#ecb

Central banks are climate change experts now. If only they possessed such skill in their core competency

Are these people for real? Does the Bank for International Settlements (BIS) truly believe that world’s central banks will become “climate rescuers of last resort”? Do we really want our central banks to be more proactive in pushing governments toward a greener economy by suggesting a carbon tax as “first-best solution“? The problem with central bankers is that every problem looks like a nail when they only have a hammer in the toolkit.

First, on what level do central banks have a clue about climate change? If they had even the foggiest notion about the science they would never have embarked on a set of reckless monetary policy measures that created the very conditions for excessive debt, mal-investment and over-consumption which they now seek to punish us for via the adoption of a carbon tax.

We should not forget the almost $300 trillion of global debt now racked up thanks to abnormally low interest rates. It is politically expedient to run budget deficits too because central banks are only too happy to keep (near) ZIRP or NIRP which makes servicing ballooning deficits appear almost perpetually affordable with short term focused politicians. It is but a figment of their imagination.

How easy it is to sound the alarm on climate change to mask the policy blunders of the last two decades. It would be nice if we could believe they possessed expertise in their mandated role before embarking into a field they have no sound base to work from. It is a dangerous distraction.

It is worth citing a few examples of the record of central banks around the world since GFC.

In 2018, the US Fed stopped reporting changes in the balance sheet. It did this to prevent spooking the markets over tapering. It reminds FNF Media of the day Bernanke’s Fed announced it would no longer report M3 money supply a year before the financial markets headed into the GFC. Why is there a need for a lack of transparency if it wishes to instill market confidence via its policy settings?

Has the Fed reflected on the fact that over half of listed corporates have a credit rating of BBB or below? Ford Motor Co’s credit rating was downgraded by Moody’s to junk. $84bn worth of debt now no longer investment grade. It will be the first of many Fortune 500s to fall foul to this reality. In 2008, there was around $800bn of BBB status credit. That number exceeds $3.186 trillion today. Brought to you courtesy of low interest rates.

The Bank of Japan (BoJ) is now responsible for 60% of all ETF market ownership. Latest reports confirm the Bank of Japan (BoJ) has now become a top 10 shareholder in almost 50% of listed stocks. In a sense, we have a trend which threatens to turn Japan’s largest businesses into quasi-state-owned enterprises (SoE) by the back door. The BoJ now owns $250bn of listed Japanese equities. It is the top shareholder in household Japanese brands such as Omron, Nidec and Fanuc. At current investment rates, the BoJ is set to own $400bn worth of the market by 2020-end.

The BoJ’s manipulation of the JGB market caused several of the major Japanese banks to hand back their trading licenses because they served no purpose anymore given the central bank’s manipulation.

The ECB has dropped the ball in Europe. Jonathan Rochford of Narrowroad Capital wrote,

Many European banks have failed to use the last decade to materially de-risk. The most obvious outworking of this is that European banks continue to receive taxpayer funded bailouts, with Germany’s NordLB and Italy’s Banca Popolare di Bari both receiving lifelines this monthOne final issue that lurks particularly amongst European banks is their gaming of capital ratios. European banks have become masters of finding assets that require little risk capital but can generate a decent margin. Government debt from Italy is one example, with pressure now being put on the ECB to allow for unlimited purchases of Greek government debt. This would substantially increase the already significant “doom loop” risk. This risk arises from the potential for a default on government debt to bankrupt the banks, and the converse situation where failing banks look for a taxpayer bailout and bankrupt the country.

The list goes on and on. Central banks are in no position to lecture the rest of us on anything given their command of their core competence remains so flawed.

Global money velocity has been declining for two decades. Every dollar printed creates an ever shrinking fraction of GDP impact. Yet all we did was double down on all the failed measures that led us into the GFC

What we do know is that the BIS has sought the advice of literature professors to come up with the phrase that climate change presented a “colossal and potentially irreversible risk of staggering complexity.”

Really?

