April 8th, 2013 Alex Jurshevski
In modern social psychology, cognitive dissonance is the feeling of discomfort when simultaneously holding two or more conflicting cognitions: ideas, beliefs, values or emotional reactions in your mind at the same time. The theory of cognitive dissonance proposes that people have a motivational drive to reduce dissonance by altering existing cognitions, adding new ones to create a consistent belief system, or alternatively by reducing the importance of any one of the dissonant elements.
Following last week’s announcement by Bank of Japan Governor Kuroda that it will “do anything it can” to get Japanese inflation up to 2%, JPMorgan said in a communication that the Japanese, European and U.S. central banks are now in the same camp when it comes to monetary stimulus. The JPM economist who provided that assessment is undoubtedly well-remunerated, being in the regular habit of taking obscurantist developments and putting them in language that his less erudite bosses find comforting, easy to understand and easy to pass on as Gospel to the bank’s clients and investors.
In fact, based on actual statements made recently by these various central banking institutions, it seems that nothing could be further from the truth.
In January, Bloomberg blared the headline â€œBernanke Dissatisfied With Growth Will Press on With QE Paceâ€. The Fed seems to be expecting growth and NOT inflation to be the result of its QE program.
Based in his recent comments ECB Governor Draghi is also focused on pushing a form of QE in the hopes that Euro-Zone Growth can recover to a more stable and higher growth path.
However, in contrast, the BOJ is hoping for inflation, and not growth. The specifics are simply that Governor Kuroda announced plans to double the BOJ’’s monthly bond purchases and achieve 2 per cent annual inflation within the next 2 years. This follows the smaller-sized, though entirely similar, expansionary policy that in the last two years has caused the Yen to fall almost 20 percent against the majors. Only the Venezuelan Bolivar and Malawian Kwacha have fallen by more over the same period.
The reality is that over the last 4 years one of the most enduring fictions promulgated by the authorities and their handmaidens on 19th Street, is that central bank money printing and central government pump priming will act together to generate self sustaining growth in the economies hit by the Global Financial Crisis. This is an elaborate fantasy on which we have commented before.
There is in fact no amount of funny money and deficit finance that can steer things back onto a sustainable path unless the obstacles to growth and recovery are removed. All of the serious economic research and actual economic history that we have reviewed supports this central truth.
And now we have evidence that the world’s central bankers do not even agree on what it is possible to achieve through QE.
Is it inflation or is it growth??
This is like asking you if the objective of your exercise regimen is to gain more muscle or more fat and you actually believe that you can achieve either by following the same plan.
The real reason for the QE being pursued in the various economies of the G7 and the Euro-Zone is that Government finances in certain key countries are hemorrhaging and that this is interfering with the ability of certain Governments Â to even keep up the pretence that financing requirements can be funded in the normal course.
As such the latest BOJ announcement is a sign of weakness and cause for concern rather than renewed hope. The markets which rallied on the news have got it wrong.
Source: The Japan Times
Beyond this, there are additional problems and concerns specific to the just announced Japanese policy update. For example
- Financial Policy. THis latest policy wheeze is nothing more than another salvo in an ongoing currency war. Therefore it is only likely that Japan’s trading partners will pressure the Government there to slacken their efforts to weaken the Yen in order to preserve their own growth prospects. This could lead to international tensions over economic policies;
- Monetary Policy Flexibility. The BOJ has been expanding its QE more aggressively than either the the FED and ECB, burdening its balance sheet with riskier assets and making even the possibility of an exit from this policy nothing more than a wistful fancy;
- Investor and Consumer Behavior. The QE policy distorts price signals; obscures the risk and risk/reward properties of investments; penalizes savers at the expense of borrowers (The Government being the biggest with the biggest interest tab. See above.) and encourages mal-investment;
- Starting Point Risk. This policy does not sufficiently take into account the very serious structural problems in the Japanese economy which have hampered growth and resulted in deflation. These include, most importantly the failure to properly remediate weakness in bank balance sheets, the effects of an aging population, including waning tax receipts; and the fact that Japan already has the largest (and effectively unsustainable) debt load on the face of the planet;
- Re-entry Risk. Monetary Policy implementation is a very uncertain process and the transmission mechanisms and relationships are not stable or predictable in even the medium term. There is no plan, no way to reverse what is being proposed, not in Japan, not in Europe and not in the US. If these policies do act on inflation and money demand drops as the policymakers wish, then it may trigger a self reinforcing bout of price Â inflation that (a) will be hard to control; (b) will cause a variety of easily anticipated economic problems, and (c) very likely create new unanticipated problems, stresses and conflicts relating to the policies of competitive devaluation that are being pursued.
Of course we are sure that the policy wonks at the BOJ (and the FED and the ECB) are completely aware of the dangers and problems regarding their policies and of which we write. It is just that they cannot muster the intestinal fortitude, leadership and political will to opt for a solution that does not amount to a combination of bargain basement wallpaper, cheap glue and a snappy sales patter.
Therefore, at this juncture it is of only one thing we can be certain: if there is a limit to “safe money printing” (as if this term is not an oxymoron in and of itself), then the current set of central bank incumbents seem dead-set on finding it.
“…nobody is qualified to wield unlimited power.”
Friedrich von Hayek, The Constitution of Liberty, 1960
March 17th, 2013 Alex Jurshevski
“An emphasis by bankers on the collateral value and expected value of assets is conducive to the emergence of a fragile financial structure.” Hyman Minsky, Stabilizing an Unstable Economy (1986).
More than 25 years ago the famed American economist Hyman Minsky postulated that financial stability would be weakened when lending in the economy became excessively dependent on the value of the underlying collateral rather than the income-earning potential of those same assets. In recent years his theories, this one included, have been vindicated by real world examples time and time again â€“ the most obvious instance of a credit system run amok and dependant on rising asset prices was Japan in the Postwar period â€“ everything was linked to real estate. They are still sweeping that one upâ€¦.and even after more than twenty years of failure, most people in that economy remain oblivious to the incompetence of their bankers, policymakers, and government officials that led the country into the abyss.
Today in Europe (and elsewhere) we are witnessing the compounding of policy mistakes made not so much strictly in advance of the recent GFC (Global Financial Crash) but in the months and years since its sudden onset in 2008. These mistakes centre on a belief by the authorities that everything would be all right if collateral values just picked up, and their unshakeable conceit that what they have done and what they are doing to remediate the damage done by the crisis in this way is safe, efficient and correct.
In the face of it all, job prospects, particularly for Europeâ€™s youth have worsened; plant closures have run apace, workers benefits have suffered, pensions and social services have been cut; yet the European economy remains stuck in neutral.
Last week for example thousands of workers again took to the streets to demand an end to the austerity measures that have seen a number of European countries wracked by social, strife, high unemployment, and despair. Most of the Euro-zone economies have remained mired in slow or negative growth mode for almost three years. With 26 Million out of work across the EU and the Eurozone registering its sixth consecutive quarter of negative growth, ordinary people are coming to the obvious conclusion : â€œâ€¦.these policies do not workâ€.
In January, even the IMF got into the act by proclaiming that its austerity-based policy prescriptions may have been erroneous and could in fact be making things worse.
So its fairly easy to conclude that last weekâ€™s EU summit wasnâ€™t exactly a warm and fuzzy family barbeque type of scenario. In fact the most recent set of meetings was probably the 250th get-together involving politicians and government officials since the crisis began. Â All of these jamborees have passed without a positive, workable solution to the crisis being tabled, much less implemented.
Last week was no different: Again, the usual platitudes were served up; accompanied by the usual hand-wringing from Europe’s brightest and best minds. No specific policies were discussed much less adopted that would have been aimed at steering away from austerity; and, importantly, there was no nod fromÂ Germany and its po-faced representatives that they would in fact countenance such proposals if they were in fact seriously put forward.
The Vatican that is not the only Global Institution that is stuck in a rut!!
Artist: Jeremy Nell,Â The New Age, South AfricaÂ Â -Â Â 3/15/2013
Moreover, we have said from the beginning that pursuing austerity policies in an effort to right the ship was a VERY long shot at best. In fact this interview from 2010 sums up our views on this matter quite neatly. In the intervening period since that segment aired it has also become obvious that there are a number of headwinds that are blunting the impact of aggressive expansionary policies. These factors are additional important reasons why the economies of the European countries (as well as those of the US, Canada, Japan) cannot seem to find any traction in generating growth significantly above â€œstall speedâ€ despite the policy impetus:
- Government Debt loads have increased a lot and this has reduced policy flexibility while eating up revenues of cash strapped Governments;
- Rapidly developing demographic factors promise to chew up Government finances at both ends: lower tax revenues as people retire accompanied by higher pension, social assistance and health-care payouts;
- Basel III capital rules and other regulatory requirements are contractionary;
- Austerity has prompted significant increases in rent-seeking behavior and tax evasion;
- Financial repression has cut saversâ€™ incomes and contributed to yawning pension shortfalls.
