The shock landslide defeat of PM Shinzo Abe’s Liberal Democratic Party (LDP) in the recent Tokyo metropolitan elections – and the triumph there of Tokyo Governor Koike’s new party (Tomin First) – has lit a faint hope that the radical Japanese monetary expansion policy could be on its way out. The flickering light though is not strong enough to soothe the mania in Japan’s carry trades and so the yen continued to slide in the aftermath of the elections. Between mid-June and early July the Japanese currency depreciated by some 5% against the US dollar and 10% against the euro. The perception in currency markets is that Japan will not be embarking on monetary normalization this year or next, in contrast to Europe where ECB Chief Draghi has hinted that the train (to monetary normalization) will start next year, even though the journey promises to be very slow. The US train to normalization continues at a glacially slow pace including some periods of reverse movement. Moreover the monetary climate prior to the journey commencing is even more extreme in the case of Japan than in Europe or the US. It was possible to imagine that the shock election setback for the LDP could have caused Shinzo Abe to withdraw support from his money-printer in chief, Bank of Japan governor Haruhiko Kuroda (whose term ends in April 2008), thereby signaling an early end to negative interest rates and quantitative easing. But markets in their wisdom have concluded this is not to be. Many elderly Japanese are pleased with their stock market and real estate gains even though they complain about negative interest rates and the threat of inflation. In any case it was young voters, responding to the stink of alleged corruption scandals, who turned out en masse for Governor Koike’s new party.
And this might become a problem for the Fed. ECB President Mario Draghi wields more power than just about any other public official in Europe, perhaps even including Angela Merkel. The organization he heads not only controls the monetary policy levers of the entire Eurozone, it also supervises the region’s 130 biggest banks. As we’ve seen in recent weeks, it even has the power to decide which of Europe’s struggling banks get to live and which don’t. Yet it is answerable to virtually no one. Until now. Emily O’Reilly, the EU Ombudsman, an arbiter for the public’s complaints about EU-institutions, has just sent Draghi a letter asking him to explain his role in the potentially compromising Group of Thirty (G30) and how he makes sure that he does not divulge insider information or runs into conflicts of interest. The tenor, tone and direction of O’Reilly’s inquiries make it clear that she means business. The Washington-based G30 was founded in the late seventies at the initiative of the Rockefeller Foundation, which also provided start-up funding for the organization. Its current membership reads like a Who’s Who of the world of global finance. It includes current and former central bankers, many of whom now work or worked in the past for major financial corporations, such as:
This post was published at Wolf Street on Jul 10, 2017.
This is how desperate the Italian Banking Crisis has become. When things get serious in the EU, laws get bent and loopholes get exploited. That is what is happening right now in Italy, where the banking crisis has reached tipping point. The ECB, together with the Italian government, have just this weekend to resolve Banca Popolare di Vicenza and Veneto Banca, two zombie banks that the ECB, on Friday night, ordered to be liquidated. Unlike Monte dei Pachi di Siena, they will not be bailed out primarily with public funds. Senior bondholders and depositors will be protected while shareholders and subordinate bondholders will lose their shirts. However, as the German daily Welt points out, subordinate bondholders at Monte dei Pachi di Siena had billions of euros at stake, much of it owned by its own retail customers who’d been sold these bonds instead of savings products such as CDs. So for political reasons, they were bailed out. Junior bonds play a smaller role at the two Veneto-based banks. According to the Welt, the two banks combined have 1.33 billion (at face value) in junior bonds outstanding. They last traded between 1 cent and 3 cents on the euro. So worthless. Only about 100 million were sold to their own customers, not enough to cause a political ruckus in Italy. So they will be crushed.
This post was published at Wolf Street by Don Quijones ‘ Jun 25, 2017.
Transparency International whacks at a central bank. The European Central Bank has found itself in the rare position of having to defend itself in the public arena following the release of a scathing report on its perceived lack of political independence. The report, published by anti-corruption watchdog Transparency International, argues that the institution has accrued new power and influence in the wake of the financial crisis but its code of conduct has not kept up with that newfound clout. It even suggests that the ECB should withdraw from the Eurozone’s Troika of creditors, precisely at a time that calls are rising for the creation of a European Monetary Fund. ‘The extraordinary measures taken by the ECB since 2008 have tested the ECB’s mandate (to ensure price stability) to breaking point,’ Transparency International EU said. ‘The ECB’s accountability framework is not appropriate for the far-reaching political decisions taken by the Governing Council.’
