer workers. Many of these jobs have been permanently replaced by new technologies: robots, software and advanced equipment that speeds productivity and requires less manpower, said Patrick O’Keefe, director of economic research for the advisory and consulting firm CohnReznick. “When heavy things need to be moved, we now have machines to do it,” O’Keefe said. “It is unlikely in the manufacturing sector that we recover much of the losses.”

Government payrolls have shrunk, taking middle class pay with them. Local school districts have 255,400 fewer employees. The U.S. Postal Service has shed 194,700 employees. And during the economic recovery, more people have left the job market than entered it. Just 58.9% of working-age Americans have jobs, down from 62.7% at the start of the recession. Some of that decline comes from an aging country in which more people are retiring. But the share of working adults among the overall population is “still bouncing around at the bottom where it was during the worst of the recession” evidence that meaningful wage gains across the economy are unlikely, O’Keefe said.

The recovery hasn’t kept up with the expanding U.S. population. Researchers at the liberal Economic Policy Institute estimate that 7 million more jobs would have been needed to keep up with population growth. The pain has been concentrated largely among lower- and middle-income workers, according to an analysis by the institute. For the bottom 30% of earners, wages, when adjusted for inflation, have fallen over the past 14 years. For the next 40% of earners, pay basically flatlined. Most U.S. workers are “running up the down escalator,” said Larry Mishel, the institute’s president.

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if nobody believes the unemployment numbers anymore, why keep publishing them?

What’s The Real Unemployment Rate? (CNBC)

The U.S. Labor Department said Friday that the unemployment rate was 6.3% in May—but does that rate tell the real story? A number of economists look past the “main” unemployment rate to a different figure the Bureau of Labor Statistics calls “U-6,” which it defines as “total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a% of all civilian labor force plus all marginally attached workers.” In other words, the unemployed, the underemployed and the discouraged—a rate that still remains high. The U-6 rate fell slightly in May to 12.2%. While it is down 160 basis points over the last year, the trend has been somewhat more volatile than in the main unemployment rate, which steadily declined. Over the last 18 months, the U-6 rate has changed by at least four-tenths of a point from month to month five times.

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The Fed Won’t Let the Economy Heal (Mises Inst.)

Most commentators are of the view that the massive monetary pumping of the Fed during 2008 prevented a major economic disaster. The yearly rate of growth of the Fed’s balance sheet jumped from 3.9% in January 2008 to 150.9% by December of that year. The federal funds rate target was lowered from 3% in January 2008 to 0.25% by December of that year. According to popular thinking, the Fed’s actions have bought time to allow the US economy to heal — much like keeping a coma patient on life support. Consequently, popular thinkers are harshly criticizing commentators that advocate allowing economic recession to take its course. Contrary to popular thinking, economic recessions or economic busts are not about the end of the world but about the removal of various non-productive activities, also labeled as bubble activities brought about by previous loose monetary policies of the central bank.

Observe that by means of loose monetary policy wealth is diverted from wealth generators to non-wealth generating activities. The stronger the pace of monetary pumping the stronger is the divergence of wealth. (Bubble activities, which don’t generate wealth, cannot exist without this divergence.) Obviously then the longer the divergence of wealth takes place the weaker wealth generators become. Note that once the ability of wealth generators to generate wealth comes under pressure the so-called economy follows suit. After all it is the increase in wealth that supports overall economic activity. It is increases in wealth that fund increases in productive and non-productive activities. So how then can aggressive monetary pumping by the Fed during 2008 have allowed the economy to buy time and to heal?

We suggest that the massive monetary pumping of 2008 has bought time for non-productive bubble activities. However, as we have seen, such activities undermine wealth generators thereby weakening the economy as a whole. If loose monetary policy is enforced over a prolonged period of time it runs the risk of severely weakening the process of wealth generation. A situation can then emerge where the pool of wealth becomes stagnant or starts to decline. Once this happens the economy plunges into a severe slump since there is now less funding available to support both productive and non-productive activities. In such a case, what is required to heal the economy is the fast removal of bubble activities. This will leave a larger amount of necessary funding in the hands of wealth generators thereby strengthening the process of wealth generation — the key for economic recovery.

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It’s clear whose side Draghi is on.

Draghi Faces Off With Regulators Over $2 Trillion In Tricky Debt (Bloomberg)

Mario Draghi is on a collision course with regulators as he seeks to revive Europe’s asset-backed debt market to boost lending to businesses. The European Central Bank president said yesterday regulators are holding back the market he wants to use to spur economic growth. Policy makers are frustrated by the Basel Committee on Banking Supervision’s demands that investors increase the capital they hold to absorb losses on the debt. “We are working on the ABS, but you know that there are also other actors,” Draghi said at a press conference in Frankfurt. “There has to be a revisitation of the regulation that had been introduced in the past few years about ABS to eliminate some of the undue discriminations.”