- There is moreâ€¦â€¦.in fact the biggie is:
â€¦â€¦.The Restructuring Deficit
For some time now it has been obvious that there have been no real attempts made to recognize, write down and remediate losses that occurred in the immediate wake of the GFC. In fact the entire focus of the policy response has been to avoid doing just that and to instead try and engineer a re-appreciation of collateral values in the economies so that investors, lenders and other creditors can see their asset exposures skate back onside.
â€œNo Painâ€ is the Objective.
â€œFinancial Repressionâ€ is the Name of the Game.
Unfortunately, these policies are not only delivering â€œMax Painâ€ for everyone but the creditors; they are risking the welfare and social peace of todayâ€™s generations of Europeans.
Under capitalistic forms of economic organization, Banks must ordinarily be held accountable to deal with their distressed credits promptly and the public balance sheet must not be used to subsidize bad risk decisions nor to prop up zombie companies at public expense and to the ultimate detriment of employees, taxpayers and other more efficient and productive entities.
However, this departure from the norm in order to favor creditor interests is exactly what has been happening.
These policies of Financial Repression have been followed before. The most obvious examples are failed communist states many of whom had to abandon the experiment over twenty years ago with the fall of the Berlin Wall and more recently, hyperinflationary Zimbabwe. Some examples in the developed economies include New Zealand in the late 1970â€™s / early 1980â€™s before the 1984 collapse and Germany in the immediate Post WWI “Weimar” period. In every instance, the outcome of these episodes was negative. Today, the Europeans (andÂ North America and Japan) are conducting policies of Financial Repression in a variety of formats.
The negative effects of these policies include restrained GDP growth, distorted asset markets, a drag on productivity, hidden credit risks, moral hazard, risk of higher inflation, misallocation of resources, destruction of savings, financial contagion and a de facto “theft” of market share and profitability from successful, non-zombie businesses. This has been accompanied in the austerity countries and many others in Europe (e.g. the UK) by rapid increases in debt levels.
Rising levels of debt may not be the only cause for alarm; particularly when one considers that they are accompanied by a single-minded focus to raise asset and collateral values. In those situations, (such as now) financial structures can become extremely precarious. This is because leveraged asset positions may not always generate enough spread revenue to either service or repay the debt. As a result, and according to Minsky, the financial system can become increasingly vulnerable to what would otherwise be relatively innocuous events, such as a small rise in interest rates or a decline in asset prices.
Italy 10 Year Bond Yield
As just one example in this regard, please note that prior to EMU, Italian bond yields were in the range of 11% and the Italian Treasury quite happily financed their deficits without any concerns. To compare, in todayâ€™s market a sustained rise in Italian yields above 6% would spell â€œGame-Overâ€ for their economy â€“ and for that of Europe.
Fascism on the Rise
A further non-trivial concern is that ominous storm clouds are forming over the European political landscape in reaction to the authorities’ tin-eared and single-minded focus on the solutions, inappropriate as they are, that they have been pursuing with vigor but with so far, none of the intended effect. Because of this, mainstream political parties are under pressure in many major Euro-zone countries. In Greece the far right parties’ membership comprise most of the police and security forces and have been rising in the polls. The Jobbik fanatics in Hungary are proposing a roll-back in social freedoms inconsistent with the EU Charter. Spaniards are trying to cope with secession risks and extremely high youth unemployment. The rise to prominence of Beppi Grillo’s Party in the recent Italian elections is being soft-pedaled by the mainstream media with the byline that “he is a comedian”. He is anything but. A cursory look at his website reveals hundreds of Anti-Semitic comments, diatribes and attacks while, at the same time, it shows him to be singing the praises of the fanatics that are running Iran, looting its Treasury, oppressing its people and exporting terrorism. Grillo’s party looks to be next in line to govern Italy.
It is worth remembering that Hitler and Mussolini were both elected by folks who didn’t want austerity
Unfortunately it seems that for now, the Brussels crowd is happy to be dancing on the edge of the volcano and, that nothing can convince them to take a less risky and saner path to recovery.
October 2nd, 2012 Alex Jurshevski
The Maginot Line, named after the French Minister of War AndrÃ© Maginot, was a military defensive construct consisting of a deep line of concrete fortifications, tank obstacles, artillery casements, machine gun posts, and other defenses, which France constructed along its borders with Germany and Italy, during the interwar period between WWI and WWII.
Military experts extolled the Maginot Line as a work of genius, believing at that time that it rendered France impregnable against invasion from Germany. In the event, while the fortifications successfully acted to dissuade direct attack, they were completely ineffective from a strategic military standpoint. This obvious defect was laid bare at the beginning of WWII when the German Blitzkrieg easily outflanked the Maginot Line by moving through the Ardennes forest and Holland, completely sweeping past the heavily defended fortifications and conquering France in less than six weeks. Although constructed at huge public expense and using the best minds and materials available at the time, the Maginot Line has heretofore become emblematic of any plan or announced remedial strategy that people hope will prove effective but instead fails miserably.
When Lehman Brothers was sent to the knackerâ€™s yard by its street rivals at Goldman Sachs and Morgan Stanley following closed door sessions with Government officials during the summer of 2008, the Best Minds on Wall Street and Constitution Avenue thought that they were protected from the fallout of a mega credit event by their risk management models and counterparty legal arrangements that included margin requirements, collateral postings and mark-to-market protocols. In fact with all major counterparty banks in place and able to continue functioning as market participants, the effect of the mega crash could have been contained, minimized and worked out. Before Dick Fuld and his management team was sent to the proverbial gibbet, the preponderance of derivatives contracts and exotic securities positions could have been settled out in a reasonably orderly fashion over time. However, with Lehman out of the way, the â€œnettingâ€ of derivatives and other exposures between institutions could no longer take place and someone had to step in to buy up the toxic waste that resulted from the abrupt halt to the â€œpass the hot potato gameâ€. With Lehman out of the loop, the toxic waste had to end up on â€œsomeoneâ€™sâ€ book.
The consequential effects of the secondary detonations in the securities and derivatives markets in the US following the demise of Lehman unleashed a wave of re-rating of sovereign risk which fell primarily onto the Europeans, who more than a decade ago had abandoned their treaty-bound commitments to fiscal probity and restraint in order to consummate a flawed monetary union riddled with institutional shortcomings and massive governance problems. â€œSomeoneâ€ had to prop up Government Finance in the Euro-zone in order to give the pretence that things were still manageable or all of the banks there would have gone down the gurgler.
The â€œsomeone with the hot potatoâ€ in the US is the Fed which since the event has been mainly concerned with somehow papering over the losses, minimizing them, and possibly inflating them away. In Europe, the â€œsomeoneâ€ is the ECB which has under the prodding of its client institutions been stretching out the remediation process in order to dragoon the taxpayers of the various Euro-zone countries to shoulder the load of bailing out greedy banks and their profligate government clients.
The story of the Global Financial Crash is far from over. Nothing has been solved; and as we have repeatedly stated in our interactions with the public through speaking engagements, or on TV, or in the press, the policies that have been implemented so far have simply narrowed the degrees of freedom for future policy steps while at the same time increasing the likelihood of negative unexpected consequences being visited on markets (potentially with a heretofore unseen ferocity).
There are therefore still a few more chapters to play out in this unfolding narrative.
The present chapter opened around three weeks ago when, after a sleepy summer where nothing much happened, ECB President Draghi announced that he was going to do â€œwhatever it takesâ€ to save the Euro-zone and support the bond markets of all the deadbeat Euro-countries through central bank purchases of bonds (something that only a year ago had been definitively ruled out). At the time, most pundits fell into line and proclaimed that this â€œbrilliantâ€ move had effectively ended the crisis and all risk assets rallied sharply.
Since then, reality has set in. In fact, Draghi can no more proclaim to have unlimited resources to solve Euro-Crisis that he can claim to be able to solve world hunger. As we have said repeatedly in the past the democratic fact is that voters in the affluent Euro-core are not going to go for what these solutions imply. Moreover as the ECB expands its balance sheet â€œwithout limitâ€ the credit quality declines and the risk profile of the ECB shareholders correspondingly increases. The expansion at Europeâ€™s Central Bank is off-set with a deterioration of the national credit quality of the nations so that the entire construct sets itself up for the possibility of being further downgraded. We pointed this obvious flaw in this strategy out on the air around a year ago.
