"No Continent For Young Assets" - Charting The Root Of Europe's Problems: Record Old Asset Age

Tyler Durden's picture

It is no secret to those who follow the daily nuances of global monetary policy that the primary reason for Europe's deplorable fate has little to do with liquidity, and everything to do with an ever diminishing base of money-good assets, which in turn is a solvency problem when run through the cash flow statement and balance sheet. Need an explanation for the ever declining collateral thresholds by the ECB? There it is: assets in Europe are generating ever lower returns, which means that an ever lower inverse LTV has to be applied to them by monetary authorities in order for the asset holder to get some return. And with trillions in incremental cash needs, before all is said and done, the ECB (and various regional central banks, as was discussed last week), will be forced to accept virtually anything that is not nailed down as collateral for 100 cents on par (not amortized) value. Yet while observing the symptom is simple, the diagnosis is much more difficult. In other words, why is Europe's asset base getting progressively worse. Courtesy of Goldman we may have found the answer. As the following chart shows, the average age of assets in years in Europe, has just hit a record high. The implications of this are substantial, and explain so very much about the core problem at the heart of the European quandary.

it will come as no surprise that the return on an aged assets gets progressively lower the further it depreciates and amortizes. Further, the less cash available for capex, the lower the rate of asset replacement, and the older the prevailing asset base becomes. This all ends up in a toxic spiral in the context of continent deleveraging, where old assets create lower returns, leading to less cash, leading to less capex spending, all the while the liability side of the balance sheet stays fixed.

So as ever more cash is spent on interest outflows and debt maturities, the average asset age continues to get progressively higher, the PPE base of Europe gets even older, finally resulting in the situation Europe is in right now: a decrepit bed of Property, Plant and Equipment, amortizing ever faster, not being replaced, generating ever less cash.

Unfortunately, until a virtuous cycle begins where European (and soon American) firms start spending more on CapEx which more than offsets annual depreciation and amortization, everything else is irrelevant, yet the ongoing confusion of a liquidity with a solvency problem (because unlike Assets, liabilities do not "amortize" on their own absent a default of course) will continue.

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Ancona's picture

I believe all of this is meaningless in the face of a Euro area breakup. If Greece iin fact defaults, then expect Portugal and Spain to come with their hands out, looking for absurd terms on their debt on the threat of leaving the union. This will make for a good movie some day. I think Joe Peschi should play Monti.

dwdollar's picture

Nobody is defaulting until everybody is defaulting.

GeneMarchbanks's picture

We'll all awake one morning and Greece won't be the topic at all. Unlike mostpeople, I actually think that will be a horrible day. As long as Tchir(+ others) is yapping about the semantics of default I'm considerably less worried.

JPM Hater001's picture

On, dont think an Irishman might not show.

SheepDog-One's picture

Theyll tell him to go get his shine box.

Zola's picture

you just have to compare taking the tube or going to the airport in places like france & UK to asia and you get the picture...

onebir's picture

Assuming the assets are physical capital assets, doesn't the graph just mean they drastically reduced investment (buying new assets) after 2008? (So the capital stock has aged almost one year for each year after 2008.)

Eventually the declining productivity of the old capital stock - or new opportunities that can't be exploited with it - ought to induce some new investment, which would help get them out of recession. But to do that, the banks have to be lending... 

JeffB's picture

"But to do that, the banks have to be lending... "


But first they have to liquidate the malinvestment, and the central banks and their puppet masters won't allow that.

The "just print more money" paradigm doesn't free up any more actual resources, it just devalues the currency, tricking people into thinking there are more resources. Of course that only contributes to yet more malinvestment and delay of liquidating current malinvestment, making the eventual reckoning all the more painful.

ParkAveFlasher's picture

TO sum: More Scrooges, fewer Crachits.  Tiny Tim is a poor Greek child beating a drum in Syntagma Square.  And who can blame anyone?

tabasco71's picture

This is just great when added on top of the 'young assets' which don't have much value either to compensate (ie: property built during the last few years).

Well, if banks would start lending again, instead of reducing holds/dumping assets... corporates could buy some new PPE.

SheepDog-One's picture

Banks cant lend, everyone is broke, no one qualifies for a loan.

JeffB's picture

and the banks themselves are broke, though no one is admitting it.

The central bankers have precipitated this worldwide fiasco "We're all Keynesians now", and still haven't figured out their folly. We're repeating all of the governmental intervention mistakes of the Great Depression in spades.

