Monday, April 30, 2012
April 30, 2012 The Secrets of the Spanish Banking System That 99% of Analysts Fail to Grasp
Spain is a catastrophe on such a level that few analysts even grasp it.
Indeed, to fully understand just why Spain is such a catastrophe, we need to understand Spain in the context of both the EU and the global financial system.
The headline economic data points for Spain are the following:
- Spain's economy (roughly €1 trillion) is the fourth largest in Europe and the 12th largest in the world.
- Spain sports an official Debt to GDP of 68% and a Federal Deficit between 5.3-5.8% (as we'll soon find out the official number)
- Spain's unemployment is currently 24%: the highest in the industrialized world.
- Unemployment for Spanish youth is 50%+: on par with that of Greece
The answer to these questions lies within the dirty details of Spain's economic "boom" of the 2000s as well as its banking system.
For starters, the Spanish economic boom was a housing bubble fueled by Spain lowering its interest rates in order to enter the EU, not organic economic growth.
Moreover, Spain's wasn't just any old housing bubble; it was a mountain of a property bubble (blue line below) that made the US's (gray line below) look like a small hill in comparison.
In the US during the boom years, it was common to hear of people quitting their day jobs to go into real estate. In Spain the boom was so dramatic that students actually dropped out of school to work in the real estate sector (hence the sky high unemployment rates for Spanish youth).
Spanish students weren't the only ones going into real estate. Between 2000 and 2008, the Spanish population grew from 40 million to 45 million (a whopping 12%) as immigrants flocked to the country to get in on the boom.
In fact, from 1999 to 2007, the Spanish economy accounted for more than ONE THIRD of all employment growth in the EU.
This is Spain, with a population of just 46 million, accounting for OVER ONE THIRD of the employment growth for a region of 490 million people.
This, in of itself, set Spain up for a housing bust/ banking Crisis worse than that which the US faced/continues to face. Indeed, even the headline banking data points for Spain are staggeringly bad:
- Spanish banks just drew €227 billion from the ECB in March: up almost 50% from its February borrowings
- Spanish banks account for 29% of total borrowings from the ECB
- Yields on Spanish ten years are approaching 7%: the tipping point at which Greece and other nations have requested bailouts
Spain's banking system is split into two tiers: the large banks (Santander, BBVA) and the smaller, more territorial cajas.
The caja system dates back to the 19th century. Cajas at that time were meant to be almost akin to village or rural financial centers. As a result of this, the Spanish country is virtually saturated with them: there is approximately one caja branch for every 1,900 people in Spain. In comparison there is one bank branch for every 3,130 people in the US and one bank branch for every 6,200 people in the UK.
Now comes the bad part...
Until recently, the caja banking system was virtually unregulated. Yes, you read that correctly, until about 2010-2011 there were next no regulations for these banks (which account for 50% of all Spanish deposits).
They didn't have to reveal their loan to value ratios, the quality of collateral they took for making loans... or anything for that matter.
As one would expect, during the Spanish property boom, the cajas went nuts lending to property developers. They also found a second rapidly growing group of borrowers in the form of Spanish young adults who took advantage of new low interest rates to start buying property (prior to the housing boom, traditionally Spanish young adults lived with their parents until marriage).
In simple terms, from 2000 to 2007, the cajas were essentially an unregulated banking system that leant out money to anyone who wanted to build or buy property in Spain.
Things only got worse after the Spanish property bubble peaked in 2007. At a time when the larger Spanish banks such as Santander and BBVA read the writing on the wall and began slowing the pace of their mortgage lending, the cajas went "all in" on the housing market, offering loans to pretty much anyone with a pulse.
To give you an idea of how out of control things got in Spain, consider that in 1998, Spanish Mortgage Debt to GDP ratio was just 23% or so. By 2009 it had more than tripled to nearly 70% of GDP. By way of contrast, over the same time period, the US Mortgage Debt to GDP ratio rose from 50% to 90%. Like I wrote before, Spain's property bubble dwarfed the US's in relative terms.
The cajas went so crazy lending money post-2007 that by 2009 they owned 56% of all Spanish mortgages. Put another way, over HALF of the Spanish housing bubble was funded by an unregulated banking system that was lending to anyone with a pulse who could sign a contract.
Indeed, these banks became so garbage laden that a full 20% of their assets were comprised of loan payments being made by property developers. Mind, you, I'm not referring to the loans themselves (the mortgages); I'm referring to loan payments: the money developers were sending in to the banks.
To try and put this into perspective, imagine if Bank of America suddenly announced that 20% of its "assets" were payments being sent in by borrowers to cover mortgage debts. Not Treasuries, not mortgages, not loans... but payments being sent in to the bank on loans and mortgages.
This is the REAL problem with Spain's banking system. It's saturated with subprime and sub-subprime loans that were made during one of the biggest housing bubbles in the last 30 years.
Indeed, to give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish Government implemented legislation demanding all Spanish banks have equity equal to 8% of their "risk-weighted assets." Those banks that failed to meet this requirement had to either merge with larger banks or face partial nationalization.
The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number of cajas has in Spain has dropped from 45 to 17.
Put another way, over 60% of cajas could not meet the capital requirements of having equity equal to just 8% of their risk-weighted assets. As a result, 28 toxic caja balance sheets have been merged with other (likely equally troubled) banks or have been shifted onto the public's balance sheet via partial nationalization.
