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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…

The Tragedy Of The Euro

The Tragedy Of The Euro

After two decades, the euro’s minders look set to drive the Eurozone into deep trouble. December was the last month of the ECB’s monthly purchases of government debt. A softening global economy will increase government deficits unexpectedly. The consequence will be a new cycle of sharply rising bond yields for the weakest Eurozone members, and systemically destabilising losses in the bond portfolios owned by Eurozone banks

The blame-game

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.

Recognise that, and we have a chance of understanding why the Eurozone has its troubles and why there are mounting risks of a new Eurozone systemic crisis. These troubles will not be resolved by replacing the euro with one of its founding components, or, indeed, a whole new fiat-money construct. It is here to stay, because it is not in the users’ interest to ditch it.

As is so often the case, the motivation for blaming the euro for some or all the Eurozone’s troubles is to shift responsibility from the real culprits, which are the institutions that created and manage it. This article briefly summarises the key points in the history of the euro project and notes how the mistakes of the past are being repeated without the safety-net of the ECB’s asset purchases.

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

Italy’s New Government Eats Its Words, Joins Bank Bailout Club

Italy’s New Government Eats Its Words, Joins Bank Bailout Club

Well, that didn’t take long. And whatever happened to the Eurozone’s new bail-in rule?

Italy’s government, in its eighth month in power, has already bailed out a bankrupt bank, mid-sized Banca Carige, with public funds. If approved by European Commission and the ECB, it will be the fourth Italian bank rescue in just over two years. As Italian daily Il Sole 24 Ore points out, Italy’s populist government has adopted virtually the exact same playbook to save Carige that was used by its predecessor in the previous three resolutions:

The draft of the new Carige decree is a carbon copy of the one used by the Gentiloni Government for the bailouts of Monte dei Paschi di Siena (MPS), BPVI and Veneto Banca — identical in every detail from the rules on state guarantees to the mechanisms adopted…

It took just eight minutes for Italy’s coalition partners, Five Star and the League, to renege on their flagship promise never to bailout a bank, reports Bloomberg. The new decree will allow the government to guarantee Carige bonds up to a maximum value of €3 billion, making it easier for the lender to retain access to the funding market. The government also wants the option, if necessary, to recapitalize the bank by injecting as much as €1 billion into its coffers despite having lambasted the previous government for doing the exact same thing with MPS.

It’s not yet clear whether the proposed rescue of Carige will contravene EU state-aid rules, which are supposed to impose strict conditions on the “precautionary recapitalization” envisaged by the government. Carige is already under the administration of ECB-appointed administrators after failing to agree to a €400 million capital increase at the end of last year. So if there are any issues it should be easy for European Commission or the ECB to stop the bailout dead in its tracks.

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

We Are Entering The “Quantitative Failure” Narrative

For a decade, the world brushed off any concerns about soaring global debt under the rug for a simple reason: between the Fed, the ECB and the BOJ, there was always a buyer of last resort, providing an implicit or, increasingly explicit backstop to bond prices, in the process creating the biggest asset bubble in history as investors seeking return were forced to buy first fixed income securities and then equities and other, even riskier securities.

However, as BofA’s Barnaby Martin is the latest to point out, “early 2019 will be uncharted territory for the market” because after years of central bank purchases crowding investors into risky assets, this dynamic will now reverse. As Zero Hedge readers have observed on countless occasions, the yearly growth of central bank balance sheets is now turning negative as shown in the following chart.

The upshot of this, in Martin’s view, is that markets will continue to experience more “corrections” than normal, leading to bigger and fatter trading ranges for credit spreads in Europe this year.

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

The Eurozone Is in a Danger Zone

The Eurozone Is in a Danger Zone

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It is easy to conclude the EU, and the Eurozone in particular, is a financial and systemic time-bomb waiting to happen. Most commentary has focused on problems that are routinely patched over, such as Greece, Italy, or the impending rescue of Deutsche Bank. This is a mistake. The European Central Bank and the EU machine are adept in dealing with issues of this sort, mostly by brazening them out, while buying everything off. As Mario Draghi famously said, “whatever it takes.”

