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Third Mega-Crisis in 12 Years: Eurozone Economy Plunges at Fastest Rate on Record

Third Mega-Crisis in 12 Years: Eurozone Economy Plunges at Fastest Rate on Record

First the Global Financial Crisis, then the Euro Debt Crisis, now the Big One.

In its 21 years of official existence, the Eurozone has already been through two brutal crises — the Global Financial Crisis and one of its own doing, the Euro Debt Crisis — that nearly tore the bloc apart. Now, it is in the grip of another one that is already exacting a larger toll than the first two, despite having barely begun.

The preliminary GDP in the first quarter for the Eurozone, GDP fell by 3.8%, according to Eurostat’s flash estimates (for the entire EU, it fell by 3.5%), “the sharpest declines observed since the time series started in 1995,” Eurostat said. This is despite the fact that most of the region’s lockdowns did not begin until mid-March:

All things considered, the Euro Area’s biggest economy, Germany, got off relatively lightly. It shrank by just (!!) 2.2% compared to the previous quarter. It was still its biggest contraction since the the Global Financial Crisis, more than a decade ago. German industrial production was particularly hard hit, tumbling by 11.6% year-on-year in March, when the lockdown forced factories to close. In Q4 2019, Germany’s GDP growth rate was already negative (-0.1%).

But many other Euro Area countries fared a lot worse. Of the four worst performing economies, three are the bloc’s second, third and fourth largest, France, Italy and Spain, which between them account for almost 45% of Euro Area GDP. The other was Slovakia. Spain, Italy and France suffered more cases of Covid-19 and resulting fatalities than any other countries in the Euro Area. They also imposed the most draconian lockdowns. The impact on their economies has been brutal.

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

Life Under Draconian Lockdown: I Can Barely See the Light at the End of this Long, Dark Tunnel

Life Under Draconian Lockdown: I Can Barely See the Light at the End of this Long, Dark Tunnel

The process of reopening Spain has been dubbed, rather ominously, “Operation New Normality.”

“Is there any light at the end of this long dark tunnel?” That’s a question many people are asking themselves in Spain, whose government has implemented one of the most draconian anti-Covid lockdown regimes in the world and is now beginning to loosen some of the restrictions. Sunday was the first time in 43 days that children were allowed to venture out, albeit only for a maximum of one hour. And only if they were accompanied by one adult. And under the age of 14.

It was hardly a return to normality, but after six long weeks of being cooped up at home, most of the children and their parents were happy to take up the invitation of a little fresh air, a few rays of sunshine and some open space. For the first time in a month and a half, the streets and squares of villages, towns and cities across Spain were alive with the sound of people.

This being Spain, not everyone obeyed the government’s slightly loosened rules. From the vantage point of our balcony, in the Exiample Dreta district of Barcelona, my wife and I could see many children being shepherded by both of their parents. We could also spot groups of families together as well as opportunistic childless couples who were hoping to blend in with the crowds unnoticed. Some got away with it. Others were stopped by the police and given a stern warning or fined.

Since the lockdown began in Spain some 740,000 people — the equivalent of 18,000 per day — have been fined for breaking the government’s Covid-19 rules, according to El País.

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THE WOLF STREET REPORT: How Even “Low” Interest Rates Screw Up the Economy

THE WOLF STREET REPORT: How Even “Low” Interest Rates Screw Up the Economy

Interest rates don’t have to be negative to make a mess in the era of “Secular Stagnation.” (11 minutes)

The Most Splendid Housing Bubbles in Canada Deflate Further

The Most Splendid Housing Bubbles in Canada Deflate Further

Vancouver prices drop. Toronto down 3.7% from peak, flat for 10 months. Winnipeg plunges most since at least 1990. Quebec City flat for 6 years.

In Greater Vancouver, BC, Canada, house prices fell 0.4% in April from March, the ninth month in a row of month-to-month declines, according to the Teranet-National Bank House Price Index. The index is down 4.7% from the peak in July 2018, the sharpest nine-month decline since July 2009. And it’s down 2.8% from April last year. One of the most splendid housing bubbles in the world is now deflating before our very eyes, after prices had skyrocketed 316% from January 2002 to the peak in July 2018 – meaning prices had more than quadrupled in 16 years:

The Teranet-National Bank House Price Index tracks single-family house prices, based on “sales pairs,” comparing the sales price of a house in the current month to the last sale of the same house years earlier (methodology). Using “sales pairs” eliminates the issues that affect median and average price indices but has its own limitations. These median and average house prices, which are much more volatile, are now showing much sharper price declines for Vancouver.