On that note, I fully believe the EU in its current form is in its final chapters. Whether it's through Spain imploding or Germany ultimately pulling out of the Euro, we've now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren't any funds or entities large enough to handle these issues.
Labels: collapse, Crash, credit, Crisis Crash, Default, depression, Euro default, Euro finished, Spain
Thursday, April 19, 2012
Forget Today's Bond Auction, Spain is an Absolute Disaster
Well the financial world is awash with reports that the Spanish auctions went well. They did not. And you better believe the ECB and other Central Banks were involved in the buying.
Instead, Wall Street is using the auction (and just about every other announcement this morning) to shred and those who sold calls in their usual options expiration games. This has been the norm for years, but the mainstream financial media continues to find "fundamental" excuses for market action that is clearly just manipulation and nothing more.
Case in point, if the Spanish auction went so well, why are Spanish Credit Default Swaps widening? Ditto for Spanish yields (the ten year is back closing in on 6%)!
However, ultimately this auction means next to nothing. Spain is an absolute disaster on a level that few if any analysts can even grasp.
How else do you describe a country for which:
Total Spanish banking loans are equal to 170% of Spanish GDP.
Total Spanish private sector debt is near 300% of GDP.
Troubled loans at Spanish Banks just hit an 18-year high of over 8%.
Spanish Banks are drawing a record €316.3 billion from the ECB (up from €169.2 billion in February).
By the way, Spanish banks need to roll over 20% of their bonds this year too. Good luck with that. I'm sure it will all work out well. After all, the ECB and IMF have the funds to prop up Spain's €1 trillion economy.
Oh wait, they don't. In fact no one does. The IMF's requests for more funds have been rejected by both the US and Canada (you really think Obama will fund a European bailout during an election year?). And the ECB has already blown up its balance sheet to the point that Germany and the ECB are growing hostile to each other (I'm sure this will work out well too).
Forget today's auction and the spin being thrown about. Spain is a disaster. Its banking system is a sewer of toxic debts which the Spanish Government has attempted to fix by either merging insolvent banks together or spreading toxic garbage onto the public's balance sheet.
This might fly in the US (or has least has so far) where the economy is more robust and diversified than in Spain. But for a country whose housing bubble dwarfed that of the US and which is already posting unemployment of 24% (the highest in the industrialized world) and youth unemployment of 50%+, it's a tough sell.
Oh, and Spain's King decided to take time off from hearing about the Crisis to go elephant hunting. That should go over well with the Spanish populace, which is now facing austerity measures when the country is already in a Depression.
Just wait, once options expiration ends, we'll be back to the fireworks. In fact, smart investors should take advantage of this ramp job to prepare for what's coming.
Labels: bailout, Banking crisis, Crash, Default, depression, Spain, toxic debts
Wednesday, April 11, 2012
Europe Will Collapse in May-June
Starting back in August, I began suggesting that we were approaching a Systemic Crisis/ Crash scenario in the markets.
The technical and fundamentals both supported this forecast, but I completely underestimated the degree to which the Central Banks and EU would attempt to prop up the market.
At that time, I thought it likely we'd see a Crash, which would then be met with another round of stimulus, which would push the economy temporarily into the green. It seemed the most logical outcome given that we were heading into an election year with a President whose ratings were at record lows.
Instead, the Federal Reserve, particularly those Fed Presidents from Financial Centers (Charles Evans of Chicago and Bill Dudley of New York) began a coordinated campaign of verbal intervention, hinting that more easing or QE was just around the corner.
These verbal interventions coincided with coordinated monetary interventions between the Federal Reserve and other world Central Banks: first on September 15 2011 and again on November 30 2011.
The effects of both coordinated moves were short-lived in terms of equity prices, but they did send a message that the Central Banks were willing to intervene in a big way to maintain the financial system. This in turn helped to ease interbank liquidity problems in Europe (more on this in a moment) and maintain the belief that the Fed backstop or "Bernanke Put" was still in effect.
Another issue that served to push the markets higher was European leaders' decision to go "all in" on the EU -bail out project. I've tracked those developments closely in previous articles.
Regarding this factor, I also underestimated the extent to which leaders would push to hold things together. After all, Greece had already received bailouts in excess of 150% of its GDP and still posted a GDP loss of 6.8% in 2011. It's hard to believe they'd want to accept more austerity measures and more debt.
Moreover, political tensions between Greece and Germany had reached the point that Greeks were openly comparing German Chancellor Angela Merkel and Finance Minister Wolfgang Schauble as Nazis while the Germans referred to Greece as a "bottomless hole" into which money was being tossed.
Looking back on it, the clear reality was that Germany wanted to force Greece out of the EU but didn't want to do it explicitly: instead they opted to offer Greece aid provided Greece accepted austerity measures so onerous that there was no chance Greece would go for it.
Well, Greece surprised many, including myself, and went for it. And so the EU experiment continues to exist today. However, before the end of this issue I will make it clear precisely why this will not be the case for much longer and why we are on the verge of a systemic collapse in Europe.
For starters, unemployment in Greece as a whole is now over 20%. For Greek youth (aged 15-24) it's over 50%. The country is in nothing short of a Depression.