There is a precondition for this legerdemain to work. Money must continue to flow into the financial system faster than the demand for it expands, because the maintenance of asset values is the key. And the ECB has done just that, with negative deposit rates and its €2.5 trillion asset purchase program. But that program ends this month, making it the likely turning point, whereby it all starts to go wrong.

Most of the ECB’s money has been spent on government bonds for a secondary reason, and that is to ensure Eurozone governments remain in the euro system. Profligate politicians in the Mediterranean nations are soon disabused of their desires to return to their old currencies. Just imagine the interest rates the Italians would have to pay in lira on their €2.85 trillion of government debt, given a private sector GDP tax base of only €840 billion, just one third of that government debt.

It never takes newly-elected Italian politicians long to understand why they must remain in the euro system, and that the ECB will guarantee to keep interest rates significantly lower than they would otherwise be. Yet the ECB is now giving up its asset purchases, so won’t be buying Italian debt or any other for that matter. The rigging of the Eurozone’s sovereign debt market is at a turning point.

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

The Ugly Truth

The Ugly Truth

For years critics of central bank policy have been dismissed as negative nellies, but the ugly truth is staring us all in the face: Market advances remain a game of artificial liquidity and central bank jawboning and not organic growth and now the jig is up. As I’ve been saying for a long time: There is zero evidence that markets can make or sustain new highs without some sort of intervention on the side of central banks. None. Zero. Zilch.

And don’t think this is hyperbole on my part, I will present the evidence of course.

In March 2009 markets bottomed on the expansion of QE1 which was introduced following the initial QE1 announcement in November 2008. Every major correction since then has been met with major central bank intervention. QE2, Twist, QE3 and so on.

When market tumbled in 2015 and 2016 global central banks embarked on the largest combined intervention effort in history to the tune of over $5 trillion between 2016 and 2017 giving us a grand total of over $15 trillion in central bank balance sheet courtesy FOMC, ECB and BOJ:

When did global central bank balance sheets peak? Early 2018. When did global markets peak? January 2018.

And don’t think the Fed was not still active in the jawboning business despite QE3 ending. After all their official language remained “accommodative”  and their hike schedule was the slowest in history, cautious and tinkering not to upset markets.

With tax cuts coming into the US economy in early 2018 along with record buybacks markets at first ignored the beginning of QT (quantitative tightening), but then it all changed.

And guess what changed? 2 things.

In September 2018, for the first time in 10 years, the FOMC removed one little word from its policy stance: “accommodative” and The Fed increased its QT program. When did US markets peak? September 2018.

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

ECB Takes “Unprecedented” Step Of Putting Italy’s Banca Carige In Administration

Investors who had hoped that the resolution of Italy’s budget showdown with the EU would mark an end to a volatile period for Italian bonds and stocks were disappointed Wednesday when fears about an Italian banking crisis reemerged after the ECB appointed a slate of temporary administrators to oversee troubled Italian lender Banca Carige after nearly its entire board resigned.

Earlier on Wednesday, Consob, Italy’s market watchdog, said it had suspended trading in shares of Banca Carige for the session following a request by the bank, according to Reuters.

European bank stocks dropped while bonds rallied as fears about softer-than-expected factory orders across the Continent were compounded by the developments in Italy (which proved an exception to the trend of weak PMIs).

Banca

Fabio Innocenzi, Pietro Modiano and Raffaele Lener have been appointed as temporary administrators while Gianluca Brancadoro, Andrea Guaccero and Alessandro Zanotti have appointed as members of the surveillance committee.

The “unprecedented” move – as Bloomberg called it – follows a failed attempt to raise some 400 million euros last month after the Malacalza family, the billionaire shareholders who control nearly one-third of Carige, abstained from a vote on a turnaround plan, which sought to fill the capital hole left by the fraud scandal.