It is easy for the BIS to shout that a “green swan” event could send us into the financial abyss. However the reality is that dreadful stewardship of monetary conditions has set us up for a huge fall. Not a bushfire, storm or flood. Perhaps we might view a green swan event as wishful thinking by central banks because it would allow them to absolve themselves of all responsibility in getting us into this mess in the first place. They want to see themselves as saviors, not culprits.

Rochford sums up central banks brilliantly with this comment,

When it comes to central banks, I would prefer to believe it is a combination of groupthink, an unwillingness to take career risk by speaking the truth and a willingness to either ignore or disregard counter evidence that has resulted in the detrimental decisions since the financial crisis. However, the increasing amount of evidence, often produced by central banks themselves, points to central banks being more culpable than gullible.

So given this condition why on earth are we paying any attention to their prescriptions on saving the planet? When they quit the excuses and fess up that the last two decades of monetary policy has failed to fix the excesses built in the system then we might lend an ear. Until then they join the list of government agencies who don’t want to be caught out not being in line with the settled politics. Truly sick.

This can only end in tears

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As Sweden’s economy slows to the worst economic growth rate in 5 years under a negative interest rate policy, one would think the Swedish Central Bank (Riksbank) would be seeking to prudently manage its asset book on the basis of appropriate risk/reward as opposed to lecturing Australia and Canada on their respective carbon footprints. What we are witnessing is yet another discrete move by authorities to manipulate markets based on fantasy rather than fact.  The hypocrisy is extreme as we shall discover.

While the Riksbank should have complete freedom in how it wishes to deploy capital, we should view this is a pathetic sop to the cabal at the European Central Bank (ECB). Since when did central bankers become experts on climate change? The RBA is no better. Deputy Governor, Guy Debelle, gave a speech in March 2019 on the risks posed by climate change which based prophecies on the data accident-prone IPCC and Bureau of Meteorology. Why not seek balance? Easier to fold to group think so as not to be outed as a pariah. Utterly gutless. Our own APRA is also pushing this ridiculous agenda on climate change reporting. It is willful negligence.

While it is true that on a per capita basis, Australia and Canada’s emissions are higher than the global average, why doesn’t the Riksbank give us credit for lowering that amount 11.4% since 2000? Even Canada has reduced its carbon emissions by 7.3% over the last 18 years. Admittedly Sweden’s emissions per capita have fallen 21.9% according to the IEA. Greta will be happy.

Why hasn’t the Riksbank taken China or India to task for their 169.9% or 94.7% growth in CO2 emissions respectively? There are plenty of oil-producing nations – Qatar, UAE, Bahrain, Saudi Arabia and Oman that have worse per capita outcomes than Australia or Canada. Do these countries get special dispensation from the wrath of the Riksbank? Clearly.

The US has pulled out of the Paris Climate Accord. If the US has marginally lower emissions per capita (15.74t/CO2-e) than Australia (16.45t/CO2-e), isn’t a double standard to write,

The conditions for active climate consideration are slightly better in our work with the foreign exchange reserves. To ensure that the foreign exchange reserves fulfil their purpose, they need to consist of assets that can be rapidly converted to money even when the markets are not functioning properly. Our assessment is that the foreign exchange reserves best correspond to this need if they consist of 75 per cent US government bonds, 20 per cent German and 5 per cent British, Danish and Norwegian government bonds.

Essentially Riksbank commitment to climate change is conditional. The US which is responsible for 13.8% of global emissions can be 75% of holdings. Australia at 1.3% can’t. No doubt sacrificing Queensland Treasury Corp, WA Treasury Corp and Albertan bonds from a Riksbank balance sheet perspective will have little impact on the total. In short, it looks to be pure tokenism. The Riksbank has invested around 8% of its foreign exchange reserves in Australian and Canadian central and federal government bonds. So perhaps at the moment, it is nothing but substitution from state to federal. Why not punish NSW TCorp for being part of a state that has 85%+ coal-fired power generation?