Indeed, Greece has now experienced five straight years of contraction bringing the total contraction of Greece's GDP to 17%. To provide some historical perspective here, when Argentina collapsed in 2001 its total GDP collapse was 20% and this was accompanied by full-scale defaults as well as systemic collapse and open riots.
With new austerity measures now in place there is little doubt Greece will see a GDP contraction of 20%, if not more. I expect we'll see other "Argentina-esque" developments in the country as well. Put mildly, the Greek issue is not resolved.
The one thing that would stop me here would be if Greece staged a full-scale default. While the political leaders and others view a total default as a nightmare (and it would be for Greek pensions, retirees, and many EU banks), it is only a total default that could possibly solve Greece's debt problems and allow it to return to growth.
Defaults are akin to forest fires; they wipe out all the dead wood and set the stage for a new period of growth. We've just witnessed this in Iceland, which did the following between 2008 and 2011:
- Had its banks default on $85 billion in debt (the country's GDP is just $13 billion).
- Jailed the bankers responsible for committing fraud during the bubble.
- Gave Icelandic citizens debt forgiveness equal to 13% of GD.
Today, just a few years later, Iceland is posting GDP growth of 2.9%: above that of both the EU and the developed world in general. In plain terms, the short-term pain combined with moves that reestablished trust in the financial system (holding those who broke the law accountable) created a solid foundation for Iceland's recovery.
Now, compare this to Greece which has "kicked the can" i.e. put off a default, for two years now, dragging its economy into one of the worst Depressions of the last 20 years, while actually increasing its debt load (this latest bailout added €130 billion in debt in return for €100 billion in debt forgiveness).
Iceland staged a REAL default, and has returned to growth within 2-3 years. Greece and the Eurozone in general have done everything they can to put off a REAL default with miserable results. I'll let the numbers talk for themselves:
| Country | 2011 GDP Growth | 2012 GDP Growth Forecast |
| Iceland | 2.9% | 2.4% |
| EU (all 27 countries) | 1.5% | 0.0% |
| 17 EU countries using Euro | 1.4% | -0.3% |
* Data from EuroStat
The point I'm trying to make here is that defaults can in fact be positive in the sense that they deleverage the system and set a sound foundation for growth. The short-term pain is acute (Iceland saw its economy collapse 6.7% in 2009 when it defaulted). However, a combination of defaulting and debt forgiveness (for households) can restructure an economy enough for it to begin growing again.
However, EU leaders refuse to accept this even though the facts are staring them right in the face. The reason is due to one of my old adages: politics drives Europe, NOT economics.
And thanks to the Second Greek Bailout (not to mention the talk of a potential Third Bailout which has already sprung up), we now know that EU leaders have chosen to go "all in" on the EU experiment.
Put another way, EU leaders will continue on their current path of more bailouts until one of two things happens:
1) The political consequences of maintaining this strategy outweigh the benefits
2) The European markets force EU leaders' hands (hyper-inflation or widespread defaults and the break up the EU).
Regarding #1, this process is already well underway for those countries needing bailouts. Investors must be aware that the Governments of Ireland, Portugal, Spain, and Italy have all watched/are watching the Greece situation closely.
Moreover we can safely assume that the topic of defaulting vs. asking for bailouts in return for austerity measures has been discussed at the highest levels of these countries' respective Governments (more on this in a moment).
These discussions are also underway at those countries that are providing bailout funds. German politicians have won major political points with German voters for playing hardball with Greece. As I've stated before Germany may in fact be the country that ends up walking if EU continues down its current path of bailout madness.
With that in mind, there are three key political developments coming up.
1) Ireland's upcoming referendum
2) Greece's upcoming election
3) France's upcoming elections (April and May)
Regarding #1, Ireland will be staging a referendum regarding the new fiscal requirements of the EU sometime before October. While the actual date has yet to be set, Ireland will likely stage its referendum after the French elections in (April and/or May... more on this in a moment).
Ireland has already staged two referendums which Irish citizens voted AGAINST until various concessions were made. This time around the primary concession being discussed is potential debt forgiveness (the country definitely needs it). Indeed, according the Boston Consulting Group, Ireland needs to write-off some €340 billion in debt just to make its debt levels "sustainable."
So Ireland could easily be a wildcard here. The country is already in recession. So we need to monitor developments there as this referendum could go very, very wrong for the EU.
However, the BIG election of note is that of France where the current frontrunners are Nicolas Sarkozy (Angela Merkel's right hand man in trying to take control of the EU) and super-socialist François Hollande.
A few facts about Hollande:
1) He just proposed raising tax rates on high-income earners from 41% to 75%.
2) He wants to lower the retirement age to 60.
3) He completely goes against the recent new EU fiscal requirements Merkel just convinced 17 EU members to agree to and has promised to try and renegotiate them to be looser.
Currently polls have Sarkozy and Hollande securing the top slots in the first round of the election on April 22. This would then lead to a second election in May which current polls show Hollande winning (this has been the case in all polls for over two months).
However, there's now another leftist wildcard coming into the mix: communist Jean-Luc Mélenchon who is now taking 11% in the polls (he was at 5% last month). And Mélenchon's primary campaign message? Rejecting austerity measures completely via "civic uprising."
Now, Mélenchon could end up taking votes away from Hollande therby allowing Sarkozy to win. It's difficult to say how this will play out. But if Sarkozy loses to either of these candidates, then the EU in its current form will crumble as Germany loses its principle ally in pushing for fiscal reform and austerity measures.
