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In his latest must read presentation, Citigroup’s Matt King continues to expose and mock the increasing helplessness and cluelessness of central bankers, something this website has done since 2009 knowing full well how it all ends (incidentally not in a deflationary whimper, quite the opposite).

Take Matt King’s September 2015 piece in which he warned that one of the most serious problems facing the world is that we may have hit its debt ceiling beyond which any debt creation is merely pushing on a string leading to slower growth and further deflation. Or his more recent report which explained why despite aggressive easing by the BOJ and ECB, asset prices continue to fall as a result of quantitative tightening by EM reserve managers and China, which are soaking up the same liquidity injected by DM central banks.

Overnight, he put it all together in a simple and elegant way that only Matt King can do in a presentation titled ominously “Don’t look down: You might find too many negatives.”

In it he first proceeds to lay out how things have dramatically changed in recent months compared to prior years: first, the “appalling” asset returns and the “rising dislocations” between asset prices in recent months and especially in 2016, or a broken market which is not just about Crude (with correlation regimes flipping back and forth), or China (as YTD bank returns in Japan and Switzerland are far worse than those in the China-exposed Eurozone), as appetite for risk has effectively disappeared. Worse, as the Japanese NIRP showed, incremental easing in the form of QE actually triggered ongoing weakness, sending both the Nikkei and the USDJPY plunging, suggesting that central bank grip on markets is almost gone.

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

Italy’s Banking Crisis Spirals Elegantly out of Control

February 15, 2016

Italy’s Banking Crisis Spirals Elegantly out of Control

How to dump toxic waste on the public through the backdoor.

Back during the euro debt crisis, while the ECB was buying government debt from Member States to keep Italian and Spanish government debt from imploding, German politicians fretted out loud about what exactly the ECB was buying. Among them was Frank Schäffler, at the time Member of the Federal Parliament, who in September 2011 said with uncanny accuracy:

“If the ECB continues like this, it will soon buy old bicycles and pay for them with new paper money.”

This is now coming to pass.

Italy, the Eurozone’s third largest economy, is in a full-blown banking crisis. Four small banks were rescued late last year. The big ones are teetering. Their stocks have crashed. They’re saddled with non-performing loans (defined as in default or approaching default). We’re not sure that the full extent of these NPLs is even known.

The number officially tossed around is €201 billion. But even the ECB seems to doubt that number. Its new bank regulator, the Single Supervisory Mechanism, is now seeking additional information about NPLs to get a handle on them.

Other numbers tossed around are over €300 billion, or 18% of total loans outstanding.

The IMF shed an even harsher light on this fiasco. It reported last year that over 80% of the NPLs are corporate loans. Of them, 30% were non-performing, with large regional differences, ranging from 17% in some of the northern regions to over 50% in some of the southern regions. The report:

High corporate NPLs reflect both weak profitability in a severe recession as well the heavy indebtedness of many Italian firms, especially SMEs, which are among the highest in the Euro Area. This picture is consistent with corporate survey data which shows nearly 30% of corporate debt is owed by firms whose earnings (before interest and taxes) are insufficient to cover their interest payments.

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

637 Rate Cuts And $12.3 Trillion In Global QE Later, World Shocked To Find “Quantitative Failure”

February 12, 2016

637 Rate Cuts And $12.3 Trillion In Global QE Later, World Shocked To Find “Quantitative Failure”

2016 is shaping up to be the year that everyone finally comes to terms with the fact that the monetary emperors truly have no clothes.

To be sure, it’s been a long time coming. For nearly 8 years, market participants and economists convinced themselves that the answer was always “more Keynes.” Global trade still stagnant? Cut rates. Economic growth still stuck in neutral? Buy more assets.

It was almost as if everyone lost sight of the fact that if printing fiat scrip and tinkering with the cost of money were the answers, there would never be any problems. That is, policy makers can always hit ctrl+P and/or move rates around. But in order to resuscitate anemic aggregate demand and revive inflation, you need to tackle the core problems facing the global economy – not paper over them (and we mean “paper over them” in the most literal sense of the term).

