#ecb

Not capitalism with warts but socialism with beauty spots

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I was fortunate enough to attend an LDP function last night where Deputy PM and Minister of Finance Taro Aso spoke. The audience was largely retirees in their 60s-80s in the Yokohama area who in part likely came for the hotel buffet. I was the only foreigner to attend among 1,000 guests. Aso truthfully described the difference between Japan and the West. Talking of how many foreign politicians can’t understand how Japan can have so many vending machines because in their countries they’d be vandalized  for their cash. Aso’s bigger point was made around deflation and how Japan is coping far better than most of the West, especially the EU. While there is a sense of celebrating an own goal, the biggest mistake made by the West in its analysis of the ‘lost two decades’ in Japan has been its unique society. Only in Japan could a population withstand two decades of hardship. Shared grief.

In the West, when it all goes to the dogs people will run as far away from the implosion as they can. Moral hazard is the order of the day. Make someone else pay. I recall the tale of a friend who had bought a condo in a ski resort in Yuzawa, Niigata Prefecture for around $20,000 off a family who had paid $800,000 for it during the bubble. They religiously paid off the loan as a form of moral obligation. In Japan, bankruptcy is seen as failure. A bankruptcy record is hung around one’s neck forever. In America, bankruptcy is seen as a badge of honor in some circles for someone pursuing the American Dream and in the next credit cycle, financial institutions will forgive the infraction, albeit at a slightly higher risk premium.

The point Aso was making was on the money. Japan is different. It is a society based on values. While the West may frown on the Japanese taking on a 250% debt: GDP ratio to allow the air to slowly leak out of a balloon, the society demands it. Despite all of the studies I’ve read on financial resurrection from deflation in the West I can safely say ‘society’ is the seemingly most overlooked yet most relevant part of the equation. As the game of convenient lies mount up from the mouths of politicians, a growing number of people are realizing that failure to act will lead to unpleasant truths. Economic cycles can only be toyed with to a point until trust leaves the system. The Japanese are indeed the most capable people on the planet to embrace change. It may take a tragedy, shock or disaster to force true action but one can be rest assured the people will unite in common purpose while the West go out of their way to look after themselves at the expense of all others.

Japan is not capitalism with warts but socialism with beauty spots. With the coming global financial train wreck approaching Japan is the best place to be.

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Does Mr Schulz’s resignation say more about fleeing a sinking EU ship than saving the Fatherland?

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EU Parliament President Martin Schulz has resigned. Just as the EU sinks deeper into the quagmire of its own making Herr Schulz seemingly wants to run against Angela Merkel for Chancellor next year.  The triumvirate of Schulz, Juncker & Tusk was supposedly inseparable but one wonders if it has become insufferable this year with the prospect of 2017 becoming even worse. Think about it – Brexit, the ditching of a free pass by the Swiss to join, the mess with Turkey over refugees, the parlous state of Greece, an Austrian presidential election that exposed the lack of respect for member state democracy by the EU, a touch and go referendum in Italy and the growing chances of a Le Pen presidency in France on top of an EU economy at stall speed with limited options.

Italy holds its referendum on Dec 4 this year. Italian politics is rarely devoid of scandal or controversy. The referendum is to do with reforming the constitution with a focus on limiting power in the Senate so laws can be passed quicker. If you believe polls, 42% don’t want change. 37% do. Referendums in 1993 and 1997 failed. PM Renzi has threatened to resign if it fails to carry. In a sense the referendum had been tracking ‘yes’ until he staked his career on it (are you listening David Cameron?) and the mood switched. Renzi thought the threat would work in his favour by alarming voters he’d throw the country into more political gridlock. The idea that Italians are “concerned by instability” is rather humorous. I am trying to work out a period when Italy had stable political leadership. Here is a list of  PMs since 1976 (all 24 of them):

1. Aldo Moro – 1974-1976
2. Giulio Andreotti – 1976-1978
3. Francesco Cossiga – 1979-1980
4. Arnaldo Forlani – 1980-1981
5. Giovanni Spadolini – 1981-1982
6. Amintore Fanfani – 1982-1983