Ron Paul is the only one of the US candidates for President who understands the economics of the situation and yet all of the power brokers think he's nuts.


SheepDog-One's picture

As the monetizers keep flooding in fake money to buy themselves all the stocks and bonds the people assume 'all is well, theyre helping me'...soon 1 morning theyll pull the rug out because you dont have to keep buying after you own everything. This game is basically over, and hardly anyone can see it.

lynnybee's picture

This game is basically over, and hardly anyone can see it.   oh, i see it !   the name of the game is to own everything .    the banks (Rothschilds) are setting themselves to own everything, they will own the system, & set themselves up for the next cycle.   

SheepDog-One's picture

I just mean outside of us here, as far as the public is concerned, 'all is well'. They dont know theyre being set up for the mother of all rapings.

tabasco71's picture

Not quite over...a new industry sector is forming which will generate employment... its called the 'compliance AML Volcker Dodd Frank SIFI FATCA' industry.

Not sure how it adds value.  Its mission statment probably argues that it delays the erosion of value.

Its funded by government hand-outs, just like economies have always been (?)


1. Actually produce value - up til 70/80's

2. Financially engineer value - last 20 years

3. Delay the erosion of value - last 5 years and the rest of your working life...

bank guy in Brussels's picture

This piece is a little puzzling and misleading.

Western Europe has quite good infrastructure ... important and useful because we are much less car-dependent. Though we like our cars, but they are more 'toys' here.

For example, Spain has more kilometres of high-speed rail per capita than any other country in the world.

Maybe the reason is that, in Europe, we have LOTS of infrastructure, a lot more by way of public facilities and plant ... some of it quite old (like in Belgium, where we had the first original railways in Continental Europe), but actually quite well maintained.

Another possibility is that the above perspective is tilted toward the old Communist East Europe, where a lot of infrastructure does still need to get accomplished.

It seems clear from many reports, it is the USA which is the dilapadating infrastructure nightmare ... not here in Western Europe.

Writing this as I am about to get on the wonderful city light rail tram line ... heading toward the national low-energy-use electrified railway network ... all in quite fine shape, thank you.

SheepDog-One's picture

Of course USA's infrastructure is decrepit, the country is scheduled for demolition soon so why fix it?

GeneMarchbanks's picture

'It seems clear from many reports, it is the USA which is the dilapadating infrastructure nightmare ... not here in Western Europe.'

The truth is both face huge challenges in reality. In the media-sphere however, only one is allowed to be talked about.

Schmuck Raker's picture

The article is concerned more with Corp assets than public infrastructure.

"This piece is a little puzzling and misleading." Yes, it could be more explicit at the outset.

Not that I am disagreeing with anything you said.

Ghordius's picture

also not disagreeing and also thinking that the article is just a spin piece about the debt paper being used as collateral - which is probably useless as such if you don't check the maturity of this debt.

example: if I use a 30y bond that is already 8y old it's a different thing from using a 10y bond that is 2y old


hemm... no LTRO jump? only a gradual rise of age? eh, if you spin data you should do a better job out of it....

Azannoth's picture

With absolute taxes in the 50%-70% range for any1 with a job, no wonder some(very little in fact) of that money keeps the lights on

In Germany it works like this let say you make 50,000 per year, you will get 25,000 on hand however your company will pay an additional 25,000 to the government(unemployment insurance, health care etc.) so in effect the cost of your employment for the company is 75,000 not 50,000 so the effective tax rate is not 50%(as if that wasn't high enough) but more like 66% and that's before all the consumption, exercise and supplemental taxes not to even count the cost of the bureaucracy and over-regulation you are lucky if you can keep your tax burden below 80%(it does not feel that high because most of the taxes are obfuscated and automatically added to anything and everything without specifically saying so)

smb12321's picture

Infrastructure is not the problem.  It's demographics, a bright spot for the US.  If the two legs of the EU economy is prosperity based on consumption and social welfare to aging citizens, how can it possibly thrive while rapidly losing population?  The cost side of the equation is exploding while the revenue side is declining.  The same thing will happen to China when India overtakes them in a couple of decades.

Clint Liquor's picture


Coming to a Country near you.

SheepDog-One's picture

Central banks now own basically every bond and stock..game, set, and match. All set up to accomplish just this since 2008, while no one had a clue because 'Socks are up', no one cares.

GeneMarchbanks's picture

Similar story a few years back, kinda funny.

nah's picture

a more complex sytem of taxes can fix that

Dapper Dan's picture

The bonds are back!!!!