Well late last month, central banks officially lost control of the narrative. Kuroda’s move into negative territory reeked of desperation and given the surging JPY and tumbling Japanese stocks, it’s pretty clear that the half-life on central bank easing has fallen dramatically.

And so, as the market wakes up from the punchbowl party with a massive hangover, everyone is suddenly left to contemplate “quantitative failure.” Below, courtesy of BofA’s Michael Hartnett is a bullet point summary of 8 years spent chasing the dragon… and a list of the disappointing results.

* * *

From BofA

Whether the recent tipping point was the Fed hike, negative rates in Europe & Japan, or simply the growing market dislocations and macro misallocation of resources and wealth, the deflationary theme of “Quantitative Failure” is stalking the financial markets. A multi-year period of major policy intervention & “financial repression” is ending with weak economic growth & investors rebelling against QE.

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

Negative-Interest-Rate Effect already Dead, Central Banks Lost Control over Stocks

February 8, 2016

Negative-Interest-Rate Effect already Dead, Central Banks Lost Control over Stocks

And there’s a bitter irony.

The Bank of Japan’s surprise Negative-Interest-Rate party for stocks set a new record: it lasted only two days.

Today a week ago, the Bank of Japan shocked markets into action. As the economy has deteriorated despite years of zero-interest-rate policy and Quantitative and Qualitative Easing (QQE) – a souped-up version of QE – the BOJ announced that it would cut one of its deposit rates from positive 0.1% to negative 0.1%.

Headlines screamed Japan had gone “negative,” that it had joined the NIRPs of Europe – the Eurozone countries, Switzerland, Sweden, and Denmark. But it was just another desperate move, a head fake, and once the dust would settle, the hot air would go out [read…QE in Japan Nears End: Daiwa Capital Markets].

Now the dust has settled and the hot air has gone out.

On Thursday, January 28, the day before the announcement, the Nikkei closed at 17,041 down 19% from its Abenomics peak of 20,953 in June 2015. Today, it closed even lower.

This situation is a bit of an embarrassment for the BOJ which has pushed Japanese asset managers of all kinds, including pension funds, particularly the Government Pension Investment Fund (GPIF), the largest such pension fund in the word, to get off their conservative stance, sell their Japanese Government Bonds which made up the bulk or entirety of their portfolios, and buy risk assets with the proceeds.

This they did, near the peak of the Abenomics bubble. While the BOJ was eagerly mopping up JGBs, the asset managers bought mostly Japanese equities, but they also bought global equities and corporate bonds. And the mere prospect of all this buying, the front-running by hedge funds, and then the actual buying drove up Japanese stock prices in 2014 and early 2015. The bet seemed to work out. Wealth had been created out of nothing.

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

Meanwhile In Greece, Familiar Scenes Are Back: General Strike, Molotov Cocktails, Tear Gas

February 4, 2016

Meanwhile In Greece, Familiar Scenes Are Back: General Strike, Molotov Cocktails, Tear Gas

Greece was fixed for a few months, when the so-called “anti-austerity” government of PM Tsipras which came to power just over a year ago did what each on its predecessors did by kicking the can and trading off what little sovereignty Greece has left for promises of more cash from Europe, but it is broken once again.

Earlier today, services across Greece ground to a halt Thursday as workers joined in a massive general strike that cancelled flights, ferries and public transport, shut down schools, courts and pharmacies, and left public hospitals with emergency staff. Even the undertakers are striking.

Thursday’s general strike is the most significant the coalition government of Prime Minister Alexis Tsipras has faced since he initially came to power about a year ago. As an opposition party, Tsipras’ radical left Syriza party had led opposition to pension reforms, but he was forced into a dramatic policy U-turn last year when he faced the stark choice of signing up to a third bailout or the country being kicked out of the eurozone.

The strike comes as the government negotiates with Greece’s international debt inspectors, who returned to Athens this week to review progress on the country’s bailout obligations. The central Athens hotel where the inspectors were staying was heavily guarded by police.