At the very least the Riksbank admits its own hypocrisy.

The Riksbank needs to develop its work on how to take climate change into consideration in asset management. For instance, we need a broader and deeper analysis of the issuers’ climate footprint. At the same time, one must remember that the foreign exchange reserves are unavoidably dominated by US and German government bonds. The Riksbank’s contribution to a better development of the climate will, therefore, remain small. This is entirely natural. The important decisions on how climate change should be counteracted in Sweden are political and should be taken by the government and the Riksdag (parliament).

Still, what hope have we got when Benoît Cœuré, member of the Executive Board of the ECB, lecturing those on “Scaling up Green Finance: The Role of Central Banks.” He noted,

2018 has seen one of the hottest summers in Europe since weather records began. Increasing weather extremes, rising sea levels and the Arctic melting are now clearly visible consequences of human-induced warming. Climate change is not a theory. It is a fact.

Reading more of this report only confirms the commitment of the ECB to follow the UN’s lead and deliberately look to misallocate capital based on unfounded claims of falling crop yields and rising prices (the opposite is occurring) and rising hurricane and drought activity (claims that even the IPCC has admitted there is little or no evidence by climate change). Sweden is merely being a well-behaved schoolboy.

Cœuré made the explicit claim, “The ECB, together with other national central banks of the Eurosystem, is actively supporting the European Commission’s sustainable finance agenda.

CM thinks the biggest problem with this “agenda” is that it risks even further misallocation of capital within global markets already drowning in poorly directed investment. It isn’t hard to see what is going on here. It is nothing short of deliberate market manipulation by trying to increase the cost of funding to conventional energy using farcical concocted “climate risks” to regulate them out of existence.

Cœuré made this clear in his speech,

once markets and credit risk agencies price climate risks properly, the amount of collateralised borrowing counterparties can obtain from the ECB will be adjusted accordingly.

What do you know? On cue, Seeking Alpha notes,

Cutting €2bn of yearly investments, the European Union will stop funding oil, natural gas and coal projects at the end of 2021 as it aims to become the first climate-neutral continent.

All CM will say is best of luck with this decision. Just watch how this kneeling at the altar of the pagan god of climate change will completely ruin the EU economy. The long term ramifications are already being felt. The EU can’t escape the fact that 118mn of its citizens (up from 78m in 2007) are below the poverty line. That is 22% of the population. So why then does Cœuré mention, in spite of such alarming poverty, that taking actions (that will likely increase unemployment) will be helped by “migration [which] has contributed to dampening wage growth…in recent years, thereby further complicating our efforts to bring inflation back to levels closer to 2%.

Closer to home, the National Australia Bank (NAB) has joined in the groupthink by looking to phase out lending to thermal coal companies by 2035. The $760 million exposure will be cut in half by 2028. If climate change is such a huge issue why not look to end it ASAP? This is terrible governance.

Why not assess thermal coal companies on the merits of the industry’s future rather than have the acting-CEO Philip Chronican make a limp-wristed excuse that it is merely getting in line with the government commitment to Paris? If lending to thermal coal is good for shareholders in 2036, who cares what our emissions targets are (which continue to fall per capita)? Maybe this is industry and regulator working hand-in-hand?

The market has always been the best weighing mechanism for risk. Unfortunately, for the last two decades, global central bank policy has gone out of its way to prevent the market from clearing. Now it seems that the authorities are taking actions that look like collusion to bully the ratings agencies into marking down legitimate businesses that are being punished for heresy.

This will ironically only make them even better investments down the track when reality dawns, just as CM pointed out with anti-ESG stocks. Just expect the entry points to these stocks to be exceedingly cheap. Buy what the market hates. It looks as though the bureaucrats are set to make fossil fuel companies penny stocks.

