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Crunch time?
Possibly the most significant consequence of the EU bailouts last week will be that the “solutions” to the problems in Europe will result in a global credit crunch. To me this outcome is a foregone conclusion. It's already happening.
The agreements give the EU banks till June 2012 to recapitalize. There are only two possible outcomes. (A) Either the banks sell more common and preferred shares to the public, or (B) they improve their capital ratios by de-leveraging.
It’s simply not possible to sell more shares. The costs (in the form of dilution or 10+% Preferred dividends) make this option a dead end. So the banks will have to get smaller.
Some data points on this from Thompson Reuters Loan Pricing Report today:
French banks have been notably absent from high-profile EMEA loans including the US$6bn loan for commodity trader Xstrata and a $4.7 billion loan for Qatar's Barzan project financing.
In Asia, BNP Paribas pulled out of an A$2.075 billion (US$2.14bn) refinancing for Australian media company Seven West after being shortlisted as one of the leads.
In the US, Societe Generale declined to participate in a $15 billion, 364-day bridge loan for United Technologies Corp.
The $6 billion loan for commodities trader Xstrata had no commitments from BNP Paribas, Societe Generale, Intesa and ING.
"Banks structuring deals are mindful of the reduced demand for dollars - you have to factor in a big drop in appetite from French and Germans." a senior banker said.
The syndicated loan market is not falling apart. At least not yet. Other big lenders have stepped into the hole left by the EU banks. Spreads have widened a bit, they will get wider still. The question is whether credit will dry up in the months ahead. I think it will.
I’m convinced that zero interest rates are adding to the problem of liquidity in the US (and therefore globally). Every month money funds get smaller. More and more money is being put on the side. MM loan funds used to buy up big chunks of deals like the 365 day UT deal. Not any longer.
I have no support from economists in my conclusion that ZERO % = ZERO RISK. In fact, the vast majority of deep thinkers (and most importantly Bernanke) believe that ZIRP is the only path to consider.
My conclusion is that the dual forces of the EU bank asset sales and perpetual ZIRP are going to bring us a very nasty credit crunch. It will be global. Given that the clock on the EU bank recaps runs out in 8 months I would expect to see clear evidence of a crunch by year-end. (Does someone have a quote for “turn of the year” LIBOR?)
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Is there really any point paying attention to LIBOR? Interbank lending rates really don't say anything anymore since the Fed set a discount rate of 0.25% and demonstrated in the past both a willingness to expand discount window access (PDCF) and pretty much eliminate all quality standards for what constitutes eligible collateral. In essence, the Fed's expanded liquidity provisioning has undercut interbank markets and made them wholly unreliable as indicators of real stress on reserves.
In the past we saw LIBOR blow out even though the Fed expanded discount window access due to the high degree of confusion as things got crazy in 2008. A few years after the fact and participants must now all be aware that the dramatically low upper limit on interbank rates set by the Fed's discount rate is here to stay and that access to the discount window will be provided if requested under duress. Consequently, there is an implicit confidence reflected in LIBOR that falsely represents reality.
Onto a coming credit crunch. Now things get interesting because we're absolutely trans-Atlantic now. As I've said in the past, when European banks finish selling off the family silver and are still falling short, we're going to need to see QE that exceeds QE1 and QE2 combined and is coordinated between the ECB and the Fed. If the ECB can't get a Fed-like mandate then I'll be wholly unsurprised to see it achieve liquidity provisioning via the Fed. Watch for a sudden relaxation of the upper limit set on the Fed's acquisition of Euros via its swap line with the ECB. Last I checked, it was still pretty tight (no limit in the other direction).
If there's a credit crunch, it won't be from US dollar shortage. Bernanke will cram eurodollars down Europe's throat if he has to. It will come from the Euro side of things due to political constraint on the ECB. Ultimately, I say Europe caves and goes for QE. Should the ECB fail to gain direct power, then the Fed will stand ready and able to assist by tripling its balance sheet crammed full of euro-denominated debt purchased using euros from its own reserve and, when that falls short, with euros created via an expanded swap line. The ECB's US dollar account with the Fed will blow out massively, but those dollars will be explicitly iced and not lead to US dollar inflation as they will be reserved to unwind positions over the coming decades.