7. Bettino Craxi – 1983-1987
8. Amintore Fanfani – 1987-1987
9. Giovanni Goria – 1987-1988

10. Ciriaco De Mita – 1988-1989
11. Giulio Andreotti – 1989-1992

12. Giuliano Amato – 1992-1993
13. Carlo Azeglio Ciampi – 1993-1994
14. Silvio Berlusconi – 1994-1995
15. Lamberto Dini – 1995-1996
16. Romano Prodi – 1996-1998
17. Massimo D’Alema – 1998-2000
18. Giuiliano Amato – 2000-2001
19. Silvio Berlusconi – 2001-2006
20. Romano Prodi – 2006-2008
21. Silvio Berlusconi – 2008-2011
22. Mario Monti – 2011-2013
23. Enrico Letta – 2013-2014
24. Matteo Renzi – 2014~

The stratospheric rise of the Euro-sceptic 5-Star Movement (M5S) could benefit from the electoral rules (Italicum law) which changed in July 2016 which grants a party that wins over 40% of the vote it wins 54% (a minimum of 340 out of 630 seats) of the Camera.

The Economist wrote of the party that aims to #draintheaqueduct “the M5S chooses its electoral candidates in online ballots. Save in municipal elections, it does not accept anyone who has served more than a term as a political representative of any sort. The intention is to guarantee that its lawmakers and office-holders are free of the compromising links that are rife in Italian politics. But one effect is to ensure they are equally untainted by experience and, sometimes, ability.” M5S is polling around 28% vs Renzi’s Democratic Party at 32%.

There in lies the rub for the establishment. Around the world, they are fast learning that political experience and ability are outweighed by the promise of change and the ability to call a spade a spade. Rome’s Mayor Ms. Raggi (M5S) has bounced from one problem to another after being left a city in deep debt and political scandal. Reality is often different to the dream.

Still if Renzi loses and he resigns, Italy maybe thrown into a snap election and if the M5S wins a majority that will have implications for the bond market. A party that looks to exit the euro will potentially raise large scale bank default risk. Holders of Italian euro-denominated debt would be stuck having to receive a devalued lira on top of wholesale dumping of Italian debt proving a double whammy. Banks are not required to hold capital against government bond holdings but such losses could well create insolvency issues. At the start of October this year, Italian 10-yr  government bonds traded at 1.2% yield. It is now 2.13%.

So the risk of the Italian referendum is perhaps being viewed by Schulz to take an emergency parachute to pursue a German state political career than his once Utopian ideal of the EU. It is telling. Surely he stood to gain much greater power in the long run if he truly believed in his beloved EU project. Resignation suggests he may believe the writing is on the wall and better to retreat to his homeland to keep what is left of a career alive. A true contender to Merkel? It remains to be seen but do not discount his move as a precursor to the dwindling fortunes of the EU movement.

European Central Bunker Mentality (ECBM) is actually friendly fire

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ECB chief Draghi kept rates unchanged with the much heralded “wait and see” mentality which pervades central banks. He’s blown €1 trillion and expanded the balance sheet toward the €4 trillion Fed BS but lagging the world’s largest, Japan, nudging €4.5 trillion.

As the above table shows clearly-central bank policy DOESN’T work. No business confidence and no inflation is being driven even with negative rates. He should know from his native Italy that no growth for the past two quarters, 50% off store sales continuing well after the traditional period has well and truly ended and Italian banks with 20% NPLs. The lady at Fendi was in despair at how bad turnover is. A group of Italian friends asked did I think Monte Paschi dei Siena, the world’s oldest bank, would survive…I pulled a €20 note and told them that will get you around 100 shares.  They got the point . Surely it will be nationalized. Of course the ECB’s policies are preventing failures?!?!!

This group think is lunacy. Even if Draghi commits to buying equities it isn’t solving for growth nor is it solving “confidence”

Whether authorities want to admit it or not, they’ve failed. More people crushed under a rock of debt or  living off morsels from a pittance of supposed low risk income assets which are increasingly turning negative. While people might want to have faith in authorities the sad fact is that day-day realities have only widened income equality. The only way to get people out of the fox holes and spend that money they’re shoving in personal safes is to lower taxes and let the real economy reset by putting power back into the hands of the consumer. Stop telling them how to spend it, stop higher taxation, stop useless and ineffective state control and let all incomes benefit rather than just the rich.

The irony of the central bank bunker mentality is that while they feel immune personally to the devastation above ground they still don’t realize is that most shells falling are friendly fire.

Burg Wachter sees home safe sales +25%

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Germany’s leading home safe company Burg- Wachter is reporting a sharp increase in demand for home safes, +25% to be precise. It’s main competitor is reporting similar and business is so brisk they’re on 24hr production. With the ECB at NIRP, it’s most venerable financial institution, Deutsche Bank sinking to record lows, German citizens are taking their cash into their own hands. Even Commerz reported that building a new vault was cheaper than storing money at ECB

In Switzerland, rich customers are already being slugged with negative interest rates by banks so many are choosing to use third party insurers to  guarantee cash stored at home for 1/5th the cost.