As CBC reports, well over 20,000 supporters of a Communist party-backed union were marching through central Athens, while around 10,000 more people — including about 1,000 lawyers in suits and ties — were gathering for a separate demonstration. A heavy police presence was deployed in the capital, as previous protests have often degenerated into riots.

Unions are angry at pension reforms that are part of Greece’s third international bailout.

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

Negative Interest Rates Already In Fed’s Official Scenario

February 2, 2016

Negative Interest Rates Already In Fed’s Official Scenario

Over the past year, and certainly in the aftermath of the BOJ’s both perplexing and stunning announcement (as it revealed the central banks’ level of sheer desperation), we have warned (most recently “Negative Rates In The U.S. Are Next: Here’s Why In One Chart”) that next in line for negative rates is the Fed itself, whether Janet Yellen wants it or not. Today, courtesy of Wolf Richter, we find that this is precisely what is already in the small print of the Fed’s future stress test scenarios, and specifically the “severely adverse scenario” where we read that:

The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities.

As a result of the severe decline in real activity and subdued inflation, short-term Treasury rates fall to negative ½ percent by mid-2016 and remain at that level through the end of the scenario.
And so the strawman has been laid. The only missing is the admission of the several global recession, although with global GDP plunging over 5% in USD terms, we wonder just what else those who make the official determination are waiting for.

Finally, we disagree with the Fed that QE4 is not on the table: it most certainly will be once stock markets plunge by 50% as the “severely adverse scenario” envisions, and once NIRP fails to boost economic activity, as it has failed previously everywhere else it has been tried, the Fed will promtply proceed with what has worked before, if only to make the true situation that much worse.

Until then, we sit back and wait.

Here is Wolf Richter with Negative Interest Rates Already in Fed’s Official Scenario

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

What A Cashless Society Would Look Like

January 31, 2016

What A Cashless Society Would Look Like

Calls by various mainstream economists to ban cash transactions seem to be getting ever louder, while central bankers have unleashed negative interest rates on economies accounting for 25% of global GDP, with $5.5 trillion in government bonds yielding less than zero. The two policies are rapidly converging.

Bills and coins account for about 10% of M2 monetary aggregates (currency plus very liquid bank deposits) in the US and the Eurozone. Presumably the goal of this policy is to bring this percentage down to zero. In other words, eliminate your right to keep your purchasing power in paper currency.

By forcing people and companies to convert their paper money into bank deposits, the hope is that they can be persuaded (coerced?) to spend that money rather than save it because those deposits will carry considerable costs (negative interest rates and/or fees).

This in turn could boost consumption, GDP and inflation to pay for the massive debts we have accumulated (leaving aside the very controversial idea that citizens should now have to pay for the privilege of holding their hard earned money in a more liquid form, after it has already been taxed). So at long last we can finally get out of the current economic funk.

The US adopted a policy with similar goals in the 1930s, eliminating its citizens’ right to own gold so they could no longer “hoard” it. At that time the US was in the gold standard so the goal was to restrict gold. Now that we are all in a “paper” standard the goal is to restrict paper.

However, while some economic benefits may arguably accrue in the short-run, this needs to be balanced in relation to some serious distortions that could rapidly develop beyond that.

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

Who Gets to Pay for the Italian Banking Crisis?

January 28, 2016

Who Gets to Pay for the Italian Banking Crisis?

The missing Capital Buffer.

Six years after Europe’s sovereign debt crisis began, the Eurozone’s third largest economy, Italy, has finally decided to do what just about every other country has done when facing a full-blown, almost out-of-control banking crisis: to set up a bad bank to hide its worst debt.

It was only a matter of time: in the last six years, Europe’s economies have been drowning in an ever-expanding vitrine of bad debt — and none more so than Italy, where non-performing loans have soared to more than 350 billion euros, a fourfold increase since the end of 2008. At 18%, Italy’s ratio of nonperforming loans is more than four times the European average (and Europe’s banks are in worse shape than America’s). It’s the equivalent of 21% of GDP in a country that boasts Europe’s second highest public debt-to-GDP ratio (130%), just behind Greece, and where the banks hold over 70% of the country’s debt.