Because the Teranet index uses a similar methodology of “sales pairs” as the S&P CoreLogic Case Shiller index for US housing markets, the indices produce comparable metrics. So let’s compare Vancouver’s housing bubble to the also deflating housing bubble in the San Francisco Bay Area. Splendid v. Splendid. The chart below shows the data of Vancouver (black columns) and San Francisco (red columns), with both indices converted into “percent change from January 2002.”

As the chart above shows, Vancouver’s housing market dipped briefly during the Financial Crisis while San Francisco’s market went into a hard four-year downturn, as the US housing bust morphed into the Mortgage Crisis that contributed to the Financial Crisis.

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

Credit-Cardholders & Bank Customers Burned Again as New IT Chaos Breaks Out in the UK

Credit-Cardholders & Bank Customers Burned Again as New IT Chaos Breaks Out in the UK

The payments industry deplores it, but cash is starting to look pretty good, and central banks agree: “We do not foresee a totally cashless society”: ECB

This has not been a good year for IT systems in the UK. First there was TSB Bank’s botched IT migration in April, which resulted in millions of customers being blocked from their online accounts. The problems at the bank continue to fester even to this day, 22 weeks later. Then there was the Visa outage in June, which caused chaos across much of Western Europe, but particularly in the UK where consumers are far more reliant on contactless Visa cards. And now there’s British Airways and Lloyds Banking Group.

On Thursday, British Airways announced that up to 380,000 card payments on both its website and app had been compromised during a 15-day data breach. BA says the breach affected bookings made between 10.58 pm on August 21 and 9.45 pm on September 5. The compromised data included the personal and financial details of the passengers that booked during that period.

BA says it was not a breach of the airline’s encryption. “There were other methods, very sophisticated efforts, by criminals in obtaining our data,” BA’s chief executive, Álex Cruz, said.

Some customers have complained of having to cancel cards as a result of the breach while others are considering changing their online passwords. BA launched a massive charm offensive assuring customers who lose out financially that they will be compensated. That didn’t stop the shares of BA’s Anglo-Spanish multinational holding company, International Consolidated Airlines Group, S.A., from falling 5% between Thursday and Friday.

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What Kind of Hyper-Enthusiastic Market is this that Blindly Keeps Pursuing Scams to Make a Fortune Overnight, even if They Already Crashed the First Time?

What Kind of Hyper-Enthusiastic Market is this that Blindly Keeps Pursuing Scams to Make a Fortune Overnight, even if They Already Crashed the First Time?

It’ll take many more sell-offs and the collapse of many more iffy stocks before this hyper-enthusiasm, after nine years of central bank nurturing, is finally wrung out of the market.

Shares of “blockchain” company LongFin (LFIN) plunged 17% today to $14.31, the sixth trading day in a row of plunges. Intraday on Friday, March 23, shares still traded at $73. The astonishing thing isn’t that they’ve plunged 81% over those six trading days, but that they had more than doubled over the prior two weeks, and that they’re still trading above penny-stock status to begin with.

LFIN started trading on December 13, following their IPO. On December 15, LongFin announced – with what I called it “a mix of gobbledygook, hype, and silliness” – that it had acquired a “Blockchain-empowered solutions provider,” namely a website that belonged to a Singapore corporation that is 95% owned by Longfin’s CEO and chairman.

Though neither the announcement nor the transaction passed the smell-test, shares skyrocketed 2,700% to an intraday high of $142.55 on December 18, giving it a market cap of $7 billion and making it the role model for a bevy of other “blockchain” companies. Then, as stock jockeys grappled with reality, shares plunged. As did the shares of other “blockchain” companies.

But then on March 12, it started all over again, when index provide FTSE Russell announced that LongFin would be added to some of its indices, including the widely-tracked Russell 2000, effective March 16:

Then all kinds of things happened.

On March 26, short-seller Citron Research tweeted: “If you are fortunate enough to get a borrow, indeed $LFIN is a pure stock scheme. @sec_enforcement should not be far behind. Filings and press releases are riddled with inaccuracies and fraud.”

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

 

What Could Dethrone the Dollar as Top Reserve Currency?

What Could Dethrone the Dollar as Top Reserve Currency?

Central banks seem leery about the Chinese yuan.

What will finally pull the rug out from under the dollar’s hegemony? The euro? The Chinese yuan? Cryptocurrencies? The Greek drachma? Whatever it will be, and however fervently the death-of-the-dollar folks might wish for it, it’s not happening at the moment, according to the most recent data.