Of course everything goes to hell if the Euro fails and because the little people on the streets of Europe don't want this shit anymore, it's a given that things are going to get politically explosive over the pond. History is echoing. If it continues to, this ends very badly.
Well, it appears we've just passed the vector point of being royally-fucked to being mega-fucked.
From that position things can only get better, right? You know reaching the bottom of our bottoms and all that.
Its a sad state of affairs when the NPV of the dollar is not worth investing in assets because they are way too exepensive, and the world still flocks to this reserve currency in panic. Definition of conundrum- an overbalnced sheet depression. Default is the only way out.
BK is the best of many on ZH, IMO.
I am itching to dump my 30 year bank and just force them to pay up in cash. The bank was once a stodid lender to businesses and was very good on sniffing out what was worthy versus the junk. I have not wanted or asked for a loan for business for fifteen years now.
I had talks with the VPs on just how fecked they would be when their garbage loans went bad. The Business loan veep dismissed me as a nutter until I came in to convert all of the deposits to three month treasury paper (the only time that I ever bought goomint paper) because I smelled the collapse and didn't care to partake.
The bank failed and the buyout from BMO gave the gutters of the old bank a bunch of parachutes. Of course the long term employees got the pink slips.
I refuse to deal with junk like BMO. (their advertizing is amazingly stupid for those that value a solid asset base in a bank that holds much of one's assets from many decades of the shitty manufacturing business. I recall the leverage ratios from my friends at ZH on the super safe Canadian banks.
BMO has Harris Bank that has taken out the atrociously run Marshall and Ilsley bank. They run a Frank Sinatra singing ad on how some banker will get the "A" widget factory on a bell ringing tour that sounds like the opening bell for scam-o-rama on wall street AM as compared to the loser that did not go head over heels in debt with the expert opinion of their banking big heads.
My conversation with the local top veep was on why I minimised my non FDIC exposure to them was because they were likely broke from the RE markets that they went in to: being south Florida and Nevada with a big dollop in Arizona. I had been mentioning to them all along the bubble that they might want to have a look at the several web sites that made it so simple for even these clowns to get away from the sure to be devastating losses from their RE lending.
That is old business. We taxcows have had insuperable levies dumped upon us and will never pay. We can be limp and just await the wreck of everything or we can just tell those that expect us to pay for their scams and wreckage that we will not pay for debts that we had no say in incurring.
Timmy can get his presses tuned as I refuse to pay any more. There is no legitimacy in goomint and the FED and banking any more for those that are not enslaved by payments to those filth.
Don Coxe's latest perspective on the Europe mess.
http://goldandsilverlinings.com/?p=1715
There is no question that markets are begging for a reprieve from the debt load. Access to new debt is a dead hole. Every possible choice is squeezing down to a photo finish.
http://georgesblogforum.wordpress.com/2011/10/31/photo-finish-update-103...
The vision of the bankers and the sovereign authorities, over the decades, painting themselves into the tight corners of the world's financial boardrooms, and now explaining how they've devised a way out of the trap if the public will supply them with more paint, has me wishing I were a cartoonist capable of making visual the fatal collapse of the 70 year old fed-sponsored credit binge.
Bruce, your speculations about the possibility or depth of a credit crunch and the reasons for it seem to me to be a bit of a mental... I don't know, I don't want to be rude and say masturbation, but I do think it is small potatoes on an otherwise larger field of play considering what has transpired just in the last 24 hours.
*Greece PM Papawhatever not to participate in any more euro bailouts or haircuts without a referendum which will essentially be a choice between dire austerity or leaving the EMU, and we all know how that vote will go
*MF Global tits up and refusing to disclose documents to regulators
*Italy getting the Greek treatment
*Ireland and other PIIGS starting to grumble for the same treatment as Greece
*Japan selling trillions of yen to staunch appreciation and more or less failing
*Finland openly questioning it's continued role in the eurozone
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So, major euro based banks we all knew were insolvent but for accounting frauds are now not able to hold it together even with mark-to-unicorn rules and sovereign backstops, like I said, small spuds in the larger picture. Those with the money and the power are not going to placidly wait to be the last to bail from the global disaster of the failure of the euro, anyone not in cash or PM's by the end of this week will be ruined. And while there will be a lot of hand wringing over the ISDA's voluntary default ruling and later suits and accusations the fact is by COB Friday I expect this entire planet to be in collapse. In fact I think that is just what and why MF Global did what it did, got out with some golden parachutes, as first to do so they get the most, but when all financial institutions are dead we will see it was only the upper execs of the first few that got anything at all, the rest will be eating shit with the chickens.
