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Whatever Happened to Inflation after All This Money Printing? It Has Arrived!

Whatever Happened to Inflation after All This Money Printing? It Has Arrived!

Workers, bondholders, savers get sacked. So what would Yellen do?

Consumer prices surged 0.6% in January from December, double the consensus forecast of a 0.3% rise. The sharpest monthly increase since February 2013, according to the Bureau of Labor Statistics.

Energy prices jumped 4% month over month, including gasoline which jumped 7.8%. Food prices edged up 0.1%. Within this group, “food at home” was unchanged, but prices for “food away from home” – restaurants, taco trucks, and the like – rose 0.4%. In just one month, the prices of apparel rose 1.4%, of new vehicles 0.9%, of auto insurance 0.8%, of airline fares 2.0%. Shelter rose “only” 0.2%, as the national numbers are now feeling the downward pressure on rents in some of the most expensive rental markets in the US.

This chart  shows just how sharp that jump in monthly price increases is, compared to recent years:

Compared to January a year ago, consumer prices as measured by CPI-U surged 2.5%, after having already jumped 2.1% in December. The rate of inflation has now accelerated for the sixth month in a row. It has surged one full percentage point over the past four months and hit the highest rate since March 2012:

So-called core inflation – which excludes food and energy – jumped 2.3% in January from a year ago. The consensus expected 2.1%. So you can’t just blame the rising costs of energy. This “core” measure of price increases has been above 2% since November 2015. Even during the Financial Crisis, when overall year-over-year CPI dipped briefly into the negative, core CPI remained in positive territory.

However much these inflation measures may understate actual increases in the costs of living that people experience in their daily lives, even those understated measures are now beginning to exude a lot of heat. And afterwards, the consensus will say that no one saw this coming.

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

Italy’s Banking Crisis Is Even Worse Than We Thought

Italy’s Banking Crisis Is Even Worse Than We Thought

The insider blame game has begun.

In this late winter of generalized discontent, it is not easy to pinpoint just where the biggest threat to Europe’s increasingly flimsy union lies, so intense is the competition. One obvious contender is the Eurozone’s third largest economy, Italy, which faces a banking crisis, an economic crisis, a debt crisis, and a political crisis all at the same time.

The country’s Five Star Movement is gaining momentum both in the polls and in its efforts to call for a referendum on euro membership. In the meantime, Italy’s newly installed government wants — indeed, needs — to bail out a growing number of banks but has neither the money nor the political capital to do so.

Things had gotten so bad that the country’s two bad banks (Atlante I and Atlante II), ostensibly created to stabilize the financial system, were themselves on the verge of collapse. Turns out that things are even worse than we had thought, following a blistering tirade on Tuesday from Italy’s bad banker-in-chief, Alessandro Penati.

“There is no clear vision of the problem and no strategy,” Penati told a financial conference in Milan, according to Reuters. He said he was virtually working alone on rescues that had revealed “horror stories” within some banks.

In short, the insider blame game has begun.

Penati, whose boutique asset management firm, Quaestio Capital Management, was chosen to oversee the supervision of Atlante in late 2015, directed much of his ire at the banks themselves, in particular Italy’s two largest financial institutions, UniCredit and Intesa Sao Paolo. Atlante’s investors had, he said, shown “zero long-sightedness,” after declining to invest more in the fund, which has used 80% of its money to rescue two mid-sized banks in northeast Italy — Veneto Banca and Banca Popolare di Vicenza. Both these lenders now need more capital.

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

UBS Warns: Spain’s “Most Italian Bank” Runs Out of Options

UBS Warns: Spain’s “Most Italian Bank” Runs Out of Options

The bank-bailout business rages on.

During the first week of 2017, Spain’s “most Italian bank”, Banco Popular, got off to a flying start as its stock outperformed all other major Spanish banks. By Jan 5th its shares had even crossed the €1-line for the first time in nearly a month. But Popular’s New Year fairy tale was not made to last.