Not capitalism with warts but socialism with beauty spots

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I was fortunate enough to attend an LDP function last night where Deputy PM and Minister of Finance Taro Aso spoke. The audience was largely retirees in their 60s-80s in the Yokohama area who in part likely came for the hotel buffet. I was the only foreigner to attend among 1,000 guests. Aso truthfully described the difference between Japan and the West. Talking of how many foreign politicians can’t understand how Japan can have so many vending machines because in their countries they’d be vandalized  for their cash. Aso’s bigger point was made around deflation and how Japan is coping far better than most of the West, especially the EU. While there is a sense of celebrating an own goal, the biggest mistake made by the West in its analysis of the ‘lost two decades’ in Japan has been its unique society. Only in Japan could a population withstand two decades of hardship. Shared grief.

In the West, when it all goes to the dogs people will run as far away from the implosion as they can. Moral hazard is the order of the day. Make someone else pay. I recall the tale of a friend who had bought a condo in a ski resort in Yuzawa, Niigata Prefecture for around $20,000 off a family who had paid $800,000 for it during the bubble. They religiously paid off the loan as a form of moral obligation. In Japan, bankruptcy is seen as failure. A bankruptcy record is hung around one’s neck forever. In America, bankruptcy is seen as a badge of honor in some circles for someone pursuing the American Dream and in the next credit cycle, financial institutions will forgive the infraction, albeit at a slightly higher risk premium.

The point Aso was making was on the money. Japan is different. It is a society based on values. While the West may frown on the Japanese taking on a 250% debt: GDP ratio to allow the air to slowly leak out of a balloon, the society demands it. Despite all of the studies I’ve read on financial resurrection from deflation in the West I can safely say ‘society’ is the seemingly most overlooked yet most relevant part of the equation. As the game of convenient lies mount up from the mouths of politicians, a growing number of people are realizing that failure to act will lead to unpleasant truths. Economic cycles can only be toyed with to a point until trust leaves the system. The Japanese are indeed the most capable people on the planet to embrace change. It may take a tragedy, shock or disaster to force true action but one can be rest assured the people will unite in common purpose while the West go out of their way to look after themselves at the expense of all others.

Japan is not capitalism with warts but socialism with beauty spots. With the coming global financial train wreck approaching Japan is the best place to be.

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Does Mr Schulz’s resignation say more about fleeing a sinking EU ship than saving the Fatherland?

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EU Parliament President Martin Schulz has resigned. Just as the EU sinks deeper into the quagmire of its own making Herr Schulz seemingly wants to run against Angela Merkel for Chancellor next year.  The triumvirate of Schulz, Juncker & Tusk was supposedly inseparable but one wonders if it has become insufferable this year with the prospect of 2017 becoming even worse. Think about it – Brexit, the ditching of a free pass by the Swiss to join, the mess with Turkey over refugees, the parlous state of Greece, an Austrian presidential election that exposed the lack of respect for member state democracy by the EU, a touch and go referendum in Italy and the growing chances of a Le Pen presidency in France on top of an EU economy at stall speed with limited options.

Italy holds its referendum on Dec 4 this year. Italian politics is rarely devoid of scandal or controversy. The referendum is to do with reforming the constitution with a focus on limiting power in the Senate so laws can be passed quicker. If you believe polls, 42% don’t want change. 37% do. Referendums in 1993 and 1997 failed. PM Renzi has threatened to resign if it fails to carry. In a sense the referendum had been tracking ‘yes’ until he staked his career on it (are you listening David Cameron?) and the mood switched. Renzi thought the threat would work in his favour by alarming voters he’d throw the country into more political gridlock. The idea that Italians are “concerned by instability” is rather humorous. I am trying to work out a period when Italy had stable political leadership. Here is a list of  PMs since 1976 (all 24 of them):

1. Aldo Moro – 1974-1976
2. Giulio Andreotti – 1976-1978
3. Francesco Cossiga – 1979-1980
4. Arnaldo Forlani – 1980-1981
5. Giovanni Spadolini – 1981-1982
6. Amintore Fanfani – 1982-1983

