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Credit is not innately good or bad. Simplistically, productive Credit is constructive, while non-productive Credit is inevitably problematic. This crucial distinction tends to be masked throughout the boom period. Worse yet, a prolonged boom in “productive” Credit – surely fueled by some type of underlying monetary disorder – can prove particularly hazardous (to finance and the real economy).

Fundamentally, Credit is unstable. It is self-reinforcing and prone to excess. Credit Bubbles foment destabilizing price distortions, economic maladjustment, wealth redistribution and financial and economic vulnerability. Only through “activist” government intervention and manipulation will protracted Bubbles reach the point of precarious systemic fragility. Government/central bank monetary issuance coupled with market manipulations and liquidity backstops negates the self-adjusting processes that would typically work to restrain Credit and other financial excess (and shorten the Credit cycle).

A multi-decade experiment in unfettered “money” and Credit has encompassed the world. Unique in history, the global financial “system” has operated with essentially no limitations to either the quantity or quality of Credit instruments issued. Over decades this has nurtured unprecedented Credit excess and attendant economic imbalances on a global scale. This historic experiment climaxed with a seven-year period of massive ($12 TN) global central bank “money” creation and market liquidity injections. It is central to my thesis that this experiment has failed and the unwind has commenced.

The U.S. repudiation of the gold standard in 1971 was a critical development. The seventies oil shocks, “stagflation” and the Latin American debt debacle were instrumental. Yet I view the Greenspan Fed’s reaction to the 1987 stock market crash as the defining genesis of today’s fateful global Credit Bubble.

The Fed’s explicit assurances of marketplace liquidity came at a critical juncture for the evolution to market-based finance.

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

Citi: “There Was Something About The Entire Recovery Narrative That Is Downright Wrong”

February 14, 2016

Citi: “There Was Something About The Entire Recovery Narrative That Is Downright Wrong”

Yesterday, we laid out what according to Citi’s Matt King, one of the most insightful and respected credit analysts in the world, is most surprising about the ongoing market selloff: the odd interplay between some asset classes which are declining in an orderly, almost boring fashion, and other assets which have crossed into and beyond a state of existential panic.

The reason for this ongoing paradox is still unclear but as Citi’s King, BofA’s Martin and Hartnett, and DB’s Konstam and Reid have all hinted on numerous occasions, the fundamental driver of everything that is wrong with the market are the actions of the policy makers themselves, who in their feverish attempt to preserve the market in the post-Lehman devastation, have made the market into a “market”, one where nothing makes sense any more. In other words, in order to save the market, central bankers broke it.

Which brings us to the conclusion from Matt King’s most recent note, one which picks up on his observations of the all too clear dislocations and paradoxes in the market, those “things which, according to all the policymakers’ models of the world, are “not supposed to be happening”.

And yet they are, and as King adds, “it is increasingly clear that the world is not fixed – far from it.”

The rest of King’s conclusion is a must read for everyone, especially those who think that anything in the past 7 years has been fixed, or even partially resolved.

This, then, is the real implication of widespread market dislocations. It suggests that there was something about the entire narrative peddled after the crisis which was at best incomplete, and at worst downright wrong.

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

Italian Banks Sink As “Bad Bank” Plan Underwhelms

January 27, 2016

Italian Banks Sink As “Bad Bank” Plan Underwhelms

Last week, we noted that Italy is rushing to defuse a €200 billion time bomb in the country’s banking sector as investors fret over banks’ exposure to souring loans.

“Italian banks’ share prices have been volatile YTD, given the market’s renewed fears over asset quality and potential developments on a possible bad bank creation,” Citi wrote, in a note analyzing which Italian banks are most exposed. “Total gross NPLs in Italy have increased by c160% since 2009 and now represents c18% of loans (vs c8% in 2009).”

Essentially, Italy was slow to tackle its NPL problem relative to other countries and the chickens have now come home to roost.

The idea was to create a “bad bank” for the “assets” (because that’s worked so well in other countries), but the plan was stalled by the European Commission due to concerns about whether Italy was set to run afoul of restrictions around when countries can provide state aid to the financial sector.