Carige

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

Weekly Commentary: The Perils of Inflationism

Weekly Commentary: The Perils of Inflationism

December 13 – Financial Times (Chris Giles and Claire Jones): “When the European Central Bank switches off its money-printing press at the turn of this year and stops buying fresh assets, it will mark the end of a decade-long global experiment in how to stave off economic meltdowns. Quantitative easing, the policy that aims to boost spending and inflation by creating electronic money and pumping it into the economy by buying assets such as government bonds, is on the verge of becoming quantitative tightening. With the Federal Reserve slowly reducing its stocks of Treasuries, central banks are no longer in the buying business. Globally, only the Bank of Japan is left as a leading central bank that has not formally called time on expanding its stock of asset purchases. Arguments over how, or even if, the trillions spent by policymakers helped the global economy recover will rage for years to come. But as central banks step back, the initial view is that the purchases worked — whether through encouraging investors to hold more risky assets, easing constraints on borrowing, providing finance so governments could run larger budget deficits or just showing that central banks still had an answer to weak demand and low inflation.”
At this point, the prevailing view holds that QE “worked.” Moreover, central banks are seen ready and willing to call upon “money printing” operations as need. The great virtue of this policy course, many believe, is that there is essentially no limit to the scope and duration of “QE infinity.” The FT quoted Mario Draghi: “[QE] is permanent and may be usable in contingencies that the governing council will assess in its independence.” Melvyn Krauss, from the Hoover Institution, captured conventional thinking: “No one willingly walks into a room from which there is no exit. Because QE proved temporary, because it worked and because it has ended, it is likely to be used again.”…click on the above link to read the rest of the article…

Gold – A Perfect Storm For 2019

Gold – A Perfect Storm For 2019

This article is an overview of the principal factors likely to drive the gold price in 2019. It looks at the global factors that have developed in 2018 for both gold and the dollar, how geopolitics are likely to evolve, the economic outlook and how it is worsened for the dollar by President Trump’s tariff war against China, the availability and likely demand for bullion, and the technical position in paper markets. Taken together, the outlook is bullish for gold.

2018 reprise

For gold bulls, 2018 was disappointing. From 11 December 2017, when gold made a significant bottom against the dollar at $1243, it has ended virtually unchanged today, after being 4.2% up. Gold had to struggle against a rising dollar, whose trade-weighted index rose a net 3.7% over the same period, and as much as 9.4% from its mid-February low.

Dollar strength has been driven less by trade imbalances and more by interest rate differentials. A speculating bank for its own book or for a hedge fund client can borrow 3-month Euro Libor at minus0.354% and invest it in 3-month US Treasury bills at 2.36%, for a round trip of over 2.7%. Gear this up ten times or more, either on a bank’s capital, or through reverse repos for annualised returns of over 27%. To this can be added the currency gain, which at times has added enough to overall returns for an unhedged geared position to double the investment.

Not that these forex returns have been guaranteed, but you get the picture. The ECB and the Bank of Japan have been frozen into inactivity, reluctant to raise rates to correct this imbalance, and the punters have known it.

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

ECB Confirms It Will End Asset Purchases, Will Reinvest Maturities In Full

As expected, the ECB – which obviously is keeping its rates unchanged – confirmed it would end its asset purchases in December 2018, while clarifying for the first time that it would “continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates.” Previously, the ECB had only committed to reinvesting “for an extended period after the end of QE.”

Also of note, the ECB announced it “expects interest rates to remain at their present levels at least through the summer of 2019” which however the market no longer believes, having priced out a full rate hike in 2019.

In any case look for more clarity in 45 minutes when Draghi speaks.