By the way, I still say LIBOR is less than useless, it is misleading, because banks no longer rely upon interbank lending these days but simply belly up to the central bank trough. If there is a difference between the 3 month LIBOR verses the 3 month treasury all it indicates is the depth to which Bernanke will sink verses the ECB as to doling out goodies to the crony capitalist banks that pretty much are their only constituents.
Edit: With the ruling today that the forced Greek default was "voluntary" it mean none of the CDS insurance will pay out. All holders of Greek debt are going to get screwed, first they laid out all that money to buy Greek debt, then they laid out more money to insure that debt should Greece default, no they have been told half the original money is gone and no insurance upon it will be paid. For the banks who hold this debt this is a bankrupting situation. If they can even go forward at all they will have no choice but to impose the same 50% haircut upon those they in turn owe money to. But, the biggest hit is within Greece itself. Greek pension funds will have no choice but to cut pensions for Greeks in half. These are already some of the lowest in the EU. Citizens will go from an average pension of under $1,000 per month to half that.
It would be as if this happened to America and our creditors imposed a haircut on what we owe. We owe a lot but the largest single holder of US debt is social security, if their assets in the form of treasury debt were to take a 50% "haircut" the only thing social security could do is dramatically cut payouts/benefits. And all because fat rich gangsterbankster fucks can stay rich.
That the EU does not understand is that by imposing this haircut AND calling it voluntary is that just dumped all their gasoline on smoldering embers.
i agree it's "slop to the trough" at the Fed. You could literally here them crying on CNBC today because "one of their PD's went down." This was on a COMMODITY exchange! Gee, i wonder what they're doing with all that money! Reminds me of the famous Doonesbury cartoon of the 80's when all the farmers were going bankrupt...save "this one guy with bloodshot eyes"--who upon being asked "the secret to his success" responded "'taint corn!" I mean give me a break. "We have families to feed"? On the "world's greatest financial network"? BUY A FARM THEN!
Don't forget the operational side of traditional banking that is also screwed (in my theory):
1. mortgage and corporate lending in a high-risk/low interest rate environment has hit saturation point; and
2. the deposit side of the business is getting squeezed as sweep accounts are attracting shrinking margins at low global rates. Account holders are likely to continue switching from everyday, non-interest accounts to higher-interest savings accounts [these are not 'swept'] as business investment and risk-taking dries up.
Bruce,
The published LIBOR for December 31, 2011 <= 0.20% - the actual LIBOR = 0 ... not as a percentage, there will be zero lending between banks. There will continue to be significant lending from Central Banks to the banks at ZIRP ... why pay for milk when the cow is free?
barliman
I'll take $1 trillion at zero then. We shall see. I say it trades tight.
Bruce, can you do a little more investigating on the MF Global BK and ultimately the role played by Corzine and the ties with Goldman and how this went down so bad so fast?. This stinks from the high heavens and I am sure our other investigator surpeme Tiabbi will be tearing all to shreds soon too!
this is gonna be a case study as to why you don't have a former Senator and Governor running your "financial services firm." if John Corzine is called to testify before Congress what do you think he's gonna say? He's not gonna lie. No way. Using this President of the company to explicitly get in the way of regulators? Better not fail! Ain't no "Fortunate Son" defense in that business! If there's someone looking to sit in the same seat that former Senator Corzine and former Governor Corzine sat in....man, i'm not sure i'd want to be hiding anything "from de autorities" as they say. "it just takes one" as they say.
We've heard it all so many times. Banks will go bust, governments will print and we'll have hyperinflation.
And yes i believe this.
But WOIII will also follow as finguerpointing and survival will rank the top of our problems.
ZIRP is not risk free even though it has the same interest rate characteristic as risk-free cash. You are right, few analysts take the time to make a distinction, one who does is John Hussman, another voice in the wilderness.
