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Lagarde, the ECB and the next crisis

Lagarde, the ECB and the next crisis

The appointment of Christine Lagarde as president of the ECB has been greeted with euphoria by financial markets. That reaction in itself should be a warning signal. When risky assets soar in the middle of a huge bubble due to a central bank appointment, the supervising entity should be concerned.Lagarde is a lawyer, not an economist, and a great professional, but the market probably interprets correctly is that the European Central Bank will become even more dovish. Lagarde, for example, is a strong advocate of negative rates.

Lagarde and Vice President De Guindos have warned of the need to carry out measures to avoid a possible financial crisis, proposing different mechanisms to mitigate the shocks created by excess risk. Both are right, but that search for mechanisms to work as shock buffers runs the risk of being sterile when it is the monetary policy that encourages excess. When the central bank solves a financial crisis by absorbing the excess risk that the market once took it does not reduce it, it only disguises it. 

Supervisors ignore the effect of risk accumulation because they perceive it as necessary collateral damage to the recovery. Risk accumulates precisely because it is encouraged.

Draghi said that monetary policy is not the correct instrument to deal with financial imbalances and macroprudential tools should be used. However, it is the monetary policy which is causing those imbalances when an extraordinary, conditional and limited measure becomes an eternal and unconditional one.

When monetary policy disguises and encourages risk, macroprudential measures are simply ineffective. There is no macroprudential measure that mitigates the risk created by negative rates and almost three trillion of asset purchases.

 …click on the above link to read the rest of the article…

Meet the New European Union, Same as the Old One

Meet the New European Union, Same as the Old One

The European Union chose new leadership this week. It was, for once, a fraught affair. 

No rubber stamps were anywhere to be seen. 

In the end all four of the new European Union leadership were not the frontrunners as put forth by German Chancellor Angela Merkel. Her choice for EU Commission President was rejected.

So too was Mario Draghi’s replacement at the top of the European Central Bank, Bundesbanke President Jens Weidmann. 

French President Emmanuel Macron was the clear winner this weekend.

The choices for these positions are all designed to both maintain the path of European integration but also weaken the hold Germany has on European Union power politics.

And this thorough rebuke to Merkel immediately threw the euro into defensive mode. But, don’t kid yourself. Weidmann was never an acceptable choice as ECB President. More on this later.

The new Commission President, replacing the odious Jean-Claude Juncker, is German Defense Minister Ursula Von der Leyen. She’s a thorough Europhile and Russophobe. Since she’s a Social Democrat, to me it looks like ALDE’s Guy Verhofstadt flexed his expanded presence in the room. He helped ensure no populist upstarts would control EU foreign policy.

It will will continue being virulently anti-Russian, if not more so than in the past.

Von der Leyen is a perfect example of leadership chosen by committee (and The Davos Crowd behind them) to be nothing more than a puppet of the globalist/neo-liberal forces which control the direction of the EU. 

Merkel’s a lame-duck trying to get what she wants from Russia while maintaining a brave face to the United States. Putting Von der Leyen in charge ensures any good relations between here and Vladimir Putin should be heavily discounted going forward.

 …click on the above link to read the rest of the article…

Europe Gives Up On Sound Money, Prepares To Join The Currency War

Europe Gives Up On Sound Money, Prepares To Join The Currency War

Not so long ago, Europe seemed to have its financial house more-or-less in order. German government spending was actually falling. Industries that had been nationalized in the socialist 70s were being privatized. The European Central Bank – run by sound money advocate Jean-Claude Trichet – was smarter and more cautious than the incoherently rambunctious Bernanke Fed. The euro, for a while, was actually preferred by many over the dollar. 

Then – gradually at first and now very quickly – everything went sideways.

Mario Draghi took over for Trichet at the ECB and promised to do “whatever it takes” to generate at least 2% inflation. Then he proceeded to deliver on that promise with massive asset purchases and negative interest rates. 

Inequality – which, we’re now coming to realize – is fed by low interest rates and easy money, rose to near-US proportions. Immigration was mishandled to the point that it became THE political issue. And populist parties opposed to the existing system attracted enough votes to rattle the mainstream parties. 

The entrenched political/financial class, shocked by the unwashed masses’ effrontery, are now responding exactly as you’d expect, with massive increases in social spending, promises of even easier money (Draghi actually claimed that there was “plenty of headroom” to cut rates from the current -0.4%) and, well, whatever else it takes to stay in power.

Here, for instance, is Germany’s government spending. Note the uptrend now that the Greens are contenders:

German government spending Europe currency war

From today’s Wall Street Journal

To win voters lost to an anti-globalization backlash, Europe’s mainstream parties are going back to the 1970s.

