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In Latest European "Stress Test" Farce, ECB Assumes No Deflation Even Under Severe Systemic Shock
In what is now an annual attempt by regional central banks to shore up confidence in their insolvent banking systems (because if they were solvent, there would be no need for such optical gimmicks as "stress tests"), yet which end up nothing shy of an all out, humorous farce, earlier today the EBA published its methodology for the 2014 EU-wide bank stress test. Before we go into the details, a quick refresher on why instead of boosting confidence in banks, these periodic wastes of taxpayer funds achieve anything but. After all, who can forget that back in 2011 it was none other than Dexia that was supposedly the best performing bank in Europe.
Of course, Dexia was promptly nationalized shortly thereafter after it was Lehmaned.
But it is not just Europe: America's own Fed cleared the 2014 US stress test-participating banks to issue more capital to shareholders just one month before Bank of America revealed that it had botched its calculation of its regulatory capital, and as a result was scrapping its capital return plan.
Some supervision; some confidence building...
But back to Europe where as noted above, earlier today the EBA published its common methodology and scenario for the 2014 EUwide bank stress test. The adverse scenario covers the period 2014 to 2016 and at least on the surface is generally tougher than the adverse scenarios in previous similar exercises, resulting in a severe negative deviation of EU GDP growth of 7% from its baseline level by 2016.
So far so good. But where the whole thing disintegrates into yet another sham spectacle confirming just how insolvent European banking truly is, is one simple observation: not even under the adverse scenario does the ECB contemplate the possibility of deflation!
That's right - so atavistic is Europe's fear of deflation, that even in what is supposed to be a purely hypothetical scenario which by definition should cover all unpleasant possible outcomes, did it not cross the mind of the test arranger to speculate that Europe, which already is struggling with deflation and will fudge each and every inflation print to make inflation appear higher than it really is, could enter outright deflation.
Needless to say, the glaring omission of this most probable path for European asset prices, makes the latest Stress Test immediately null and void. What is worse, the fact that the ECB made it a point of excluding this possibility, shows just how terrified Europe is of declining prices (for which Draghi can thank his colleague Kuroda who has been engaging in a historic episode of deflation export for the past year), and that should deflation indeed flare up in Europe even more, then all bets are off.
Here is SocGen's take:
On inflation the adverse scenario lowers inflation by 1.3pp in 2016 compared with the baseline, resulting in still positive inflation of 0.3% in the euro area. Noteworthy is that among the larger euro area countries, France would be the only country to enter deflation in 2016, while both Italy and Spain would have higher inflation than Germany. While these scenarios are static, assuming no change in commodity prices and monetary policy, they suggest that it would require a rather big shock in the euro area to see a clear deflationary scenario developing for the area as a whole. This is somewhat surprising given the recent vivid debate on whether the euro area is already close to deflation or not.
As we said, superficially at least, the stress test is said to be tougher than any previous one. What "tougher" means however in the context of a world where banks (as Bank of America did) can and will openly fudge and make up whatever numbers they wish, is debatable. Here are the details:
Stress tests tougher than in the past, but banks may also be better prepared Compared with previous stress tests, the new adverse scenario is both more demanding and long-lasting (3 years). As regards, GDP growth, the negative deviation now stretches over three years, implying a decline of 7% for the EU, compared with a deviation of around -2% per year in the last Stress Test. Also the decline in house and stock prices in now more pronounced while the rise in bond yields is significantly higher. The rise in short-term interbank interest rates is however more muted this time, while the change in the labour market is broadly similar. While this all suggests a tougher test for banks, banks are likely also in a better position in terms of capital and earnings than they were in the past which should mitigate the impact.
On top of the common shock to short-term interbank rates, the ESRB also includes a more generic shock to EU banks’ funding access, capturing both cyclical and structural forces. Interestingly, the cyclical factors are said to be “rooted in concerns about insufficient balance sheet repair due to doubts about the public backstops available for the Comprehensive Assessment”, which is in line with the ECB’s previous criticism on the progress with Banking Union. This shows an encouraging willingness by the ESRB to acknowledge that the slow progress with Banking Union can have tangible costs.
Here we will reserve our right to laugh: after all it was the IMF itself which said in August of 2013 that the "Eurozone Funding Shortfall Rises To Over $4 Trillion, Increases By More Than $500 Billion In A Year." In other words, all Europe can hope is to kick the can indefinitely and pray nobody asks to look under the cover of what is really happening, and certainly not force the ECB to use its magical, and still completely non-existent OMT program.
But what is the straw that breaks the camel's back is the following blurb:
No deflation expected in the euro area even in the adverse scenario (!)
