Today, lots of people woke up in shock and horror to what happened in Cyprus: a forced capital reallocation mandated by political elites under the guise of an "equity investment" in insolvent banks, which is really code for a "coercive, mandatory wealth tax." If less concerned about political correctness, one could say that what just happened was daylight robbery from savers to banks and the status quo. These same people may be even more shocked to learn that today's Cypriot "resolution" is merely the first of many such coercive interventions into personal wealth, first in Europe, and then everywhere else. For the benefit of those people, we wish to point them to our article from September 2011, "The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis", which predicted and explained all of this and much more. What else did the September BCG study conclude? Simply that such mandatory, coercive wealth tax is merely the beginning for a world in which there was some $21 trillion in excess debt as of 2009, a number which has since balooned to over $30 trillion. And with inflation woefully late in appearing and "inflating away" said debt overhang, Europe first is finally moving to Plan B, and is using Cyrprus as its Guniea Pig. For those who missed it the first time, here it is again
“Financial stability has not been assured”
Short answer: we don't know.
We do, however, know something we have been pointing out since early 2012 - when it comes to the funding strcuture of European banks, there is a dramatic difference between the US and Europe. In the US, as we showed most recently two months ago, the Big Three depositor banks (JPM, Wells and Bank of America, excluding the still pseudo-nationalized Citi), have a record $858 billion in excess deposits over loans. So what about Europe? Here things get bad. Very bad. So bad in fact that we covered it all just one short year ago. What is the reason for this? Well, as readers can surmise based on what just happened in Europe, it once again has to do with deposits, and specifically the loan-to-deposit ratios of European banks. Because if the US has an excess of deposits over loans, Europe is and has always suffered from the inverse: a massive excess of loans (impaired assets) compared to the most critical of bank liabilities - deposits... One doesn't have to be a rocket scientist to figure out that in a world in which European loans are massively mismarked relative to fair value, and where bad and non-performing loans are an exponentially rising component of all "asset" exposure, it will be the liabilities that are ultimately impaired. Liabilities such as deposits.
French government study: cost would be over three times GDP. Financially, France would cease to exist as we know it
Though much has been written about the popping of the housing bubble in the U.S. and Ireland, remarkably little has been written about the many housing bubbles that remain unpopped. As a rule, speculative bubbles pop and revert to their pre-bubble levels, so we can anticipate the eventual popping of all remaining housing bubbles. Given the dearth of investment options open to households in China seeking to invest their prodigious savings, it is unsurprising that China's housing bubble continues expanding. Every proponent of housing during bubbles confidently proclaims that "this time it's different," and a decade later the dazed survivors shift through the financial rubble, wondering what went wrong with "guaranteed" fundamentals, trends, valuations, collateral and wealth.
The political balance has changed substantially over the last year, from the cosy days when Merkel met Sarkozy and Monti kept the Italians in order. Germany faces full elections in September this year, and it will be difficult for Chancellor Merkel to win, given that her party, the Christian Democrats, did badly in the local German elections in January. The German voter has generally been more concerned with Germany’s relative economic success, bringing low unemployment, than the intractable problem of supporting other Eurozone nations. Given Merkel’s political difficulties, she is likely to be slow to subscribe Germany’s full commitment and can use the excuse that she can only be expected to match the other large contributors – who are by the way, France, Italy, and Spain. It is likely to be a political virtue for her to take a tougher line. It would therefore be a mistake to think that Germany is going to continue to fund profligate governments. Since the ECB has already created the precedent (quote from Mr Draghi: “Whatever it takes”), the ECB will have to end up creating the money required.
Recent news about Federal plans to "help" manage private retirement accounts renewed our interest in the topic of capital controls. One example of capital control is to limit the amount of money that can be transferred out of the country; another is limiting the amount of cash that can be withdrawn from accounts; a third is the government mandates private capital must be invested in government bonds. Though presented as "helping" households, the real purpose of the power grab would be to enable the Federal government to borrow the nation's retirement accounts at near-zero rates of return. As things fall apart, Central States pursue all sorts of politically expedient measures to protect the State's power and the wealth of the political and financial Elites. Precedent won't matter; survival of the State and its Elites will trump every other consideration. All this raises an interesting question: what would America look like at $5000 an ounce gold?
