The standard Keynesian narrative that "Households and countries are not spending because they can’t borrow the funds to do so, and the best way to revive growth, the argument goes, is to find ways to get the money flowing again." is not working. In fact, former IMF Director Raghuram Rajan points out, today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side as technology and foreign competition means that "advanced economies were losing their ability to grow by making useful things." Detailing his view of the mistakes of the Keynesian dream, Rajan notes "The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.", and critically his conclusion that the industrial countries have a choice. They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities.
All models of non-linear complex systems are crude because they attempt to model millions of interactions with a handful of variables. When it comes to global weather or global markets, our ability to predict non-linear complex systems with what amounts to mathematical tricks (algorithms, etc.) is proscribed by the fundamental limits of the tricks. Projecting current trends is also an erratic and inaccurate method of prediction. The current trend may continue or it may weaken or reverse. "The Way of the Tao is reversal," but gaming life's propensity for reversal with contrarian thinking is not sure-fire, either. If it was that easy to predict the future of markets, we'd all be millionaires. Part of the intrinsic uncertainty of the future is visible in unintended consequences. The Federal Reserve, for example, predicted that lowering interest rates to zero and paying banks interest on their deposits at the Federal Reserve would rebuild bank reserves by slight-of-hand. Banks would then start lending to qualified borrowers, and the economy would recover strongly as a result.
They were wrong on every count.
Name the plunging bond shown on the left. If you said some sovereign or corporate issue based out of Spain, Italy, Ireland, Portugal, or even Greece you would be close... but no cigar. No - the bond in question is an issue of Caisse Centrale du Credit Immobilier de France (3CIF), which together with its sister entity CIF Euromortgage (CIFE), is a 100% subsidiary of Credit Immobilier de France Development (CIFD), which as Fitch describes it, is a French "housing loans specialist, with business exclusively directed to France." CIFD is in turn owned by Procivis Group, which just happens to be France's second largest full-service real estate group.
FHA insured loans have been a big booster for the current market. Historically FHA insured loans made up roughly 8 to 12 percent of all mortgage originations but in 2009 they hit 30 percent. For first time home buyers it was a stunning 50 percent showing that most people can only purchase a home today with a very small down payment. Yet small down payments create instant negative equity positions if the market moves sideways or pops lower (aka our current market). For example, the 3.5 percent standard FHA down payment is wiped away by the 5 to 6 percent selling costs. What is interesting with this is that the FHA insured loan market is fully backed by the government (i.e., you) so any losses will be completely shouldered by the public.
A few days ago we suggested that this action by LCH.Clearnet was only a matter of time. Sure enough, as of minutes ago the bond clearer hiked margins on all Spanish bonds with a duration of more than 1.25 years. Net result: the Spanish Banks which by now are by far the largest single group holder of Spanish bonds, has to post even moire collateral beginning May 25. Only problem with that: it very well may not have the collateral.
There's a big, fat "I told you so" coming down the pike.
Gold rose for its 2nd day on concerns that Europe’s debt crisis is growing and the yellow metal is once again seeing increased demand as a safe haven asset. Fitch's downgrade of Greece's credit rating sent the euro to a 4 month low against the dollar and investors wonder if Greece will be able to continue in the EU fiscal union. The gold price jumped over $30 yesterday its most since January, and news from a US report on manufacturing in Philadelphia showed contraction for the first time in over 2 quarters. Moody's Investor Service downgraded 16 Spanish banks yesterday, including Banco Santander, the euro zone's largest bank. All the banks' long-term debt ratings were decreased by at least one grade and some suffered three-grade cuts. This is just days after Moody's downgrade of 26 Italian banks on Monday. Spain's banks like those in other EU countries (PIIGS) have been left with a sea of bad loans after the real estate bubble burst and investors see a state bailout as extremely difficult in light of the country’s limited public finances.