Its upward momentum, if that’s the right term, was brought to a halt by a bombshell report from UBS that concludes that Popular’s stock, which already lost three-quarters of its value last year and is down over 90% since 2008, is still overvalued by 20%. In less than an hour, Popular’s shares were back under a euro. That’s life in the penny-stock lane.

According to the report, Popular has a provision deficit of €1.9 billion. In other words, it has nonperforming loans and other toxic assets on its books whose losses would amount to €1.9 billion. But it has not yet booked (or “recognized”) those losses. If it did finally recognize those losses, it could end up with a €2.4 billion capital gap. That’s the equivalent of roughly 60% of its current market cap.

The UBS analysts acknowledged that their previous forecast of the bank’s capacity to absorb loss provisions had been “too optimistic”, with the new estimates showing a lower coverage ratio (46% compared to the previous 50%) and capital ratio (10% instead of 10.8%).

UBS also poured cold water on the idea of Banco Popular further expanding its bad-debt provisions, since doing so would “permanently depress” its profitability, limiting its capacity to create new capital and increasing its regulatory risk. This is bad news for a bank that continues to drown in its own toxic soup eight years after the burst of Spain’s mind-boggling real estate bubble.

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

Who Exactly Benefits from Italy’s Ballooning Bank Bailout?

Who Exactly Benefits from Italy’s Ballooning Bank Bailout?

Italy’s third largest bank, Monte dei Paschi di Siena, is not insolvent, according to the ECB; it just has “serious liquidity issues.” It’s a line that has already been heard a thousand times, in countless tongues, since some of the world’s largest banks became the world’s biggest public welfare recipients.

In order to address its “liquidity” issues, Monte dei Paschi (MPS) is about to receive a bailout. The Italian Treasury has said it may have to put up around €6.6 billion of taxpayer funds (current or future) to salvage the lender, including €2 billion to compensate around 40,000 retail bond holders.

The rest will come from the forced conversion of the bank’s subordinated bonds into shares. According to the ECB, the total amount needed could reach €8.8 billion, 75% more than the balance sheet shortfall originally estimated by MPS and its thwarted (but nonetheless handsomely rewarded) private-sector rescuers, JP Morgan Chase and Mediobanca.

All these events conform to a well established script. The moment the “competent” authorities (in this case, the ECB and the European Commission) agree that public funds will be needed to prop up an ostensibly private financial institution that is not too big to fail but nonetheless cannot be allowed to fail, the bailout costs inevitably soar.

And this is just the beginning. According to Italy’s Finance Minister Pier Carlo Padoan, the Italian government has already authorized a €20-billion fund to support Italy’s crumbling banking sector, with up to eight regional banks lining up for state handouts. In addition, MPS plans to issue €15 billion of new debt to “restore liquidity” and “boost investor confidence,” as several Italian newspapers reported on today. That debt will be guaranteed by the government and its hapless taxpayers.

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

Bank Bailout Balloons, Tab for Italian Banking Crisis Soars

Bank Bailout Balloons, Tab for Italian Banking Crisis Soars

Monte dei Paschi di Siena sinks deeper into the mire.

Over the Christmas holidays, when no one was supposed to pay attention, and when the markets were closed, the bailout costs of Monte dei Paschi di Siena, the third largest bank in Italy, and the center of the Italian banking crisis, suddenly jumped by 75% to €8.8 billion ($9.2 billion)!

Just how immense the black hole inside of a bank really is remains unknown until the bank collapses entirely and the pieces are sorted out. No one wants to know, especially not bank regulators. But when banks are teetering, and a bank bailout, or rather a bondholder bailout is being discussed, the aspects of that hole begin to emerge, and the hole keeps getting bigger the longer someone looks at it.

Earlier this year, the ECB’s stress tests of 51 large European banks determined that Monte dei Paschi was the shakiest among them. The ECB gave the bank until the end of 2016 to raise enough capital or contemplate the prospect of being wound down.