Finally, let's not forget Greece where politicians are now pushing for an election on April 29 or May 6 (the Second Bailout was passed based on new parliamentary elections being held soon after).
This could be yet another wildcard as it is around the time of the French elections, which Greek politicians will be watching closely. Remember, the key data points regarding Greece's economy:
1) A 20% economic contraction over the last five years
2) Unemployment north of 20% and youth unemployment over 50%
3) Unfunded liabilities equal to 800% of GDP courtesy of an aging population and shrinking working population (which is shrinking all the time as youth leave the country in search of jobs)
These facts will not play out in a victory for "pro-bailout" politicians. So the Greece deal, which is supposed to solve Greece's problems, could actually be in danger based on a change in politics.
Remember, as stated before, politics rule Europe, not economics. And Europe now appears to be shifting towards a more leftist/ anti-austerity measure political environment. If this shift is cemented in the coming Greek, French, and Irish elections/ referendums, then things could get ugly in the Eurozone VERY quickly.
That's the political analysis of Europe. Now let's take a look at what the various EU economies/ markets are telling us.
Spain's current economic condition matches that of Greece... and it hasn't even begun to implement aggressive austerity measures. Unemployment is already 20+% without any major austerity measures having been put in place.
Anecdotal reports show Spain to be an absolute disaster. Spanish banks GREATLY underplay their exposure to the Spanish housing market ("officially" prices are down 20% but most likely it's a lot more than that).
In simple terms, things are getting worse and worse in Spain... and the market knows it. Indeed, the charts of most EU indexes, particularly Spain, are telling us in no uncertain terms that the markets are expecting a truly horrific collapse sometime in the not so distant future. Timing this precisely is difficult but the window between May-June is the most likely time, as it will coincide with:
1) The end of seasonal buying (November-May)
2) The French, Greek, and Irish elections/ referendums all of which could go very wrong for the EU (April-May)
3) The end of the Fed's Operation Twist 2 Program (June).
Now, having said all of this I have to admit I have been very early on my call for a Crash. I'm fine with admitting that. Calling a crash is difficult under normal conditions, let alone in a market that is as centrally controlled as this one.
Indeed, going back to March 2009, it is clear that the Fed has been the ONLY prop under the markets as QE 1, QE lite & QE 2, and now Operation Twist 2 have all been announced any time stocks staged a sizable correction (15+%).
In fact, on a weekly chart of the S&P 500 going back four years, we find two items of note:
1) The Fed will only tolerate a 15% drop or so in stocks before it announces a new monetary program
2) Each successive Fed program has had a smaller and smaller impact on stock prices (QE 1: 44%, QE 2 and QE lite: 33%, Operation Twist 2: 22%).
Aside from these monetary interventions, we also have to deal with the Fed's verbal interventions: every time stocks start to break down some Fed official (usually Charles Evans or Bill Dudley) steps forward and promises more easing... or the Fed releases some statement that it will maintain ZIRP an additional year... and VOOM! stocks are off to the races again.
With that in mind, I will admit I've been caught into believing a Crash was coming several times in the last few years. In some ways I was right: we got sizable corrections of 15+%. But we never got the REAL CRASH I thought we would because the Fed stepped in.
So what makes this time different?
Several items:
1) The Crisis coming from Europe will be far, far larger in scope than anything the Fed has dealt with before.
2) The Fed is now politically toxic and cannot engage in aggressive monetary policy without experiencing severe political backlash (this is an election year).
3) The Fed's resources are spent to the point that the only thing the Fed could do would be to announce an ENORMOUS monetary program which would cause a Crisis in of itself.
Let me walk through each of these one at a time.
Regarding #1, we have several facts that we need to remember. They are:
1) According to the IMF, European banks as a whole are leveraged at 26 to 1 (this data point is based on reported loans... the real leverage levels are likely much, much higher.) These are a Lehman Brothers leverage levels.
2) The European Banking system is over $46 trillion in size (nearly 3X total EU GDP).
3) The European Central Bank's (ECB) balance sheet is now nearly $4 trillion in size (larger than Germany's economy and roughly 1/3 the size of the ENTIRE EU's GDP). Aside from the inflationary and systemic risks this poses (the ECB is now leveraged at over 36 to 1).
4) Over a quarter of the ECB's balance sheet is PIIGS debt which the ECB will dump any and all losses from onto national Central Banks (read: Germany)
So we're talking about a banking system that is nearly four times that of the US ($46 trillion vs. $12 trillion) with at least twice the amount of leverage (26 to 1 for the EU vs. 13 to 1 for the US), and a Central Bank that has stuffed its balance sheet with loads of garbage debts, giving it a leverage level of 36 to 1.
And all of this is occurring in a region of 17 different countries none of which have a great history of getting along... at a time when old political tensions are rapidly heating up.
Labels: Banking crisis, Crash, Default, depression, Greece, Spain
Monday, April 09, 2012
We Are Nearing the End Game of Central Bank Intervention
Because of a lack of foreign interest in long-term Treasuries, the Fed decided to step in to pick up the slack. As a result of this, the US Federal Reserve has accounted for 91% of all new debt issuance in the 20+years bracket. Put another way, the US Federal Reserve is now effectively the long-end of the US debt market.