In Germany, the U.K, Denmark, France and Spain, these parties are aiming to reverse decades of pro-market policy and promising greater state control of business and the economy, more welfare benefits, bigger pensions and higher taxes for corporations and the wealthy. Some have discussed nationalizations and expropriations.

 …click on the above link to read the rest of the article…

Global Negative Yielding Debt Hits Record $12.3 Trillion

Global Negative Yielding Debt Hits Record $12.3 Trillion

Somewhere, SocGen’s permabearish strategist Albert Edwards is dancing a jig, as every day that passes bring us every closer to his trademark “Ice Age.”

One week after the universe of negative yielding debt regained its prior high of $11.7 trillion, overnight – thanks to the dovish capitulations by both the ECB and Fed – the notional value of global sovereign debt with a minus yield sign jumped to $12.3 trillion, a new all time high.Source: Bloomberg

The collapse in yields started on Tuesday morning when Mario Draghi said that the central bank might also trim rates and resume its bond-buying should inflation continue to languish well below its 2% target (recently European 5Y5Y forwards hit an all time low but have since rebounded following Draghi’s comments).

The dovish comments sent another jolt through fixed income markets and pushed another $714bn worth of bonds into sub-zero yield territory on Tuesday. The market value of bonds trading at negative yields — once thought to be economic lunacy — to a fresh record of $12.3TN, according to Bloomberg surpassing the last peak in 2016. The average yield of the global bond market is now just 1.76 per cent, down from 2.51 per cent in November last year.

Meanwhile, in another startling observation, Bank of America recently wrote that “highly-anticipated events in recent years (e.g. Shanghai G20, Brexit, Trump) have typically coincided with big unwinds of crowded positions; and “Japanification” rate theme max consensus.” As a result, the collapse in global inflation breakeven levels have taken global govt bond yields (ex. UST) to a new all-time low of 1.2%.

While the majority of core European and Japanese government bonds have been trading with negative yields since 2016, on Tuesday the Austrian, French and Swedish 10-year yields all slumped below zero for the first time. The 10Y German Bund yield stands at -0.32, an all time record low.

 …click on the above link to read the rest of the article…

Draghi Punts, Trump Grunts, Gold Bunts

Draghi Punts, Trump Grunts, Gold Bunts

ecb-draghi-failure

For months now the markets have been in denial that ECB President Mario Draghi has any answers to the Euro-zone’s problems. Today’s statement confirms what anyone with eyes to see has been saying.

There is no Plan B.

Draghi started the year saying he would end his various QE programs and by June he’s not only put them back on the table (New TLTRO in September) but has now opened up the possibility of taking rates lower.

Draghi told an ECB conference in Sintra, Portugal, that “further cuts in policy rates… remain part of our tools.” He added that there was “considerable headroom” to re-start bond purchases, which inject newly created money into the financial system in the hope of boosting lending and economic activity. 

Draghi has been exposed as swimming naked, as Warren Buffet would put it.

The fun part is that Draghi used the cover of Trump’s trade war with everyone to justify a policy that was inevitable anyway.

In response, President Trump piled on accusing Draghi of being a currency manipulator. And then announced his upcoming meeting with Chinese Premier Xi Jinping to hammer out a trade deal.

But, as I’ve pointed out in the past, Trump doesn’t have a serious offer on the table for China. 

Trump backed himself into a corner with China, essentially demanding it give the U.S. ultimate say over its fiscal, monetary and trade policy.

The Chinese aren’t going to agree to that any more than the Palestinians are going to agree to a Palestinian State in name only, administered like a Native American reservation by Israel.

Lebanon is not going to accede to Pompeo’s demands to remove Hezbollah from its government. North Korea isn’t going to give up its nukes so the U.S. will allow it to trade with dollars. Negotiations with Trump are nothing of the sort.

 …click on the above link to read the rest of the article…

The Great Unknown

The Great Unknown 

QUESTION: Martin, if Europe and Japan have destroyed their bond markets, would it be a good idea for them to get the government out of the bond market and have short term rates be floating in the free market?  The free market would probably help since they don’t know how to move rates correctly.

RG

ANSWER: What will happen is that there is already unfolding a bifurcation in interest rates with a widening spread between real rates (Private Sector) and government. If they allow government rates to float, that means they must abandon QE.

Neither the BoJ nor the ECB is ready to admit total failure. This means that the entire Keynesian-Monetarist tools have failed and they have no economic theory upon which to manage the economy. That means the government cannot control the economy and therein lies the denial of power.