To complicate matters further, most securities analysts have been paring back earnings forecasts and published data has turned rather negative. In fact over 80% of the world’s manufacturing capacity is now in contraction.
On this side of the pond we were treated to Dr Bernanke going â€œAll-inâ€ with his open-ended commitment to print money through QE3 (an event that we have been predicting since QE1 was announced ). Without belaboring all of the issues, we have with Mr Bernankeâ€™s implied claims that he knows better that the markets what interest rates should be and how capital and lending flows need to be directed at a particular point in time; let us just examine a small example of his fatal conceit that we have drawn from the speech he gave yesterday in Indianapolis.
â€œThe securities that the Fed purchases in the conduct of monetary policy are held in our portfolio and earn interest. â€¦â€¦. Ultimately, the securities held by the Fed will mature or will be sold back into the market. So the odds are high that the purchase programs that the Fed has undertaken in support of the recovery will end up reducing, not increasing, the federal debt, both through the interest earnings we send the Treasury and because a stronger economy tends to lead to higher tax revenues and reduced government spending.(Page 7)â€
While Dr Bernanke so glibly proclaims that â€œthe securities held by the Fed will mature or will be sold back into the marketâ€ as if this operation was some kind of benign voodoo magic with no real-world consequence, we would ask the good Doctor what will happen to the issuing institutions whose securities are â€œmaturingâ€ on the Fedâ€™s books? Wonâ€™t these notes have to be re-financed to support asset positions or ongoing activities at the borrowing institution? Who will conveniently show up to buy this re-issued paper in the amounts that the Fed has so done in the past, and, more importantly, at what price?
This is debt management 101.
In deference to the esteemed Fed Chairman, we will only ask one more question that flows from this fantastical description of his policy: If this is the magic bullet, and printing money actually reduces debt painlessly as you so describe, then why have we ever bothered with trying to do things any other way?
Now, after having read his speech yesterday and having managed to regain cognitive equilibrium, we offer on sober reflection that the ECB and Fed policy announcements boil down to acts of desperation that are now, so shortly after being introduced, becoming obvious to the markets. Market participants know that all they have to do is wait for the cracks to appear before pouncing and bleeding the central bank players for significant trading profits.
The bottom line thus is that all Draghi and Bernanke did with their â€œBig Bazookaâ€ announcements is buy some time, much in the same way that the French Military planners bought some time in constructing the Maginot Line before the German Military planners found a way to beat it. The only question is, “How much time have they bought?” Our expectation is that within a few short months, the ECB and Fed policies will again fail to prove equal to the task. Unfortunately the two biggest central bank players in the world have gone â€œAll-inâ€ on a policy which amounts to an ill-advised high stakes game of poker with the markets. There can be no retreat now.
This is the worst position a gambler can be in because it exposes their strategy to significant event risks and unanticipated outcomes.
The next card that is dealt could in fact blow the hand that they are jointly holding completely out of the water.
Postscript: A little known fact is that the Maginot Line and the Federal Reserve Building in Washington DC were both completed in the same year: 1937, during a period in history when failed financial policies and regional hostilities were driving the world towards catastrophe. In the just two short years following, there ensued an outbreak of general hostilities that led to WWII which brought with it global privation, outbreaks of disease, the directed mass extermination of ethnic groups, the mentally challenged and LGB populations; the first detonation of nuclear devices over heavily populated areas, the forced resettlement of hundreds of millions of people and the death of tens of millions.
June 13th, 2012 Alex Jurshevski
(This title is attributable to Miguel de Cervantes Saavedra – “Don Quixote”)
Recovery Partners was interviewed last Friday and again this past Monday regarding developments in the European debt crisis. Unfortunately these interviews only allow a little time to get some sound bites in and not a whole lot of time for reasoned analysis. ThereforeÂ this blog is aimed at adding some needed color and insight to the SUN TV and BNN interviews that underline the seriousness of the situation.
The simple reality is that not much has been done to solve any of Europe’s financial problems since they started over three years ago and, as a consequence, the available runway that European policymakers have left with which to craft workable solutions to the debt mess is getting very short. What is extremely concerning therefore, is that the latest events indicate that the Euro-strategy of incrementalism and trying to stretch out the process before hard decisions have to be made is being pursued by the Eurocrats and politicians there with even more vigor now.
After dithering for years about the rot in the Spanish banking sector and botching the recapitalization of several failed banks a few short weeks ago, the political authorities there finally and reluctantly agreed to accepting aid from the Eurozone this past weekend. In flippant style, Spanish Prime Minister Rajoy triumphantly declared that he had arranged a â€œhandy credit lineâ€ and that the crisis was â€œnow overâ€ before jetting off to Poland to see the Spanish footballers tie the Azzurri 1-1 in Gdansk.
When have we heard this type of denial before?
There is in fact much to worry about in the wake of the news regarding the Spanish bank bailout not in the least because there are more questions than answers coming out of this series of announcements
As we mentioned Â in the TV interviews, these issues include:
- The fact that the EUR 100 MM amount mentioned, while much larger than the authorities may have admitted they were short in the past, is still likely far below the amounts that are really required. Certain estimates place the size of the hole at around EUR 400 Billion.
- The housing and real estate markets have been artificially propped up in Spain for years. Not only does this mean that it is now almost impossible to understand values without significant due diligence, this strongly suggests that there may be another downleg to the real estate bust there that would see even those lofty bailout requirements climb.
- This â€œcredit lineâ€ as Rajoy so euphemistically termed the panic decision involving EUR 100 Billion (or more) piles more debt onto the very large debt load that Spain already has. Spanish central government funding requirements approach EUR 220 Billion for 2012 and almost EUR 170 Billion for 2013. Unfortunately, Spain is all but foreclosed from the traditional bond markets. Where will that funding and the not insubstantial funding for local governments not included in those requirements come from?
- But even before we consider the source of general Government funding requirements it is not even clear where this bank bailout money is going to come from or the specific terms of the deal. This table, drawn from a speech we recently delivered at an RBC Dexia client seminar, shows that for all intents and purposes that the EFSF mechanism is already tapped out. After accounting for dud guarantees and monies already earmarked, there is almost nothing left over. Note that the “Bank Recap” line in the table refers to the EUR 110 Billion that was only a few short months ago estimated by the ECB and IMF that the entire European Banking system needed. Now we find that Spain itself has gobbled up EUR 100 Billion. Also please note that the EFSF/ESM mechanism has been unable to fund itself and has been dowdgraded.
- What will the Greeks, Portuguese and Irish now think about the deals that they agreed to and will they now demand a â€œlook-backâ€ adjustment to the terms of those deals? Almost equally as important: What will now happen to the Italians who have mountains of debt to refinance and a government that, as admitted by Prime Minister Monti last week, is in its death throes and will likely have to call a snap election before its term expires next Spring? Italy is next in line to be punished by the markets and everyone knows it, yet there is no lifeline in place and moreover, none of the myriad zombie problems festering away elsewhere in Europe have been durably fixed.
- Similar to the Greek re-boot, this transaction calls into question the seniority of existing Spanish government debt obligations, potentially subordinating those to the creditor group that will make the â€œhandy credit lineâ€ (ie BAILOUT) money available. This action has increased the risk of these obligations and has thus cast significant doubt over the ability of the Spaniards to raise any money at all from domestic and international bond markets.
Boiling all of this down, we come to the conclusion that we are seeing a tragedy play out in Spain that is very similar to the one still underway in Greece: The central Government has been foreclosed from raising money in the open market; there is an accelerating bank run in progress; to cope, Â a hastily conceived bailout patch is applied by the ECB, IMF and EU which results in the very significant probability that Spain will continue to be unable to meet its financing requirements in the normal course. This Financial Frankenstein thus threatens to run smack into the refinancing obligations that loom just ahead.
Given the magnitude of Spain’s funding requirements and the cross border exposures it has to the rest of Europe, this policy is thus far from being a â€œhandy credit lineâ€ as described by Prime Minister Rajoy. It rather more completely resembles a financial time bomb with the detonator already having been set in motion.
Nothing in this is therefore any cause for renewed confidence.