If the new year started off with a bang, March is setting up to be quite a whimper. In the first news overnight, we got the "other" official Chinese PMI, which as we had predicted (recall from our first China PMI analysis that "it is quite likely that the official February print will be just as weak if not more") dropped: while the HSBC PMI dropped to 50.4, the official number declined even more to just barely expansionary or 50.1, below expectations of a 50.5 print, and the lowest print in five months. This was to be expected: Chinese real-estate inflation is still as persistent as ever, and the government is telegraphing to the world's central banks to back off on the hot money. One country, however, that did not have much hot money issues was Japan, where CPI declined -0.3% in January compared to -0.1% in December, while headline Tokyo February data showed an even bigger -0.9% drop down from a revised -0.5% in January. Considering the ongoing surge in energy prices and the imminent surge on wheat-related food prices, this data is highly suspect. Then out of Europe, we got another bunch of PMIs and while French and Germany posted tiny beats (43.9 vs Exp. 43.6, and 50.3 vs 50.1), with Germany retail sales also beating solidly to cement the impression that Germany is doing ok once more, it was Italy's turn to disappoint, with its PMI missing expectations of a 47.5 print, instead sliding from 47.8 to 45.8. But even worse was the Italian January unemployment rate which rose from 11.3% to 11.7%, the highest on record, while youth unemployment soared from 37.1% to 38.7%: also the highest on record, and proof that in Europe nothing at all is fixed, which will be further confirmed once today's LTRO repayment shows that banks have no desire to part with the ECB's cash contrary to optimistic expectations.
Owners of bank debt were sacrificed
Horsemeat Scandal Goes Global As World's Largest Food Maker Pulls Tainted Pasta From Spain And ItalySubmitted by Tyler Durden on 02/18/2013 21:44 -0500
First it was Ireland, then the entire UK, then Germany, and gradually it spread to all of Europe (except for France of course, where it was always a delicacy). But it was only once its finally crossed the Alps and made its way to the Swiss factories of Nestle, the world's largest food maker, did the horsemeat scandal truly go global. The FT reports that "the escalating horsemeat scandal has ensnared two of the biggest names in the food industry, Nestlé, the world’s number-one food maker, and JBS, the largest beef producer by sales. Switzerland-based Nestlé on Monday removed pasta meals from shelves in Italy and Spain and suspended deliveries of all processed products containing meat from German supplier, H.J. Schypke, after tests revealed traces of horse DNA above 1 per cent. Nestlé said it had informed the authorities....Nestlé withdrew two chilled pasta products, Buitoni Beef Ravioli and Beef Tortellini from sale in Italy and Spain. Lasagnes à la Bolognaise Gourmandes, a frozen meat product for catering businesses produced in France, will also be withdrawn."
Keep your eyes on the prize. The important part of the G20 statement had nothing to do with currency wars.
Because “there’s no difference in the taste”
The European Commission formally endorsed the financial transaction tax agreed to by eleven of the 27 members. The tax will be set at 0.1% for stocks and bonds and 0.01% for derivatives. The tax will go into effect at the start of 2014, by which time the participating countries will give it formal approval.
There seems to be two purposes of the tax. The first is to raise revenue. The EC projects the tax will raise 30-35 bln euros annually where ever and whenever an instrument from eleven is traded. This would seem to block the ability to avoid the tax by moving transactions out of the eleven countries. It reinforces the "residence principle". This essentially means that if some one is a resident of the eleven countries, or acting on behalf of a resident, the transaction will be taxed anywhere it takes place. The other purpose is to deter the high frequency trading, which some officials see as largely unnecessary and potentially destabilizing.
Europe Q4 GDP declines 0.6%, and economy contracts 0.9%. No one should be surprised at the latest disappointing European GDP numbers, but they hide important trends – Germany’s Q4 0.6% GDP drop was worse than expected, although the expectations remain for growth later this year. For the rest of Europe the numbers were generally worse than expected – and no one credible is talking about significant growth prospects. (Sure, the Euro Elites are telling us they see growth tomorrow.. but tomorrow is always tomorrow..) My current interest in Spain was pricked by Blackrock CEO Larry Fink’s comments to ABC following a visit to Madrid. He reckons “Spain will be a star economy if reforms continue.” Spain last ran a balanced budget in Q1 2008 when growth was 2%. Now the economy is shrinking 1.7% on an annualised basis.” That’s a massive amount of catch up to be achieved. We are looking at another 3-4 years of economic misery just to get the Spanish economy back into the EU’s 3% deficit/GDP groove. Then we’re looking at on-going relative poverty for Spanish workers within Europe. At some point... something has to give...
One of the recurring memes of the now nearly 4 years old "bull market" (assuming the recession ended in June 2009 as the NBER has opined), is that corporate profits are soaring, and that despite recent weakness in Q4 earnings (profiled most recently here), have now surpassed 2007 highs on an "actual" basis. For purely optical, sell-side research purposes that is fine: after all one has to sell the myth that the US private sector has never been healthier which is why it has to immediately respond to demands that it not only repatriate the $1+ trillion in cash held overseas, but to hand it over to shareholders post-haste (see recent "sideshow" between David Einhorn and Apple). However, a problem emerges when trying to back this number into the inverse: or how much money the US government is receiving as a result of taxes levied on these supposedly record profits. The problem is that while back in the summer 2007, or when the last secular peak in corporate profitability hit, corporate taxes peaked at well over $30 billion per month based, the most recent such number shows corporate taxes barely scraping $20 billion per month!