The battle continues. In spite of all the inflationary juice the world’s central banks are pouring into asset markets the world wide the debt deleveraging 1000 pound gorilla is back in town and has started to hit asset markets into touch here. Only a massive increase beyond the existing massive increases in central bank balancesheets will knock the gorilla back on his heels.
Many commentators have picked up on the ECB’s balance sheet expansion. Here Bloomberg.
Financial Sense and others have posted up the Cumber research. http://www.financialsense.com/node/7182
Anyone can see that the ECB, BOE, BOJ and SNB have been expanding their balance sheets. The Fed have increased but the level of increase has slowed. The USD has strengthened therefore and this has increased the asset market sell offs as USDs are repatriated and USD debt paid down. US large cap stocks have held up, thus far due to their strong balance sheets and increasing trend to pay down their cash mountains back to shareholders. This can allow them to outperform but out performance can occur at lower nominal levels if you follow.
Lets be clear here. In spite of the ECB balancesheet approaching the 3trn mark this increase in their balance sheet are three year 1% loans to their banks which have parked investment grade assets with the central bank for this cash. The Fed and BOE, by contrast, have purchased government debt directly and held this on their balancesheet. The Fed/BOE actions, along with tarp (troubled asset relief program) permanently removed pressure from their banks. They both purchased troubled assets outright at 100% of the paper value and purchased government debt directly and so freeing their banks from this responsibility. The private sector banks were and are free to use their balance sheets to lend directly to the private sector leaving the central bank to concentrate on government bond issuance. The ECB has not followed this model. They are instead providing no new capital to the banks via a euro ‘tarp’ program. And, although providing liquidity they are leaving the euro banks the responsibility to use every % of their extended balancesheets to continue to purchase euro government bonds. Given 1) The disasterous position of the euro bank’s balancesheets due to lending practices 2) Euro deposit drawdowns which are increasing 3) Continued enormous deficits across the euro zone.. this is clearly no solution, at all.
Issue one above we understand. The banks lent too much money to too many capital lite projects across consumer and corporates alike. They spread themselves too thinly in the boom days. They werent prepared for any fall in asset prices and rest is history. As this recession continues we now find the euro banks are being threatened not only by the consumer and commercial assets on their books but additionally now by a decline in deposits.
http://www.worldcrunch.com/new-signs-invisible-bank-run-southern-europe-cash-shifts-scandinavia/4223
A decline in deposits threatens the whole shooting match for euro zone banking system. Capital controls have been used many times before to limit such instances of capital flite and i would suspect new rules are being discussed in this respect as i type this note. Financial repression demands that private capital is stolen by the state in the name of the wider good and reallocated for all our mutual benefit. History of course suggests that it never does any good and is simply misallocated towards friends and family of those that get to allocate this stolen capital. Thats the history but who knows maybe this occasion our wise leaders will do a better job.
Savings rates remain high across Europe. Every year around 12% on average of GDP is saved. Spanish savings rates are the second highest in europe after France. At circa 15% of GDP a year spanish bank’s capital problems should be solved very quickly in theory. Given 92% leverage through the banking system vast amounts of debt can be added on minimal savings. What is vital is that these savings remain in the euro banking system and do not escape to other banking juristictions. Here Italy imposing 1000 euro maximum cash payments. Anything more than 1000 euros in cash has been made illegal in Italy.
http://www.reuters.com/article/2011/12/04/italy-idUSL5E7N40CB20111204
Cash must be recorded for tax and capital reasons. I.E. cash held personally will not assist the bank’s capital ratios. Similar measures will be implemented across the developed world.
And here below the latest data from Spain and Italy provides more evidence of this deposite flite as well as the deleveraging gorilla:
Spain’s deposits must be watched. A decline sept from aug should be expected, even seasonally adjusted. But if this is sustained given such a high spanish savings rate this would be disasterous. From a wider perspective, we can see, consumer and corporate debt declines as deposits decline as government debt continues to increase. The private sectors decline as government expands. Bank’s and insurance companies balance sheets increase their exposures to government debts as they decline their lending to the private sector. The central banks extend almost free money to encourage banks to leverage their balance sheets to the maximum levels in order to increase lending to governments squeezing out private sector lending. Most certainly this is the road to serfdom that Hayek wrote about so clearly in 1947. The private sector creates wealth not governments therefore such policies as we are following, over the coming years, will lead to the greatest decline in living standards this century.
Here the latest eurozone lending figures.. another contraction following the script perfectly of cheap and expanding loans to governments vs more expensive and contracting loans to the private sector.
Any discussion of this developed world policy trend towards beaurocratic central management and planning must include the Japanese economy.
A good article here on Financial Sense. http://www.financialsense.com/contributors/kieran-osborne/japanese-yen-a-red-dawn
And here the latest budget care of Bloomberg: http://www.bloomberg.com/news/2011-12-24/japan-budget-s-dependence-on-debt-sales-to-rise-to-record-next-fiscal-year.html
When 50% of your public expenditure is debt you have to start looking for the life boats i would suggest. In fairness, many have been looking at these statistics inc Hugh Hendry and others for many years. Japan has stumbled on as other more pressing issues on the global stage has stolen the spot light. The situation keeps weakening however year on year. This year we see a continuation of last year’s theame. I.e. the great Japanese saver that has yoy funded his government has finally turned into a net seller. In 2011 Japanese households became net sellers and at a surprisingly large level scoring a net -13.5% yoy JGBs. As the baby boomers hit retirement their holdings of government paper will have to be liquidated. The pool of capital will be consumed for retirement purposes. The death nail of all ponzi schemes is when investors try and realize the paper value of their capital. The process has started is all we can say. For now, the BOJ qe program as well as overseas buyers and domestic banks came forward to mop up the ever increasing Japanese debt mountain as the economy declines.
http://www.bloomberg.com/news/2011-12-27/japan-factory-output-falls-on-global-slump.html
Interest rates cannot rise in Japan as if they were to rise the government would quickly become insolvent. Capital flite from Japan is also systemically impossible. When inflation starts to show in Japan the situation would quickly become unmanageable. Capital repression will have to exercised on her people on a way that is unimaginable now.
It seems the entire developed world has all her guns pointing at the deflationary gorilla. When the gorilla dies there will be no cause to celebrate. The damage caused by inflation will be even worse. A case of lurching from the frying pan into a fire.
The Santa magic saved many asset markets and will still doubtless allow some to record a positive number for the year. But with so many problems around us the 1000 pound gorilla looks pretty formidable for now. Only continued and ever more extreme central banks actions will prevent asset markets from tumbling. Long USD, hedges for high yielders inc investment grade corp debt are the assets to hold. The gorilla will be defeated but for now he reigns supreme is my view. Technical comments another day.
Rich
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