My good mate Jonathan Rochford of Narrow Road Capital has compiled a brilliant summary of the recent madness in markets, politics and economics. One could be forgiven for thinking it is a lot like satire. Link here.
The beauty of being young is that any manner of words can come out of the mouth and be automatically assumed to be fact or truth. Anyone with teenagers knows this.
How sorry we feel for the high priestess of woke, NZ PM Jacinda Ardern, to be chastised by the infamous Swedish teenage truant for not doing enough on climate change. We should prepare ourselves in the future for Greta Thunberg as UN Secretary General because she is gifted in the ways of admonishing those that stray from the preordained orthodoxy.
Now that COVID19 is almost behind us and Joe Biden has officially been nominated president-elect by the electoral college we should expect to see the coronavirus restrictions/cases to disappear and climate change to regain its rightful place at the top of the liberal agenda.
We’ve always held the Paris Accord as an absolute joke. Self-declared developing nation, China, as the world’s biggest polluter by a minimum factor of two, is free to increase emissions out to 2030 while the rest of the developed world must self-flagellate. No matter what strides are made by nations on emissions abatement, it is never enough. Thank God we have all those elites who fly by private jet to global summits to tell mothers who drive their kids to soccer practice in second hand SUVs will burn in hell if they don’t quit their selfish behavior.
No doubt Greta will praise China’s net zero emissions commitment by 2060 as she’ll probably be one of the few that will be around to validate the promise.
Now that peons around the world have proved their obedience during lockdowns, ramming the global warming agenda should be a piece of cake. Maybe those who rationally want to see fair minded cost benefit analysis of going 100% renewable will risk being arrested by the apparatchiks and charged with hate crimes, as has previously been promote by the more radical climate alarmists.
Before they do that, we always have green pioneer Germany to guide us with the massive costs of decommissioning wind farms that have outlived subsidies. None of it factored into the modeling but you aren’t allowed to question this additional burden.
Rest assured global central banks have extended their expertise from monetary policy to saving the planet. We are in safe hands. Treasury Secretary-elect Janet Yellen has told us as much. After all, she claimed as Fed Chair that we’d never see another depression in our lifetime. Hmm.
Now that we are presented with negative sovereign yields for Portuguese, Italian or Greek debt despite the fact much of it will never be repaid, we know these geniuses have got Frankenstein under control. Just trust them, the media and ignore our thoughts. It’s above our pay grade and intelligence. So shhhhh. We’re in safe hands. School skipping teenagers know best.
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.
There is an irony to EC President Jean-Claude Juncker promising to spend €1 in €4 of the EU budget on climate mitigation. Worse he used 16yo Swedish climate school strike activist Greta Thunberg as the pawn to justify it. €1 trillion will be spent annually through 2027. It is for their future after all!
Last week CM debated a former client who tried to justify teachers using WMO data in their studies of teenage students on climate. WMO is a part of the U.N. which has been embroiled in so much data manipulation, scandal, lack of governance, unethical conduct and conflicts of interest as to beggar belief. So kids are being indoctrinated if the scholastic standard is the WMO.
Has Juncker considered how his climate plan will alleviate stubborn poverty and anemic economic growth?
EU poverty or risk of exclusion in 2017 stood at 22.4%. So 1 in 4 EU-28 member state citizens are struggling. In Greece it remains high at 35%. In 2007 poverty in the EU-28 was 16%. Even poster child Germany has gone from 16% to 19% in the same period. Macron’s yellow vests are protesting at 17.1% poverty vs 13% in 2007. In 2007 there were 78mn at risk of social exclusion. In 2017 there were 114mn.
The U.N. has called for “no poverty” in 15 years. The EU subscribes to this nonsense. While poverty may have drifted from the post GFC peak of 24.8% in the eurozone, 36mn extra people are unable to afford to heat their homes, afford a colour TV or eat meat, fish or chicken once every two days. These are the EU metrics on poverty. So how does spending €1 trillion per annum to mitigate climate change sit with a growing number of constituents dying to see blazing sunshine bask upon their economic climate?