This post was published at Wolf Street on Mar 29, 2017.
It didn’t take much for the Greek bank run jog to return: with Greece once again stuck between an IMF rock and a Schauble hard case, and whispers that another bailout may be on the horizon, the local population took advantage of whatever capital controls loopholes they could find, and withdrew money from the local banking sector, which to this day remains on ECB life support, almost two years after the 3rd Greek bailout in the summer of 2015. According to Greece central bank data, Greek private sector bank deposits declined in January for the second month in a row, driven by renewed concerns over the country’s neverending bailout. Business and household deposits fell by 1.63 billion, or 1.34% month-on-month to 119.75 billion ($126.8 billion), the lowest level since November 2001. The January outflow follows a “jog” of 3.4 billion in December, making the two-month drop the worst since the latest Greek bailout panic in July of 2015.
This post was published at Zero Hedge on Feb 28, 2017.
Next Tuesday will mark four weeks since Indian Prime Minister Narendra Modi made his surprise demonetization announcement that has sent shockwaves throughout the South Asian country’s economy. In an effort to combat corruption, tax evasion and counterfeiting, all 500 and 1,000 rupee banknotes are no longer recognized as legal tender. I’ve previously written about the possible ramifications of the ‘war on cash,’ which is strengthening all over the globe, even here in the U. S. Many policymakers, including former Treasury Secretary Larry Summers, are in favor of axing the $100 bill. In May, the European Central Bank (ECB) said it would stop printing the 500 euro note, though it will still be recognized as legal currency. The decision to scrap the ‘Bin Laden’ banknote, as it’s sometimes called, hinged on its association with money laundering and terror financing. Electronic payment systems are convenient, fast and easy, but when a government imposes this decision on you, your economic liberty is debased. In a purely electronic system, every financial transaction is not only charged a fee but can also be tracked and monitored. Taxes can’t be levied on emergency cash that’s buried in the backyard. Central banks could drop rates below zero, essentially forcing you to spend your money or else watch it rapidly lose value. Inevitably, low-income and rural households have been hardest hit by Modi’s currency reform. Barter economies have reportedly sprung up in many towns and villages. Banks have limited the amount that can be withdrawn. Scores of weddings have been called off. Indian stocks plunged below their 200-day moving average. Demonetization has also weighed heavily on the country’s manufacturing sector. The Nikkei India Manufacturing PMI fell to 52.3 in November from October’s 54.4. Although still in expansion mode, manufacturing production growth slowed, possibly signaling further erosion in the coming months.
This post was published at GoldSeek on 2 December 2016.
Why The Eurozone Is A Financial Powder Keg ………. In short, Europe is a financial and political powder keg. The ECB is bluffing a $40 trillion debt market (including bank loans) and the Brussels apparatchiks are bluffing 340 million citizens. The only problem is that the true facts of life are so blindingly obvious that it’s only a matter of time before these bluffs are called. And then the furies will break loose. In the first place, the EU-19 is marching toward the fiscal wall and even Germany’s surpluses cannot hide the obvious. During the last six years, the collective debt-to-GDP ratio among the Eurozone nations has gone from 66% to 91% of GDP. The sheer drift of current policy momentum will take the ratio over the 100% mark long before the end of the decade.
KORSCHENBROICH, Germany – Two years ago, the European Central Bank cut interest rates below zero to encourage people such as Heike Hofmann, who sells fruits and vegetables in this small city, to spend more. Policy makers in Europe and Japan have turned to negative rates for the same reason – to stimulate their lackluster economies. Yet the results have left some economists scratching their heads. Instead of opening their wallets, many consumers and businesses are squirreling away more money. When Ms. Hofmann heard the ECB was knocking rates below zero in June 2014, she considered it ‘madness’ and promptly cut her spending, set aside more money and bought gold. ‘I now need to save more than before to have enough to retire,’ says Ms. Hofmann, 54 years old.
This post was published at David Stockmans Contra Corner By Georgi Kantchev, Christopher Whittle and Miho Inada, Wall Street Journal ‘ August 9, 2016.