Operations Twist 2 has also allowed US commercial banks to unload their long-term Treasury holdings in exchange for new capital: something most of the Primary Dealers are in dire need of. This in turn helps to explain why the US stock market has advanced despite the fact that retail investors have been pulling out of the market in droves.
Put another way, the markets have been ramped higher by more juice from the Fed (and corporate buybacks). However, the fact remains that this juice has come from the Fed reallocating its current portfolio holdings, NOT printing more money outright to monetize US debt via QE.
So while the media and 99% of analysts believe the Fed is and can continue to act aggressively to prop up the markets, the fact is that the Fed has been reining in its monetary stimulus over the last nine months, largely relying on verbal intervention from Fed Presidents to push stocks higher.
We have known this for some time. But the general public and financial media are only just starting to realize that the Fed, in some ways, is at the end of its rope in terms of monetary intervention. This has become increasingly clear in the Fed FOMC statements.
Consider the latest FOMC statement released last week...
Fed Signals No Need for More Easing Unless Growth Falters
The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target.
"A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below" 2 percent, according to minutes of their March 13 meeting released today in Washington. That contrasts with the assessment at the FOMC's January meeting in which some Fed officials saw current conditions warranting additional action "before long."
Ignore the verbal obfuscation here. The Fed knows that inflation is higher than 2%. It also knows that US growth is faltering. The above announcement is the Fed essentially admitting its hands are tied regarding more easing due to:
- Gas being at $4 and food prices not far from record highs.
- This being an election year and the Fed now politically toxic.
- Growing public outrage over the Fed's actions (secret loans, etc.) in the past.
Again, we are in a process of slow awakening to the fact that the Fed has not solved the problems that caused 2008. Instead, the Fed has exacerbated these problems (excess leverage) and created new problems in the process (inflation).
Fortunately for the Fed, the European Central Bank has picked up the intervention slack since the Fed began pulling back in mid-2011. Indeed, between July 2011 and today, the ECB has expanded its balance sheet by an incredible $1+ trillion: more than the Fed's QE 2 and QE lite combined (and in just a nine month period).
The two largest interventions were the ECB's LTRO 1 and LTRO 2, which saw the ECB handing out $645 billion and $712 billion to 523 and 800 banks respectively.
As a result of this, the ECB's balance sheet exploded to nearly $4 trillion in size, larger than the GDPs of Germany, France, or the UK.
This rapid and extreme expansion of the ECB's balance sheet (again it was greater than QE lite and QE2 combined... in nine months) indicates the severity of the banking crisis in Europe. You don't rush this much money out the door this fast unless you're facing something very, very bad.
This rapid expansion has also resulted in the ECB obtaining a similar political toxicity to that of the US Federal Reserve. Indeed, those European banks that participated in the LTRO schemes have found their Credit Default Swaps exploding relative to their non-LTRO participating counterparts.
The reason for this is obvious: any bank that participated in either LTRO implicitly announced that it was in dire need of capital. As a result of this the markets have stigmatized those banks that participated in the schemes, thereby:
1) Diminishing the impact of the ECB's moves.
2) Indicating that the ECB is now politically toxic in that those EU financial institutions that rely on it for help are punished by the markets.
In simple terms, the Fed's hands are tied and the ECB is out of ammo. The End Game for Central Bank intervention is approaching. And it won't be pretty... First Europe. Then Japan. Then the US. The Debt Implosion will spread throughout the global financial system.
If you're not already taking steps to prepare for the coming collapse, you need to do so now.
Labels: Banking crisis, Collaps, Crash, Default, depression
Thursday, March 15, 2012
The Big Fat Greek Lie Is Now Obvious to Spain... So Who's Next to Default?
The big fat Greek lie being spread throughout the financial community is that "Greece has been saved". It's a lie for the following reasons:
1) Greece did in fact default.
2) Greece now has more debt than it did before the bailout (how does writing off €100 billion Euros in debt and taking on €130 billion Euros in more debt improve this situation?)
3) The Greek economy continues to implode (youth unemployment over 50%, one in ten Greek youth looking for jobs abroad, Greek GDP fell 7% in 4Q11)
4) This Second Bailout was indeed a "Credit event" which the markets have yet to discount (though German investors are already lining up litigation)
5) Germany's finance minister has already admitted Greece may need a third bailout.
Anyone who thinks that Greece is better off, let alone "saved" is out of their minds. The Euro may have been saved for a few more weeks/ months. But Greece is in worse shape than ever.
Indeed, if anything, the Greek situation has made it clear that the whole "give up fiscal sovereignty and implement austerity measures in exchange for bailouts" formula is a waste of time and money. Let's take a look at the progression here.
1) Greece claims it doesn't need a bailout at all (January 2010-March 2010)
2) Greece begins to ask for a bailout (April-May 2010)
3) Greece gets a bailout equal to 57% of its GDP (May 2010)
4) Greece posts a GDP of -4% in 2010
5) Greece announces it won't be able to meet budget requirements/ payback the first bailout on time and asks for an extension (January-February 2011)
6) Greece asks for another extension (May 2011)
7) Talk of Second Greek Bailout begins (July -October 2011)
8) Greece posts a GDP of -6.5% in 2011
9) Second Greek bailout announced/ finalized (February/March 2012)
10) Talk of third Greek bailout begins (March 2012)
No other EU country could look at this progression and think "this looks like a good approach." Indeed, Spain and Italy must be watching what's happening in Greece and asking themselves whether they want to go through this whole process of negotiating for bailouts via austerity measures or not?