Welcome to the Great Unknown

Decades of laissez-faire in Europe or the destruction of the middle class

Decades of laissez-faire in Europe or the destruction of the middle class 

The EU elites pay homage to the laissez-faire of liberalism. They have been deregulating and “liberating” the market for 30 years. The Western governments also follow the philosophy and hardly intervene in the market. There is only one authority that can intervene effectively in the EU: the ECB. Globalisation since the 1980s, as well as the liberation of trade and human traffic, has enabled a violent increase in world GDP and the enrichment of corporations. For emerging economies such as India or China, this was an opportunity to get out of poverty. The liberals, however, who had a global village and human happiness on their banner, were basically interested in opening up the large Asian markets for their products. The tools of these elites, the World Trade Organization and the IMF, ensured that the middle class grew in emerging countries and thus the sales markets for European corporations. Their bosses would probably say: it is a pity that India and China are not allowed to join the EU.

Awesome! In any case, the West monetized Asia’s cheap labour in this way. At the same time, the middle class in China, India, South Korea and other tigers grew, but at the expense of the European workforce and middle class, which were virtually cut off from liberal profits. While corporate profits, and hence GDPs, skyrocketed, real wages did not rise and wealth was concentrated among elites and their lobbyists. This process was accelerated by the reforms of the 2000s: in Germany at that time the reforms of the left-liberal coalitions were supposed to create more jobs for people through unusual forms of employment (mini-jobs, temporary work, fixed-term contracts, etc.), which led to the fact that even today there are more and more people with low incomes in abnormal working conditions. “The middle class has shrunk from 48 per cent in the period 1995-99 to 41 per cent in 2014-15.1)

 …click on the above link to read the rest of the article…

Debt & the Point of No Return

Debt & the Point of No Return 

QUESTION: Mr. Armstrong; First I want to thank you for coming to Europe this year. It has been some time since your Berlin Conference. My question is simple. How can the ECB tell countries to reduce their debt when as you say nobody ever pays off the debt? Is this just fantasy or do they really believe what they are saying?

Looking forward to Rome.

WVM

ANSWER: The sheer demographics warn that more people will move into retirement, increasing expenditures at a faster pace than there are younger generations to compensate. This means that expenditures will rise and revenues will decline. Even if we were talking about governments that actually did pay off debt, they would still not be able to do so once we pass 2020.

Insofar as do they really believe their own nonsense? I am afraid they do. They have not yet reached the point where they will come to terms with the fact that this is a fictional world in which they dream of endless powers and they will prevail in the end. We have gone past the point of no return. We now require structural change and FAST!!!!!!!

A Week in the Life of a Topsy-Turvy Wildly Whirling World

A Week in the Life of a Topsy-Turvy Wildly Whirling World 

By Germán Torreblanca (Own work) [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons

Let’s review this past devilishly whacky week to see if we can divine the way the world is turning and why the markets are churning. It was 2019’s worst week in stocks and, well, just about everything economic all across this crazily spinning planet. Volatility lifted its head back out of the water like Loch Ness’s monster while the citizenry took flight to treasury safe havens, bringing treasury yields down again to the five-year’s lowest point of the year. North Korea’s Rocketman returned to his rocketry, and the Chinese threw up their hands and ran as far from Mar-a-Lago as they could … or maybe they just threw up from too much chocolate cake.

The China syndrome is back

Most notably all over the world, bad news finally moved back to just being bad news, even as it arrived in cloudburst after cloudburst. Gold popped as money dropped and China flopped. Chinese exports fell 20%, outstripping the worst prediction four fold. The central bank of the billions of people of China mainlined major yuan jolts into the Xi dynasty’s tiring economy, and yet the Sino stock market fell off the mountain, taking a full panda bear plunge in one week. Apparently the nouveau riche Chinese ghost-city dwellers are wising up to all this easing and just realized talk of more of the same as far as the eye can see simply means the economy is finished more than it means refreshed hope waits on some distant horizon. 

Trump talked and China walked. The best boast Trump could biggly bluster from his tweet blaster was that the stock market would rise again ifChina would only deal; China chose, instead, to cancel Chairman Xi’s second coming at Mar-a-Lago. 

 …click on the above link to read the rest of the article…

Super Mario Draghi’s Day of Reckoning Has Arrived

Super Mario Draghi’s Day of Reckoning Has Arrived

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” — MARIO DRAGHI JULY 26TH 2012

No quote better defines Mario Draghi’s seven-plus years as the President of the European Central Bank than that quote. Draghi has thrown literally everything at the deflationary spiral the Euro-zone is in to no avail.

What has been enough has been nothing more than a holding pattern. 