Retail electricity prices across Europe are up 23% in the last decade. In Germany +39%. Spain +47%, Portugal +50%. Sweden +76%. France +40%. This is what happens when a growing amount of renewables are thrust on the grid. The countries with far lower renewables targets, like Hungary, have seen electricity prices fall. Who’d have thunk?
EU GDP growth has been slowing for the last 5 quarters and expected to slow to 1.1% in the coming quarter.
The EU claimed a 6.6% unemployment rate in Dec 2018. An update is expected on March 1. Is that number realistic if the poverty rate remains so high or is it a reflection of low paying rubbish job opportunities? Greek unemployment is north of 18% and Spain at 15%. Part time employment has grown to 20% from 15% over the last decade. In the Netherlands almost 50% of work is part time.
December 2018 EU industrial production fell 4.2%YoY. Ireland fell back 19.8% and Spain -6.7%. Hardly positive readings.
So instead of promising teenagers a green future, Juncker would find it far more sensible to focus on alleviating the chronic youth unemployment in Europe which remains around 19%. At least Thunberg is likely to skip the unemployment queue by landing a cushy EU job when she graduates unlike her fellow Swedish schoolmates who will face 18% unemployment.
What’s the point of listening to kids pleas to save the planet when the unelected overpaid bureaucracy in Brussels won’t even be able to provide them with a sustainable career to enjoy it? No doubt the kids will realize this folly when they grow up in the real world.
Why are we surprised at the yellow vest uprising across France? Poverty/risk of social exclusion across Europe has continued to spiral upwards since the Global Financial Crisis (GFC). There were 78mn living below the poverty line in 2007. At last count, Eurostat notes that number was 118mn (23.5% of the European population). In the Europe 2020 strategy, the plan is to reduce that by 20 million. 37.5mn (7.5%) are living in severe material deprivation (SMD) , up from 32mn in 2007.
The SMD rate represents the proportion of people who cannot afford at least four of the nine following items:
The French are merely venting what is happening across the EU. The EU could argue that at 18% poverty, the French should be happy compared to other nation states. Europeans aren’t racist to want a halt to mass economic migration when they are the ones financially struggling as it is. Making economic or compassionate arguments aren’t resonating as they feel the problems first hand.
Is it a surprise that the UK, at 22.2% poverty, wanted out of the EU project to take back sovereign control? Project Fear might be forecasting Armageddon for a No Deal Brexit but being inside the EU has hardly helped lift Brits from under a rock. Why would anyone wish to push for a worse deal that turns the UK into a colony?
Why is anyone surprised that there has been a sustainable shift toward populist political parties across Europe? Austria, Italy, The Netherlands, Poland, Hungary, Sweden, Germany…the list goes on. Even France should not forget that Front National’s Marine LePen got 35% of the vote, twice the level ever achieved. Is is a shock to see her polling above Macron?
The success and growth of EU-skeptic parties across Europe will only get bigger. The mob is unhappy. Macron may have won on a wave of euphoria as a fresh face but he has failed to deliver. He may have suspended the fuel tax hikes, but the people are still on the street in greater numbers. He has merely stirred the hornet’s nest. Perhaps UK PM Theresa May should take a look at the table above and realise that her deal will only cause the UK to rise up. At the moment sanity prevails, and when it comes in the shape of Jeremy Corbyn that is perhaps a sign in itself.
The Titanic was most infamous for being an unsinkable ship. We all know the tragedy of its maiden voyage. Folklore tells us that to calm the passengers, the band played as the ship went down. The cautionary tale is one that fits the EU almost too perfectly. Macron’s win is akin to the EU playing the band (well Macron did play the EU anthem for his victory speech rather than La Marseillaise) all the while the Hard Brexit iceberg has ripped a huge hole below the waterline of SS Titanic II. The problem is the EU continues to behave as if the SS Titanic II is indeed unsinkable. Le Pen’s loss is much like believing the water tight compartments will keep the ship afloat. They couldn’t be more wrong as chief designer Thomas Andrews told White Star Line boss J. Bruce Ismay – who protested she was unsinkable- “She’s made of iron, sir! I assure you, she can… and she will. It is a mathematical certainty.”