To make matters even worse, if Brussels gets its way, Italy’s government will not be able to dip into future taxpayer funds to stop its debt-laden banks from dropping like flies. European law no longer allows that sort of thing. Well, not really. Now, in the wake of new regulations that came into effect at the beginning of this year, collapsing banks in Europe will be “resolved” with the funds of stockholders, bondholders and other investors, including account holders with deposits of more than €100,000 euros — instead of classic bailouts that would raid directly or indirectly the taxpayers of other countries.

It might even make bank creditors realize that investing in a bank is not a risk-free venture.

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

Why the Black Hole of Deflation Is Swallowing the Entire World … Even After Central Banks Have Pumped Trillions Into the Economy

January 24, 2016

Why the Black Hole of Deflation Is Swallowing the Entire World … Even After Central Banks Have Pumped Trillions Into the Economy

Deflation Threatens to Swallow the World

Many high-powered people and institutions say that deflation is threatening much of the world’s economy …

China may export deflation to the rest of the world.

Japan is mired in deflation.

Economists are afraid that deflation will hit Hong Kong.

The Telegraph reported last week:

RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.

***

Andrew Roberts, the bank’s research chief for European economics and rates, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings.

The Independent notes:

Lower oil prices could push leading economies into deflation. Just look at the latest inflation rates – calculated before oil fell below $30 a barrel. In the UK and France, inflation is running at an almost invisible 0.2 per cent per annum; Germany is at 0.3 per cent and the US at 0.5 per cent.

Almost certainly these annual rates will soon fall below zero and so, at the very least, we shall be experiencing ‘technical’ deflation. Technical deflation is a short period of gently falling prices that does no harm. The real thing works like a doomsday machine and engenders a downward spiral that is difficult to stop and brings about a 1930s style slump.

Referring to the risk of deflation, two American central bankers indicated their worries last week. James Bullard, the head of the St Louis Federal Reserve, said falling inflation expectations were “worrisome”, while Charles Evans of the Chicago Fed, said the situation was “troubling”.

Deflation will likely nail Europe:

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

Creditors Accuse Portugal Of “Unfair, Populist Short-Cut” In €2 Billion Bank Bail-In

January 14, 2016

Creditors Accuse Portugal Of “Unfair, Populist Short-Cut” In €2 Billion Bank Bail-In

Two weeks ago, The Bank of Portugal shocked markets by bailing in senior Novo Banco bondholders.

Novo Banco was the “good” bank forged from the ashes of Banco Espirito Santo which had to be bailed out by the state in August of 2014. The idea was to sell Novo Banco to pay for the cost of the bailout, but the auction process eventually floundered amid turmoil in Chinese markets (at least two of the potential bidders were Chinese) and uncertainty about whether this “good” bank would in fact need more capital given the elevated level of NPLs already on its books.

In November, the ECB told Novo it woudl indeed need to raise some €1.4 billion in fresh capital which the bank initially said would come from asset sales. A little over a month later, Portugal’s central bank essentially just gave up. On December 29, the bank announced it was transferring €2 billion in NB senior notes back to Banco Espirito Santo which, like a ghost skyscraper in China, is set for demolition.

In other words, Novo Banco plugged the €1.4 billion hole by essentially declaring €2 billion in bonds null and void.

There were five issues affected but you can get a pretty good idea about what happened next by having a look at how the 2017s traded that morning:

The reason this had to be done quickly was because if Portugal had waited until January, uninsured depositors would have been at risk under the EU’s new bank resolution mechanism. Plus, Portugal is anxious to get the auction process started again to avoid the decidedly unappealing prospect of having to keep the cost of the bailout on Lisbon’s books in perpetuity thus inflating the fiscal deficit by an extra 3% of GDP.