We reiterate the point that we have been making for several years now: Nothing has been solved by the various policy patches that have been applied by the Fed and other Central Banks together with the politicians in Europe and North America. Since the onset of the Global Financial Crisis all that has been achieved are temporary delays and the imposition of growing and severe constraints on future policy flexibility, while at the same time the risk of unanticipated open-ended outcomes, second order effects and other nasty surprises (Black Swans) has been vastly increased because of the approach followed. There is now a non-trivial risk that this Black Swan phenomenon could overwhelm the ability of existing institutions to successfully and properly cope with the various problems unless decisive action â€“ loss recognition, write-down and remediation â€“ is taken soon.
The experience so far easily proves that anything short of swallowing that bitter pill simply wonâ€™t work.
December 12th, 2011 Alex Jurshevski
â€œItâ€™s interesting to note that 20 years later we have realized â€” we have succeeded â€” in creating a more stable foundation for that economic and monetary union, and in so doing weâ€™ve advanced political union and have attended to weaknesses that were included in the system.â€ Angela MerkelÂ 9th December 2011
The weekend headlines blared a mixture of adulation and success: â€œResurgent Germanyâ€, â€œShrewd Sarkozyâ€, â€œBritain Isolatedâ€. In fact Germany is far from resurgent, Sarkozy is more reacting to events rather than leading solutions, and Great Britainâ€™s refusal to submit to fiscal control from Brussels is hardly a surprise given that she is not a member of the Monetary Union.
Had the agreement for fiscal union been reached prior to the launch of the Euro that would have been extremely favorable news; and the fiscal controls, had they been made to work would likely have muted the breadth and depth of the current Eurozone crisis. But alas, we are not living in 1991. It is 2011 and the promised reforms are just that: â€œpromisedâ€, they still are subject to debate and ratification by each member nation. And then there is the question of sanctions against members who violate the proposed fiscal rules. If the enforcement mechanisms are too stringent, no national government will ratify the fiscal proposals. If they are too lax, the agreement will be toothless and incapable of serving as a bulwark against some future crisis.
But the real story is that the proposed agreement does not address any of the urgent and important issues that the Eurozone is facing right now. These stresses threaten the continued existence of the common currency. Last weekâ€™s entire exercise, and the posturing before, during, and after therefore must be judged as a lost opportunity of significant dimensions
None of the structural problems relating to pensions and entitlements spending in a large number of countries has been adequately dealt with;
At last count, large European banks are undercapitalized to the tune of over EUR 120 Bn. Moody’s Investors Service downgraded the three largest banks in France on Friday and said there was a “very high” probability that the French government would be forced to step in to support them if conditions worsened.
Fifteen out of Seventeen EU countries were placed on negative Creditwatch last week by Standard and Poors.
Greece, Ireland, Italy, and Portugal and Ireland cannot fund themselves at economical levels. Spain is arguably close to the borderline as is Belgium. Over the next 12 months the aggregate funding requirements for these countries amount to EUR 1000 Bn.
The Â EFSF is broken and no credible mechanism yet exists to replace it. Announcement of the formation date of the ESM as being in 2012 in place of 2013 does not make money available sooner until the ESM is actually funded. No updated funding plans were announced in the wake of the recent â€œdudâ€ China funding effort launched in spectacularly disastrous fashion by Klaus Regler, the EFSF honcho.
There is no relief for countries suffering with austerity. The solution, according to Merkel and Sarkozy appears to be â€œMore Austerity!!â€. As we have said in the past, the track record of these programs is not good, and that reflects cases where countries were able to devalue their currencies. In the present scenario no â€œSoft Exitâ€ from the Euro for the PIIGS and other sufferers is being countenanced by the Euro Leaders. It is only a matter of time before large scale social unrest erupts in one of these places and/or the austerity programs are abandoned.
- The IMF is washing its hands of this mess. In fact, there may no longer be any legal or politically palatable way to re-engage the IMF after this episode. Similarly, the US is adopting a hands-off approach.
- One recurring theme of this crisis in Europe (and North America) was also played out yet again in that it was obvious that there is no political will to force banks that made all of the bad bets to pay for their oversights.
- The other recurring theme is that markets have again been asked to wait “another three months” for the next installment of this sorry saga.
Looking at the list above it becomes apparent that there are actually more and deeper problems on the boil now than in the late Fall when the crisis seemed to be close to a blow-off phase.
The Euro Leaders are likely taking comfort from the fact that there has been a muted to slightly positive market reaction to the announcements of last week. The reality is that what they are really admiringÂ is the market reaction to the efforts of the Euro spin doctors hired to generate false headlines, and not developments that are substantive and likely to contribute to renewed and durable confidence in Eurozone economic management or the Euro itself.
Being suspicious of free markets, what the current Euro Leadership does not recognize is that markets do not necessarily follow a rational path in reacting to information and do not process it in a temporally consistent and predictable manner. Recovery Partners believes that although a measure of calm has returned, it will prove temporary. This is because the ongoing failure of the Euro politicians to implement apprpriate measures with enough speed and force to counter market pressures that are threatening the Euroâ€™s survival is risking evaporation of what remains of the opportunity to turn things around. This is the fourth kick at the can this year. Each time anyone has looked for substantive progress, they have been left wanting.
For now, the relative calm in the markets is therefore more a reflection of year end book flattening andÂ position squaring behavior rather than a true reaction to last weekâ€™s efforts of the Euro people to fix the problems. In a sense, it appears that a â€œProzac Bubbleâ€ has formed to shield the markets from bad news in what is supposed to be a happy time of year.
Unless something intervenes to prick this â€œProzac Bubbleâ€, we will have to wait until the New Year to fund out what Mr. Market really thinks about the latest Euro-wheeze. Whatever the timing, in our opinionÂ the reaction won’t be pretty.
Happy and I’m smiling,
walk a mile to drink your water.
You know I’d love to love you,
and above you there’s no other.
We’ll go walking out
while others shout of war’s disaster.
Oh, we won’t give in,
let’s go living in the past.
Once I used to join in
every boy and girl was my friend.
Now there’s revolution, but they don’t know
what they’re fighting.
Let us close our eyes;
outside their lives go on much faster.
Oh, we won’t give in,
we’ll keep living in the past
Ian Anderson, Jethro Tull
December 4th, 2011 Alex Jurshevski
“Was fÃ¤llt, muÃŸ man nur noch stoÃŸen”Â Friedrich Nietzsche <PgDn for translation>
Dear Madam Chancellor,
This week will likely mark a critical turning point for Europe. The seriousness of the situation is underscored by the fact that this Euro-summit will also be attended by participants from the US Administration, the IMF and other third parties not normally seen at gatherings of the Eurozone political leadership.
You alone among the Euro leadership have consistently understood and have attempted to communicate that we should stop kidding ourselves that this crisis can be solved without a lot of pain.
By this point it should be clear that the tried and tested solutions for dealing with insolvency and default must be pursued. This means that Europe needs triage and restructuring, not additional â€œcan kickingâ€ and “monetary fakery” as some would suggest.
It also means that the â€œincrementalâ€ approach followed in the past 3 years has not only failed, it has become extremely counterproductive, and must be replaced by an action plan that features decisive and rapid action that will offer markets a clear roadmap to recovery.
For the negotiations that are upcoming the choice therefore is clear: you must either (1) lead Germany (and Europe) down a path of delusion and pain, submitting to the â€œfunny moneyâ€ Brussels elites who are calling for bond buying and money printing and inflicting significant cost and suffering on the peoples of Northern Europe (Germany and France being the key players) who have not over-borrowed or otherwise badly managed their economies, in order to bail out certain other nations who have done just that; all at the risk of huge expense yet with no guarantee of sustainable success; or (2), you must lay the groundwork for an orderly restructuring of the Monetary Union, which will see certain nations leave the Euro-zone (Greece, Ireland, Portugal, Spain; with Italy remaining within the EMU as a possible â€œAssociate Memberâ€), so that these exiting nations might catch their breath and recover. Accession plans for other nations would be put on indefinite hold.
Do not listen to the Brussels elites that believe that the problems can be papered over in the same fashion that US policymakers believe that they have done in the US. These types of gambles have never worked and inevitably have led to worse problems. It is a tacit axiom of international relations that there is no â€œaltruism between nationsâ€ and therefore no legal, moral or ethical principle exists that would suggest the profligate countries should continue to benefit from the largesse of their neighbors at whatever the cost and without sanction. Now is the time to restructure out the countries that are not suited to, or capable of, following the fiscal and monetary discipline required as per the agreements they acceded to when they entered the Eurozone. Contrary to the advice that you may be offered by others connected to this situation, the plans for fiscal union and the role of the ECB should be sorted out after the membership structure has been adjusted. Moreover, in order to exit the crisis there is absolutely no need to add to the powers of the ECB.