Labels: Crash, crisis, Debt crisis, depression, Euro Collapse, Greece, Greece bailout
Friday, March 09, 2012
Mr. Market: Get It Through Your Head, The PSI DOESN'T Matter
I don't know how many times I have to say this, but I'm saying it again.
Greece and the Euro are finished. The math is impossible. There is no way on earth that this Second Bailout accomplishes anything worthy of note. The idea that this country will somehow return to economic growth within two years, based on an additional €130billion in bailouts is outright insane.
Remember, Greece already received €110 billion in bailout funds in 2010... and still posted GDP growth of -4.5% in 2010 and -6.8% in 2011. Greece's economy is only €227 billion, so the country failed to post any economic growth and in fact saw its economic collapse accelerate after receiving a bailout equal to 57% of its GDP!!!
And somehow another 130€ billion is going to get this country back to economic growth in two years' time? Greece hasn't experienced any growth in five years.
Again, this entire deal is just stupid. And all it's done is alert Spain and Italy to the fact that handing over fiscal sovereignty and implementing austerity measures in exchange for bailouts is a waste of time.
As I wrote several weeks ago:
Meanwhile, on the other side of EU equation, Spain and Italy must be watching what's happening in Greece and asking themselves whether they want to go through this whole process of negotiating for bailouts via austerity measures.
Both countries have already had a small sampling of the austerity measure medicine. Spain recently implemented a meager 19€ billion in austerity measures while Italy passed 30€ billion in austerity measures in 2011... hardly a drop out of their respective 1.06€ trillion and 1.5€ trillion economies.
Yet, even these tiny moves resulted in protests and riots. One can only imagine what Spanish and Italian politicians are thinking as they witness the widespread civil unrest, country-wide strikes, and economic depression that have occurred in Greece as a result of that country's full commitment to the EU's austerity measure demands.
Spain's official Debt to GDP is only 64%, but its private sector debt is at an astounding 227% of GDP. And the Spanish banking system is leveraged at 19 to 1 (worse than Greece).
Moreover, the country is already experiencing an economic Crisis with an unemployment rate of 20+% and an economy that has been contracting since mid-2011 (in fact Spain's GDP just actually went negative in the first quarter of 2012)...
So... we must consider that it is highly likely the option of simply defaulting is being discussed at the highest levels of the Spanish and Italian government. Should either country decide that austerity measures don't work and it's simply easier to opt for a default, then we are heading into a Crisis that will make 2008 look like a joke.
Well, Spain just woke up and smelled the coffee:
Spain's sovereign thunderclap and the end of Merkel's Europe
As many readers will already have seen, Premier Mariano Rajoy has refused point blank to comply with the austerity demands of the European Commission and the European Council (hijacked by Merkozy).
Taking what he called a "sovereign decision", he simply announced that he intends to ignore the EU deficit target of 4.4pc of GDP for this year, setting his own target of 5.8pc instead (down from 8.5pc in 2011).
In the twenty years or so that I have been following EU affairs closely, I cannot remember such a bold and open act of defiance by any state. Usually such matters are fudged. Countries stretch the line, but do not actually cross it.
With condign symbolism, Mr Rajoy dropped his bombshell in Brussels after the EU summit, without first notifying the commission or fellow EU leaders. Indeed, he seemed to relish the fact that he was tearing up the rule book and disavowing the whole EU machinery of budgetary control.
So... if you still think the Greek PSI matters in any way, you're not thinking past the next 24 hours. Spain has just told the EU to "shove it." Having seen Greece enter a depression and get pushed around by Germany and France for two years, Spain's just told the EU that it's not going that route.
So... if Greece, whose economy is roughly the size of Massachusetts, nearly took down the European banking system... what do you think will happen when Spain decides to it doesn't want to play ball and would rather just default.
Hint: It will be Lehman times ten.
Labels: Crash, Crisis Crash, Default, depression, Euro Collapse
Monday, March 05, 2012
You Cannot Build a Strong Economy or a Bull Market on Fudged Numbers and Lipstick
Let's say that you just spent a large sum, to the tune of several trillion Dollars, bailing out various businesses that were literally run into insolvency by shortsighted and greedy business practices.
Having spent this money, your next concern becomes avoiding popular outrage as sooner or later folks will find out that this money was practically given away and that everyone else got a raw deal.
So, at that point your primary focus must become convincing the world that your policies worked and that you did in fact save the world.
How do you do this?
1) The businesses you bailed out need to appear successful and profitable again
2) The economy you "saved" needs to look to be in recovery
This is precisely the blueprint for what the Powers That Be have followed post 2009.
Regarding the bailed out businesses, the large banks are posting great profits by writing down bonds they own (and recording this as a profit) and by lowering loss reserves.
Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $26.3 billion in the fourth quarter of 2011, a $4.9 billion improvement from the $21.4 billion in net income the industry reported in the fourth quarter of 2010. This is the 10th consecutive quarter that earnings have registered a year-over-year increase. As has been the case in each of the past nine quarters, lower provisions for loan losses were responsible for most of the year-over-year improvement in earnings...