And after more than six years of the market believing Draghi’s words, after all of the alphabet soup programs — ESM, LTRO, TLTRO, OMB, ZOMG, BBQSAUCE — Draghi finally made chumps out of traders yesterday.

Draghi reversed himself after December’s overly hawkish statement in grand fashion but none dare call it capitulation. For years he has patched together a flawed euro papering over cracks with enough liquidity spackle to hide the deepest cracks. 

The Ponzi scheme needs to be maintained just a little while longer.

He’s not alone. In fact, all the major central banks have been working in concert since the day they broke the gold bull market back in September 2011, when the Swiss National Bank pegged the Franc to the euro which began the era of coordinated central bank policy.

And since 2013’s Taper Tantrum when then FOMC-Chair Ben Bernanke  
timidly announced a future without QE the markets have consistently tore at their resolve to normalize monetary policy.

Because when you paper over reality you don’t fix the underlying problems. The losses are still there, hidden in plain sight, held at mark-to-model prices, on central bank balance sheets. 

Ben retired and Janet took over. She held the fort for nearly her entire term, refusing to raise rates while Draghi sent rates negative alongside Japan’s Kuroda. 

 …click on the above link to read the rest of the article…

ECB Warns Slowdown Isn’t Temporary: Draghi Announces Bold Stimulus Plan

ECB Warns Slowdown Isn’t Temporary: Draghi Announces Bold Stimulus Plan

Mario Draghi surprised even the doves with his bold new stimulus plan. It won’t help one iota.

The Wall Street Journal reports ECB Reverses Course With New Stimulus Measures.

The European Central Bank made a major policy reversal Thursday, unveiling plans for fresh measures to stimulate the eurozone’s faltering economy less than three months after phasing out a €2.6 trillion ($2.9 trillion) bond-buying program, making it the first rich-country central bank to ease policy in response to the global slowdown.

The ECB said it would hold interest rates at their current levels at least through the end of this year—months longer than previously signaled—and announced plans for a fresh batch of cheap long-term loans for banks. The first loans will be launched in September, each with a maturity of two years.

Despite the new stimulus, ECB President Mario Draghi said that the risks to the economy remain prevalent, though the likelihood of a recession is very low. Thursday’s decision was unanimous, he said at a press conference. “Given the complexity of the package, I think this is a very positive sign,” he added. The ECB also slashed is forecast for gross domestic product growth this year to 1.1% from 1.7% in December. It lowered its inflation projection to 1.2% from 1.6%, further below the ECB’s target of just under 2%.

Still, the ECB refrained from more extreme measures such as restarting its bond-buying program or cutting its deposit rate further from minus 0.4%. These options weren’t discussed, Mr. Draghi said. “In a dark room, you move with tiny steps,” he said.

Bold New Plans

Please consider ECB’s Draghi Surprised Colleagues with Bold Stimulus Plans.

European Central Bank President Mario Draghi caught even dovish rate-setters off guard by pushing on Thursday for unexpectedly generous stimulus after forecasts showed a large drop in economic growth, four sources familiar with the discussion said.

 …click on the above link to read the rest of the article…

Weekly Commentary: Dudley on Debt and MMT

Weekly Commentary: Dudley on Debt and MMT

December’s market instability and resulting Fed capitulation to the marketplace continue to reverberate. At this point, markets basically assume the Fed is well into the process of terminating policy normalization. Only a couple of months since completing its almost $3.0 TN stimulus program, markets now expect the ECB to move forward with some type of additional stimulus measures (likely akin to its long-term refinancing operations/LTRO). There’s even talk that the Bank of Japan could, once again, ramp up its interminable “money printing” operations (BOJ balance sheet $5.0 TN… and counting). Manic global markets have briskly moved way beyond a simple Fed “pause.”

There was the Thursday Reuters article (Howard Schneider and Jonathan Spicer): “A Fed Pivot, Born of Volatility, Missteps, and New Economic Reality: The Federal Reserve’s promise in January to be ‘patient’ about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth. But interviews with more than half a dozen policymakers and others close to the process suggest it also marked a more fundamental shift that could define Chairman Jerome Powell’s tenure as the point where the Fed first fully embraced a world of stubbornly weak inflation, perennially slower growth and permanently lower interest rates.”

And then Friday from the Financial Times (Sam Fleming): “Slow-inflation Conundrum Prompts Rethink at the Federal Reserve: Ten years into the recovery and with unemployment near half-century lows, the Federal Reserve’s traditional models suggest inflation should be surging. Instead, officials are grappling with unexpectedly tepid price growth, prompting some to rethink their strategy for steering the US economy.