There are some who say that breaking up the Eurozone would be an expensive mistake that Europe cannot afford. We say it is a course of action that Europe cannot afford not to take. There are political as well as financial reasons for this.
Following reunification Germany had a period of adjustment which was expensive, painful and lengthy. Your recent elections have shown that the German people do not want to see these sacrifices and achievements squandered. In fact, most of your neighbors are fully supportive of your policies during the recent crisis period and are looking to Germany to supply continued reasoned and reliable stewardship of this situation.
This crisis and the crisis in the United States are evidence that the West is wounded and its way of life is at risk. That means repairing (not bailing out) the financial system and insolvent countries quickly as possible. Therefore any plan that promises to restore stability at a minimum of risk and cost should be greeted favorably by all Europeans, Americans and their allies. Already too much time and money has been squandered pursuing unworkable solutions aimed at preserving some kind of idealistic and now unattainable, â€œstatus quo anteâ€ in the Euro area.
The US should be in favor of this for that very reason, and also because a festering crisis in Europe imposes strong headwinds on the fragile growth potential in the United States, restraining activity and complicating the job of economic management there. The same is true for the UK. And the same should be true of the Euro-zone countries now under financial pressure and having to deal with austerity programs without the ability to devalue the currency that they use. In the latter case it is extremely unlikely that the austerity programs will bear fruit before a time bomb of social upheaval and popular discontent explodes and drives these nations even further into chaos.
Caption: An anti-austerity protester holds a placard with the Greek flag and swastika reading "NO to the 4th Reich" after a student parade in Athens, on Friday, Oct. 28, 2011. The student march, in commemoration of the 71st anniversary of Greece's entry into World War II, went on without major incident, but in other cities officials were heckled and in Thessaloniki, Greece's second city, a military parade was canceled. They also wrote â€œ1941-2011 The enemy is the sameâ€. Some shouted slogans â€œGermany Out from the EUâ€. (AP Photo/ Thanassis Stavrakis)
Europe is no stranger to currency crises. We saw enough of those throughout the 1970â€™s, 1980â€™s, and 1990â€™s. With the exception of the UK in the 1970â€™s the IMF has never before intervened in European affairs. This crisis is a European problem, and there is no strong rationale for IMF lending under the existing IMF articles. In fact the IMF does not even have sufficient resources to render any offer of assistance credible. Moreover some of the less wealthy members of the IMF would begin to register legitimate complaints about co-opting the IMF to bail out large wealthy nations. Europe has lots of money and no balance of payments problem. The Euro is a reserve currency. You and your country can do a lot to fix this problem, and using the Bundesbank, the German Treasury and the ECB, you can do everything that the IMF can do.Â We are sure that the very experienced people on 19th Street in DC understand the difference between a bad risk and a good one, know that they have scarce resources, and would welcome the chance to step aside.
Part of the costs will be the default of the Greeks, Irish, Portuguese and the Spanish and possibly the Italians, and needed bank recapitalizations in those economies and for banks in other Eurozone countries. The costs for the leavers can be estimated by looking at past crises. According to the IMF which has examinedÂ over 100 currency and banking crises, the data show that for countries that have experienced a banking and a currency crisis (the most severe combination of adverse events) that the average output loss is about 18.8 percent, and that the average time to full output recovery is around 2.6 years. The Eurozone problem countries have already experienced these types of losses in the three years since the crisis descended upon them, but there is no recovery in sight. On the present course there is also no end game, no guarantee that the bailouts will prove successful and no estimate of the final bill.
Your national treasure will be better spent on a program of triage and recovery accompanied by the needed reforms to the EMU beyond the exit of the wayward countries. This combination of measures will deliver finite costs within a reasonably finite timeframe and, we believe, will ultimately prove politically palatable to the peoples of Europe and their neighbors.
Who knows ….if you can pull this off, one day a re-energized, institutionally more robust and better managed Euro might supplant the USD as the Number One Reserve Currency for the world.
Best Regards and Good Luck,
Frau Merkel, sagen Sie einfach “Nein”!
â€œIf you see anything that is falling, give it an extra push for good measureâ€Â Friedrich Nietzsche
Sehr geehrte Frau Bundeskanzlerin,
Diese Woche wird wahrscheinlich markieren einen wichtigen Wendepunkt fÃ¼r Europa. Der Ernst der Lage wird durch die Tatsache, dass diese Euro-Gipfel wird auch von Teilnehmern aus der US-Regierung, dem IWF und anderen Menschen in der Regel nicht bei Versammlungen der Eurozone politische FÃ¼hrung gesehen besucht werden unterstrichen.
Sie allein unter den Euro-FÃ¼hrung haben stets verstanden und haben versucht zu vermitteln, dass wir aufhÃ¶ren sollten, uns gegenuber zu sherzen, dass diese Krise ohne groÃŸe Schmerzen gelÃ¶st werden kann.
An diesem Punkt sollte klar sein, dass die bewÃ¤hrten LÃ¶sungen fÃ¼r den Umgang mit Insolvenz ausgeÃ¼bt werden mÃ¼ssen. Dies bedeutet, dass Europa muss Triage und Schuldenumstrukturierung folgen, und nicht zusÃ¤tzliche â€žCan kicking” und â€žMonetary fakeryâ€œ wie manchen wÃ¼rden vorschlagen.
Es bedeutet auch, dass die “inkrementelle”-Ansatz das in den letzten 3 Jahren verfolgt wurde, hat nicht nur versÃ¤umt, es hat sich extrem kontraproduktiv vorgestellt und muss durch einen Aktionsplan, der entscheidende und rasches Handeln, das Angebot MÃ¤rkte einen klaren Fahrplan, um Recovery-Funktionen ersetzt werden.
FÃ¼r die kommende Verhandlung ist est also klar: Sie mÃ¼ssen entweder (1) fÃ¼hren Deutschland (und Europa) auf einen Weg der TÃ¤uschung und des Schmerzes, die sich dem “funny money” BrÃ¼sseler Eliten, die fÃ¼r die Anleihe zu kaufen und Geld drucken anrufen und fÃ¼gt erhebliche Kosten und Leid Ã¼ber die VÃ¶lker des nÃ¶rdlichen Europa (Deutschland und Frankreich zu den wichtigsten Akteuren), die nicht Ã¼ber over-geliehen oder anderweitig schlecht ihre Volkswirtschaften gefÃ¼hrt, um aus der Patsche helfen bestimmte andere Nationen, die genau das getan haben, alle an das Risiko von groÃŸen Lasten noch mit keine Garantie fÃ¼r nachhaltigen Erfolg, oder (2), mÃ¼ssen Sie den Grundstein fÃ¼r eine geordnete Umstrukturierung der WÃ¤hrungsunion, die unter bestimmten LÃ¤ndern verlassen die Euro-Zone (Griechenland, Irland, Portugal, Spanien lag ; mit Italien noch in der EWU als mÃ¶gliche “Associate Member”), so dass diese spannende Nationen kÃ¶nnte zu Atem zu kommen und wieder wachsen konnen. Beitritt PlÃ¤ne fÃ¼r andere Nationen wÃ¼rden auf unbestimmte Zeit gehalten werden.
Mann kann nicht die heutigen Probleme mit Tapete verstecken. Diese Arten von GlÃ¼cksspielen haben noch nie gearbeitet und unweigerlich zu schlimmeren Problemen gefÃ¼hrt haben. Es ist eine stillschweigende Axiom der internationalen Beziehungen, dass es keine “Altruismus zwischen den Nationen” gibt und damit auch keine rechtlichen, moralischen oder ethischen Grundsatz gilt, dass wÃ¼rde vorschlagen, die verschwenderische LÃ¤nder sollten weiterhin von der GroÃŸzÃ¼gigkeit ihrer Nachbarn an, und ohne Sanktion. Jetzt ist die Zeit zur Umstrukturierung aus den LÃ¤ndern, die nicht geeignet sind, oder in der Lage, im Anschluss an die fiskal-und geldpolitische Disziplin gemÃ¤ÃŸ den Vereinbarungen sie, wenn sie in die Eurozone beigetreten erforderlich. Im Gegensatz zu den Rat, den Sie bereits vielleicht schon erhalten haben, sollten die PlÃ¤ne fÃ¼r das GeschÃ¤ftsjahr Union und die Rolle der EZB aussortiert werden, nachdem die EWU-Mitgliedschaft Struktur angepasst hat. DarÃ¼ber hinaus, um die Krise zu beenden gibt es absolut keine Notwendigkeit, die Befugnisse der EZB hinzuzufÃ¼gen.