7. Bettino Craxi – 1983-1987
8. Amintore Fanfani – 1987-1987
9. Giovanni Goria – 1987-1988

10. Ciriaco De Mita – 1988-1989
11. Giulio Andreotti – 1989-1992

12. Giuliano Amato – 1992-1993
13. Carlo Azeglio Ciampi – 1993-1994
14. Silvio Berlusconi – 1994-1995
15. Lamberto Dini – 1995-1996
16. Romano Prodi – 1996-1998
17. Massimo D’Alema – 1998-2000
18. Giuiliano Amato – 2000-2001
19. Silvio Berlusconi – 2001-2006
20. Romano Prodi – 2006-2008
21. Silvio Berlusconi – 2008-2011
22. Mario Monti – 2011-2013
23. Enrico Letta – 2013-2014
24. Matteo Renzi – 2014~

The stratospheric rise of the Euro-sceptic 5-Star Movement (M5S) could benefit from the electoral rules (Italicum law) which changed in July 2016 which grants a party that wins over 40% of the vote it wins 54% (a minimum of 340 out of 630 seats) of the Camera.

The Economist wrote of the party that aims to #draintheaqueduct “the M5S chooses its electoral candidates in online ballots. Save in municipal elections, it does not accept anyone who has served more than a term as a political representative of any sort. The intention is to guarantee that its lawmakers and office-holders are free of the compromising links that are rife in Italian politics. But one effect is to ensure they are equally untainted by experience and, sometimes, ability.” M5S is polling around 28% vs Renzi’s Democratic Party at 32%.

There in lies the rub for the establishment. Around the world, they are fast learning that political experience and ability are outweighed by the promise of change and the ability to call a spade a spade. Rome’s Mayor Ms. Raggi (M5S) has bounced from one problem to another after being left a city in deep debt and political scandal. Reality is often different to the dream.

Still if Renzi loses and he resigns, Italy maybe thrown into a snap election and if the M5S wins a majority that will have implications for the bond market. A party that looks to exit the euro will potentially raise large scale bank default risk. Holders of Italian euro-denominated debt would be stuck having to receive a devalued lira on top of wholesale dumping of Italian debt proving a double whammy. Banks are not required to hold capital against government bond holdings but such losses could well create insolvency issues. At the start of October this year, Italian 10-yr  government bonds traded at 1.2% yield. It is now 2.13%.

So the risk of the Italian referendum is perhaps being viewed by Schulz to take an emergency parachute to pursue a German state political career than his once Utopian ideal of the EU. It is telling. Surely he stood to gain much greater power in the long run if he truly believed in his beloved EU project. Resignation suggests he may believe the writing is on the wall and better to retreat to his homeland to keep what is left of a career alive. A true contender to Merkel? It remains to be seen but do not discount his move as a precursor to the dwindling fortunes of the EU movement.

European Central Bunker Mentality (ECBM) is actually friendly fire

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ECB chief Draghi kept rates unchanged with the much heralded “wait and see” mentality which pervades central banks. He’s blown €1 trillion and expanded the balance sheet toward the €4 trillion Fed BS but lagging the world’s largest, Japan, nudging €4.5 trillion.

As the above table shows clearly-central bank policy DOESN’T work. No business confidence and no inflation is being driven even with negative rates. He should know from his native Italy that no growth for the past two quarters, 50% off store sales continuing well after the traditional period has well and truly ended and Italian banks with 20% NPLs. The lady at Fendi was in despair at how bad turnover is. A group of Italian friends asked did I think Monte Paschi dei Siena, the world’s oldest bank, would survive…I pulled a €20 note and told them that will get you around 100 shares.  They got the point . Surely it will be nationalized. Of course the ECB’s policies are preventing failures?!?!!