The IMF just released its report, Currency Composition of Official Foreign Exchange Reserves (COFER) for the fourth quarter 2017. It should be said that the IMF is very economical with what it discloses. The COFER data for the individual countries – the total level of their reserve currencies and what currencies they hold – is “strictly confidential.” But we get to look at the global allocation by currency.

In Q4 2017, total global foreign exchange reserves, including all currencies, rose 6.6% year-over-year, or by $709 billion, to $11.42 trillion, right in the range of the past three years (from $10.7 trillion in Q4 2016 to $11.8 trillion in Q3, 2014). For reporting purposes, the IMF converts all currency balances into dollars.

Dollar-denominated assets among foreign exchange reserves rose 14% year-over-year in Q4 to $6.28 trillion, and are up 42% from Q4 2014. There is no indication that global central banks have lost interest in the dollar; on the contrary:

Over the decades, there have been some efforts to topple the dollar’s hegemony as a global reserve currency, which it has maintained since World War II. The creation of the euro was the most successful such effort. Back in the day, the euro was supposed to reach “parity” with the dollar on the hegemony scale. And it edged up for a while until the euro debt crisis derailed those dreams.

And now there’s the ballyhooed Chinese yuan. Effective October 1, 2016, the IMF added it to its currency basket, the Special Drawing Rights (SDR). This anointed the yuan as a global reserve currency.

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

Banks & Builders Want New Property Bubble In Spain, Government Obliges

Banks & Builders Want New Property Bubble In Spain, Government Obliges

“This plan, far from solving or alleviating the problem, is likely to make it a whole lot worse.”

Spain’s second biggest bank, BBVA, just announced that it’s resurrecting the 100% mortgage, a high-risk loan instrument that notoriously helped fuel Spain’s madcap property boom. For the first time in almost a decade, property buyers will be able to receive credit equivalent to the total value of the property they wish to purchase. As before, no down payment will be needed. But this time, interest rates will be even lower.

Despite boasting the largest stock of empty housing in Europe — 1.36 million units at last count, almost a quarter of them belonging to banks and investment funds — Spain’s economy is being primed for another property boom. Real estate developers and builders want it and banks need it, not only to fatten their NIRP-eroded margins but also to dispose of some of the real estate assets still lingering on their books from the last crisis.

The government will do just about anything it can to help out. For the coming years, real estate developers want to build around 120,000-150,000 new housing units. It’s a mere fraction of the 700,000 new homes a year being built at the apogee of the last bubble — more than in France, Germany, Italy and the UK combined — but still a lot higher than current production levels.

In 2017, a paltry 43,300 new homes were built — little more than a third of the ambitious target real estate developers now have in their sights. There’s likely to be little change in this trend in the coming years, according to forecasts by the National Institute of Statistics (INE). Between 2017 and 2021 it predicts that around 188,000 new homes will be built – an average of just 47,000 a year.

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

Even the World’s Most Cashless Nation Doesn’t Want to Go Fully Cashless

Even the World’s Most Cashless Nation Doesn’t Want to Go Fully Cashless

It’s too risky and systematically excludes the most vulnerable people.

There are small but growing signs that Europe’s “War on Cash” is not going exactly according to plan. First, a number of central bankers began voicing concerns about its potential ramifications. Now, even in Sweden, the first European country to enlist its own citizens as largely willing guinea pigs in an economic experiment — negative interest rates in a cashless society — public support is beginning to waver.

Initially, the plan was so successful that by 2017 the amount of cash in circulation had dropped to the lowest level since 1990 and was more than 40% below its 2007 peak, earning Sweden a reputation as the world’s “most cashless nation.” The declines in 2016 and 2017 were the biggest on record. An annual survey by Insight Intelligence found that in 2017, only 25% of Swedes paid in cash at least once a week, down from 63% just four years before; and 36% never used cash at all, or just pay with it once or twice a year.

But that doesn’t mean everyone is on board. In a recent survey, an overwhelming 68% of the respondents stated that they would not like to live in a fully cashless society. The survey, commissioned by Bankomat AB, an ATM chain company representing an alliance of Swedish banks that admittedly has a vested interest in preserving cash’s role as a means of payment, polled over 2,000 people aged 18-65.

Opinions differed markedly between age groups but in no single demographic was there a majority in favor of abolishing physical currency. Among the 18-29 year old respondents 56% declared that they still want to keep cash while 38% said they would welcome a cashless society. Among the survey’s oldest demographic, the 65-year-olds, 85% wanted to keep cash.

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Catalonia Crisis Far From Over Despite Market Surge

Catalonia Crisis Far From Over Despite Market Surge

Hopes that Catalonia’s woes could be contained are fading.