Es gibt einige, die AuflÃ¶sung der Eurozone wÃ¤re ein teurer Fehler, dass Europa es Sich nicht leisten kann, werden sagen. Wir sagen, es ist ein Vorgehen, dass Europa Sich nicht leisten kann, nicht zu nehmen. Es gibt politische als auch finanzielle GrÃ¼nde.
Nach der Wiedervereinigung hatte Deutschland eine Phase der Anpassung, die teuer, schmerzhaft und langwierig war. Ihre kÃ¼rzlichen Wahlen haben gezeigt, dass das deutsche Volk will nicht diese Opfer und Leistungen verschwendet zu sehen. In der Tat sind die meisten Ihrer Nachbarn voll und ganz hinter Ihrer Politik wÃ¤hrend der Krise Zeitraum und sind in Deutschland auf eine weitere vernÃ¼nftige und zuverlÃ¤ssige Verwaltung von dieser Situation zu liefern.
Diese Krise und die Krise in den Vereinigten Staaten sind der Beweis, dass der Westen verwundet ist und seine Art zu leben ist in Gefahr. Das bedeutet, dass die Reparatur (nicht â€žBailoutâ€œ) des Finanzsystems und insolventen LÃ¤ndern so schnell wie mÃ¶glichpassieren soll. Daher ist jede Plan, um die StabilitÃ¤t bei einem Minimum an Risiko und die Kosten wieder Versprechungen positiv von allen EuropÃ¤ern, Amerikanern und ihren VerbÃ¼ndeten begrÃ¼ÃŸt. Schon zu viel Zeit und Geld verschwendet worden verfolgt undurchfÃ¼hrbar LÃ¶sungen zur Erhaltung einer Art idealistischen und nun unerreichbar, “status quo ante” in der Euro-Zone ab.
Die USA sollten sich fÃ¼r diese gerade aus diesem Grund, und auch, weil eine schwÃ¤rende Krise in Europa auferlegt starken Gegenwind auf der fragile Wachstumspotenzial in der USA, einstweilige AktivitÃ¤t und erschweren die Arbeit des Ã¶konomischen Managements gibt. Das gleiche gilt fÃ¼r das UK. Und das gleiche sollte auch fÃ¼r die LÃ¤nder der Eurozone nun unter finanziellem Druck und mit mit Sparprogramme ohne die FÃ¤higkeit, die WÃ¤hrung abzuwerten, die sie verwenden viel. Im letzteren Fall ist es Ã¤uÃŸerst unwahrscheinlich, dass die Sparprogramme wird Obst vor einer Zeitbombe des sozialen Umbruchs und der Unzufriedenheit in der BevÃ¶lkerung explodiert tragen und treibt diese Nationen noch weiter ins Chaos.
Europa ist kein Fremder in WÃ¤hrungskrisen. Wir sahen genug von diesen ganzen 1970er Jahre, 1980er und den 1990er. Mit Ausnahme von ber UK in den 1970er Jahren hat der IWF noch nie zuvor in europÃ¤ischen Angelegenheiten eingegriffen. Diese Krise ist ein europÃ¤isches Problem, und es gibt keine starken GrÃ¼nde fÃ¼r IWF-Kredite im Rahmen der bestehenden IWF-Artikel. In der Tat der IWF nicht einmal Ã¼ber ausreichende Mittel verfÃ¼gen, um ein Angebot der UnterstÃ¼tzung glaubhaft zu machen. DarÃ¼ber hinaus einige der weniger wohlhabenden Mitglieder des IWF beginnen wÃ¼rde, um legitime Beschwerden Ã¼ber die Kooptierung des IWF zur Rettung von groÃŸen wohlhabenden Nationen registrieren. Europa hat viel Geld und keine Zahlungsbilanz Problem. Der Euro ist eine ReservewÃ¤hrung. Sie und Ihr Land kÃ¶nnen eine Menge tun, um dieses Problem zu beheben, und mit der Bundesbank, die deutsche Finanzminister und der EZB, kÃ¶nnen Sie alles tun, dass der IWF tun kÃ¶nnen. Wir sind sicher, dass die sehr erfahrene Leute an der 19th Street in DC der Unterschied zwischen einem schlechten Risiko und ein gutes VerstÃ¤ndnis, wissen, dass sie knappe Ressourcen haben, und wÃ¼rde die Chance, beiseite zu treten willkommen.
Ein Teil der Kosten ist dass die Griechen, der irischen, portugiesischen und spanischen und mÃ¶glicherweise die Italiener, Bankrott sind und auch benÃ¶tigt Rekapitalisierungen der Banken in den Volkswirtschaften und fÃ¼r die Banken in anderen LÃ¤ndern der Eurozone. Die Kosten fÃ¼r die Abiturienten kÃ¶nnen, indem Sie auf vergangene Krisen geschÃ¤tzt werden. Nach dem IWF, die Ã¼ber 100 WÃ¤hrungs-und Bankenkrisen untersucht hat, zeigen die Daten, die fÃ¼r die LÃ¤nder, dass eine Bank-und eine WÃ¤hrungskrise (die schlimmste Kombination von unerwÃ¼nschten Ereignissen), die mittlere Ausgangsleistung Verlust Ã¼ber 18,8 Prozent erlebt haben, und dass die durchschnittliche Zeit bis zur vollen Leistung Erholung um 2,6 Jahre. Die Eurozone Problem LÃ¤nder haben bereits diese Art von Verlusten in den drei Jahren seit der Krise auf sie herab erlebt, aber es gibt keine Erholung in Sicht. Auf dem gegenwÃ¤rtigen Kurs gibt es auch kein Ende Spiel, keine Garantie, dass die Rettungsaktionen als erfolgreich erweisen werden und keine SchÃ¤tzung der Endabrechnung.
Ihr nationaler Schatz wird besser auf ein Programm der â€žTriage-und Recoveryâ€œ durch die notwendigen Reformen des EMU begleitet Ã¼ber den Ausgang des eigensinnigen LÃ¤ndern ausgegeben werden. Diese Kombination von MaÃŸnahmen werden endlich die Kosten in einem angemessenen Zeitrahmen zu liefern und endlich, wie wir glauben, sich letztlich als politisch schmackhaft zu den VÃ¶lkern Europas und ihre Nachbarn.
Wer weiÃŸ…. wenn Sie dies zu erreichen, einen Tag mit eine neuer Energie, institutionell robuster und besser verwaltet Euro kÃ¶nnte der USD als Nummer eins der Reserve WÃ¤hrung fÃ¼r die Welt zu verdrÃ¤ngen.
Mit freundlichen GlÃ¼ckwunschen,
November 23rd, 2011 Alex Jurshevski
“Now if I tell you that you suffer from delusions; You pay your analyst to reach the same conclusions; You live your life like a canary in a coalmine; You get so dizzy even walking in a straight line”
Sting and The Police
Monday’s news of the failure of the debt ceiling negotiations in the US ahould not have come as a surprise to anyone who has followed this issue. Disheartening, sad, and ultimately dangerous to our economic well-being and Global Stability, yes, but unexpected, no. Recovery Partners was interviewed on that very topic yesterday and the full interview is avialable here in part 1 and part 2 or you can watch an abridged version on our site.
On MondayÂ Zerohedge posted a note on Austria, entitled “35 Seconds Of TV Air Time Explaining Why Austria’s AAA Rating Is Doomed“. Most of the discussion focused on the massive Central and Eastern European credit exposure. According to them, massive bank credit losses and a sovereign downgrade is a sure bet as well as the fact that contagion has spread to several Central and Eastern European economies.
Elsewhere on the Continent, the Sovereign obligations of Eurozone countries were getting smoked as spreads against German bonds blew out across the board.Â Looking ahead at the heavy borrowing calendars for many of these countries the picture does not look good.
In related news, European stock markets dropped Tuesday after an expensive bond auction for Spain and as data showed that the U.S. economy grew at a slower pace in the third quarter than initially estimated.
Also today, IMF Managing Director Christine Lagarde said in an e-mailed statement to accompany a press release annoucing the creation of a new IMF fast-track liquidity facility. â€œThis is another step toward creating an effective global financial safety net to deal with increased global interconnectedness.â€Â It is no surprise as these announcements came as Europeâ€™s crisis threatens to spread to Spain and France. The real “non-announcement” here is that this is happening because the Euro-people have yet to implement the Bailout plans agreed to weeks ago in part because the EFSF has become non-functional and incapable of producing needed funding for cash-starved Euro-governments. This despite the recent publicly announced intentions to ramp up the EFSF to between EUR 1 and 2 Trn. How ironic it is that just over a year ago on the establishment of the EFSF, that Olli Rehn, EU commissioner, boasted that the EFSF would “never need to be used”. Now it is obvious that, apart from some half-completed bailouts, it has proven to be of extremely limited effectiveness and can no longer function.