Last week, after Monte dei Paschi failed to work out a private-sector rescue deal led by JP Morgan, a taxpayer bailout was moved to the front burner. The bank’s shares and bonds were suspended from trading until the details of the bailout would emerge. This came after two prior capital increases from the private sector in recent years had failed to fill the holes. Each time, gullible investors had gotten crushed.

On Friday, the Italian government decided to shanghai its taxpayers into bailing out the bank’s bondholders with only a small haircut for holders of certain junior bonds. The decree it approved to that effect was based on the assumption that a €5-billion bailout – a “precautionary recapitalization” – would be needed.

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

Canada’s Goods Producing Sector Caves

Canada’s Goods Producing Sector Caves

Many countries, including the US, report GDP on a quarterly basis. Canada reports on a monthly basis. So today Statistics Canada reported GDP for October. What’s disconcerting isn’t so much that GDP fell 0.3% on a monthly basis – these things happen – though it disappointed economists along the way…

The “results were surprisingly bad,” wrote Krishen Rangasamy, senior economist at Economics and Strategy, National Bank of Canada.

“The GDP report is an ugly snowball of reality to the face of the economy to end the year after a nice run earlier in the fall,” said Douglas Porter, chief economist BMO .

But what was disconcerting was just how much the goods producing sectors are getting hammered across the board.

This chart by NBF Economics and Strategy shows the decline in October (blue bars, left scale), and it also shows that this type of monthly decline, during our mediocre economic era, is not rare. The red line (right scale) shows the annualized rate for the last three months, which is still positive, but careening lower:

Output of the overall goods producing industries caved 1.3% from September. It was broad-based, with manufacturing, mining, quarrying, and oil & gas extraction, construction, utilities, agriculture, and forestry all declining. It more than wiped out the gains of the goods producing sectors in September.

Manufacturing, which contributes about 10% to GDP, has taken a big beating, despite the loonie that the Bank of Canada has successfully devalued over the past few years to make exports more competitive, particularly in the US. But manufacturing output fell 2% on a monthly basis, the largest monthly decline since December 2013. It has gone nowhere since February 2014 (red line):

Both durable and non-durable manufacturing fell. StatCan:

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

Currency Armageddon? A Word about the Hated Dollar

Currency Armageddon? A Word about the Hated Dollar

The “death of the dollar” will have to be rescheduled.

Sharply higher yields on Treasury securities and the prospect of more rate hikes by the Fed – in a world where other major central banks are still stewing innocent bystanders in the juices of NIRP, negative yields, and “punishment interest” – sent the hated dollar, whose death has been promised for a long time, soaring.

It soared against the euro. Or, seen from the other side, the euro plunged against the dollar, to $1.039, the lowest level since January 2003; down 35% from its peak of $1.60 during the Financial Crisis; down 10% from its 52-week high in March of $1.16; and down 2.7% from $1.068 yesterday before the Fed announcement.

Pundits are once again declaring that the euro will fall to “parity” with the dollar, as the ECB has been wishing for a long time, though it cannot admit officially that it is trying to crush the euro to give member states an export advantage. That would be “currency manipulation,” which is frowned upon in other countries. But a big wave of “money printing” and forcing yields below zero “to stimulate the economy,” whereby the currency gets crushed as a side effect, is OK.

Tourist destinations and flagship retailers in the US watch out: for your euro tourist customers, things are getting very expensive in the US, and some may choose to buy less or travel to cheaper countries.

The yen plunged 3% since the Fed announcement to ¥118.4 to the dollar. It’s down 15% since September. But it’s still higher than it had been in mid-2015, when it had sunk as low as ¥123 to the dollar.

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

This is How Consumers Turn into Debt Slaves

This is How Consumers Turn into Debt Slaves

The Fed likes the word “credit.” Sounds less onerous than “debt.”