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

Russell Napier Explains How The Decline Of The Yuan Destroys Belief In Central Banking

January 7, 2016

Russell Napier Explains How The Decline Of The Yuan Destroys Belief In Central Banking

It’s Not a Pet, It’s a Falcon: How the decline of the RMB destroys belief in central banking and a successful reflation

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;

– The Second Coming- W.B. Yeats

First catch your falcon, as the formidable Mrs Beeton might have said if she was in need of a method of catching her main course (see Mrs Beeton’s Book of Household Management 1861- ‘Recipe for Jugged Hare’).

Having caught your wild falcon, you can now begin the training process. You are attempting to impose your will upon a creature that, in its wild state, catches, kills and devours other birds. This is creative destruction in its rawest form as those acts of savagery provide the fuel to keep our falcon flying. Taming such wild forces is not easy, whether they be birds of prey or the desires, wishes, greed and fear of millions of people determining prices through their supply and also their demand.

Let’s get some advice from the field of falconry for our central bankers, and the other handmaidens of state control, as they seek to impose their wishes on the will and acts of millions-

‘Falconry is a great sport, but there is a lot of time involved. You will want to have enough time to train your bird. If you don’t have the time, or the willingness, then you might as well not do it at all. If you are one of those people who is not patient, falconry may not be for you. You should not take up falconry if you want the falcon as a pet, or something to show off.

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

Bob Janjuah Warns The Bubble Implosion Can’t Be “Fixed” This Time

January 7, 2016

Bob Janjuah Warns The Bubble Implosion Can’t Be “Fixed” This Time

Having correctly foreseen in September that “China’s devaluations are not over yet” it appears Nomura’s infamous ‘bear’ Bob Janjuah has also nailed The Fed’s subsequent actions (hiking rates into a fundamentally weakening economy in a desperate bid to “convince markets that strong growth and inflation are on their way back”). In light of this, his latest note today should be worrisome to many as he warns the S&P 500 will trade down around 20% to 25% from current levels in H1, down to the 1500s and for dip-buyers, it’s over: “I now feel even more certain that debt-driven asset bubble implosions cannot merely be ‘fixed’ with even more debt and another round of central bank-driven asset bubbles.”

As Janjuah said in September (excerpted):

I believe there is more weakness ahead – both fundamentally and within markets – over Q4 and perhaps into Q1 2016.
I repeat my view that the Fed does not need to hike based on fundamentals, but I would not be at all surprised to see the Fed hike in late 2015, in an attempt to convince markets that strong growth and inflation are on their way back. Any such hiking cycle by the Fed would I believe be extremely short-lived and quickly give way to renewed dovishness.

While I think a US recession is merely possible rather than probable, the evidence is growing in my view that a global recession is more probable than possible.

Where is the Fed “put”, and what would such a “put” look like? It is very early in the process and lots will depend on global policy responses and data outcomes, but I am happy to declare my view: the next Fed “put” is not likely until the S&P 500 is trading in the 1500s at least (so more likely to be a Q1 2016 item rather than Q4 2015); and in terms of what the Fed could do, clearly QE4 has to be in the Fed’s toolkit.

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

Greece’s Two Currencies

January 7, 2016

Greece’s Two Currencies

ATHENS – Imagine a depositor in the US state of Arizona being permitted to withdraw only small amounts of cash weekly and facing restrictions on how much money he or she could wire to a bank account in California. Such capital controls, if they ever came about, would spell the end of the dollar as a single currency, because such constraints are utterly incompatible with a monetary union.

Greece today (and Cyprus before it) offers a case study of how capital controls bifurcate a currency and distort business incentives. The process is straightforward. Once euro deposits are imprisoned within a national banking system, the currency essentially splits in two: bank euros (BE) and paper, or free, euros (FE). Suddenly, an informal exchange rate between the two currencies emerges.

Consider a Greek depositor keen to convert a large sum of BE into FE (say, to pay for medical expenses abroad, or to repay a company debt to a non-Greek entity). Assuming such depositors find FE holders willing to purchase their BE, a substantial BE-FE exchange rate emerges, varying with the size of the transaction, BE holders’ relative impatience, and the expected duration of capital controls.

