Five years later, while some are congratulating themselves on avoiding another depression, no one in Europe or the United States can claim that prosperity has returned. The financial system may be more stable than it was five years ago, but that is a low bar – back then, it was teetering on the edge of a precipice. Those in government and the financial sector who congratulate themselves on banks’ return to profitability and mild – though hard-won – regulatory improvements should focus on what still needs to be done. Some are pleased that the economy may have bottomed out. But, in any meaningful sense, an economy in which most people’s incomes are below their pre-2008 levels is still in recession. An The glass is, at most, only one-quarter full; for most people, it is three-quarters empty.
The financial crisis of 2008 killed a lot of things. It killed the line of credit, it killed the finances of millions of people around the world, it ousted governments and relegated leaders to the back offices and it was the kiss of death to a failed system and brought down entire states.
Fingers of Instability
Now that "bail-ins" have become accepted practice all over the planet, no bank account and no pension fund will ever be 100% safe again. In fact, Cyprus-style wealth confiscation is already starting to happen all around the world. As we warned two years ago, "the muddle through has failed... and there may only be painful ways out of this."
Men have had their stab at making the world into what they wanted and they made a pretty poor show of it all we might say when we look at the economy.
Many well-meaning commentators look back on the era of strong private-sector unions and robust U.S. trade surpluses with longing. The trade surpluses vanished for two reasons: global competition and to protect the dollar as the world's reserve currency. It is impossible for the U.S. to maintain the reserve currency and run trade surpluses. It's Hobson's Choice: if you run trade surpluses, you cannot supply the global economy with the currency flows it needs for trade, reserves, payment of debt denominated in the reserve currency and credit expansion. If you don't possess the reserve currency, you can't print money and have it accepted as payment. In other words, the U.S. must "export" U.S. dollars by running a trade deficit to supply the world with dollars to hold as reserves and to use to pay debt denominated in dollars. Other nations need U.S. dollars in reserve to back their own credit creation.
Following the crisis in October 2008, Iceland's government declared all deposits in domestic financial institutions were 'blanket' guaranteed - an Emergency Act that was reafrmed twice since. However, according to RUV, the finance minister is proposing to restrict this guarantee to only deposits less-than-EUR100,000. While some might see the removal of an 'emergency' measure as a positive, it is of course sadly reminiscent of the European Union "template" to haircut large depositors. This is coincidental (threatening) timing given the current stagnation of talks between Iceland bank creditors and the government over haircuts and lifting capital controls - which have restricted the outflows of around $8 billion.
The Germans will be getting out the beer and drinking a double dose of the amber nectar not only because MuttiMerkel as she is known (otherwise known as ‘Mother’ Angela Merkel) was reelected on Sunday 22nd September, but also because new reports issued today show that the Eurozone is doing better than expected.
Recall that three weeks ago we warned that "Monti Paschi Faces Bail-In As Capital Needs Point To Nationalization" although we left open the question of "who will get the haircut including senior bondholders and depositors.... given the small size of sub-debt in the capital structures." Today, as many expected on the day following the German elections, the dominos are finally starting to wobble, and as we predicted, Monte Paschi, Italy's oldest and according to many, most insolvent bank, quietly commenced a bondholder "bail in" after it said that it suspended interest payments on three hybrid notes following demands by European authorities that bondholders contribute to the restructuring of the bailed out Italian lender. Remember what Diesel-BOOM said about Cyprus - that it is a template? He wasn't joking.
As we wrap up a most interesting, and volatile, week there are some things that we have discussed previously that are now brewing, interesting points to consider and risks to be aware of. In this regard we thought we would share a few things that caught our attention:
1) Angela Merkel Election No So Assured
2) The Debt Ceiling Debate
3) The "Taper" Indecision Is Back
4) In The "Economy Is Improving" Camp
5) Syria Already Set To Miss A Deadline
6) Everything Else...
Simply put, complacency is not an option; Stocks are overvalued, rates are rising, earnings are deteriorating and despite signs of short term economic improvements the data trends remain within negative downtrends. Investors, however, have disregarded fundamentals as irrelevant as long as the Federal Reserve remains committed to its accommodative policies. The problem is that no one really knows has this will turn out and the current assumptions are based upon past performance.
There are very few people that actually give even one hoot and even fewer that could give two of them when it comes to poverty of people that are living in society alongside us.
In a world in which when the numbers don't comply with the propaganda, the only recourse is to change the rules, and if that fails, change the numbers themselves (see Fukushima radiation count, US GDP, Employment numbers, anything out of Europe, etc.) it was only a matter of time before that last sticking point of the grand made up narrative, the lack of economic improvement in the European despite evil, evil austerity (which somehow has resulted in record debt which is rising faster than expected virtually everywhere in Europe) resulting in unpalatable deficits, was magically "fixed." This was resolved moments ago when as the AP reports, "European Union finance officials have reached a preliminary agreement to change the way the bloc determines some deficit figures, which might lessen the pressure for austerity measures in crisis-hit economies." In other words, Europe's "recovery" will now be based on even more made up numbers. One wonders: since Europe is finally admitting that the numbers are fake, i.e., lying, are things finally getting truly serious again?
A very soon tomorrow will bring the decision of the Fed concerning tapering into focus. Ok, a kind of fuzzy, hard to see and wispy focus. The one thing that we can assure you of is that whatever is to come our way it will not be a singular event. You will hear from the imbibers of Cool Aid and other mischievous reality altering drinks that it could be a one-off event. Tomorrow a process will be started, it will probably go in fits and starts but do not blind yourself; it will be the beginning of the journey to cut back on the propping up of the markets by the Fed.
European recovery propaganda may be humming (for the latest proof see today's German ZEW sentiment index which soared from 42.0 to 49.0 matching the all time high in the Dax), but when it comes to the actual economy - that place where commerce is conducted and where supply and demand curves intersect, the situation has never been worse. And not only unemployment which is at a persistently record high for the Eurozone, but actual transactions, in this case in the form of car sales. As AP reports, for the first eight months of the year, passenger car sales in the European Union were off 5.2% to 7.84 million compared with the same period last year, the European Auto Manufacturers' Association said Tuesday. That's the lowest January-August figure since the group started keeping track in 1990.
- Less Tapering Becomes Tightening Credit No Matter What Fed Says (BBG)
- Yellen Is Now Top Fed Hopeful (WSJ)
- Syria - A chemical crime, a complex reaction (Reuters)
- More ECB collateral: Wrecked cruise ship Costa Concordia raised off rocks in Italy (Reuters)
- Aging Boomers Befuddle Marketers Eying $15 Trillion Prize (BBG)
- Abe Turns Pitchman, Says Japan Is Now A Buy (WSJ)
- Ex-JPMorgan Employees Indicted Over $6.2 Billion Loss (BBG)
- Barack Obama blinked first in battle for Lawrence Summers (FT)
- Berlusconi to support Italian government in video message: sources (Reuters)
- How China Lost Its Mojo: One Town's Story (WSJ)