And earlier this morning it was reported by the FT that the Chinese Banking Regulator (the CBRC) announced that the Chinese Property slump exceeded the test limits of the Chinese bank stress tests. In April, the CBRC told banks to test their loan books against a 50 per cent fall in prices, and also a 30 per cent fall in transaction volumes. In October, however, property transactions fell 39 per cent year on year in China’s 15 biggest cities, according to government data. The weaknesses in the Chinese scenarios echo earlier problems with stress testing in the EU, where regulators underestimated the potential impact of a sovereign debt crisis.
Joining the party, the Fed announced new stress tests for the top 19 US banks to take place between now and January and having the results announced by March 2012. There are six large banks that are going to attract particular focus according to the Fed press release and accompanying statements.
Watch this space.
Early Warning Systems and all That
During my time in New Zealand I remember seeing lorry loads and trainloads of sheep, cattle and pigs being packed offÂ to the slaughter houses and knackerâ€™s yards. Over the time I was in that beautiful country, I observed the behaviours of these animals as the transport vehicles rumbled past and this left me with the indelible impression that these creatures somehow knew that something ominous was afoot….even though they could not read, write or understand a sentence of English, much less the road map.
Â This brings to mind the OWS movement which appears to have swept the globe as a phenomemenon that defies definition. The OWS movement seems a jumble of contradictions: it professes respect for the enviroment but its activities have destroyed parkland and befouled inner cities with garbage and human waste; it professes respect and fellowship for citizens of the countries in which it staging its protests, yet itâ€™s activities have significantly interfered with the commercial interests of small businesses and their employees, threatened passersby with violence and has otherwise commanded the attention of our law enforcement authorities to the deriment of others who might actually have benefited more from their attention at a particular time; and yet all along it professes to be able to â€œsee the futureâ€ and is therfore justified in attempting to change that â€œfateâ€ for everyoneâ€™s benefit. Moreover, in conversation, not one of the OWS protesters has been able to articulate a coherent vision, objective or group mission that all OWS protesters can agree with.
Â The ultimate irony of the OWS â€œmovementâ€ however lies not in the paucity of substance, it lies in the fact that what little substance its demands and prescriptions contain, all seem to feature demands for exactly the wrong thing. This is quite simply thatÂ the common thread among OWS protesters is that they are screaming for : more Government, more state control, more handouts, and generally speaking, for the Government or some other central authority to â€œsolveâ€ their problems. This is precisely the wrong prescription delivered at a time when the reality is that the cause of many of our challenges today is that the modern Welfare State has run out of rope, our political structures have not responded well to recent challenges and, combined with the demographic picture, that there is simply is no more â€œwealthâ€ to be â€œspread aroundâ€. The choices Western society confronts today all revolve having to make do with less. That is the Bottom Line that the OWS is ignorant of at a fundamental level.
This â€œmovementâ€ in its present state will therefore likely fade away shortly and none too soon. Although the OWS folks sense that â€œsomething is wrongâ€ in the world, they, like the animals on the way to the slaughterhouse, cannot articulate what it is they sense and fear, and, because of that and other inherent limitations, they are in no way equipped to devise strategies or action plans to avoid whatever fate awaits them, nor by the same token, to be able profess that they can render such advice to anyone else.
Given the present unsettled state of the world the real issue for clear-thinking people is: “What comes next after these â€œoccupiersâ€ fade into the sunset?”
For more on that, please dial in to Part II of our Canaries Blog seriesÂ in 24 hours.
July 12th, 2011 Alex Jurshevski
â€œWhen the blind lead the blind, both will fall in the waterâ€
Old Chinese Proverb
In the last several months a number of politiciansÂ have been calling for a â€œfirewallâ€ to be erected between the PIIGS and the rest of Europe and the world that would stand in the way of the spread of financial contagion.
These clarion calls miss the point: Contagion is already here by virtue of the interconnectedness ofÂ financial markets generally, and the central role played by the European Central Bank in backstopping each national banking market in Europe.
Not only are the limitations of the ECB arrangements becoming clear, the reality is now dawning on European bankers, politicians and policymakers that their efforts to contain the Greek, Irish and Portuguese debt problems have to date succeeded in only making the scale of the problems larger and render theÂ probable outcome from this mess far moreÂ likely to involve a farÂ more costlyÂ meltdown than would otherwise have been the case.
In the last year scarcely a month has gone by without the ECB announcing some kind of easement in its collateral rules thus enabling it to continue supplying liquidity to banks in the PIIGS and keep those Governments able to pay bills. Unfortunately this has only come at the cost of polluting its balance sheet with junk rated debt andÂ vastly magnifiedÂ the consequential risks and damages to its own solvency, and to its credibility as a central bank. [In March 2010 we downloaded the Operations Handbook of the ECB from its website.Â It shows that the lowest rated collateral asset accepted by the ECB back thenÂ must haveÂ been rated at least single "A" by at least two major credit rating agencies. That document is available from us on request. As for the risk protocols today? Please read Â Trichet's comments immediately below.]
In a related development, Jean Claude Trichet, the ECB President said that with Portugal now under the umbrella of the IMF and EU bailout, that the ECB would not seek minimum ratings requirements for Portuguese debt â€œuntil further noticeâ€. The esteemed M. Trichet said that this was meant to remove â€œan element of pro-cyclicality on ratings agency announcements.â€ And in further reaction to the ratings agencies downgrading of Portugal, he stated that â€œa small oligopolistic ratings structure is probably not what is probably desirable at the level of global financeâ€Â Zut, alors!! Plus ca change!!
We are now awaitingÂ M. Trichet’s reaction to the Moody’s downgrade of Ireland to “junk” status that was just announced today.
AÂ few days ago, Bloomberg told us, that in an effort to stem deteriorating bond prices and escalating CDS spreads â€œEuropean lawmakers voted in favor of a ban on short selling of government bonds in the EU unless traders have at least â€˜located and reservedâ€™ in advance the securities they intend to sell. The European Union Parliament in Strasbourg, France, also called for restrictions on tradersâ€™ use of credit-default swaps to profit from defaults on sovereign debt they donâ€™t own.â€ The politicians apparently believe that If you donâ€™t like what markets are telling you, then you should simply change the rules and paper over the inconvenient truths.
In the last 10 days revelations that the French plan to â€œre-profileâ€ Greek debts would not pass the ratings agencies definitions of default provided further evidence that this is a problem that is growing like Topsy, but that is lacking a champion to tackle it. Anyone who has previously been involved in these kind of problem situations will recognize the importance of discussing these types of proposals with all affected parties – especially the ratings agencies – prior to approaching the market with any announcements. Clearly this was not done in this case, illustrating the lack of foresight, planning and communications protocols involved at the very highest levels of the decision-making structure.
Investors in Periperal EU sovereign debtÂ issues, bank shares and short dated European bank paper have been flocking from those markets in droves, fearing the worst. Spanish and Italian CDS spreads have spiked to their highest levels since the creation of the Euro. The remaining PIIGS cannot fund in the open market.
Shares of European banks have dived, particularly in the PIIGS and the market is now fixating on the massive and looming debt rollover profiles of all European countries, but particularly the PIIGS.
These examples of recent developmentsÂ amply illustrate that theÂ entire debacle has so far featured â€œproblem solving by committeeâ€ (and that no one on this â€œcommitteeâ€ has likely ever had to fund any portfolio or trade any assets â€“ ever). Not surprisingly, the outcomesÂ have beenÂ predictable.
The more the ECB compromises its balance sheet andÂ the longer the EU/ECB/IMF Troika continues to insistÂ that its remedies be applied in doctrinaire fashion, then the closer this crisis edges towards the inevitable blow-up and, it seems, towards an unwelcome event that will be far larger than any default may have produced a year ago. As a sidebar to illustrate this point in the case of Greece, whereas a haircut of 20% may have sufficed a year ago, now a write-down of at least 70% is probably required.
And finally, the EFSF is tapped out and its remaining resources are insufficient to fund another country meltdown. The authorities have blown the heavy artillery on a set of smaller problems, have failed to cure or contain them,Â and do not haveÂ sufficient firepower left in terms of Balance Sheet and Credibility to tackle what is now clearly coming down the track.