KORSCHENBROICH, Germany – Two years ago, the European Central Bank cut interest rates below zero to encourage people such as Heike Hofmann, who sells fruits and vegetables in this small city, to spend more. Policy makers in Europe and Japan have turned to negative rates for the same reason – to stimulate their lackluster economies. Yet the results have left some economists scratching their heads. Instead of opening their wallets, many consumers and businesses are squirreling away more money. When Ms. Hofmann heard the ECB was knocking rates below zero in June 2014, she considered it ‘madness’ and promptly cut her spending, set aside more money and bought gold. ‘I now need to save more than before to have enough to retire,’ says Ms. Hofmann, 54 years old. Recent economic data show consumers are saving more in Germany and Japan, and in Denmark, Switzerland and Sweden, three non-eurozone countries with negative rates, savings are at their highest since 1995, the year the Organization for Economic Cooperation and Development started collecting data on those countries. Companies in Europe, the Middle East, Africa and Japan also are holding on to more cash. Economists point to a variety of other possible factors confounding central-bank policy: Low inflation has left consumers with more money to sock away; aging populations are naturally more inclined to save; central banks themselves may have failed to properly explain their actions.
‘Correlation does not imply causation, but it does waggle its eyebrows suggestively and gesture furtively while mouthing ‘look over there,’’ quipped the comic xkcd. A new working paper by Filippo De Marco and Marco Macchiavelli is likely to raise many eyebrows as it makes the case that political suasion may have created the very thing that helped plunge the eurozone into crisis, using stress test data to argue that higher state ownership and the presence of politicians on bank boards are linked to lenders’ penchant for snapping up domestic government debt. The tendency of European banks to accumulate government bonds issued by their own countries on their balance sheets – banks’ average ‘home’ exposure was a whopping 74 percent of total government debt holdings on the eve of the crisis in late 2010 – created the perfect path for sovereign stress to infect the financial system (and vice versa). The origins of this so-called sovereign-bank loop, or nexus, have since been the topic of much speculation with blame placed on everything from financial regulation that encourages banks to snap up government debt to the liquidity operations of the European Central Bank (ECB). Even five years on from the worst of the eurozone debt crisis, the debate is very much alive given current proposals to restrict the amount of government bonds on European bank balance sheets and in light of concerns over Italian financials, where domestic state debt accounts for a greater-than-eurozone-average proportion of lenders’ total assets.
The market’s attention this week was focused on the Bank of England’s decision to purchase 10 billion in corporate bonds over the next 18 months. By doing so Mark Carney, like Draghi, has opened up a Pandora’s box, since ultimately corporate debt is nothing more than post-petition equity, and all it would take to make the BOE (or ECB) an activist stakeholder in an legal process is for the obligor to go bankrupt. Consider the following scenarios. The Bank of England purchases a corporate bond of XYZ British Corporation and 2 years later, the company goes bankrupt. What will the BoE do? Will it sit in the bankruptcy table and negotiate with other creditors? Does it even have the legal authority to do so? Essentially they are gambling with the taxpayer’s money. If a large foreign company wants to take over a British corporation and the BoE happens to own their debt, how will the act? Can they sell the debt into a market that is already pricing a corporate event? Will the act as an activist investor, lobbying for one outcome? What possible connection is there between economic growth and corporate purchases?
This post was published at Zero Hedge on Aug 6, 2016.
It’s getting harder for corporate debt investors to avoid the volume of negative yielding bonds that are now pouring into credit markets. Investors are holding about 465 billion euros ($512 billion) of investment-grade company bonds with yields below zero, an eleven-fold increase on the start of the year, according to Bank of America Merrill Lynch data. While this means they’re effectively paying for the luxury of holding the debt, that’s still better than buying into the safest government bonds, where yields are even lower. The dilemma facing investors is down to the European Central Bank’s asset-purchase stimulus program that’s pushed yields so low that buying some government bonds guarantees a loss. With the ECB setting deposit rates even deeper into negative territory, parking money there is a less viable alternative. Even though some short-dated indexes show corporate debt yields have dipped below or are approaching zero, the securities remain relatively attractive. ‘Investors are going into these assets more because of capitulation,’ said Geraud Charpin, a portfolio manager at BlueBay Asset Management LLP in London, which oversees about $58 billion. They’re buying ‘because cash is too expensive to hold in most European jurisdictions, rather than because they genuinely like the asset and are genuinely increasing their appetite for risk.’