This scenario analysis naturally represents a relatively static view, providing a snapshot of shocks and bank’s balance sheets at a particular point in time (Q42013). For instance, no changes are assumed on oil, non-oil commodity prices or monetary policy. Interestingly, even if the magnitude of the shocks is larger in this exercise, the effect on inflation appears to be more muted and delayed. With a larger drop in GDP growth than in 2011, inflation is still only expected to decline by 0.1 and 0.6pp compared with baseline in the first two years, whereas in 2011, the decline was 0.5 and 1.1pp in the first two years. This may relate to the fact that inflation now is much lower, and possibly stickier, but it also suggests a surprising resilience to a negative growth and financial market scenario. Interestingly, only France (along with five other euro area countries) is expected to see negative inflation in 2016, whereas both Italy and Spain would have higher inflation than Germany. A relatively large shock would thus be necessary to tip the euro area into deflation, possibly larger than what is currently commonly assumed given the already vivid debate on whether the euro area is already close to entering a deflationary scenario.
This points to the difficulties in designing realistic scenarios (without affecting expectations), with success only possible to establish ex post. Still, progress has been made from previous Stress Test exercises in terms of stringency, length and transparency of the adverse scenario, which should ultimately benefit the robustness of the upcoming Stress Test.
Yes, progress, from one fabricated and completely worthless "test" to another, neither of why has any utility whatsoever. But at least someone, somewhere is expected to feel more "confident" about European banks (of which Deutsche Bank as we observed yesterday, has a total notional derivative position of $75 trillion, or 20 times more than the GDP of Germany).
And since our running commentary on this particular farce from the central bank toolkit has been well-known since our running commentary on the first 2010 European stress test, we will leave it to SocGen instead:
One could question the pass-through into inflation or whether the (ECB’s) baseline inflation outlook in fact constitutes a relatively optimistic scenario.
Translation: even SocGen, with its own share of balance sheet issues and happy recipient of ECB generosity for years, thinks the latest and greatest stress test is a joke. In that case what is everyone else supposed to think?
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As long as you keep your head in the sand....all will be well
Good Italian friend of mine once told me, "A man is worth whatever he can get his hands on in 24 hours."
That seems like a good rule of thumb to apply to everyone and everything in determining the value of something.
This mind set musty be behind the VXX slam, with all the VOL indexes heading down to 0. Since nothing can ever go wrong, VOL belongs at zero.
These guys are paid to make this shit up. Just think about that for a second.
I know what you're talking about. Just like the way Abe, and his buddies in Japan releases a "News" about how they will be doing moar QE at 1:00 A.M. Tokyo time.
Won’t they be surprised as the next hiccup makes their economies contract faster than a whoopee cushion being sat upon by Michael Moore.
Even in a collapsing economy they can keep bond values up using the oldest trick in the book, currency printing and resulting inflation.
Zimbabwe's stock market soared while the economy collapsed. How? Massive currency printing and hyperinflation.
It works because nominal values are all that matter. The numbers on the tickers, quote screens, etc. Long as those numbers keep rising everybody is happy.
Any central bank in any country can guarantee no deflation. All they have to do is crank the printing press up faster, print lots more currency.
Doesn't matter what the economy does. They don't care about the economy anyway.
Of course they didn't assume deflation. Then all the banks FAIL.
Screw'em
I hear the helicopters coming…
I suspect the ECB also assumes no restriction of natural gas or oil supply from Russia. That couldn't happen, you see.
We're talking the paper world here, please move along! </sarc>
BLACK HAWK DOWN
Is that "D" word even in the bankers' dictionary?
Bryan Is that "D" word even in the bankers' dictionary?
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Why would it be? With all the massive printing by the FRB, ECB, and BOJ, everyone for years have feared and talked about inflation or hyperinflation. Most of them have been PM bugs.
But as I have said for years, deflation is the problem because of debt. Basically debt absorbed money printing, thus that money isn't circulating throughout the economies. Yes, we have had some price inflation in come areas, but based upon the massive amount of printing, those price increases are tame. Consumers feel the pinch because everyone is fighting for scarce dollars. If we had no debt, at the current levels of printing, we would see $10 plus for a loaf of bread, but we don't.
Look at the size of todays REPO... Unfucking believable! [ $183.327 billion] That's no typo my friends.
http://www.newyorkfed.org/markets/omo/dmm/temp.cfm?SHOWMORE=TRUE
Junkies always need more smack to achieve the same high.
YC, I checked the site and it looks like they did 242 at the end of last month. Then a descent in early April.....with a hockey stick to the end of this month. Taper shmaper.
The Fed has no intention of ever drawing down liquidity. They've just tried to create the illusion for the sheeples. Between backdooring treasury purchases through Belgium and Reverse REPOs the fed. has just become even more sneaky and controlling.