Leaderless. Aimless. Europe is about to take a dunking.
â€œThere is no Plan B to avoid defaultâ€
Olli Rehn EU Economic and Monetary Affairs Commissioner
* “Roach Motel” is a trademark of the Black Flag Corporation. Amongst traders, itÂ also denotes a transaction structure that is impossible to get out of without losing a significant amount of money.
June 15th, 2011 Alex Jurshevski
“I am concerned about the fact that the recovery that we’re on is not producing jobs as quickly as I want it to happen,”Â POTUS Barack Obama
President Obama has recently been chastising Americans for being too pessimistic about the future while at the same time continuing to push his high-spending agenda down the nationâ€™s throat. Continued reliance on PRÂ spin and blaming George W Bush for the countryâ€™s ills is no substitute for substantive steps to stem the red ink and deterioration of financial risk profile that his and his various predecessors’ Â policies have produced. Unfortunately, it is not only Obama, but perhaps the entire US leadership of the two mainline parties that have been ignoring the grim reality of the situation unfolding around them.
It is therefore of no surprise to us that Austan Goolsbee resigned several days ago as Obama’s Chief Economic Advisor in the wake of a slew of troubling economicÂ numbersÂ (To which we might add, “Mr. President: What “recovery” are you referring to?”)
In this blog we examine some interesting statistics that we came across recently that these folks might do well to reflect on. For example, the unofficial number (based on the 1980’s calculation methodology) for the Misery Index at 25.3%, is now higher than it was under Jimmy Carter (21.8%)Â . Other statistics show that the US Government is now spending almost all tax revenues on entitlement programs while (ominously)Â financing the balance of itsÂ budgetary obligations by printing money. Paranthetically, no mention is being made by this Administration, or anyone else inside the Beltway, of the lack of Congressional spending authority for the warfighting operations in the Libyan quagmire and the newly disclosed “secret” operations in Yemen.
Here we go:
|Number of US Unemployed Private Sector Employees
|Number of US Persons unemployed longer that 27 weeks
|Misery Index as calculated by the US BLS in 2011 for 2011
|Misery Index as calculated by the US BLS in 1983 for 2011
|Drop in the value of US Private Sector Housing equity off peak
||Â $7.9 Trillion
|Proportion of people in the US that feel the economy is in bad shape
|Proportion of people in the US expecting another Depression
|Size of Fiscal Adjustment the IMF recommends for Ireland (2010)
|Size of Fiscal Adjustment the IMF recommends for Greece (2010)
|Size of Fiscal Adjustment the IMF recommends for the USA (2010)
|Dollar Value of Agreement on Deficit Cuts and Fiscal Compromise in the US
|Amount of bail set for Dominique Strauss Kahn by US District Court in NYC
|Proportion of people in the USA expecting their country to default
|Proportion of people in France expecting their country to default
|Proportion of people in Great Britain expecting their country to default
|Proportion of people in Greece expecting an armed revolution there
|Taxpayer support in the EU for bailouts to indebted EU countriesÂ
|37.0%Â Â Â
|Year over Year Increase in Gun Sales in the US (May 2011)
|Year Over Year Increase in Retail Sales in the US (May 2011)
||Â Â 7.5%
|Daily Interest Bill For the US Treasury (2010)
|Days to expiration of US debt limit
|Proportion of US Tax Revenue spent on entitlements (2010)
|Proportion of time Obama has been away from DC since becoming POTUS
|Drop in Obamaâ€™s Approval Ratings since becoming POTUS
|Bernankeâ€™s Years of Bond Trading experience
|Bernankeâ€™s Years of Credit Adjudication experience
|Notional Size of Bernankeâ€™s Directionally-Biased Bond Trade (QE)
|VBP (Value per Basis Point) of Bernankeâ€™s Bond Trade
|Number of US Military Bases outside the US in Â 2005Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â
|Number of British Military Bases outside the UK in 1898Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â
|Number of Roman Military Base outside of Rome in 117 ADÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â
|Argentinaâ€™s World Ranking by GDP per Capita in 1900
|Argentinaâ€™s World Ranking by GDP per Capita in 2008Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â
|Number of Games left in the 2010/11 Stanley Cup PlayoffsÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â
So now, less than five years later, you can go up on a steep hill in Las Vegas and look West, and with the right kind of eyes you can almost see the high-water markâ€”that place where the wave finally broke and rolled back.” â€” Hunter S. Thompson (Fear and Loathing in Las Vegas)
May 16th, 2011 Alex Jurshevski
This past weekend we came across two really interesting items while reading the New York Times.
One was an op-ed by Paul Krugman that we actually happen to side with. In it, Krugman writes about the â€œUnwisdom (sic) of Elitesâ€ in terms of the reasons that the policies that got us into the financial mess in the US were more typically a product of narrow self interest of policy elites than demands by the public at large. It was this narrow self interest of the elites, according to Krugman, that got the US into trouble, so it is no use blaming the electorate for asking for “tax and spend” policies that pumped up real estate and the financial markets before the inevitable bust occurredÂ three years ago.
In this connection, Krugman would do well to heed his own counsel in the matter of negotiating an exit from ruinous debt-based problems by continuing to recommend elitist solutions that pile on more debt.
…….Which brings us to the next gem that we found nestled in the pages of the venerable old paper; namely, the arrest of IMF Managing Director Dominique Strauss-Kahn at JFK Airport on charges of attempted rape and forcible confinement of a hotel chambermaid. This is not the first of such peccadilloes that have marked the career of this man. Indeed before the ink was dry on that story another woman had come forward with stories of unwelcome advances by the IMFâ€™s top dog. Strauss-Kahn was denied bail at a hearing today.
The irony of this situation is not lost on many as the cartoon would indicate. It is the IMF together with its partner-in-arms, the ECB which has most strongly resisted any talk of restructuring debts for any Euro-zone countries. Today, ECB Economics Chief Juergen Stark even took to the airwaves to denounce any suggestion of restructuring as something that would inflict â€œmassive harmâ€ on the Euro-zone.
To us, it seems that the European authorities are again reverting to type. A year ago, the EU Sovereign Debt problem was â€œsolvedâ€ with the creation of the EFSF (which would â€œnever be neededâ€ according to the ECB at the time). Then as the need for action became more obvious, massive bailout loans were forced onto a variety of countries. [The one exception here was Iceland which was all set to take on vast new debts in obeisance to the ECB and IMF until Recovery Partners addressed the issue directly with the Government there. The IMF / Nordic loan package was never closed and Iceland today is recovering albeit slowly and without the millstone of additional debt. The Icesave settlement hasÂ been pushed off as we had also earlier advised the Althingi to do.]
And, after the loan packages were doled out to theÂ over-indebted countries, they were proclaimed healthy again by the EU honchos.
Now as the vacuity of this policy response is becoming clear, clarion calls denouncing restructuring of the debts are once again being mounted in order to avert any losses being pushed back onto the lending banks.
There is no way out of a debt problem by adding more debt to the mix. The unfortunate history here is that the IMF is an extremely creditor-friendly institution, as is the ECB. Their constituency consists in part of the largest banks in the world, and it is because of that, that these institutions are reluctant to recommend any policies that would act against the interests of these constituents, that a strict â€œno haircutâ€ stance has been maintained by both.
The reality is that the debt problem in the EU is far from over. It is related as much to the lack of a framework of institutional bailout arrangements and enforcement mechanisms within the EU as it is to bad borrowing decisions by EU governments as well as bad lending decisions by Euro-zone banks. Eventually the piper will have to be paid. And, as we haveÂ observed in the past, the history of Governments under austerity succeeding in cutting back debt on a sustained basis is not encouraging. Moreover, the people of the EU have no desire to effectively become permanent tax slaves of the banks.
The impact of Mr Strauss-Kahnâ€™s arrest on the ongoing debt talks in the EU is likely not going to have a material effect on the outcomes here. John Lipsky will do just as good a job in delivering the party line this week, and a permanent successor to Strauss-Kahn will soon be found. Over time however, the reality that some EU Governments are going to need more than just more debt and that Â EU banks are going to have to take a chop and likely be restructured themselves (in certain cases) will assert itself.
Recognizing that many of the lending decisions that led to the current situation were bad is the only way that we can begin to dig our way out of this situation. The sooner that this happens, the better.
In the meantime, the important thing for those countries inÂ debt difficulties is to ensure that they obtain timely, high-qualityÂ advice and have robust crisis management plans in place that willÂ enable an exit from these problems with a miinimum of stress and social upheaval.Â