Consumer debt rose by $19.3 billion in September to $3.71 trillion, another record in a five-year series of records, the Federal Reserve’s Board of Governors reported on Monday. Consumer debt is up 6% from a year ago, at a time when wages are barely creeping up and when consumer spending rose only 2.4% over the same period.

This follows the elegant principle of borrowing ever more to produce smaller and smaller gains in spending and economic growth. Which is a highly sustainable economic model with enormous future potential, according to the Fed.

Consumer debt – the Fed uses “consumer credit,” which is the same thing but sounds a lot less onerous – includes student loans, auto loans, and revolving credit, such as credit cards and lines of credit. But it does not include mortgages. And that borrowing binge looks like this:

us-consumer-debt-total-ex-mortgages-2016-09

Diving into the components, so to speak: outstanding balances of new and used vehicle loans and leases jumped by $22.6 billion from Q2 to $1.098 trillion, another record in an uninterrupted four-year series of records.

Auto loans have soared 38% from Q3 2012, the time when they regained the glory levels of the Greenspan bubble before the Financial Crisis:

us-consumer-debt-auto-2016-09

Auto loan balances have soared because people bought more cars. New car sales hit an all-time record last year, though they’ve started to flatten out or decline in recent months. The balances have also been rising because loan terms are getting stretched, and because the balances on individual loans have been getting bigger as cars got more expensive and loan-to-value ratios rose:

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

Tiny Region of Wallonia in Small Country of Belgium Trips up Global Corporatocracy

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Wolf Richter: The Economy Is Cracking Under Too Much Debt

Wolf Richter: The Economy Is Cracking Under Too Much Debt

Housing, restaurants & retail are suffering

Wolf Richter joins the podcast this week to discuss the deterioration of the global macro situation, and how he is seeing growing signs of recession breaking out across the economy:

I think that was one of the biggest mistakes the central banks made during the financial crisis: They stopped the debt from blowing up. So we never had a cleansing.

In a recession, normally companies de-leverage. They go through bankruptcy, they shed their debts, and you have this big wave of debt restructuring. This is painful for bondholders and banks, but it clears out the crap that is clogging up the pipeline. And so these companies reemerge or get bought out and the debt just disappears. The same with consumers: they unload their debts through various methods, and so when the recovery starts, you are not suffocating under this huge load of debt.

That has not happened in the United States, particularly, but in other countries, too. That debt never got fully blown out. And then the recovery started with 0% interest rates and monetary stimulus, which only encouraged companies and individuals and governments to take on even more debt. So now we’re burdened with such an enormous amount of debt that I think it is very hard to even breathe for the economy. A lot of people out there are worried about this, which is why you hear now voices saying we need a serious reflation. They need to come up with a lot of inflation to wipe out that debt. And of course, that will be a fiasco for our economy because if you have any uptick inflation without an equivalent uptick in wages — which we have not been getting — then you will destroy the consumer. And so this is not a great solution either.

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

Why Italy’s Banking Crisis is Spiraling to Heck

Why Italy’s Banking Crisis is Spiraling to Heck

Things have got so serious in Italy that the only two things propping up the country’s crumbling banking sector — apart from the last few remaining crumbs of public faith in the system — are two inadequately capitalized bad bank funds, Atlante I and the imaginatively named Atlante II.

Both funds are operated by a deeply opaque Luxembourg-based private firm called Quaestio SGR. The firm is a wholly owned subsidiary of Quaestio Holding S.A, which is itself jointly owned by a bizarre mishmash of organizations, including Fondazione Cariplo (37.65%), an influential “charitable” banking foundation; Fondazione Cassa dei Risparmi di Forlì (6.75%), a regional savings bank; Cassa Italiana di Previdenza e Assistenza dei Geometri liberi professionisti (18%), a bank for professional freelance surveyors (no, seriously); Locke S.r.l. (22%), an obscure Milan-based holding company; and Direzione Generale Opere Don Bosco (15.60%), a Roman Catholic religious institute. No surprises there.