In short, creditors at Italy’s banks would need to take a hit before PM Matteo Renzi’s government would be allowed to extend state aid. That is unless Italy could devise some kind of end-around, which is precisely what Renzi was attempting to do last week.

As a reminder, this would have been easier had it been negotiated last year before new rules on bank resolutions came into effect in 2016. That’s why Portugal pushed through the Novo Banco bail-in and the Banif rescue in December.

In any event, Italy has indeed managed to strike a deal with Brussels to help alleviate banks’ NPL burden.

Essentially, Italian banks will securitize their souring loans, sell them to investors, and the government will guarantee the senior tranches of the new paper.

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

Fumbling Toward Independence

January 21, 2016

Fumbling Toward Independence

Foggy road

Some blogs focus on single-word subjects like knitting or superheroes. This one wanders a bit; one week I might write about our neighbors here in rural Ireland, the next about our garden, then about old black-and-white movies or reading with my daughter. All of it, though, deals with our attempts to discover an older and better way of living, and learn the values and skills that were normal before everything became cheap, fast and easily discarded.

Thus, I study the past to see what worked better. Our elderly neighbors grew up without electricity, cars or mass media, and I see how different their village culture was from our own frantic and lonely society. I read diaries and letters from a century of two ago, and see a complexity of thought and language that gives college students trouble today. The writers — in colonial America, Victorian Britain or 20th-century Ireland — might have been farmers, but they often grew up reading the same classics as their forebears — Hesiod and Sophocles, Livy and Marcus Aurelius, Aquinas and Dante. Now I’m reading these works one by one, and teaching what bits I can to my daughter. For that matter, I’m learning how to genuinely read again, and not just scan text on a screen.

We try to learn the ways people used to provide for their own basic needs rather than relying entirely on companies and governments, so we built a chicken coop, got bees, grow a garden, and learned to forage wild plants and mushrooms. We have make our own pickles, sauerkraut, beer, bread, wine and jam, and have taken courses in tree grafting, oven building, black-smithing, wood carving, and so on. We fail a lot, but we have fun learning.

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

Weather that reminds us to give thanks

January 4, 2016

Weather that reminds us to give thanks

As many times as I’ve seen the wind whistle across our land in the Bog of Allen, I’ve never before felt as nervous as I have today, as the giant trees around our property are bending alarmingly in the gale. Our cement house has actually groaned in the intense wind, which blew down a tree across our driveway recently and ripped our greenhouse door apart.

Our heat pump gave out and the house is cold, the road to our house has patches of water so wide it is almost impassable, and our chickens are barely able to step out of the coop without being blown down. We do have a shed-full of wood for the fire, along with a pile of turf from the bog — but there’s been nothing but rain, and that soaks the turf and slows down the chopping. I’m supposed to be at work in Dublin right now, but our car broke down and the bus never showed up. Thankfully, our internet and phone works, so I could post this. Basically, though, it’s not my best morning.

Then again, I’m thankful we don’t live on the streets of Kilkenny yesterday, as the swelling river burst through the streets, smashing open the doors to pubs and businesses. I’m pleased that we have electricity, as thousands of people here in Ireland were left without it after recent storms. I’m thankful we did not have to abandon our homes over Christmas, or come home to a devastated neighbourhood. I’m thankful we were not on one of the flights that had to be cancelled, or on the roads that were completely impassable.

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

It Begins: Desperate Finland Set To Unleash Helicopter Money Drop To All Citizens

December 7, 2015

It Begins: Desperate Finland Set To Unleash Helicopter Money Drop To All Citizens

With Citi’s chief economist proclaiming “only helicopter money can save the world now,”and the Bank of England pre-empting paradropping money concerns, it appears that Australia’s largest investment bank’s forecast that money-drops were 12-18 months away was too conservative.

Over the last few months, in a prime example of currency failure and euro-defenders’ narratives, Finland has been sliding deeper into depression. Almost 7 years into the the current global expansion, Finland’s GDP is 6pc below its previous peak. As The Telegraph reports, this is a deeper and more protracted slump than the post-Soviet crash of the early 1990s, or the Great Depression of the 1930s. And so, having tried it all, Finnish authorities are preparing to unleash “helicopter money” to save their nation by giving every citizen a tax-free payout of around $900 each month!

