There is "not a chance," that the Fed will be able to unwind its balance sheet in an orderly manner, "because everybody is front-running [them]," as the Fed is creating "serial bubbles," that are increasingly hard to manage since "we're getting in deeper and deeper every time." David Stockman has been vociferously honest in the last few days and his Bloomberg Radio interview with Tom Keene was extremely so. While Keene tries his best to remain upbeat and his permabullish self, Stockman just keeps coming with body blow after body blow to the thesis that this 'recovery' is sustainable. "They are using a rosy scenario forecast for the next ten years that would make the rosy scenario of the 1981 Reagan administration look like an ugly duckling," he exclaims, adding that the Keynesian Krugmanites' confidence is "disingenuous" - "the elephant in the room - the Fed," that are for now enabling rates to stay where they are. The full transcript below provides much food for thought but he warns, if the Fed ever pulled back, even modestly, "there would be a tremendous panic sell off in the bond market because it is entirely propped up... It's to late to go cold turkey."
Most publications talk about the 10B or 17B Cyprus bailout. Let’s take a pop quiz on the right answer:
(a) 17B Euros (89% of GDP)
(b) 10B Euros (52% of GDP)
(c) 2.5B Euros (13% of GDP)
(d) -3.0B Euros (-15% of GDP)
(e) -7.5B Euros (-39% of GDP)
Now let’s work through the answers... (hint: we don’t see any version of the numbers where Cyprus is not a net creditor to the EU bailout regime, as opposed to a net beneficiary.)
There are many lessons and implications from the Cypriot crisis (we list 25 here). Among the most important is that conditionality is back, energetically, which is very important when considering the circumstances under which other, bigger, countries might access ESM or OMT. We believe, like BNP's James Mortimer-Lee, that the market has been too complacent, seeing OMT and “whatever it takes” as unconditional – that’s wrong. A second lesson is that a harsher line is being taken by the core. This partly reflects more effective firewalls, so that core countries are more willing to “burn” the private sector, where doing so does not represent a serious systemic risk. Cyprus may not be a template, but we have seen enough to glimpse what the new pan eurozone bank resolution system could look like. Risk for certain classes of stakeholders in banks has risen. We are a long way from seeing the eurozone crisis resolved.
Suddenly it should be dawning on a lot of Europeans that deposit-guarantee limits matter. In Slovenia, the maximum is 100,000 euros per depositor, the same as in Cyprus. (Deposit- insurance programs vary among the 17 countries that use the euro.) For a few days last week, it looked as if customers at Laiki and Bank of Cyprus would lose even some of their insured deposits, which would have been a sacrilege. That plan was scrapped, but could resurface elsewhere for all we know should some genius at the German Finance Ministry insist upon it. The one constant among bailouts of euro-area countries is that there is no rhyme or reason, much less fairness, in the way many details get worked out... So far, there have been no signs of a mass exodus in countries such as Italy or Spain. But deposit migrations can happen slowly, with lots of time passing before they appear in official statistics. Or maybe little will change and most bank customers will go on believing “it can’t happen here,” until one day it does.
Reclaiming the Founding Fathers' Vision of Prosperity
Hopefully the memory of the new Eurogroup head, who in a one day lost more credibility than his admittedly lying predecessor Juncker ever had, will be jogged courtesy of this full transcript provided by Reuters and the FT of what he told two reporters - on the record - and for the whole world to read. Because, by now, we are confident everyone has had more than enough with watching the entire Eurozone rapidly and tragically turn itself into a complete and utter mythomaniac, kletpocratic circus.
The most positive aspect of last night’s deal was that a deal was reached at all, and that some steps have been taken to counter moral hazard. However, overall, this is a bad deal for Cyprus and the Cypriot population. Cypriot GDP is likely to collapse in the wake of the deal with the possible capital controls hampering the functioning of the economy. The large loan from the eurozone will push debt up to unsustainable levels while the austerity accompanying it (along with the bank restructuring plan) will increase unemployment and cause social tension. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and central bank funding, with little hope of economic growth. Meanwhile, the country will remain at the edge of the single currency as tensions increase between members with Germany, the ECB and the IMF now looking intent on a more radical approach to the crisis. The eurozone took this one down to the wire. But late last night, after a week of intense back and forth negotiations, a deal was reached on the Cypriot bailout. Below we lay out the key points of the deal (the ones that are known, there are plenty of grey areas remaining) and our key reactions to the deal.
For those still with capital in the paper markets, Peak Prosperity's Chris Martenson believes there are dangerous risks re-building. In particular, he sees an unacceptably high and growing risk of a cascading series of corrections in the bond markets (corporate and sovereign), which would have a much greater impact on destroying wealth worldwide than any stock market crash could. The return of reckless practices like CDOs and overuse of derivatives indicates that we are far along the timeline in repeating a 2008-like contraction -- but worse. Despite today's heady elevated prices, it's time to get to the sidelines, and use your paper - while it still has the purchasing power it does - to park your wealth in hard assets.
China’s economic model, which has delivered a genuine economic miracle over the last 30 years by lifting more people out of poverty than ever before in human history, is increasingly tapped out. While the authorities have been talking about rebalancing the economy since at least 2006, BNP Paribas' Richard Iley notes that China’s macroeconomic imbalances have become progressively more extreme. The economy now has an investment share of ~48% of GDP, which, Iley explains, no other economy has been able to reach, let alone sustain. Unsurprisingly diminishing returns are increasingly apparent. Largely uneconomic investments in sectors already suffering overcapacity, such as real estate and steel, continue to accelerate, fuelling exponential growth in energy consumption and producing increasingly unbearable levels of pollution as we discussed here. Despite the long-term gulf between reform rhetoric and concrete action, ‘hype’ at least continues to spring eternal.
No, American Banks DON'T Need to Be Big to Compete with Bigger Foreign Rivals
A successful entrepeneur's take on the European sitaution...
Today’s big event was Italy's 10% auction. Buyers can’t ignore yield, and we suspect many were “encouraged” to participate. But a decent Italy auction doesn't change the brutal facts. Electoral fall-out blankets the Euro battlefield, but it was decisions made years ago that have brought us to this blasted heath. Markets are caught in... Stalemate. On one side you have the disbelief on the Italy election (although why markets are surprised we cannot fathom) and all that entails about rising uncertainty on the Euro. On the other is the fact buyers need to invest. From there it becomes a debate about whether the Italy election was just another minor stumble that can be glossed over, or is it part of a more significant fundamental shift? We suspect market fears, uncertainty, and the global fundamentals will likely see the Euro crisis reveal itself again in four distinct ways in coming months.
Even Democrats Are Starting to Admit It
16 point 7 trillion dollars. That is our current national debt. 12 point 8 trillion dollars. That is the amount households carry in mortgage and consumer debt. We are now addicted to debt to lubricate the wheels of our financial system. There is nothing wrong with debt per se, but it is safe to say that too much debt relative to how much revenue is being produced is a sign of economic problems. At the core of our current financial mess is how we use debt as a parachute for any problem. We’ve been masking the shrinking of the middle class by allowing households to take on too much debt for a couple of decades. The results were not positive. People think that this recovery has come from organic forces when in reality, it has come because of number games and also the Fed injecting trillions of dollars into the banking industry. Ironically these banks are using this money to speculate in markets like stocks and housing where they are now crowding out working and middle class Americans. When you have access to a printing press with no restraints, it becomes too tempting to spend into oblivion. Addictions are never easily cured and we have yet to come to terms with our insatiable appetite for debt.