That was quick. With nearly 85% of the Brexit loss recovered in three days and the market now up for the quarter and the year, what’s not to like? After all, the central banks are purportedly at the ready, and, in the case of the ECB and BOE, are already swinging into action according to their shills in the MSM. MarketWatch thus noted, Markets were boosted by reports indicating the European Central Bank is weighing changes to its bond-buying program, while ‘the Bank of England also said they are all in,’ said Joe Saluzzi, co-head of equity trading at Themis Trading. The European Central Bank is considering changing the rules regarding the types of bonds it can buy as part of its stimulus package to amid concerns it could run out of securities to buy under current stipulations, according to Bloomberg News. The report followed comments from Bank of England Gov. Mark Carney, who indicated the central bank is poised to further ease monetary policy to combat Well now, by the sound of it you would think that the madman Draghi is fixing to uncork the mother of all QEs if there is a danger that the ECB will ‘run out of securities to buy’. Who would have thought that the debt engorged governments of the eurozone couldn’t manufacture enough IOUs to satisfy Mario’s ‘buy’ button? In fact, with public debt at 91% of GDP you would think that the $12.5 trillion outstanding would be more than enough to go around.
That was quick. With nearly 85% of the Brexit loss recovered in three days and the market now up for the quarter and the year, what’s not to like? After all, the central banks are purportedly at the ready, and, in the case of the ECB and BOE, are already swinging into action according to their shills in the MSM. MarketWatch thus noted, Markets were boosted by reports indicating the European Central Bank is weighing changes to its bond-buying program, while ‘the Bank of England also said they are all in,’ said Joe Saluzzi, co-head of equity trading at Themis Trading. The European Central Bank is considering changing the rules regarding the types of bonds it can buy as part of its stimulus package to amid concerns it could run out of securities to buy under current stipulations, according to Bloomberg News. The report followed comments from Bank of England Gov. Mark Carney, who indicated the central bank is poised to further ease monetary policy to combat Well now, by the sound of it you would think that the madman Draghi is fixing to uncork the mother of all QEs if there is a danger that the ECB will ‘run out of securities to buy’. Who would have thought that the debt engorged governments of the eurozone couldn’t manufacture enough IOUs to satisfy Mario’s ‘buy’ button? In fact, with public debt at 91% of GDP you would think that the $12.5 trillion outstanding would be enough to go around.
“You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.” Rahm Emanuel prophetic words were quickly put to use by Italy on Monday morning, which barely waited one full day before using Brexit as the scapegoat excuse to warn that a 40 billion bailout of Italian banks is coming. As a reminder, on Monday morning the local media reported that Renzi’s government was pursuing a six-month waiver of EU state-aid rules, allowing it to shore up banks without forcing investors to share losses. Two days ago, when we first reported of Italy’s proposed bank rescue plan, we said that the chairman of Lower House’s Finance Commission, Maurizio Bernardo, confirmed that the government is studying options to support the banking sector, including a capital injection, and said a law decree ‘with measures going in that direction’ could be approved by the end of this week. We pointed out that how such an intervention would be implemented was unclear; it was is also unclear how such a direct state recapitalization of Italian banks using public funds would be permitted by current EU and ECB regulations, which prohibit state bailouts of insolvent banks, although Europe has a long and illustrious history of finding massive loopholes to that particular prohibition. “Last but not least it is unclear how existing stakeholders, shareholders, bondholders and uninsured depositors, would be impaired under such a bailout.”
This post was published at Zero Hedge on Jun 29, 2016.
The European Central Bank’s loose monetary policy risks destroying the European project, Deutsche Bank has warned. In a blistering attack, Deutsche suggested the ECB had ‘los[t] the plot’ and that its ‘desperate’ actions raised the risk of a potentially ‘catastrophic’ mistake by the central bank. David Folkerts-Landau, Deutsche’s chief economist, said negative interest rates and quantitative easing had hurt savers and allowed politicians to delay badly-needed structural reforms. ‘ECB policy is threatening the European project as a whole for the sake of short-term financial stability,’ he said in a note titled ‘The ECB must change course’. It said: ‘The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics. ‘The benefits from ever-looser policy are diminishing while the litany of distortions, perversions and disincentives grows by the day. Savers are punished and speculators rewarded. Bad companies survive while good companies are too scared to invest.’ The German economist also warned that the ‘whatever it takes’ stance taken by president Mario Draghi and the ECB had ‘distorted the market-based pricing of government bond yields’.
