- ECB's rate decision and NIRP - yet another show without an audience.
- Europe's default is only way out as bad loans surpass €1 trillion.
- Global conflict continues to spread, as expected, and not priced in.
There's a weird celebration going on fueled by the European Central Bank decision to reduce rates from 0.25% to 0.15%, although it still disappointed some because the expectation was for 0.10%. What now? Will the ECB adopt a rate reduction program that will be measured in 0.01% steps, so it appears that they haven't run out of "tools?" Only 15 more meetings to go, and never say never! In addition, NIRP - negative interest rate policy - was also adopted, with banks paying a storage fee for storing their goods, which could be revised to included a fee structure that is based on needed space, in line with Public Storage. Monetary gurus never cease to amaze. The message is quite simple: it's bad out there and "you ain't seen nothin' yet." A word of caution was delivered by Jaime Caruana, head of the Bank for International Settlements.
"The truth is that the entire architecture of financial markets is based on positive rates - this is the normal thing," he added. "The consequences of negative rates are therefore very much unknown. Moreover, the benefits are not obvious."
The thinking, or lack thereof, hinges on the idea that credit to small businesses must be facilitated, although it is the consumer that truly feeds consumption and the debt pool, moving future consumption to the present, and defying all logic to eternity, while helping to widen the wealth gap. That discretionary item that one can't afford but makes one look good in his/her own mind is feeding the wallets of wealthy people while saddling one with debt that will increasingly claim one's future earnings.
Mario Draghi's statement did point to supporting "bank lending to households and non-financial corporations," although "loans to households for house purchase" are excluded. But lend to whom when unemployment is still close to record highs? Is the policy "lend at any cost, for any reason, to anybody" viable? Isn't that why we're in trouble in the first place? One scenario is that banks, like other businesses, will pass their NIRP costs to their customers, actually raising real market interest rates and reducing lending.
On a quick side note, Americans and Europeans are not alone, and while the Chinese politburo claims that slower growth is acceptable, one must watch what they do, not what they say.
China's central bank said it will cut the level of deposits that banks have to keep with it by 50 basis points for some lenders, a move aimed at freeing up more cash for loans to bolster flagging economic growth.
In addition, the Chinese "finance ministry said fiscal spending had surged nearly 25 percent in May from a year earlier, highlighting government efforts to energize the slowing economy," or "Quantitative Whateva." But China is already defined as a train wreck in slow motion, with widening and deteriorating tracks ahead, and the old continent is the one showing up on the radar once again, despite 10-year yields for Spanish debt being as low as U.S. 10-year treasuries. Who would have thought that risk would evaporate in Europe based on a few words? Considering the appetite for European sovereign debt, it is obvious that there's a strong belief that one is able to swim in a swamp, alligators and all. It's never about the debt itself, especially the public kind, but the ability to service it. Then there's that annoying reminder that, unlike in the U.S., Spain's sovereign debt is denominated in a currency that it cannot control, and there will be a surprise much like the World Cup match against the Netherlands. First you're up, and then you're down big time.
German finance minister Wolfgang Schaeuble gave an interview to Spiegel, and only one answer stood out in response to recent European election results.
The people aren't against Europe. They simply don't understand sufficiently what Europe actually does. It has to be explained. Perhaps foreign crises will help boost enthusiasm for Europe once again. The acceptance of the euro in Germany continually climbed during the euro crisis.
Indeed, the people don't get it and for good reason. Mr. Schaeuble delivered typical elitist nonsense, never missing an opportunity to highlight how stupid people are. Well, the soothing comfort is that we have plenty of Wolfgang types, the never ending bright minds that will show us the way out of our ignorance. But then the numbers come in and crush their persuasive talk, although we're relegated to the moronic band because the numbers have a deeper, extremely difficult to comprehend meaning, and only the A-list is educated enough to decipher them. How lucky are we to have such distinguished leaders? In case it hasn't surfaced yet, the still impalpable end result of the European elections is a politically paralyzed Europe.
Two years have passed since "Why Europe's Economy Failed And Will Fail" was written, and as we enter yet another distressing economic chapter, the reasoning stands.
Currency depreciation is not the goal, or so we're told, but French President François Hollande welcomed the ECB's decision, and although German Chancellor Merkel did not opine, the idea of a weaker euro was already approved after a 180 degree turn by Jens Weidmann, the Bundesbank chief.
As recently as last November, Jens Weidmann steadfastly opposed any move by the European Central Bank to print money to buy assets and buoy the eurozone economy. No longer. The Bundesbank chief, known for his hardline stances at the ECB and as head of the German central bank, is now ready to support such quantitative easing (QE) if he and his ECB colleagues deem it necessary. What has changed is that "the situation has changed," according to one person familiar with the German's thinking, speaking on condition of anonymity.
The situation has changed, indeed, or, better yet, it never changed and only progressed while people continued to wear rose colored glasses. Germany's inflation reading of 0.6% in May, the lowest since 2009, forced Weidmann to fold, and with "France in 14bn-euro tax black hole," additional structural issues are exposed that exacerbates the wider problem. Just can't catch a break!