Full statement below:

At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

Regarding non-standard monetary policy measures, the net purchases under the asset purchase programme (APP) will end in December 2018. At the same time, the Governing Council is enhancing its forward guidance on reinvestment. Accordingly, the Governing Council intends to continue reinvesting, in full…

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

Europe Struggles as the ECB Pretends to Know What It’s Doing

Europe Struggles as the ECB Pretends to Know What It’s Doing

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The European Central Bank (ECB) is rumored to be planning a halt  to its four-year quantitative easing program at the end of this week when it will stop its asset purchases while continuing to keep interest rates at current near-zero levels through 2019. The Economist laments this ‘rash’ decision, arguing that the European economy is still ‘faltering’, showing only very feeble and unstable signs of growth.

Since 2015, the ECB has bought bonds worth almost $3trn. However, core inflation has remained fairly low, exports have waxed and waned, and the Euro area has shown no clear signs of recovery after the 2008 financial collapse. Groping in the dark, The Economistblames “[p]oor weather, strikes and a bad flu season” for the shaky start of 2018, and low demand, both domestic and foreign, for the overall bleak outlook.

But in fact, the European economy is a very sick patient whose self-appointed doctor, the ECB, is treating it with the same poison that made it ill in the first place. It is also judging the health of its patient by monitoring the wrong signs, i.e. looking for some color in its cheeks rather than a strong heartbeat.

Mises (2009, 20) pointed out as early as 1934 that

[…] the inevitable and ineluctable consequence of the expansion of credit… was bound to lead eventually to a collapse. And the thing which is chiefly advocated as a remedy is nothing but another expansion of credit, such as certainly might lead to a transitory boom, but would be bound to end in a correspondingly severer crisis.

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

A Global Dearth of Liquidity

A Global Dearth of Liquidity

Worldwide Liquidity Drought – Money Supply Growth Slows Everywhere

This is a brief update on money supply growth trends in the most important currency areas outside the US (namely the euro area, Japan and China)  as announced in in our recent update on US money supply growth (see “Federal Punch Bowl Removal Agency” for the details).

Nobody likes a drought. This collage illustrates why.

The liquidity drought is not confined to the US – it is fair to say that it is a global phenomenon, even though money supply growth rates in the euro area and Japan superficially still look fairly brisk. However, they are in the process of slowing down quite rapidly from much higher levels – and this trend seems set to continue.

Euro Area – Money Supply Growth Still High, But Slowing Fast

The chart below shows the euro area’s narrow money supply aggregate M1 (stock) and its year-on-year growth rate. M1 in the euro area is almost equivalent to US TMS-2, which makes it a good enough stand-in (it includes savings deposits that are in practice payable on demand; however, it lacks euro deposits belonging to foreign residents and central government deposits).

It is worth noting that a slowdown to a 0% growth rate triggered crisis conditions in 2008. After a sharp, but short term spike in money supply growth after the ECB made emergency liquidity facilities available to European banks to mitigate the fallout from the US housing bubble implosion, crisis conditions promptly returned when these facilities expired and money supply growth fell to around 1% in 2011.

Euro area, M1 (~TMS-2): Total in millions of EUR (blue line) and y/y rate of change (orange line). We have highlighted the three most recent slowdowns in money supply growth associated with economic crises and declining asset prices.

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

QE Created Dangerous Financial Dependence, Italy Hooked, Withdrawal Next, ECB Warns

QE Created Dangerous Financial Dependence, Italy Hooked, Withdrawal Next, ECB Warns

“Who will purchase the €275 billion of government debt Italy is to issue in 2019?”

The ECB, through its army of official mouthpieces, has begun warning of the potentially calamitous consequences for Italian bonds when its QE program comes to an end, which is scheduled to happen at the end of this year.

During a speech in Vienna on Tuesday, Governing Council member Ewald Nowotny pointed out that Italy’s central bank, under the ECB’s guidance, is the biggest buyer of Italian government debt. The Bank of Italy, on behalf of the ECB, has bought up more than €360 billion of multiyear treasury bonds (BTPs) since the QE program was first launched in March 2015.

In fact, the ECB is now virtually the only significant net buyer of Italian bonds left standing. This raises a key question, Nowotny said: With the ECB scheduled to exit the bond market in roughly six weeks time, “who will purchase the roughly €275 billion of government securities Italy is forecast to issue in 2019?”