On Tuesday night, for the briefest of moments, Catalonia’s government severed its ties with Spain. The region’s president, Carles Puigdemont, declared independence from Spain at around 7.40 p.m., Spanish time. Then, roughly ten seconds later, he put it all on hold, to the visible dismay of many of his fellow travelers.

The markets were pleased, interpreting the suspended declaration of independence as a retreat from the brink. The Spanish stock index IBEX 35 surged 1.5% on Wednesday, and is up 3.4% in five trading days, making up a big part of what it had lost over the prior four trading days. It remains 7% below its year-to-date high at the end of April.

For many other aspiring nation states, the key to independence lay in getting enough votes on the UN security council. But if Catalonia’s bid for self-determination ever made it to the UN, it probably wouldn’t garner enough support from the Security Council, for the simple reason that an independent Catalonia could encourage other separatist regions in the EU to launch similar bids.

So why did Puigdemont change the script at the very last minute? According to the Catalan government’s chief spokesperson, Jordi Turull, he did so in response to pressure from key international mediators that are insisting on dialogue between Barcelona and Madrid. “[They] said that if we did this they would be willing to act,” said Turull, who refused to reveal the identity of said mediators.

The problem is that Madrid has shown absolutely no interest in dialogue, for two main reasons:

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It Gets Ugly in Catalonia

It Gets Ugly in Catalonia

Spain’s “ships of repression” are coming to help out. 

Madrid’s crackdown on Catalonia is already having one major consequence, presumably unintended: many Catalans who were until recently staunchly opposed to the idea of national independence are now reconsidering their options.

A case in point: At last night’s demonstration, spread across multiple locations in Barcelona, were two friends of mine, one who is fanatically apolitical and the other who is a strong Catalan nationalist but who believes that independence would be a political and financial disaster for the region. It was their first ever political demonstration. If there is a vote on Oct-1, they will probably vote to secede.

The middle ground they and hundreds of thousands of others once occupied was obliterated yesterday when a judge in Barcelona ordered Spain’s militarized police force, the Civil Guard, to round up over a dozen Catalan officials in dawn raids. Many of them now face crushing daily fines of up to €12,000.

The Civil Guard also staged raids on key administrative buildings in Barcelona. The sight of balaclava-clad officers of the Civil Guard, one of the most potent symbols of the not-yet forgotten Franco dictatorship, crossing the threshold of the seats of Catalonia’s (very limited) power and arresting local officials, was too much for the local population to bear.

Within minutes almost all of the buildings were surrounded by crowds of flag-draped pro-independence protesters. The focal point of the day’s demonstrations was the Economic Council of Catalonia, whose second-in-command and technical coordinator of the referendum, Josep Maria Jové,was among those detained. He has now been charged with sedition and could face between 10-15 years in prison. Before that, he faces fines of €12,000 a day.

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Spain’s New Big Bubble Begins to Wobble

Spain’s New Big Bubble Begins to Wobble

Tourism is now bigger than construction was during the real estate bubble.

Since hitting rock bottom in 2013, Spain has been one of the biggest engines of economic growth in Europe, expanding at around 3% per year. But according to a report by the Bank of Spain, most of the factors behind this growth — such as cheaper global oil prices, the ECB’s expansionary monetary policy, and the subsequent decline in value of the Euro — are externally driven and transitory in nature.

This is particularly true for arguably the biggest driver of Spain’s economic recovery, its unprecedented tourism boom, which some local economists are finally beginning to call a bubble.

In large part the boom/bubble is a result of the recent surge in geopolitical risks affecting rival tourist destinations like Turkey, Egypt, Tunisia and, in smaller measure, France, which helped boost the number of foreign visitors to Spain in 2016 to a historic record of 75.3 million people — an 11.8% increase on 2015.

Based on first-half figures for this year, the trend is set to continue, at least for a little while longer. Between January and June 2017 36.3 million foreign visitors came to Spain — an increase of 11.6% on the same period of 2016. But if recent developments are any indication, this year’s surge in visitors could well represent Spain’s tourist boom’s final swansong.

Rising “Tourism-phobia.” After years of growing public opposition to the unrestrained growth of the Barcelona’s tourist industry, the city has witnessed a rash of coordinated attacks against tourist targets led by Arran, the youth wing of the radical separatist CUP (Popular Unity Candidacy) party. Arran’s highly publicized actions have spawned a flurry of copycat attacks in places like Palma de Mallorca, San Sebastian and most recently Tenerife.

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Volatility in Housing: What Surges & Crashes the Most?

Volatility in Housing: What Surges & Crashes the Most?