[Hat tip to regular WOLF STREET reader and commenter MC for pointing out some of the peculiarities of Italy’s two bad banks]Atlante I’s funds are largely privately sourced, coming primarily from Italy’s largest banks. The two biggest banks, Unicredit and Intesa San Paolo,both pledged around a billion euros a piece. A further €500 million was provided by a gaggle of smaller banks and another €500 million was pledged by Cassa Depositi e Prestiti (CDP for short), an almost wholly state-owned financial institution. With a little extra help from certain foreign investors, Atlante was able to claw together some €4.8 billion — to help solve a €360 bad-debt problem.

So far, €1.5 billion of those funds have been used to sub-underwrite the capital expansion and failed IPO of Banco Popolare di Vicenza.

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

 

There’s No Plateau in a Housing Bubble, Not Even in Canada

There’s No Plateau in a Housing Bubble, Not Even in Canada

Vancouver in turmoil, Toronto spikes.

Canadian house prices jumped 11.7% in September from a year ago, according to The Teranet–National Bank National Composite House Price Index released today. But the index papers beautifully over the dynamics in each metro.

In six of the 11 metro markets of the index, prices have been languishing or even declining over the past couple of years, as they’ve hit the wall of reality after often stupendous price gains in the prior decade: Montreal, Calgary, Edmonton, Quebec City, Halifax, and Ottawa-Gatineau.

In the two largest markets – Toronto and Vancouver, which combined account for 54% of the index – prices have blown through the roof. Both markets are among the hottest, most over-priced housing bubbles in the world. UBS recently ranked Vancouver Number 1 globally on that honor roll.

But suddenly the dynamics have changed.

Vancouver’s housing market is in turmoil, to use a mild word, as sales have crashed, after the implementation of a real-estate transfer tax this summer by British Columbia, aimed squarely at non-resident investors. In Vancouver, those investors are mostly Chinese. And where do these folks now go to inflate prices? Toronto.

Still, the national house price index (red line, right scale), after the 11.7% jump over the past 12 months (blue columns, left scale), has doubled since 2005!

canada-house-price-index-2016-09

The index, similar to the Case-Shiller Home Price index in the US, is based on repeat sales. It looks at properties that sold at least twice over the years to establish “sales pairs.” It then uses a proprietary formula to deduct price changes from these transactions and extrapolate them into an index for each of the 11 markets and nationally. It’s not perfect, but it offers an alternative view to median prices or Canada’s “benchmark” prices.

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

Fed Vice Chair Fischer Admits Fed is Waiting for Godot

Fed Vice Chair Fischer Admits Fed is Waiting for Godot

The Fed’s fourth mandate.

In his keynote speech on the usual suspects of central-bank topics at the Institute of International Finance’s big shindig in Washington DC today, Fed Vice Chair Stanley Fischer nevertheless managed to develop a new theory for a fourth Fed mandate.

This new mandate would come on top of the third mandate: inflating asset bubbles at all costs (unlimited asset price inflation). The other two mandates are “full employment” (whatever that means) and “price stability,” which is ironically defined as consumer price inflation, the way the Fed counts it, of at the moment 2%, and a lot more in most people’s real-life experience.

Fischer has been grumbling about the slow growth of the US economy for a while – “Everybody is trying to find out what is going on,” he said today, and then went on to explain what’s going on. Turns out, what’s restraining economic growth and investment is a lack of “confidence” and “animal spirits.”

“Confidence has to be turned on for people to want to invest and we’re waiting to see that happen,” he said, according to MarketWatch. “It will happen at some point. But precisely when” is unknown he said.

“Animal spirits aren’t there – people aren’t excited about growth prospects.”

So no interest rate increases until these “animal spirits” and “confidence” show up?