Maturity risk is converted into default risk through the alchemy of open market 'magic'. What else? How about a carry trade that robs the US of investment capital and turns it into millions of empty apartment buildings in China. GRRR!
More Fed garbage from FT Fedwatchers: the chance of additional MBS purchases (which are illegal, but good for Bernanke's banker friends).
http://ftalphaville.ft.com/blog/2011/10/28/715566/another-reason-the-fed...
I gotta job for Bernanke, some reactors want cleaning in Fukushima.
had the (mistaken) idea that M2 was outperforming, but it is not in fact M1 is parabolic and M1 velocity is at 1980 levels! see the Fred graph. we all know what happens when the stuff stops flowing through the pipes, (similar to a crunch, but more like a sludgy backed up effect)
it may take some WH plumbers to get us out of this.
bruce is right & ben doesn't get it
You mean the Germans and the Jews are not singing from the same hymnal?
Who'da thunk it?
Nice find, Bruce. Any banks or fund pools anywhere, that might step into the breech?
The French & Spanish Banking Crisis (and it's a whopper), of which there has been conspicuous lack of analysis lately (at least by the Main Stream Financial Government Proxy 'News' Networks), is going to be the trillionS dollar straw that breaks the back of the global banking system, and that takes the option/ability of bailing out sovereigns off the table, as the direct and indirect financial/credit market destruction resulting from the EU banking implosion (that spreads to the U.S.) gobbles up all central bank resources and efforts.
100% haircuts for bondholders, bitchez. It'll be the new normal.
TruthInShunshine,fd
May not be full 100% but aside from that, I could not agree more. Fundamentally, money is only useful in exchange of goods and services as long as the party with real goods is conficent enough of the value of the money to proceed with the exchange.
Three decades ago during a Spanish vacation side trip to the"Casbah" in Algiers, a street vendor was giving me a very hard sell on a hand worked silver bracelet for 75 cents. The time was shortly after the start of US token coinage but not before silver was totally gone from circulation. I didn't really want the bracelet but he was trying so hard I decided that I would give him the sale. I gave him three of my US token quarters. He looked at them and handed them back. His new proce was $5 paper.
So, IMO, as I am sure that everyone on this board expects, here in the US, we will default through a relatively orderly inflation route with all of the effects that that implies.
"we're not getting the inflation." that's a fact. and the Fed just pulled the plug on a PD. As is often said here "the Fed is a private bank." Once Super Mario takes over "the scales will fall from his eyes" once he sees what Trichet has done. That's a banker replacing a...i don't know Trichet was actually. Anywho let me sum it up: Spain or Italy. That' how serious what Mr. Draghi faces. Needless to say from a political perspective...
Weinberg from this past Thursday
Echoes what BK is saying - ("a $1.3T crowding out - the basis for a depression" "a dark period for Europe")
this is worth listening to
http://media.bloomberg.com/bb/avfile/News/Surveillance/vbsKTNrj3p3k.mp3
10-31 15:35: US Treasury says increase in Oct-Dec borrowing due to lower receipts
Green sharts...errr, shoots!
Yet today was the first day in a very, very long time LIBOR didn't go up.
I'm not a bond guy, but I wonder if LIBOR is even still relevant, since it's the rate at which banks borrow overnight from each other. My take on it is that banks aren't borrowing from each other any more, since they can't trust each other enough to make loans. Instead, the ECB or the Fed pump in whatever amount of liquidity is needed to cover shortfalls on any and all time scales. Am I missing the point here?
Central Banks still borrow from each other. They just do it "in gold." Talk about "tonning it."
I have no support from economists in my conclusion that ZERO % = ZERO RISK. In fact, the vast majority of deep thinkers (and most importantly Bernanke) believe that ZIRP is the only path to consider.
Here's one who agrees with you. ZIRP only works if asset prices are already at equilibrium, and this can only happen IF all of the crap from the last cycle has already been washed through the system. Otherwise you end up where we are now: Artificially high asset prices supported by goofy government policies designed to keep politicians in office. Nobody will take the risk of borrowing to finance (still) overpriced assets, even if the money is free, because the loss on the asset immediately crushes your P&L.
http://seekingalpha.com/article/299596-fixing-wall-street-it-s-time-to-b...