Just over two years ago, when the world was deciding who would be Bernanke Fed Chair replacement, Larry Summers or Janet Yellen (how ironic that Larry Summers did not get the nod just because a bunch of progressive economists thought he would not be dovish enough) we wrote about a different problem: with the end of QE3 upcoming and with the inevitable failure of the economy to reignite (again), we warned that there remains one option after (when not if) QE fails to stimulate growth: helicopter money.

While QE may be ending, it certainly does not mean that the Fed is halting its effort to “boost” the economy. In fact… the end of QE may well be simply a redirection, whereby the broken monetary pathway, one which uses banks as intermediaries to stimulate inflation (supposedly a failure according to the economist mainstream), i.e., “second-round effects”, is bypassed entirely and replaced with Plan Z, aka “Helicopter Money” mentioned previously as an all too real monetary policy option by none other than Milton Friedman and one Ben Bernanke. This is also known as the nuclear option.

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

Sorry Troika, Spain’s Economic Recovery Is “One Big Lie”

August 12, 2015

Sorry Troika, Spain’s Economic Recovery Is “One Big Lie”

During six months of protracted and terribly fraught negotiations between Athens, Berlin, Brussels, and the IMF, the idea that Spain, Italy, and Ireland somehow represented austerity “success stories” was frequently trotted out as the rationale behind demanding that Greece embark on a deeper fiscal retrenchment despite the fact that the country is mired in recession. Here’s the official line from the German Council of Economic Experts:

The economic turnarounds in Ireland, Portugal, Spain and – until the end of last year – also in Greece show that the principle “loans against reforms” can lead to success. For the new program to work, Greece has to show more ownership for deep structural reforms. And it should make use of the technical expertise offered by its European partners.

As we’ve shown, the idea that the periphery has truly implemented anything close to “austerity” is absurd on some measures – like debt-to-GDP for instance.

Equally absurd to the 44.2% of Italian youths who are unemployed and, no doubt, to the nearly 23% of Spain’s population that are jobless, is the idea that the policies imposed by the troika in exchange for aid have done anything at all to engineer what Germany’s economic wisemen are calling “turnarounds.”

Here, courtesy of The New York Times, is what “success” and “recovery” looks like in Spain:

Spain, heralded by many as a success story for austerity policies, is on track for more than 3 percent growth this year and has created more than one million jobs since the beginning of 2014.

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

The Great Greek Fudge

August 1, 2015

The Great Greek Fudge

A third Greek bailout involving loans from the European Stability Mechanism (ESM), the eurozone’s bailout scheme, is now being negotiated. The start was quite rocky, with haggling over the preciselocation in Athens where negotiations need to take place and Greek officials once again withholding information to creditors. Therefore, few still believe that it will be possible to conclude a deal in time for Greece to repay 3.2 billion euro to the ECB on 20 August. Several national Parliaments in the Eurozone would need to approve a final deal, which would necessitate calling their members back from recess around two weeks before the 20th, so it’s weird that French EU Commissioner Pierre Moscovici still seems so confident that the deadline can be met.

If indeed there is no deal, Greece is likely to request a second so-called “bridge loan” to allow it to pay the ECB, firmly within the Eurozone tradition of the creditor providing the debtor cash in order to pay back the creditor. France, which is most eager to keep Greece inside the Eurozone, is afraid that bilateral bridge loans from Eurozone countries wouldn’t be approved by the more critical member states, as this would risk France having to foot this bill on its own, perhaps with Italy. Not exactly a rosy prospect for socialist French President Hollande, who’s already struggling to contain the far right anti-euro formation Front National.

The only European fund practically available to provide a bridge loan is the European Financial Stabilisation Mechanism (EFSM), a fund created in May 2010, which has been raising 60 billion euro on the markets, with the EU’s €1 trillion Budget as collateral. The EFSM belongs not just to Eurozone member states, but to all EU member states.

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

Did The IMF Just Open Pandora’s Box?

July 3, 2015

Did The IMF Just Open Pandora’s Box?

By now it should be clear to all that the only reason why Germany has been so steadfast in its negotiating stance with Greece is because it knows very well that if it concedes to a public debt reduction (as opposed to haircut on debt held mostly by private entities such as hedge funds which already happened in 2012), then the rest of the PIIGS will come pouring in: first Italy, then Spain, then Portugal, then Ireland.