 …click on the above link to read the rest of the article…

Blain: It Feels Like A Liquidity Storm Is Coming Soon

Blain: It Feels Like A Liquidity Storm Is Coming Soon

I note with some delight Bernie Sanders plans to stand for US President. One of my US chums sent me the story of the Half-a-Bernie sign propped up against a wall. Someone had cut it neatly in two and left the wooden handle affixed to the remaining half. Attached was a note: “Dear Bernie; you had a sign and I didn’t, so I took half. I’m sure you understand.” 

I did feel something of a market judder yesterday – just a moment where it felt like all the negativity was on the verge of swamping markets. Whether is the cumulative effect of US rate path expectations (Fed today), China Trade Wars, Trump vs Europe, (ECB tomorrow), Brexit, and all the rest.. or the UK mid-term holidays, the whole market feels thin and rudderless.

At least Wal-Mart surprised to the upside! One of my top stock technical commentators is my old buddy Steve Previs of Mint who calls it “complacent.” That’s never a good thing. His charts are telling him to look for a “corrective C wave” but for now he’s patient as “FOMO” (Fear of Missing Out) continues to drive the current trend.

I am fortunate enough to work with some very bright folk here at Shard. Yesterday we were shooting the breeze on the current market uncertainties, threats and fears. We came to the conclusion we’ll know the moment we hit the Reefs of Crisis when we hear the crashing wail of market liquidity vanishing. What’s that sound – it’s the Macro Liquidity Storm! Coming to a market near you. Maybe Very Soon!

 …click on the above link to read the rest of the article…

How the Euro Enabled Europe’s Debt Bubbles

How the Euro Enabled Europe’s Debt Bubbles

It’s the twentieth anniversary of the euro’s existence, and far from being celebrated, it is being blamed for many — if not all — of the Eurozone’s ills. 

However, the euro cannot be blamed for the monetary and policy failures of the ECB, national central banks and politicians. It is just a fiat currency, like all the others, only with a different provenance. All fiat currencies owe their function as a medium of exchange from the faith its users have in it. But unlike other currencies in their respective jurisdictions, the euro has become a talisman for monetary and economic failures in the European Union.

The Birth of the Euro

To swap a number of existing currencies for a wholly new currency requires the users to accept that the purchasing powers of the old will be transferred to the new. This was not going to be a certainty, and the greatest reservations would come from the people of Germany. Germans saved, and therefore risked the security of their deposits in a new money and monetary system. They were reassured by the presence of the hard-money men in the Bundesbank, who had a mission to protect the mark’s characteristics against the weaknesses that would almost certainly be transferred into the new euro from more inflationary currencies.

These anxieties were assuaged to a degree by establishing the ECB in Frankfurt, close to the watchful eye of the Bundesbank. The other nations were sold the project as bringing greater monetary stability than offered by their individual currencies and the reduction of cross-border transaction costs. Borrowers in formally inflationary currencies also relished the prospect of lower interest rates.

 …click on the above link to read the rest of the article…

The ECB’s Quantitative Easing was a Failure–Here is What it Actually Did

The main reason why the ECB quantitative easing program has failed is that it started from a wrong diagnosis of the eurozone’s problem. That the European problem was a demand and liquidity issue, not due to years of excess.

The ECB had been receiving tremendous pressure from banks and governments to implement a similar program to the US’ quantitative easing, forgetting that the eurozone had been under a chain of government stimuli since 2009 and that the problem of the euro-zone was not liquidity, but an interventionist model.

The day that the ECB launched its quantitative easing program, excess liquidity stood at 125 billion euro. Since then it has ballooned to 1.8 trillion euro.

“Only” after 2.6 trillion euro purchase program and ultra-low rates.

Eurozone PMIs are atrocious. The euro-zone index falls from 52.7 in November to 51.3 in December, well below the consensus forecast of 52.8. More importantly, France’s PMI plummeted from 54.2 in November to a 34-month low of 49.3.

Unemployment in the euro-zone, at 8%, is double that of the US and comparable economies. Youth unemployment rate remains at 15%.

Economic surprise has plummeted as the ECB balance sheet reached 41% of GDP (vs 21% of the Fed).

More than 900 billion euro of non-performing loans remain in the banking system, which keeps a trillion euro timebomb in its balance sheets (read). A figure that represents 5.1% of total loans compared to 1.5% in the US or Japan.

Deficit spending is rising. Government debt to GDP has risen to 86.8%.

The number of zombie companies -those that cannot pay interest expenses with operating profits- has soared to more than 9% of all large quoted firms, according to the BIS.

…click on the above link to read the rest of the article…

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