But, but, but… the Fed’s monetary policies for the past eight years have created the biggest credit bubble in US history, including the biggest junk bond bubble ever, a stock market bubble, housing bubbles in numerous cities around the country that exceed by far the peaks of the prior housing bubbles that imploded so spectacularly, the most gigantic commercial real estate bubble, now according to the Green Street Commercial Property Price Index, 26.5% above its totally crazy bubble peak of August 2007….

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

I’m in Awe of How Fast Deutsche Bank is Falling Apart

I’m in Awe of How Fast Deutsche Bank is Falling Apart

Counterparties lose confidence, withdraw cash.

Deutsche Bank, with $2 trillion in assets, amounting to 58% of Germany’s GDP, one of the most globally interwoven banks, with gross notional derivatives exposure of €46 trillion, right at the top along with JP Morgan (booked as €41 billion in derivative trading assets after netting and collateral) – this creature of risk and malfeasance, is finally starting to scare its counterparties.

This is how Lehman came unglued. Slowly and then all of a sudden.

Bloomberg News today:

[S]ome funds that use the bank’s prime brokerage service have moved part of their listed derivatives holdings to other firms this week, according to an internal bank document seen by Bloomberg News. Millennium Partners, Capula Investment Management, and Rokos Capital Management are among about 10 hedge funds that have cut their exposure, said a person familiar with the situation….

So far, these are just the first of Deutsche Bank’s 200 hedge-fund clients that use it to clear their derivatives transactions. Banking is a confidence game. When confidence sags, the whole construct comes tumbling down. And the first movers have a big advantage in getting their cash out in in time. Bloomberg:

Clients review their exposure to counterparties to avoid situations like the 2008 collapse of Lehman Brothers Holdings Inc. and MF Global’s 2011 bankruptcy when hedge funds had billions of dollars of assets frozen until the resolution of lengthy legal proceedings.

As the leak ricocheted around the world, Deutsche Bank shares plunged 6.6% in late trading today in Frankfurt to €10.25, having been down 8% at one point earlier. Shares are at the lowest level since they started trading on the Xetra exchange in 1992. They’re down 68% from April 2015. Just before the financial Crisis, they briefly traded at over €100 a share. By that measure, they’re down over 90%!

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

Canadian Housing Bubble, Debt Stir Financial Crisis Fears

Canadian Housing Bubble, Debt Stir Financial Crisis Fears

Their bone-chilling chart.

Everyone is fretting about the Canadian house price bubble and the mountain of debt it generates – from the IMF on down to the regular Canadian. Now even the Bank for International Settlement (BIS) and the Organization for Economic Co-operation and Development (OECD) warn about the risks.

Every city has its own housing market, and some aren’t so hot. But in Vancouver and Toronto, all heck has broken loose in recent years.

In Vancouver, for example, even as sales volume plunged 45% in August from a year ago – under the impact of the new 15% transfer tax aimed at Chinese non-resident investors – the “benchmark” price of a detached house soared by 35.8%, of an apartment by 26.9%, and of an attached house by 31.1%. Ludicrous price increases!

In Toronto, a similar scenario has been playing out, but not quite as wildly. In both cities, the median detached house now sells for well over C$1 million. Even the Bank of Canada has warned about them, though it has lowered rates last year to inflate the housing market further – instead of raising rate sharply, which would wring some speculative heat out of the system. But no one wants to deflate a housing bubble.

During the Financial Crisis, when real estate prices in the US collapsed and returned, if only briefly, to something reflecting the old normal, Canadian home prices barely dipped before re-soaring. And this has been going on for years and years and years.

The OECD in its Interim Economic Outlook warned:

Over recent years, real house prices have been growing at a similar or higher pace than prior to the crisis in a number of countries, including Canada, the United Kingdom, and the United States. The rise in real estate prices has pushed up price-to-rent ratios to record highs in several advanced economies.

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

Olduvai II: Exodus
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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