This group think is lunacy. Even if Draghi commits to buying equities it isn’t solving for growth nor is it solving “confidence”

Whether authorities want to admit it or not, they’ve failed. More people crushed under a rock of debt or  living off morsels from a pittance of supposed low risk income assets which are increasingly turning negative. While people might want to have faith in authorities the sad fact is that day-day realities have only widened income equality. The only way to get people out of the fox holes and spend that money they’re shoving in personal safes is to lower taxes and let the real economy reset by putting power back into the hands of the consumer. Stop telling them how to spend it, stop higher taxation, stop useless and ineffective state control and let all incomes benefit rather than just the rich.

The irony of the central bank bunker mentality is that while they feel immune personally to the devastation above ground they still don’t realize is that most shells falling are friendly fire.

Burg Wachter sees home safe sales +25%

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Germany’s leading home safe company Burg- Wachter is reporting a sharp increase in demand for home safes, +25% to be precise. It’s main competitor is reporting similar and business is so brisk they’re on 24hr production. With the ECB at NIRP, it’s most venerable financial institution, Deutsche Bank sinking to record lows, German citizens are taking their cash into their own hands. Even Commerz reported that building a new vault was cheaper than storing money at ECB

In Switzerland, rich customers are already being slugged with negative interest rates by banks so many are choosing to use third party insurers to  guarantee cash stored at home for 1/5th the cost.

The Swiss luckily have the option to store cash with CHF1000 bills, something EU citizens can’t do as the ECB banned €500 bills recently to stop hoarding. Which begs the question of how far down the road to oblivion central banks are. To stop at nothing to try force expenditure by raising the cost of saving. So out of tune are they with citizens lacking confidence in them central banks are playing chicken with a freight train that doesn’t want to derail.

I’m still concerned at how aloof many seem on social media channels that we live in prosperous times. One person suggested I fly to NY to see reality myself because clearly the spin in the Aussie news cycle must be filling my head with wrong notions about how bad I believe it is. That’s the problem with asset bubbles – it is when people still believe it isn’t one.

Mad I keep warning, no other country has Japan’s culture of group sacrifice yet central banks keep thinking Japan sets the benchmark for how things will turn out. How wrong they will be.

Encouraging children to play with a blowtorch

When the GFC hit in 2008 the world wanted investment banking blood. While the ‘banksters’ weren’t faultless, the regulator had left a child to play with matches without supervision and the house burnt down. This time around, the authorities in the form of central banks are encouraging the children to play with a blow torch. The central banks are flagrantly colluding with investment banks in private placements. How bad are things out there if the ECB is out there buying €80 billion per month extending to corporate debt as they’re running out of government debt to buy?

Investment banks are rejigging their desks to cater to their new largest client. Much like the Bank of Japan is encouraging banks to create new ETFs (which the BoJ now owns 60%) the ECB is encouraging new debt offerings from corporates without prospectuses as it is conducted off line. So central banks don’t care what is bought as long as they can mask their failure in policy setting even further.

What we’re witnessing is stupidity on a global scale. Group thinking central banks are trying to drive the velocity of money but every dollar, euro or yen more they try to pump into the fragile system creates less and less effect. It has been obvious for years but central banks believe they need to try something else which only creates more bubbles, widens the gap between the rich and poor while creating the exact opposite of what is needed.

I noted last week that the Fed’s language showed just how little credibility is left in these groups. The “The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that both monetary and fiscal policy appeared to be better positioned to offset large positive shocks than adverse ones.” comment really makes out everyone for fools.

Now it seems that the Fed is admitting they’ll need $4 trillion in QE if things don’t go according to plan. The paper explains that

“the volume of asset purchases needed to make up for the ELB constraint has now expanded to $4 trillion—even more than the $3.5 trillion purchased by the FOMC between late 2008 and mid-2014.”

In summary, were the acts by central banks conducted by investment banks they would risk prison sentences. There is no transparency and markets continue to be manipulated. Sadly these actions will come to light one day and when markets are allowed to function properly the ramifications will be swift and frightening. Confidence is the ingredient missing from the global economy. If businesses and consumers can’t see the cycle, they won’t invest. Interest rate policy is impotent.