The problem is that while it took Europe some 5 years to transfer a little over €200 billion in Greek private debt exposure to the public balance sheet (by way of the ECB, EFSF, ESM and countless other ad hoc acronyms) at a cost of countless summits and endless negotiations, which may or may not result with the first casualty of the common currency which may prove to be reversible as soon as next week, nobody in Europe harbors any doubt that the same exercise can be repeated with Italy, or Spain, or even Portugal. They are just too big (and their nonperforming loans are in the hundreds of billions).

And yet, today, in a stunning display of the schism within the Troika, it was the IMF itself which explicitly stated that Greece is no longer viable unless there is both additional funding provided to the country, which can only happen if there is another massive debt haircut.

This is what the IMF said:

Even with concessional financing through 2018, debt would remain very high for decades and highly vulnerable to shocks. Assuming official (concessional) financing through end–2018, the debt-to-GDP ratio is projected at about 150 percent in 2020, and close to 140 percent in 2022 (see Figure 4ii). Using the thresholds agreed in November 2012, a haircut that yields a reduction in debt of over 30 percent of GDP would be required to meet the November 2012 debt targets.

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

“No Deal”: Tsipras Says Creditors Did Not Accept Greek Proposal

June 24, 2015

“No Deal”: Tsipras Says Creditors Did Not Accept Greek Proposal

Who could have possibly foreseen that the IMF would throw up all over the Greek “proposal”… aside from this post here “Why The IMF Will Reject The Latest Greek Proposal In Just Two Numbers” yesterday afternoon of course. In any event, moments ago Bloomberg reported that just as we wrote here yesterday afternoon, there is no deal and that Greek PM Alexis Tsipras told his associates that creditors not accepting equivalent fiscal measures has never happened before, according to a Greek govt official, who asked not to be named in line with policy.

Creditors “not accepting parametric measures has never happened before. Neither in Ireland, nor in Portugal, nor anywhere. This strange stance can hide two scenarios; they either don’t want an agreement or serve specific interests in Greece,” the official cited Tsipras as saying.”

As a reminder, Tsipras is meeting Wednesday with European Central Bank President Mario Draghi, International Monetary Fund Managing Director Christine Lagarde and European Commission President Jean-Claude Juncker in an effort to reach a deal before Greece’s bailout expires and about 1.5 billion euros ($1.7 billion) in payments come due to the IMF on June 30.

Here is the man himself tweeting as much and confirming that the blame game continues:

The repeated rejection of equivalent measures by certain institutions never occurred before-neither in Ireland nor Portugal. #Greece (1/2)

6:32 AM – 24 Jun 2015

This odd stance seems to indicate that either there is no interest in an agreement or that special interests are being backed. #Greece (2/2)

6:32 AM – 24 Jun 2015

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

Britain’s GCHQ monitored Irish internet traffic — RT News

November 30, 2014

Britain’s GCHQ monitored Irish internet traffic — RT News.

Britain’s surveillance body, Government Communications Headquarters (GCHQ), could be tapping underwater cables connecting Ireland to the global web, according to a new document leaked by former NSA contractor Edward Snowden and released by German media.

The document, titled ‘Partner Cables,’ identifies the cables that GCHQ has tried to gain access to, and names their owners by codename.

Vodafone subsidiary Cable & Wireless apparently cooperated closely with the British intelligence agency and provided them with details, German newspaper Süddeutsche Zeitung (SZ) reported as it published the leak.

A total of 63 submarine cables are listed – among which are 29 Cable & Wireless lines under the alias GERONTIC, which are mentioned as potential helpers. The Solas undersea cable – which links Ireland’s County Wexford to Wales – is included in the list.

The method of access is described as being “DCO,” which stands for “direct cable ownership.”

According to the document, Cable & Wireless “actively shaped and provided the most data to GCHQ mass surveillance programmes, and received millions of pounds in compensation.” It added that Cable & Wireless apparently played a key role “in the establishment of one of the Government Communications Headquarters’ (GCHQ) most controversial surveillance programs.”

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

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