OK, I agree----No buyers, no owners, no equity in reo at these price levels= no sales= dead in the water
So who blinks first before the Fed runs out of confidence? Or the 'confidence' of the capital markets runs out of confidence in the Fed?
Or is what Bruce is writing about the manifestation of all of the above?
I think so om
Pushing on a string...
Just warming up....
http://www.youtube.com/watch?v=978uQUK231M&feature=related
you forgot QEn. Bernanke will never let it happen, he is the God.
I have no support from economists in my conclusion that ZERO % = ZERO RISK.
Is that a typo?
Don't you mean: ZERO % does not = ZERO RISK ??
Or are you trying to say that ZIRP causes investors to shy away from commiting risk capital?
Mercury
that ZERO % = ZERO RISK
Bruce said the same thing, w/out spelling it out.
That was my take on it. Why expose yourself to any risk at all if there is practically no return?
When Ben drives interest rates negative, you will be forced to take risk or else your money evaporates before your eyes. While small amounts can be withdrawn in greenbacks, large amounts cannot. The Fed could probably enforce a negative rate up to 1-2% before everyone withdraws cash or piles into gold.
We are already putting money it to physical gold.
I believe that Bruce means "ZERO % = zero risk tolerance."
No, money/capital is never ever put out there without some kind of "reasonable" return. What I think he means in an algebraic way and assumes we all know is that in a world where RISK=RETURN but return is nominally zero, then we are actually living in a world with a negative risk situation. That would entail no threat of inflation but actual deflation, or capital appreciation or both. Dollars risked are returned to you worth more than they were when put up for "investment." There are dozens of people that want you to think this is the case too, Bernanke and half the Fed board for starters. And this is just why the Fed is pretty much the only real buyer of major asset classes. ZIRP implies we are and have been in a deflation for some time. Tell that to the fuckers at the gas station and Safeway please. Or my landlord.
Yes, Bruce has been pretty consistent in the 18 months I've been reading that there is no risk premium, and no inflation premium in bonds. ie, there is no real bond market, only Ben, and a few fund managers with hair triggers.
+1
I have the same question.
There is a very real cost for the creation of capital and any increase in the money supply, period. ZIRP does indeed increase the size of the black hole that is currently sucking liquidity out of the system via the destruction of what could be otherwise productive capital. The infinite growth model on a planet with finite resources blows up faster when and the paper is backed by nothing of real value and the sheeple start waking up to this.
Hedge accordingly.
Spanish bankers accusing Sweedish banks playing by looser rules in defining capital ratios.
http://www.bloomberg.com/news/2011-10-30/spain-bankers-point-to-fudges-a...
They said SWISS banks, not Swedish.
ZIRP shmerp, let's penalize people for savings by debiting their accounts for cash. Hmmm, a new iPad or a depleted savings account? Oh, this is of course on top of the inflation that the FED was not causing and the depletion of real purchasing power. NIRP, Negative Interest Rate Policy. Spend till you are done, then go bankrupt. Works for Greece, sort of.
You could just follow the Pope's prescription and enact a global central bank with a single electronic currency for all - the Mark of The Beast Currency. They tell you to spend your points by the end of the month or else they disappear. Sort of like food service points at any US college that disappear at the end of the semester.
Bruce wrote about one year ago how he cut back his annual spending by $150,000/year to accommodate his lost income from low risk savings vehicles. Has any dope in the Fed considered how many instances of this is going on, and the economic drag that causes? Does Black Hawk Ben understand how is vendetta against savers, retired people and poor people are suffering from the twin evils of high commodity prices and diminished income? We have Tea Parties and OWS, but where is the citizens that are being crushed by these policies?
Our spending as a couple has DEFINITELY gone down since they lowered interest rates so much. Now it's just (about) as safe to hold the actual FRNs under the mattress at home.
Gold > US$ FRNs > electrons at the bank
DoChen, Bro,
Dead on, you should hear the 20 questions I am gettng when I withdraw anything around, over 5k...........
Used to have my ATM set up for $1,000.000 /24 hr w/d's.(max allowable)
They cut it back(no notice to me), to $500.00 /24hr w/d's.(now max allowable)
NEW bank Policy.