But there's also talk of QE, despite treaties and other rules. What treaties? Legality? What legality? At this juncture the Maastricht Treaty is meaningless, because when the ship is sinking, all bets are off. Who can blame them? Philippe Legrain, a former senior aide to European Commission president José Manuel Barroso, gave a succinct description of the required medicine, especially the "second key," although everyone knows that "restructure" really means default, unaffordable bailouts and bail-ins by bank depositors.
"Europe needs to restructure its banking system," he said in an interview with The Telegraph. "The Americans have been much more vigorous in that than we have. "There has been a belief that it's best to try to preserve existing banks and exercise regulatory forbearance rather than force them to face up to their losses, sorting viable banks from unviable ones, recapitalizing viable ones and closing down the unviable - the usual standard policy for dealing with a banking crisis.
The second key strand involves writing down excessive national and household debt, while the third is "combining measures to boost public and private investment with meaningful reform."
As the FT reported last month, "European banks' bad loans hit €1tn" - bad, not total - and that is exactly what Mr. Legrain is referring to on the private side.
A majority of Europe's banks have suffered a jump in bad loans even as investors lined up to lend them money, according to a study by Fitch, the rating agency. Impaired loan volumes rose 8.1 percent in 2013 to slightly more than €1tn compared with the year before, said the Fitch analysis, which used banks' financial results for the years ending 2012 and 2013.
On the ECB's rate decision, European Central Bank Executive Board member Benoit Coeure went a step further, and while we must take every word from any central banker with a grain of salt, the underlying message is extremely depressing.
"Clearly what we wanted to indicate on Thursday is the fact that monetary conditions will diverge between the eurozone on one hand and the United States and the United Kingdom on the other for a long period, which will be several years," he said.
"We are going to keep rates close to zero for an extremely long period, whereas the United States and the United Kingdom will at some point return to a cycle of rate rises."
But despite what we've seen thus far, the promises that the ECB has more tricks up its sleeve keep on coming.
"This is not it yet," Liikanen said at the Bank of Finland's quarterly news conference when asked about remaining tools in the ECB's kit. "We have the capacity to act, we can make decisions, this has not changed."
Did you say Finland, a country that is traditionally removed from the headlines? Yes, the country that scolded the Greeks for their profligacy, which "may come back to haunt its policymakers as they struggle to agree on reforms from taxes to pensions," while enduring a two-year recession. Here's the short version, and further proof that free lunches only exist in the mind of uninformed and largely ignorant people.
While southern Europe starts to win back investors after years of donor-imposed job losses and welfare cuts, Finnish welfare costs and taxes have risen as jobs are lost. Government levies as a share of gross domestic product (GDP) have jumped to a European Union high, piling costs onto the private sector.
Then there's Norway, a model of oil dependency with parallels to the Asian export model, or, in simple terms, outsider dependency, while "the government is spending $20 billion more oil money this year than in 2007."
Norway's energy boom is tailing off years ahead of expectations, exposing an economy unprepared for life after oil and threatening the long-term viability of the world's most generous welfare model. High spending within the sector has pushed up wages and other costs to unsustainable levels, not just for the oil and gas industry but for all sectors, and that is now acting as a drag on further energy investment. Norwegian firms outside oil have struggled to pick up the slack in what has been, for at least a decade, almost a single-track economy
But let's continue to prime the pump with more adulterated Keynesian stimulus, even after the previous stimuli failed to deliver the promised crops while throwing more debt onto the pile. U.S.A.? Europe? Japan? China? Are you sure? Yes, it's going to work in someone's dreams - or nightmares! Another desperate rain dance dedicated to the economic drought.
If negative rates push the euro down, it will supposedly aid exports which must find buyers at the other end of this colorless rainbow, while increasing energy prices and mirroring the bad inflation in Japan. But there's that other thingamajig with its own problems - I remember now! It's the U.S. dollar - not to mention all the other currencies. Yes, we'll try any unproven theoretical and textbook robotic approach in order to avoid the obvious, and the fact that we're still here witnessing a plethora of monetary tools being used across the globe after six years have passed since the crisis ensued, it should be a source of extreme discomfort. Welcome to the global economic twilight zone.
Now onto the ever evolving global conflict domain, and, as expected, the gears of war continue to be in motion, with the white swan flapping its wings in plain sight. Meanwhile, we must not forget that July 20 is the date when Iran must come clean regarding its nuclear program, Iraq is now being overrun by the usual suspects, while the terrorists took hostages from Turkey, a NATO member, and the Taliban continues to gain strength in both Afghanistan and Pakistan. Syria is a nest of complications and bad actors, and Iran is now aiding Iraq, it's long-time nemesis. To add insult to injury and because there's momentum and the time is just right, "Hamas calls for intifada against Israel," a story not widely covered because it's inconvenient.
The fact remains that jihadist groups do not lead productive lives, are not using their profits from industry or farming to pay the bills, and are being financed by somebody. In case one hasn't noticed, guns are no better than baseball clubs without ammo, and the question is "who's supplying the bullets and pulling the strings?" Maybe we should be asking the Kremlin, while preparing and adapting to a different global landscape well into 2016. While many are still talking about buying dips and market rallies, mixed with a good dose of crash talk, the stock market will be the least of our worries when compared with the disruption that is afoot.