As we noted last week, the Swiss National Bank's decision to un-peg from the Euro (thus strengthening the CHF dramatically) will have very significant repercussions - not the least of which is for Hungarian and Polish Swiss-Franc-denominated mortgage-holders. The 20% surge in Swiss Franc translates directly into a comparable jump in the zloty value of loan principles and and monthly payments for about 575,000 Polish families owing a total $35 billion in mortgages denominated in the Swiss currency which has prompted calls for Poland's government to bail them out. Never mind the FX risk, the low-rates were all anyone cared about and now yet another 'risk-free' trade has exploded, Deputy PM Piechocinski says, if the franc "remains above the 4 zloty level, the government may provide support" to debtors but Poland's Central Bank is not supportive of the bailout.
Having exposed the 20+1 charts of China's demise previously, we move to Exhibit (a) in the "illusion of prosperity" that keeps the dream (looking) alive to the outside (mostly Western get-rich-quick fast-money) world - China's Zombie Factories...
In another Christmas surprise, China once again decided to adjust the cost of money, only this time instead of hiking, it eased, and in an effort to shore up the world's second-largest economy, China Business News reported that the PBOC will waive reserve requirements for non-bank deposits. As the WSJ adds, at a meeting with big financial institutions on Wednesday, the People's Bank of China told participants that they will soon be able to add deposits from nonbank financial institutions to their calculations of their loan-to-deposit ratios, according to the executives. The move would add considerably to the banks' deposits and allow them to lend more. Chinese stocks, which had been pricing in further easing by the PBOC for the past 3 months, a period during which the Shanghai Composite soared over 50%, were delighted by the latest easing move and surged even more, surging higher by the most in the past three weeks.
But the market acts deaf, dumb and blind...
Back in March the ECB predicted 2014 inflation would be 1.0%, with prices rising to 1.3% in 2015. Since then one can say that deflation has once again taken hold, and following two consecutive cuts to 2014 inflation expectations, moments ago Draghi just released the ECB's latest set of inflation expectations. In a nutshell: in just 9 short months, the ECB's current year inflation forecast has been cut in half, with 2015 inflation also down nearly 50%, from 1.3% to 0.7%.
"The stock market just keeps zooming up. A low equity allocation must be hurting you now... For all purposes, this is a hideously expensive market. I don’t care if it’s a bubble or not. It’s too expensive, and I don’t need to own it. That is the problem. This is the first central bank sponsored near-bubble. There is just nowhere to hide... but... to think that central banks will always be there to bail out equity investors is incredibly dangerous."
Economic data from China have generally been on the weak side of late, but not catastrophically so. And yet, apart from growing weakness in aggregated data, we also see more and more anecdotal evidence that the economy is deteriorating.
- Republicans expect gains, but many races close on election day (Reuters)
- Ahead of tough election, White House blames dismay with Washington (Reuters)
- On Election Day, a Tale of the Young and the Old (WSJ)
- Because the recovery: Sprint to Cut 2,000 Jobs as Mobile Customers Keep Leaving (BBG)
- Ukraine's rebel leader is sworn in, crisis deepens (Reuters)
- Brilliant: Burkina Faso Army Promises Religious Leaders It Will Step Down (BBG)
- More Unknowns Leave Central Banks Facing Greater Internal Strife (BBG)
- Scapegoat found: IBM to Change Leadership at Global Services Unit (WSJ)
- Explains why Europe just slashed its GDP forecast: Don’t Be Fooled by Warm Spell as Cold Air About to Return (BBG)
The week ahead, as if it mattered.
Several days ago we were confused why, out of the blue, a €1 billion loan BWIC appeared that was dumping German non-performing loans. After all, the whole point of the European "recovery" fable to date has been to deflect all the attention from the "pristine" German banks, up to an including world-record derivatives juggernaut Deutsche Bank, and to focus on Greece and other insolvent peripheral European nation. Earlier today, German Handelsblatt provided an answer, when it reported that "four German banks are on the brink", i.e., four banks of which three are known, HSH Nordbank, IKB and MunchenerHyp, will likely fail the ECB's stress test whose results are due to be announced next Friday.
When Mario Draghi set off on his latest quest to slay Europe's deflation monster, after an endless array of failed alphabet soup programs to inject money into stock markets mysteriously failed to fix Europe's insolvent economy riddled by record unemployment and trillions in non-performing loans, he clearly was guided by this latest Eurobarometer survey of Public Opinion in the European Union, in which virtually everyone across the board admitted that the most important issue facing the common folk in Europe is plunging prices and crushing deflation.
Oh wait... it says rising prices/inflation. Well, that's embarrassing.
While all the western banks are clearly envious at the facility with which Zimbabwe managed to hyperinflate away its debt mountain after simply printing a few trillion in fiat monetary equivalents, which instead of the stock market hit the broader economy, there is much more the "developed" world can learn and is learning from Robert Mugabe domain of experimental yet practical monetarism.
In a striking admission that Mario Draghi's "strategy" about the ECB's Private QE future, aka ABS monetization plan, is nothing short of converting Europe's central bank into a "bad bank" repository for trillions in bad and non-performing debt, the FT yesterday reported that "Mario Draghi is to push the European Central Bank to buy bundles of Greek and Cypriot bank loans with “junk” ratings, in a move that is set to exacerbate tensions between Germany and the bank." It is expected that the former Goldmanite will unveil details of a plan to buy hundreds of billions of euros’ worth of private-sector assets at tomorrow's ECB meeting.
Today we learned that as part of the domestic "macroprudential" effort to ensure firms don't run out of cash in a crisis, the so-called Liquidity Coverage Ratio, US regulators said banks likely will have to raise an additional $100 billion to satisfy the new requirement, the WSJ reported. The disclosure is part of the final draft of the so-called Liquidity Coverage Ratio, released by the Fed earlier today, and which was promptly passed on a 5-0 vote Wednesday that will subject big U.S. banks for the first time to so-called "liquidity" requirements. The Federal Deposit Insurance Corp. and the Treasury Department's Office of the Comptroller of the Currency adopted the rules later in the day. On the surface, this is all great macroprudential news: forcing banks to hold even more "high quality collateral" is a great idea, to minimize the amount of money taxpayers will have to fork over when the system crashes once again as it certainly will thanks to the unprecedented Fed micromanaging interventions over the past6 years. There are just three problems...
- Ukraine Shifts to Defense Against Russian Incursion (WSJ)
- U.S. forces carry out operation against al-Shabaab in Somalia (Reuters)
- Bond Markets Tilt Toward Frankfurt as Draghi Negates Fed (BBG)
- Another "unexpectedly" - Swiss Economy Unexpectedly Stalls as Euro Area Takes Toll (BBG)
- Japan's 'Abenomics' feared in trouble as challenges build (Reuters)
- Germany Imposes Nationwide Ban on Uber's Cab-Hailing Service (WSJ)
- Japan's 'forward guidance', the GPIF, has "already begun a highly anticipated portfolio reshuffle" (WSJ)
- Detroit Brings Bankruptcy Plan to Court With Billionaires (BBG)
- Burger King has maneuvered to cut U.S. tax bill for years (Reuters)