I checked. Based on my anecdotal evidence...the sheep have never heard of the taper. So, really, who are they trying to kid? Maybe, they just are addicted to lying and bullshit and can not stop. Yeah...I am going to go with that.
hold the fucking phone: 183 billion?? Is that really correct?
Not doubting you at all, I just looked at the number. I'm only questioning it because it seems utterly mind boggling.
at least they are being honest about their future intentions. print till the moon.
there will be no 'deflation' of the money supply. they will print more money.
how the settlements of debts , and prices respond makes no difference. because there will be a crash of the availability of supplies and high quality services. but don't worry----cheap and free labor will be plentiful.
"Draghi is the model Central Banker"
James G Ricktards during a BBC interview
Yeah, because he is a duchebag.
Which one?
Both in effect. Ricktards is a double agent. He is a jockeying for a high position in the NWO. Draghi is just a Goddam Sucks Stooge like Carney.,
It is just a bunch of BULL SHIT that tries to keep money from taking flight.
The fact that they have to do these "stress tests" speaks volumes to the solvency of these institutions.
Where there is smoke there is fire.
you're all missing the biggest story in the world right now.
For the first time ever, you get to watch live EU Presidential Debates, where an EU citizen can make their choice from a pool of candidates representing the entire political spectrum (the left, socialist, green, democratic/market liberalists, conservative/centre-right), rather than the silly demopublican, limited-choice, fixed, bs...
http://euranetplus-inside.eu/big-crunch-presidential-debate-on-april-29/
Psst! It's the SYSTEM!
this wouldn't be allowed if the outcome were not fixed (all candidates are controlled, one way or another). voting in the system only validates the system.
actually, this system is pretty cool. much better than US. just think of the dynamics of the usa, if you guys were to adopt the following voting procedure:
Dude...you suck ass!
Why don't you just shut up?!?
not until you offer something more than 2 lines of teenage angst...
your other posts aren't that bad...
so, why don't you try again to be funny, but also inject some philosophical references into a retort?
I think that this also says: "You will buy what we tell you to buy!" as long as we're using Their currencies then they are going to tell/force us what to buy. If we don't buy what the're pushing then deflation is pretty much the "default."
The Farce is strong in these swindlers...may the Farce be with them...
Prediction: FAIL- they'll end up doing a farce plant!
This is what most people don't understand - paper over a lie all they want, the end result is still the lie.
Mother Nature doesn't like being lied to...
It's Tuesday! Sell the fucking top!
I tried shorting aud/jpy and it pissed in my face for 15 lousy pips. Although I do think this EOM risk-on farce is going to wind down into the Fed. and BoJ.
Meanwhile, in the US, all is fine:
U.S. consumer confidence near six-year high, home prices risehttp://www.reuters.com/article/2014/04/29/us-usa-economy-confidence-idUS...
But wait!
Detroit Homeowners Gun Down Burglars as Police Wait for Carshttp://www.bloomberg.com/news/2014-04-29/detroit-homeowners-gun-down-bur...
All under control, all under control...
http://finance.yahoo.com/blogs/daily-ticker/bank-capital-is-an-illusion-...
Not sure about her claim that things are better, but all else, logic-wise, seems pretty spot-on.
Seer Not sure about her claim that things are better, but all else, logic-wise, seems pretty spot-on.
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Such as " McLean calls herself a perma-bear, and says she’s worried about a tech bubble, profit coming from cost-cutting and not growth, and the slow-down in China."
Like most analysts, she puts in that caveat to cover their ass. I am bullish and I'm bearish, so I'm right either way.
So this must mean ... BTFD, BTFATH, BTFWWIII, BTFSCCWMB (Buy the fuckin' shit, cock, cunt, wank mutherfuckin' bullshit), at least between 2014 and 2016!
>>>
...and still completely non-existent OMT program...
<<<
Whether or not there is an OMT depends on what Germany wants - Draghi himself has no power.
Since Merkel won her election, and she really believes in the United States of Europe, if she thinks OMT is necessary German taxpayers will be the buyers.
That does not mean that OMT, even if implemented in the size and scale possible with a Merkel blessing, will actually achieve anything...see Japan.
"That's right - so atavistic is Europe's fear of deflation, that even in what is supposed to be a purely hypothetical scenario which by definition should cover all unpleasant possible outcomes, did it not cross the mind of the test arranger to speculate that Europe, which already is struggling with deflation and will fudge each and every inflation print to make inflation appear higher than it really is, could enter outright deflation."
don't agree. Europeans worried about deflation? wrong continent
US confirms its first case of MERS virus
http://tersee.com/#!q=mers&t=text