In the 1970s economists started to incorporate rational expectations into their models and not long after the seminal Kydand & Prescott (1977) article named Rules Rather than Discretion: The Inconsistency of Optimal Plan was published. Their work has been driving the mainstream macroeconomic debate ever since. The question raised in this debate is how policy-makers can credible commit to promises made today when future events may cause short-term pain if restricted by stringent rules from taking action? For example, in the Treaty on the Functioning of the European Union Article 125 it clearly states that ‘the Union [or any Member States] shall not be liable for or assume the commitments of central governments, regional, local or other public authorities…’ it also says in Article 123 that’[o]verdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States… …in favour of Union institutions… …shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.’Both rules are there to credibly commit to not bail out EU nations either through ECB inflation or with other member states tax euros. Needless to say, after SMP, OMT, ELA, EFSF, ESM, maturity extensions and interest rates reductions these rules turned out to be useless. Rational actors obviously adapt their behaviour accordingly as the European Union turns into tragedy of the commons where moral hazard abounds. Actually, the whole monetary union has been a monetary tragedy of commons since its inception as credit expansion in one country did not have any of the adverse effects associated with either falling exchange rates or gold outflows. The euro area essentially incentivises maximized inflation with no natural correcting mechanisms apart from gargantuan capital consumption that goes along with it.
The central bank war on savers is rooted in a monumental case of the Big Lie. Here is what a retired worker who managed to save $5,000 per year over a 40 year’s lifetime of toil and sweat in a steel factory now earns in daily interest on a bank CD. To wit, a single cup of cappuccino. Yet the central bankers claim they have absolutely nothing to do with this flaming economic injustice. That’s right. A return that amounts to one Starbucks cappuccino per day on a $200,000 nest egg is purportedly not the result of massive central bank intrusion in financial markets and pegging interest rates at the zero bound; it’s owing to is a global ‘savings glut’ and low economic growth. Thus, Mario Draghi insisted recently that ultra loose monetary policy and NIRP are, ……… ‘not the problem, but a symptom of an underlying problem’ caused by a’global excess of savings’ and a lack of appetite for investment…… This excess – dubbed as the ‘global savings glut’ by Ben Bernanke, former US Federal Reserve chairman – lay behind a historical decline in interest rates in recent decades, the ECB president said. Nor did Draghi even bother to blame it soley on the allegedly savings-obsessed Chinese girls working for 12 hours per day in the Foxcon factories assembling iPhones. Said Europe’s mad money printer:
That the artificial interest rates in evidence in our hugely distorted capital and money markets can be made negative in nominal as well as in real terms is, alas, the curse of the modern age. Though entirely at odds with natural order – as we have repeatedly tried to make plain – they are also a curse that we are unlikely to have lifted any time soon, especially not in a Europe where there is no effective restraint to be had upon the exercise of his awful powers by the likes of a fanatic like Draghi. Like some latter-day Pope Gregory, Draghi pretends to a power superior to that of the secular realm’s rulers. Forgetting that it was an act of political will which first set up the ECB, he now demands that the Lords Temporal of the Eurozone shuffle barefoot through the snows, like the Emperor Henry IV before them, to genuflect before him at his seat at that modern Canossa which stands on Sonnemannstrasse. Though the ‘mandate’ which he unfailingly invokes in place of a claim of descent from St Peter was indeed intended to keep the Bank insulated from the worst, inflationary impulses of the short-horizon politician, it cannot be argued from that one act of self-denying foresight that the ECB is now only subject to a higher court. Laws are, after all, made in parliaments and when it becomes evident that among those laws there are those that have either been made obsolete by events or have become subject to exploitation by the unscrupulous, it is the duty of the people in parliament to highlight such abuses and to set in train the process by which the offending laws will be revised or repealed.
Amidst all the pearls of wisdom unleashed in mainstream economics over the past unbelievable eight years or so, it was one paragraph of common sense that had it been written and appreciated at the start of this period might have saved us all the inordinate and totally unwarranted trouble. But borrowers will only demand more credit if they have optimistic expectations of future income – and banks will only supply it if they deem them creditworthy. Interest rates, which is [sic] all ECB policy can affect, are less important than economic expectations. That was published by the Wall Street Journal in an article describing how European banks are largely if not completely at the margins indifferent to QE and NIRP.