The Swiss luckily have the option to store cash with CHF1000 bills, something EU citizens can’t do as the ECB banned €500 bills recently to stop hoarding. Which begs the question of how far down the road to oblivion central banks are. To stop at nothing to try force expenditure by raising the cost of saving. So out of tune are they with citizens lacking confidence in them central banks are playing chicken with a freight train that doesn’t want to derail.

I’m still concerned at how aloof many seem on social media channels that we live in prosperous times. One person suggested I fly to NY to see reality myself because clearly the spin in the Aussie news cycle must be filling my head with wrong notions about how bad I believe it is. That’s the problem with asset bubbles – it is when people still believe it isn’t one.

Mad I keep warning, no other country has Japan’s culture of group sacrifice yet central banks keep thinking Japan sets the benchmark for how things will turn out. How wrong they will be.

Encouraging children to play with a blowtorch

When the GFC hit in 2008 the world wanted investment banking blood. While the ‘banksters’ weren’t faultless, the regulator had left a child to play with matches without supervision and the house burnt down. This time around, the authorities in the form of central banks are encouraging the children to play with a blow torch. The central banks are flagrantly colluding with investment banks in private placements. How bad are things out there if the ECB is out there buying €80 billion per month extending to corporate debt as they’re running out of government debt to buy?

Investment banks are rejigging their desks to cater to their new largest client. Much like the Bank of Japan is encouraging banks to create new ETFs (which the BoJ now owns 60%) the ECB is encouraging new debt offerings from corporates without prospectuses as it is conducted off line. So central banks don’t care what is bought as long as they can mask their failure in policy setting even further.

What we’re witnessing is stupidity on a global scale. Group thinking central banks are trying to drive the velocity of money but every dollar, euro or yen more they try to pump into the fragile system creates less and less effect. It has been obvious for years but central banks believe they need to try something else which only creates more bubbles, widens the gap between the rich and poor while creating the exact opposite of what is needed.

I noted last week that the Fed’s language showed just how little credibility is left in these groups. The “The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that both monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones.” comment really makes out everyone for fools.

Now it seems that the Fed is admitting they’ll need $4 trillion in QE if things don’t go according to plan. The paper explains that

“the volume of asset purchases needed to make up for the ELB constraint has now expanded to $4 trillion—even more than the $3.5 trillion purchased by the FOMC between late 2008 and mid-2014.”

In summary, were the acts by central banks conducted by investment banks they would risk prison sentences. There is no transparency and markets continue to be manipulated. Sadly these actions will come to light one day and when markets are allowed to function properly the ramifications will be swift and frightening. Confidence is the ingredient missing from the global economy. If businesses and consumers can’t see the cycle, they won’t invest. Interest rate policy is impotent.

FOMC – “better positioned to offset large positive shocks!”

I’ve just read through all 16 pages of the July 26-27 FOMC minutes and boy is the language a treat. Here are some of the stupid things that were written up (and you have to ask yourself would you entrust your livelihoods to these people when they can look you in the eye with this garbage?):

“The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that both monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones.”

Think about those words – “better positioned to offset large positive shocks” – what a load of hooey. If central banks around the world could buy ‘positive shocks’ believe me they would take everyone they could get. Sad thing is with chronically low interest rates, growth is slowing, wages are falling and the RoW is in an even worse position.

The report on the current conditions swings between positive and negative and secretly admitting they have little clue. Every risk they talk of seems skewed to the downside.

“In addition, the staff continued to see the risks to the forecast from developments abroad as skewed to the downside. Consistent with the downside risks to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as tilted to the upside. The risks to the projection for inflation were still judged as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged lower.

So with that in mind, the US Fed has created its own dilemma. Since raising rates from nothing to next to nothing in Dec 2015, growth has stalled. Q2 came in at half estimates and Q1 was revised below 1%/ Cutting rates from here would be a hugely negative signal for markets and raising rates would brake the economy harder. So they talk the game of scope to raise rates in 2016 yet the minutes don’t give any real sense of confidence that they can carry it out.

They talk up consumer spending but note business investment continues to slow. If businesses aren’t investing because they can’t see the cycle, is it any wonder.