Italian police seize about $6 trillion of fake US treasury bonds in Switzerland - @Reuters
hedgeless_horseman's picture


These are not the bonds you are looking for (Jedi wave), we can go on about our business.

We shall see if they let them go again without much questioning.

Sandmann's picture

This is mixing apples and pears. There are huge cash balances inside major European businesses for CapEx. There is however little motivation to invest because of the Green Agenda which makes every investment decision harder to justify in Europe as opposed to outside Europe. The limit on Working Hours makes returns to capital investment lower, and the constant flow of EU Directives and Regulations makes investment harder to plan over the horizon. In the UK the hurdle rates are too high and ROE is ridiculous in any sector requiring market development as opposed to share-cropping. It is virtually impossible to invest as a UK business in Germany because the City-approved Returns are simply not possible to generate in product-driven businesses which is why Germany and Austria can make goods in family-businesses - basic goods such as leather boats and slippers - which British companies have outsourced to China. Germans and Austrians produce quality but the British source shit and retail it at a premium.

The age of utility assets in Europe is far lower than the USA which has backward electricity grids. The transport system in the US is aged and decrepit compared to Europe. The steel industry in the US is backward with low productivity and protected by Washington rather than modern assets.

Return on "aged assets" does not need to be lower - it can be a competitive advantage. Depreciation is a non-cash charge but the price of producer goods is key. Typically the Japanese mark up producer goods for their factories in Europe or the USA to gain high depreciation shields and lower profitability repatriating profits through producer goods transfer pricing.


Goldman focuses far too much on accounting data when looking at PPE rather than economic value. There is no point in over-investing in capital equipment as Japan did in the 1980s during the Japanese Warrants farce whereby Japan borowed at 0% and firms like SONY went beserk investing in audio-visual only to end up as zombified when Samsung took their lunch through R&D. The problem in Europe is massive under-investment in R&D especially in Britain where the country was transformed from a sickly manufacturer under Margaret Thatcher into a giant Hedge Fund with bloated FIRE and Retail sector incompetely selling imported goods at inflated prices and like the USA a bizarre focuis on cOmmercial and Residential Real Estate as if these were productive assets.


tabasco71's picture

Sandmann - I've clicked your green arrow for that.

I actually realised I have been waiting since 2007 for the UK to fulfil its potential as 'high-end niche manaufacturer' of low volume, high margin, quality products.

Wonder where that dream went...?

GeneMarchbanks's picture

"To trace something unknown back to something known is alleviating, soothing, gratifying and moreover a feeling of power. Danger, disquiet, anxiety attend the unknown-the first instinct is to eliminate these distressing states. First principle: any explanation is better than none…The cause-creating drive is thus conditioned and excited by the feeling of fear…" -- Nietzsche

Goldman always there with a perfect 'explanation'. Jay-Zeus, get these people out of Europe before they start another clusterfuck and then write about it in their nonsensical reports.

Peter K's picture

Europe problem is socialism. They spent all their money on the welfare nanny state. It's just that simple.:)

GeneMarchbanks's picture

Not really, but you are 'that simple'.

Eeyores Enigma's picture

"Europe problem is socialism."

Yeah, why should the people benefit from the excess of real production. Thats only for the usury/rentier class.

Canucklehead's picture

As the old saying goes... Don't eat your seed corn.

HoardeBilly's picture

Especially Monsanto corn!  Don't get that anywhere near your mouth! 

Stuck on Zero's picture

We don't need CapEx in the U.S. We wait for the Chinese to make something and then we retail it.  What's wrong with that?

Eeyores Enigma's picture

There was a time a long long time ago when the REAL economy didn't need nor could it support banking and finance.

Then things became complex enough, population soared and excess was created in abundance and thus banking and finance entered the scene stepping in between producer and consumer, sucking up excess, encouraging complexity and providing jobs whereby encouraging population growth.

Now banking and finance and to some degree it's illegitimate offspring, insurance & Real estate (and lets not forget Government) thinks it has out grown the need for a REAL economy and the world can get along just fine without it. Everyone can make a living shuffling around money and paper. 

Guess what...it's bull shit. It's all down hill from here as complexity unwinds and population declines.

HoardeBilly's picture

Hey, I can survive on paper.  We Goats can survive on anything!  But sux for the rest of you soft bipeds.

Peter Pan's picture

Is the problem that they are old or is it that they were sold for ridiculous amounts of money during the boom of the last decade? This in turn is yielding low rates of positive cash flow which when combined with a recession is making new investments hard to find.

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