With foreigners shedding a net €69 billion of Italian government bonds since May, when the right-wing League and anti-establishment 5-Star Movement took the reins of government, and Italian banks in no financial position to expand their already bloated holdings, it is indeed an important question (and one we’ve been asking for well over a year).

According to former Irish central bank governor and ex-member of the ECB’s Governing Council Patrick Honohan, speaking at an event in London, when the ECB’s support is removed, “the yield on Italian government bonds will be much more vulnerable.”

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

Take Heed Italy, Brussels Doesn’t Care One Whit About You

Take Heed Italy, Brussels Doesn’t Care One Whit About You

Take Heed Italy, Brussels Doesn’t Care One Whit About You

Watching the complete betrayal of Brexit by British Prime Minister Theresa “The Gypsum Lady” May is proving to be a wake up call for Italians. The latest polling results coming out of Italy show that while the populist coalition in Italy is unpopular in Brussels it is still very popular with Italians.

And that’s a good thing because when you look closely at Brexit negotiations it is clear that all that matters is the EU retaining power over the U.K. and not what is in the best interest of anyone involved, British or otherwise.

The Italian coalition partners still command nearly 60% of all Italians’ support, only their preference has changed. Lega now outpolls Five Star Movement (M5S) 33% to 26%, while the other center-right parties, namely Silvio “Stalking Horse” Berlusconi’s Forza Italia have collapsed (from 14% at March’s elections to just 7% now).

And roughly that same number now see the EU as mistreating Italy. These numbers will only get worse if the EU goes through with levying fines against Italy for submitting a budget Brussels doesn’t like.

Moreover, now we’re seeing support for Italeave rise as well. A recent poll by Politico Magazine posted over at Zerohedge shows a slight majority of Italians under age 45 are ready to do just that, leave the European Union.

The over 45 crowd is still enamored with the ideal of the EU tying together a warring Europe rather than confront the reality of what it actually is, a distant and tyrannical oligarchy led by unelected technocrats with strong ties to old money and old power.

The source of this support comes from, I think, the stark contrast between May’s appeasement of rankled EU leadership over the British people’s temerity to want out of their wretched union and how Deputy Prime Minister Matteo Salvini is attacking Brussels’ hypocrisy over fiscal restraints.

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

The Eurozone Banks’ Trillion Timebomb

The Eurozone Banks’ Trillion Timebomb

Eurozone banks have fallen dramatically in the stock market despite the results of the stress tests carried out by the ECB, and the EU Banks Index is down 25% on the year despite year-long bullish recommendations from almost every broker. This should not surprise anyone because we have seen in the past that these tests are only a theoretical exercise. Moreover, stress tests’ results are widely challenged, and rightly so, because the exercise starts with the most ridiculous premise in economics: Ceteris Paribus, or “all else remaining equal”, which never happens. Every asset manager knows that risk builds slowly and happens fast.

Disappointing earnings, rising risk in the eurozone as well as in their diversification markets such as emerging economies, weak net income margins and low return on tangible equity are factors that have contributed to the weak performance of European banks. Investors are rightly suspicious about consensus estimates for 2019 with expectations of double-digit EPS growth rates. Those growth rates look impossible in the current macroeconomic scenario.

Eurozone banks have done a good job of strengthening their capital structure, reaching almost a one per cent per annum increase in Tier 1 core capital. The question is whether this improvement is enough.

Two factors weigh on sentiment.

. More than EUR104 billion of risky “hybrid bonds” (CoCos) are included in the calculation of core capital.

. The total volume of Non-Performing Loans across the European Union is still at around EUR 900 billion, well above pre-crisis levels, with a provision ratio of only 50.7%, according to the European Commission.  Although the ratio has declined to 4.4%, down by roughly 1 percentage point year-on-year, the absolute figure remains elevated and the provision ratio is too small.

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

Olduvai IV: Courage
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