It depends on the value of the home.

What happens to home prices during the current housing boom and the next housing bust depends to some degree on whether the home is relatively “affordable” — whatever that means at today’s prices — or more expensive.

This is an important data point in the consideration for lenders that have to worry about their collateral value and for residential property investors and for homeowners who might want to get a foretaste of what is next.

The CoreLogic Case-Shiller Home Price Index offers an index based on three tiers of prices — low tier, middle tier, and high tier. Like small-cap stocks versus large-cap stocks, the less expensive homes show much more price movements up anddown and are thus far more volatile during booms and busts than their more expensive counterparts.

The Tiered Home Price Index (TPI) comprises 16 metro areas: Boston, New York City, Washington DC, Chicago, Denver, Las Vegas, Los Angeles, San Diego, San Francisco (five-county Bay Area), Miami, Atlanta, Minneapolis, Phoenix, Portland, Seattle, and Tampa.

Prices in the low tier rose 10.8% year-over-year, according to the TPI, published in August. For mid-tier homes, the index rose 7.5%. And for expensive homes prices rose 4.8%.

That principle has been true for the past 17 years of the index, covering two housing booms and one housing bust so far. The chart below shows how prices of homes in the low tier (yellow line) rise much faster than higher priced homes, but during the bust, they also plunge much faster and bottom out a lot lower (chart via  John Burns Real Estate Consulting):

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Many European Banks Would Collapse Without Regulators’ Help: Fitch

Many European Banks Would Collapse Without Regulators’ Help: Fitch

Only two things keep these banks alive: “a State willing to support them and a regulator that does not declare them insolvent.”

Dozens of Greek, Italian, Spanish and even German lenders have volumes of troubled assets higher or similar to that of Spain’s fallen lender Banco Popular. They, too, are at risk of insolvency. This stark observation came from Bridget Gandy, director of financial institutions for Fitch Ratings, who spoke at a conference in London on Thursday.

The troubled banks include:

  • Greece’s HB, Piraeus, NBG, Eurobank and Alpha;
  • Italy’s Monte dei Pachi di Siena (which is in the process of being rescued with state funds), Carige (9th largest bank, now under ECB orders to raise capital or else), CreVal, and the two collapsed banks, Veneto and Vicenza (whose senior bondholders were bailed out last weekend);
  • Germany’s Bremer Landesbank (which just cancel interest payments on its CoCo bonds) and shipping lender HSH Nordbank.
  • Spain’s Liberbank and majority state-owned BMN and Bankia, which are completing a merger after private-sector institutions refused to buy BMN. Now, the problems on BMN’s balance sheet belong to Bankia, which already has its own set of issues, Gandy said.

That many of Europe’s banks are teetering on the brink of insolvency is not exactly new news. Most of the problems that caused the financial crisis have not been resolved. As the financial journalist and former investment banker Nomi Prins said in a 2015 interview with Dutch media group VPRO, “in Europe there still exist massive amounts of trades (on banks’ balance sheets) that are underwater and going wrong every day.”

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Two Italian Zombie Banks Toppled Friday Night

Two Italian Zombie Banks Toppled Friday Night

ECB shuts down Veneto Banca and Banca Popolare di Vicenza.

When banks fail and regulators decide to liquidate them, it happens on Friday evening so that there is a weekend to clean up the mess. And this is what happened in Italy – with two banks!

It’s over for the two banks that have been prominent zombies in the Italian banking crisis: Veneto Banca and Banca Popolare di Vicenza, in northeastern Italy.

The banks have combined assets of €60 billion, a good part of which are toxic and no one wanted to touch them. They already received a bailout but more would have been required, and given the uncertainty and the messiness of their books, nothing was forthcoming, and the ECB which regulates them lost its patience.

In a tersely worded statement, the ECB’s office of Banking Supervision ordered the banks to be wound up because they “were failing or likely to fail as the two banks repeatedly breached supervisory capital requirements.”

“Failing or likely to fail” is the key phrase that banking supervisors use for banks that “should be put in resolution or wound up under normal insolvency proceedings,” the statement said. This is the first Italian bank liquidation under Europe’s new Single Resolution Mechanism Regulation. The ECB explained:

The ECB had given the banks time to present capital plans, but the banks had been unable to offer credible solutions going forward.

Consequently, the ECB deemed that both banks were failing or likely to fail and duly informed the Single Resolution Board (SRB), which concluded that the conditions for a resolution action in relation to the two banks had not been met. The banks will be wound up under Italian insolvency procedures.

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Olduvai IV: Courage
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Olduvai II: Exodus
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