On August 18, 2015, a few weeks after pulling the plug from Greece’s banks (thus making capital controls inevitable), the European Central Bank and its Greek branch, the Bank of Greece, actually formalized a dual-currency currency regime. A government decree stated that “Transfer of the early, partial, or total prepayment of a loan in a credit institution is prohibited, excluding repayment by cash or remittance from abroad.”

The eurozone authorities thus permitted Greek banks to deny their customers the right to repay loans or mortgages in BE, thereby boosting the effective BE-FE exchange rate. And, by continuing to allow payments of tax arrears to be made in BE, while prescribing FE as a separate, harder currency uniquely able to extinguish commercial bank debt, Europe’s authorities acknowledged that Greece now has two euros.

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

The Eurozone Sovereign Debt Crisis and a Potential OTC Interest Rate Derivatives Crisis

December 19, 2015

THE EUROZONE SOVEREIGN DEBT CRISIS AND A POTENTIAL OTC INTEREST RATE DERIVATIVES CRISIS

Summary

After considering the alternative scenarios of Grexit, debt renegotiation, transferring of debt, a deflationary spiral and so on, it is concluded that this will either result (ceteris paribus) in an increase in sovereign debt yields or a decrease in the volume of sovereign debt issued. This is worrying; not only due to the events in Greece and the ripples it has sent throughout the Eurozone but also because elections are approaching in other peripheral countries.
The effect that this has on Repo market rates (where “government bond collateral” accounted “for almost 80% of EU-originated repo collateral” in the European repo market) would then have a subsequent, significant impact on EURIBOR rates (EURIBOR being a key rate for unsecured lending which many derivatives – OTC interest rate derivatives especially – are linked to).
Given that EURIBOR has remained relatively low in recent years and governments have sought to keep interest rates low in an effort to stimulate a recovery, this would be a sudden shock to a vulnerable, sensitive system.
It is further argued (using Keynes’ theoretical analysis) that the sharp increase in liquidity preference and the depression of the marginal of efficiency of capital is, in general, far greater than that which occurred during the Great Depression and that, due to the especially uncertain climate of monetary policy, this means that Central Banking has been the reason why the OTC Interest Rate Derivatives market has been systemically primed for a crisis.
I further argue that the potential scale of the OTC Interest Rate Derivatives crisis dwarfs both the Credit Default Swaps and Collateralised Debt Obligations positions that were associated with the Great Recession.
It is also argued that the risks are greater than the Great Depression and that, if the money and banking system remains unreformed, the world could be plunged into a crisis that belittles the Great Depression itself.

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

European Dream Turns into Dystopian Nightmare

December 16, 2015

European Dream Turns into Dystopian Nightmare

Why We Brits Should Vote for Brexit.

As a Europhile British ex-pat who has spent most of his adult life living on “the continent,” as we Brits are fond of calling the non-British part of Europe, it might seem rather odd to be encouraging my fellow Brits to vote to leave the European Union.

Not so long ago — perhaps a decade or so — I believed that the interests of Britain would be best served if the country was a full-fledged member not only of the EU but of the euro zone. I was wrong, but it was a different time and I was a different, more innocent me.

Total Dependence

By the time the sovereign debt crisis hit Europe in 2010, the full extent of the EU’s ambitions was clear: to slowly, almost imperceptibly, weaken nation-state institutions to the point of total dependence on Brussels; and then have them supplanted with EU institutions. As I wrote in a 2014 article, it is the financial equivalent of death by a thousand cuts. The EU’s weapon of choice was the single currency.

Luckily for Britain, its government had not joined the euro. The Chancellor of the Exchequer at the turn of the century, Gordon Brown, knew that sacrificing the pound would have been electoral suicide. Preserving the national currency has provided the UK with some measure of economic independence and flexibility.

For many other European countries, their economic independence and flexibility died the day they joined the euro. As Spain’s economy minister Luis de Guindos recently put it, “the Eurozone is a club where you can check in but you cannot check out.” The main reason for this is that the euro is merely a means to a much more coveted end — political union, as Germany’s Finance Minister glibly admitted in a 2011 interview with Welt am Sontag:

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

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