“Business fixed investment appeared to have declined further during the second quarter, with broad-based weakness in equipment and another steep drop in drilling and mining structures…”

This was also a doozy:

“However, during the discussion, several participants commented on a few developments, including….the elevated level of equity values relative to expected earnings, and the incentives for investors to reach for yield in an environment of continued low interest rates…It was also pointed out that investors potentially were becoming more comfortable locking in current yields in an environment in which low interest rates were expected to persist, rather than engaging in the type of speculative behaviour that could pose financial stability concerns.”

Investors getting more comfortable? Are you kidding? As I pointed out in the past in order to hunt for yield poor unsuspecting pensioners are being forced out the quality curve taking on unnecessary risks.

This was also amusing were it not frightening at the same time. For central banks that have next to no credibility remark that they must protect it:

“Ms. [Esther L.] George dissented because she believed that a 25 basis point increase in the target range for the federal funds rate was appropriate at this meeting. Information available since the June FOMC meeting showed solid employment growth, economic growth near its trend, and inflation outcomes aligning with the Committee’s objective. Domestic financial conditions had eased since the U.K. referendum. She believed that monetary policy should respond to these developments by gradually removing accommodation, consistent with the prescriptions of several frameworks for assessing the appropriate stance of monetary policy. She believed that by waiting longer to adjust the policy stance and deviating from the appropriate path to policy normalisation, the Committee risked eroding the credibility of its policy communications.”

The FOMC stands for “Fed Open Market Committee” although I wonder whether it should be “Foolishly Optimistic Myopic Comedians”

You won’t win a prize lawn competition using a flame thrower

Just completed reading an article on Bloomberg titled, “Fed Officials Challenge Decades of Accepted Wisdom on Inflation.”  When people say they enjoyed a book so much they couldn’t put it down, I was getting so annoyed by this article I couldn’t wait for it to finish. That Fed Officials apparently think they know what they are doing when it is so obvious they are clueless. So perhaps my title might be more apt. This group-think led reckless rate setting by central banks is now supposedly being sold to the rest of we stupid folk as a victory in so far as “run away inflation risk is slight.” Inflation is so far away from target setting even if central banks halved their aspirations they’d still be a country mile away.

Lesson #1- Businesses invest in cycles not because interest rates are low

OK so while central banks have been dousing the lawn in hi-octane fuel, the clogged filter of business confidence is the missing link. Businesses and people invest because “THEY CAN SEE A CYCLE” not because “INTEREST RATES ARE LOW.” So until these supposed 180 IQ people realise that the confidence filter is clogged no amount of fuel mix and turbo charging will influence outcomes much. Why can’t they realise this?

Lesson #2 – Poverty is growing and growing

While interest rates have been at ZIRP, NIRP or near as makes no difference those that have had financial assets have benefitted while those without have fared worse, widening the gap between rich and poor. This is why we’re seeing so much disruption amongst voters – Brexit and the rise of characters like Trump confirm it. Poverty is on the rise.

Lesson #3 – Real wages aren’t growing

Look at the hard data central banks – it is pretty telling! Growth is slowing down in US, EU, China, Australia etc etc, over capacity clogs the system and real wages aren’t going up! If consumers aren’t feeling warm and fuzzy with their pocket books they will not feel like going out and shopping til they drop.

Lesson #4 – Corporate credit is worsening

In the last decade, rating agencies have seen a marked shift from corporates with top rated credit toward non-investment grade creditAll the while $15 trillion in sovereign debt has negative yields. Most pensioners aren’t buying for capital growth but the income stream. Now they are forced to buy riskier assets with paltry (but better than nothing) yields which could see them wiped out.

Lesson #5 – time to admit you need to have central banks cooperate with governments

Milton Friedman said he didn’t believe in central bank independence. Too many governments are ceding decisions to the central banks. Turning a blind eye to the clear and present danger of over indebtedness on all levels – private, corporate and government- can’t continue. Over reliance on central banks patrolling the swell is madness. Governments are clueless. Most think raising taxes is the only way to cut debt. Burying tapped out consumers in higher taxes is absolutely guaranteed to knock the much needed confidence to get us out of this mess. Control must be put back into the hands of the consumer. It won’t happen because there is too much group think and populist governments won’t inflict pain on the people to save their own hides. Such short termism will have an even more negative impact on the global economy than the rates that are set.

Whether we like it or not we have no choice but to rely on governments to set policy and central banks to set rates. It might require a radical shift and changes at the top but if they don’t do it proactively let me assure you the markets will force the change on them.