Fourth-quarter loss provisions totaled $19.5 billion, about 40 percent less than the $32.7 billion that insured institutions set aside for losses in the fourth quarter of 2010. Net operating revenue (net interest income plus total noninterest income) was $3.8 billion (2.3 percent) lower than a year earlier, due to a $4.4 billion (7.4 percent) decline in noninterest income.
http://www.fdic.gov/news/news/
Nevermind that most of these profits are illusory and that the policies used to create them (not thinking ahead but focusing on the near-term) are precisely what caused the 2008 Crisis. As long as headlines ready "great profits" all will be well.
Then of course there's General Motors, the other bailout darling.
GM's Crowded Truck Stop
A year ago today analysts rained on General Motors' parade. Wall Street's finest pointed out that GM's strong February 2011 sales were boosted by extremely generous incentives to customers. These turned out to be wholly unnecessary too: Japan's earthquake 10 days later wrecked competitors' supply chains. U.S. carmakers gained market share, slashing inventory and making record profits with solid pricing over the next several months.
While not wishing natural disasters on anyone, GM could use a deus ex machina of some sort this year. Not only did it lag every major carmaker last month with a mere 1.1% U.S. sales gain (fellow bankruptcy victim Chrysler notched 40%). But GM's dealer inventories are also at a post-bankruptcy record of 667,000 vehicles, up 29% versus a year ago and 59% compared to two years ago.
And it's the wrong sort of inventory to boot: With pump prices surging, GM has 116 selling days' worth of trucks gathering dust. Zero percent financing, anyone?
http://blogs.wsj.com/
In this situation, GM is seeing some sales growth, though it's the worst of any major carmaker. However, what the company is really excelling at is delivering cars to dealers, in a sense, maintaining the appearance of economic growth, when in reality the cars are just sitting on the lots unsold.
Here again, the "success" is illusory in nature.
As for the other issue, (making the economy you "saved" look like it's in recovery), you've got Government bean-counters with an entire arsenal of seasonal adjustments and other accounting gimmickry to make the economy look far better off than it really is.
Case in point, the BLS claims we ADDED 243,00 jobs in January. That's an odd claim given that the BLS admits, in the very same report, that without adjustments, the US actually LOST 2.69 MILLION jobs in January.
This is roughly a discrepancy of 3 MILLION jobs. And this 243,000 jobs number for January also comes along with upward revisions that saw roughly 50,000 jobs added in both October and November.
So according to the BLS, the US is on the upswing again, maybe not in a HUGE way, but overall things are improving: we're adding jobs and unemployment is falling (from 8.5% to 8.3%).
In the end, both policies (making the bailed out businesses look successful and the economy strong) essentially boil down to fudging the numbers. And whether or not people fully understand these issues, most Americans have a sense that the Government is lying to them about the "success" of the 2008 bailouts and the recovery.
Put another way, most Americans know that all this talk of recovery is just putting lipstick on a pig. They know that the economic reality facing the US is in fact far worse than the numbers claim. Heck, it's the people are on unemployment, food stamps, and are unable to find jobs that know the real situation in the US.
An equally dangerous problem is the fact that professional investors (institutions, hedge funds, traders) are investing based on this fudged data. We've already seen how this kind of situation plays out before (2007-2008). What happens when the REAL situation in the economy and the financial system comes home to roost? What happens when Americans' retirement accounts get decimated by yet another collapse as most asset managers and financial advisors have yet to even regain their 2008 losses.
Big hint: it won't be pretty.
Make no mistake, the entire "success" of the 2008-2009 bailouts and stimulus is just a mirage. And the people simply aren't buying it. Which is why they're pulling their money from the markets en masse (investors pulled $132 billion from Us-stock based mutual funds in 2011, that's only $15 billion short of the record amount they pulled in 2008).
Labels: Collaps, crisis, Default, depression
Tuesday, February 14, 2012
The Triumvirate of Wall Street/ The Fed/ and the White House is Beginning to Crumble
According to the BLS, we ADDED 243,00 jobs that month. That's an odd claim given that the BLS admits, in the very same report, that without adjustments, the US actually LOST 2.69 MILLION jobs in January
This is roughly a discrepancy of 3 MILLION jobs. And this 243,000 jobs number for January also comes along with revisions that saw roughly 50,000 jobs added in both October and November.
So according to the BLS, the US is on the upswing again, maybe not in a HUGE way, but overall things are improving: we're adding jobs and unemployment is falling (from 8.5% to 8.3%).
These numbers make the Obama administration look good, at least relative to how it's looked in the previous 12 months. However, they're not reflecting as positively on two of Obama's primary support groups: Wall Street and the US Federal Reserve.
As a brief refresher, let's take a look at Obama's top campaign contributors in 2008:
Altogether, the finance industry ponied up $24 million for Obama in 2008. And Wall Street has not only been cutting their growth forecasts but has actually been firing people based on the fact the economy is so rough.
N.Y. faces 10,000 Wall St. cuts through 2012
(From October 2011)
Bank of America Corp. plans to cut 30,000 jobs over the next few years, while UBS AG intends to shave 3,500 jobs and Goldman Sachs Group expects to eliminate 1,000 jobs.
As for the forecasting component:
Wall Street banks curb economic growth forecasts
(From January 2012)
Wall Street banks lowered their outlook for U.S. economic growth due to concerns over the European debt crisis, oil prices, regulatory uncertainties and "continued disarray in Washington," according to a financial industry survey released on Tuesday.