Europe’s $2 trillion ABS market contracted 32% since 2009 as regulators cracked down on the debt they blamed for deepening the financial crisis. The securities package individual loans such as mortgages, auto credit or credit-card debt and sell them on to investors, allowing banks to share the risk of default and encouraging them to offer more credit. Regulators have been wary of the securities as the complicated structure of some products can obscure the true riskiness of the underlying assets. That happened with securities backed by the U.S. sub-prime mortgage market, which imploded in 2007. Lenders from London-based Barclays Plc to Deutsche Bank AG in Frankfurt say the rules are becoming so onerous they may shun some of the debt, prompting the ECB to join with the Bank of England to seek to ensure the market isn’t unnecessarily impaired.

The ECB is promoting bonds backed by loans to small- and medium-sized enterprises in a bid to increase funding to the businesses that employ about 70% of the European Union’s private-sector workers. Draghi said the plan to revive the market includes buying “simple and transparent” notes that are backed by non-financial private sector debt. That may prove to be a challenge, according to New York-based Citigroup Inc., because there are only about 13 billion euros ($18 billion) of public bonds outstanding. “They may well succeed in reviving the market, but only in encouraging exactly the sort of credit-intensive growth and associated bubbles in asset prices which got us into trouble in the first place,” Citigroup analysts led by Matt King said in a note to clients yesterday before Draghi spoke.

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Draghi’s Big Fat Monetary Zero (Detlev Schlichter)

Before the ECB’s latest move, eurozone banks could get regular funds from the ECB at 0.25%, emergency funds at 0.7%, and they could deposit money at the ECB at 0%. After the ECB’s move, they can borrow regular funds at 0.15%, emergency funds at 0.40%, and they now get charged 0.1% for anything they keep at the ECB. What will the impact of all of this be? Pretty much nothing, I believe. It is sometimes stated that the –0.1% on deposits at the ECB is a fine for “parking” cash at the ECB and that it will encourage banks to do other things with the money. I think that this description is inaccurate. It gives the impression that banks could lend this money to corporations and households. But banks cannot do this.

Deposits at the central bank are bank reserves. They cannot be transferred and cannot be lent to non-banks because non-banks do not have an account at the central bank. Banks can lend these balances to other banks but the banking sector in aggregate cannot get rid of them. This means that at the new negative deposit rate the banking industry will pay about €220 million to the ECB every year and they can do precious little about it (but not to worry, this is small change in the big scheme of things). How can this potentially be stimulating? Individual banks that sit on large reserves may try and reduce their balances at the ECB by creating extra loans. When banks extend new loans they also create extra deposits (new money). Some of these deposits may flow to other banks, which means reserves also flow to other banks, that is, the balances at the ECB of the first bank (the credit and money creating bank) shrink. (Again, this does not lower balances at the ECB in aggregate.)

How many new and risky loans to small and medium sized companies banks will create to avoid the 0.1% “fine” at the ECB I do not know. My guess is it won’t be many. The extra money injections from September onwards seem equally ridiculous to me. Banks are not lending because of some shortage of reserves or lack of interbank liquidity but out of concern for their own balance sheets and the risks inherent in extending new loans to their shaky debtors. There also appears to be limited demand for loans.

By caving in to its critics rather than vigorously defending its previously passive but reasonable policy position, the ECB nurtures the foolish belief that various monetary shenanigans could play a meaningful role in improving the European economy. These policies will not solve anything but wet the appetite for more monetary interventions down the road. The advocates of “easy money” will not be appeased for long. For these people money is always too tight, interest rates are always too high and budget deficits always too small. There is always too little “stimulus”. Paul Krugman is a case in point.

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Draghi’s Horrible Threat: “Are We Finished? The Answer is No” ! (Stockman)

Taken at face value yesterday’s action by the ECB amounted to a monetary farce. How could any adult believe that a benchmark rate cut of 10 bps from an already microscopic level of 25 bps would move the needle in an economic zone that is already groaning under of the weight of $60 trillion in public and private credit market debt? Similarly, what exactly is the point of negative rates on excess bank funds deposited at the ECB when there will never be any takers? After all, Euro banks do have alternative parking lots for idle cash. Likewise, how does inventing a grand new acronym called TLTRO hide the fact that its essentially a free toaster program for clever loan book managers? As instructed by this swell new ECB writ, they will presently shuffle some funds out of mortgages, sovereign debt or other speculative purposes yet to be defined and into approved “productive” loans.

And then they will pass “go”, collect some cheap TLTRO funding from the ECB and collect their own performance bonus for all the bother. All of this silly kidstuff, in fact, is the work of Keynesian desperados in Frankfurt who embrace two propositions that are unequivocally and provably wrong. Namely, that the Euro area economy is floundering due to a tiny decline in non-financial credit and that “low-flation” is the great roadblock that prevents the wheels of credit and commerce from turning at a more satisfactory pace.

In truth, the Euro zone has had an explosion of bank credit growth to the private non-financial sector. Outstanding bank loans grew at a 7.5% CAGR during the 10-years ending at the eve of the financial crisis in early 2008. During those halcyon days there was obviously nothing wrong with the bank credit machinery—especially given the fact the euro zone money GDP grew during the same decade at only a 4.4% CAGR. Expressed in absolute dollar terms, the gain borders on a borrowing frenzy. During that decade, non-financial debt outstanding in the euro zone grew by the equivalent of $7 trillion—which is to say, by an amount equal to the entire loan book of the US banking system on the eve of the crisis.

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