When Mr. Market ultimately becomes disenchanted with the fiscal excesses of the sovereign deadbeats, he can express his ire most energetically. When the current bond bubble here in the US ultimately bursts, as it must, it's going to be a bloodbath. Of course, there is much, much more at stake to coming to the correct answer on the recovery, or lack thereof, than that. For instance, poor economies make for poor reelection odds for political incumbents. And when it comes to maintaining a civil society, the lack of jobs inherent in poor economies often leads to a breakdown in civility. On that note, overall unemployment in Spain is now running at depression levels of almost 25%, and youth unemployment at close to 50%. How long do you think it will be before the citizens of this prominent member of the PIIGS will refuse being led to the slaughter and start taking out their anger on the swine (governmental and private) seen as bearing some responsibility for the malaise? Meanwhile, back here in the United States, the commander-in-chief is striding around the deck of the ship of state trying to look like the right man for the job in the upcoming election, despite the gaping hole of unemployment just under the economic water line. His future prospects are very much entangled with this question of recovery.
So, what's it going to be? Recovery… no recovery… or worse, maybe even a crash?
As was leaked earlier today, so it would be:
- MOODY'S CUTS 16 SPANISH BANKS AND SANTANDER UK PLC
- MOODY'S CUTS 1 TO 3 LEVELS L-T RATINGS OF 16 SPANISH BANKS
- MOODY'S DOWNGRADES SPANISH BANKS; RATINGS CARRY NEGATIVE
In summary, the highest Moodys rating for any Spanish bank as of this point is A3. But luckily the other "rumor" of a bank run at Bankia was completely untrue, at least according to Spanish economic ministry officials, so there is no need to worry: it is all under control. The Banko de Espana said so.
- As ZH warned last week, JPMorgan’s Trading Loss Is Said to Rise at Least 50% (NYT)
- Spanish recession bites, may be prolonged (Reuters)
- Obama Lunch With Boehner Ends With Standoff Over Budget (Bloomberg)
- Hilsenrath: Fed Minutes Reflect Wariness About Recovery's Strength (WSJ)
- N. Korea Ship Seizes Chinese Boats for Ransom, Global Times Says (Bloomberg)
- Greece Plans for June 17 Vote Under Caretake Government (Bloomberg)
- Hollande turns to experience to fill French posts (FT)
- ECB Stops Loans to Some Greek Banks as Draghi Talks Exit (Bloomberg)
- Spain Urges EU to Provide More Support (WSJ)
- North Korea resumes work on nuclear reactor: report (Reuters)
- Fed’s Bullard Says Labor Policy Is Key to Cut Joblessness (Bloomberg)
- China Expands Scope for Short Selling, Securities Journal Says (Bloomberg)
It was such a promising morning for Spain which sold some €2.5 billion in 2015 and 2016 bonds earlier in yet another meaningless and symbolic LTRO-covered exercise, when things went from bad (bank run, pardon, withdrawal meme) to worse, as local Expansion newspaper says Spanish bank ratings will be downgraded in a few hours.
Just As I Warned Of JPM's Exposure, Those Other Warnings Will Come To Pass As Well. I pull stuff out of my analytical archives and low and behold, who do I find?
Well, my hat is off to the global central planners for averting the next stage of the unfolding financial crisis for as long as they have. I guess there’s some solace in having had a nice break between the events of 2008/09 and today, which afforded us all the opportunity to attend to our various preparations and enjoy our lives.
Alas, all good things come to an end, and a crisis rooted in ‘too much debt’ with a nice undercurrent of ‘persistently high and rising energy costs’ was never going to be solved by providing cheap liquidity to the largest and most reckless financial institutions. And it has not.
- Facebook's selling shareholders can't wait to get out of company, increase offering by 25% (Bloomberg)
- Boehner Draws Line in Sand on Debt (WSJ)
- Romney Attacks Obama Over Recovery Citing U.S. Debt Load (Bloomberg)
- BHP chairman says commodity markets to cool further (Reuters)
- Merkel’s First Hollande Meeting Yields Growth Signal for Greece (Bloomberg)
- Greek President Told Banks Anxious as Deposits Pulled (Bloomberg)
- EU to push for binding investor pay votes (FT)
- Martin Wolf: Era of a diminished superpower (FT)
- China’s Hong Kong Home-Buying Influx Wanes, Midland Says (Bloomberg)
- U.N. and Iran agree to keep talking on nuclear (Reuters)
- US nears deal to reopen Afghan supply route (FT)