The survey, which included bankers from Morgan Stanley, Wells Fargo Securities and Citigroup, forecast that the U.S. economy will grow at a rate of 2.2 percent this year, down from a previous forecast of 3.1 percent.
The January jobs report not only makes these guys look like they can't forecast anything... but that they don't even know how to run their own businesses. It also adds to the image that they're heartless and will lay people off to maintain profits (if the economy is improving, why are they firing people?)
This is not exactly the best policy to maintain for constituents who have put up some big money for Obama's campaigns in the past. One wonders if Obama's campaign managers considered this.
The January jobs report also reflects poorly on the White House's monetary buddy, the Obama's administration's "go to" guy for any kind of uptick in economic data: Ben Bernanke. After all, the Fed has also been cutting its growth forecasts and expecting higher unemployment.
US Fed cuts growth forecasts for 2012
(From November 2011)
The Federal Reserve said it now expects US growth to be weaker and unemployment higher than it thought in its last set of forecasts, as the central bank left the door open to fresh measures to help the world's biggest economy.
Also...
Fed foresees weak US growth through 2014
(From January 2012)
The Federal Reserve cut its US growth forecast Wednesday and said that with business investment and the housing sector depressed, it expected to keep interest rates near zero for another three years
Despite an upturn late last year, the Fed said ongoing economic weaknesses and strains in global financial markets mandated continued easy-money policies...
"I don't think we're ready to declare that we have entered a strong phase at this point.
So add the Fed to the group of people Obama's jobs report leaves looking less than on top of things. On a side note, it also makes the likelihood of more QE or monetary easing from the Fed more remote (if the economy is improving, they have no reason to announce more policies... which is not positive for asset prices... or Wall Street).
This all returns to two primary themes I've been expounding on for months now: that the political environment has changed dramatically in the US and that we are going to see escalating tension between Wall Street, the Fed, and the White House.
The reason for this is simple: the public is growing more outraged by the minute. That anger will have to be directed somewhere. And when push comes to shove, it's likely we're going to see some actual real litigation relating to what happened in 2008-2009.
When this happens, the whole Fed/ Wall Street/ Politician triumvirate will begin to change dramatically. Some of these groups will try to portray themselves as "men of the people" (Obama is doing this, and so is the Fed with its recent town-hall meetings and Bernanke's efforts to appear like a average joe who reads his kindle). Others will prepare for battle (Goldman Sachs' CEO has hired a defense attorney).
How this will all play out remains to be seen. But the debt markets are going to speed this process up dramatically as Europe implodes and the great debt implosion comes to the US. With 48% of US citizens living in a house in which at least one person receives Government aid, you can imagine the impact that the sort of large cuts in social welfare programs that a debt restructuring in the US would have on the political process in here.
My assessment, this January jobs report is the tip of the iceberg. Tensions will be rising in the US over the next 12 months. How exactly this will play out remains to be seen (there are too many factors), but changes are coming to the political arena as well as the monetary balance between Wall Street and the Fed (remember, the Fed actually sued Goldman Sachs last year). These changes will be dramatic.
Labels: Crash, crisis, Crisis Crash, Default, depression
Monday, January 09, 2012
Nothing Changed
We are now into the second week of 2012 and frankly I can't see any fundamental reason to be bullish about things. The European debt Crisis continues to accelerate, with France's borrowing costs rising dramatically and the yield on Italy's ten-year back above 7% despite massive intervention on the part of the ECB.
Indeed, it's quite telling that the one country that kicked off the entire EU Crisis, Greece, still hasn't gotten its fiscal house in order: there's only 37 billion Euros' worth of aid left from the first bailout of 110 billion Euros... and the EU has yet to hammer out details of the second Greek bailout, worth an additional 150 billion Euros.
If the ECB/ IMF/ Central Banks cannot solve the Greece situation... what hope do they have of tackling the larger issues of Italy and France? Heck, even Germany now sports a Debt to GDP ratio that exceeds Maastricht Treaty requirements and they haven't recapitalized their banks.
As a result of this, shares of even the supposedly "rock solid" German banks have come under stress, breaking down into the gap established during the 2008 Crash.
Aside from Europe, we find signs of a brewing solvency Crisis in Japan, an economic slowdown in China, Iran is playing war games with the Strait of Hormuz, and the US is entering a second recession within the context of a larger Depression.
Against this highly deflationary backdrop, the one primary prop for the markets is hope of more juice/credit from the world Central Banks. However, even that prop is rapidly losing its strength: the gains of the last coordinated Central Bank intervention lasted just a few weeks before the market rolled over again.
Moreover, if the world Central Banks are about to launch another massive wave of liquidity, the commodity space sure isn't picking up on it...
Gold has broken its post-Crash trendline:
While Copper appears to be forming a massive Head and Shoulders top:
Does this mean that the markets are about to plunge straight down? No. But these charts do serve as massive warnings that anyone expecting another round of QE or some other huge monetary stimulus from the Central Banks may be in for a RUDE surprise.
With that in mind, this week's action will go a long ways towards explaining where we're heading from here. Start of the Year buying is over and holiday ebullience is fading fast. Put another way, the market is on very thin ice.
Labels: Crash, crisis, depression, recession