The SS Titanic II’s crew treats its customers with varying levels of service. It entertains Lady Merkel and Lord Macron in proper first class fashion but for steerage passengers like the Greeks, Spanish and Portuguese they are kept locked below deck. The Greeks were willingly given passage on the SS Titanic II in full knowledge they possessed forged promissory notes as they boarded. The belief was that when they landed on the other side of the Atlantic they’d be able to work it off. Sadly the crew has finally realized it is futile and are now demanding they hand over whatever they have left before handing out life jackets. Moreover they must promise if they’re let out of steerage they must stay chained to the Master at Arms.
In all seriousness the treatment of the Greeks is despicable beyond words. 36% of Greeks live below the poverty line. 58% youth unemployment. That means many can’t access affordable healthcare because it is generally provided by corporates and when you lose a job you lose the healthcare. This means many are forced to use A&E of major hospitals which are now overcrowded and understaffed as more doctors are leaving to seek better fortune for their services elsewhere.
If that wasn’t enough, mothers who had given birth were being restricted from taking their new-borns home if they couldn’t pay the fees. While the government has banned this practice they have introduced new laws to allow the seizure of assets (e.g. homes) if debts are not settled.
Naturally the EU wishes to keep control over the way Greece handles its economic affairs but using the nation’s defiance of autocratic rule from Brussels as a weapon against it shows how little the federal state truly cares for its members. Deeds, not words. It promised to punish steerage countries, Spain and Portugal, for breaching debt covenants. This is the real EU. It is a supranational. A federation through the back door.
The Brexit vote is without a doubt the most damaging iceberg for the EU. The gaping hole it exposes is far more serious than any perceived phyrric victory through Macron’s win.
The issue here is that if Hard Brexit (May is likely to get the majority she needs on June 8th to push for it) is shown to work for the UK (likely) and the idea of extortionate exit penalties are legally unenforceable (confirmed last week) then the risks of jumping ship are sharply lowered. The problem for the EU is that there won’t be enough life boats to save all the crewreaucrats when more member states realize self preservation is the only viable option.
Le Pen’s 1/3rd of the vote, Hofer’s 46% in Austria, Wilders’ 25% increase in seats in The Netherlands, the Sweden Democrats jump to the top of the polls, Italy’s ousting of Renzi, Brexit, the Swiss handing back a 30yr standing free ticket to join…these don’t look like promising trends for an EU which is already badly listing. Despite ample warnings the EU refused (and still refuses) to change its course or exercise due care.
Will Captain Juncker go down with his unsinkable ship or follow Seamen Martin Schulz off before it is too late?
The majority of Europeans polled by a Chatham House survey of more than 10,000 people from 10 European states threw light on what people think about migration from mainly Muslim countries. It showed overwhelmingly that they want further Muslim immigration stopped. Majorities in all but two of the ten states agreed. It ranged from 71% in Poland, 65% in Austria, 53% in Germany and 51% in Italy to 47% in the UK and 41% in Spain. Those that disagreed with the idea failed to go over 32% (Spain) with the bulk in the 10-20% range. So while the press went full rage against Trump’s temporary ban it seems many Europeans agree with him. In Austria, Poland, Hungary, France and Belgium over 38% of respondents “strongly agreed” to stop more immigration. By gender, age and education we see that the results show a skew. Males more for the proposal than women but over 50% for both. Only 18-29yo failed to have a majority but more in favour than not. The older those surveyed the more in favour of the ban. Is it that they are bigoted fools or is it their experience on the planet that leads them to this conclusion. Those with less than a post grad diploma voted in the majority in favour while undergraduates and above only reached 48% but much higher than the 27% against. Rural towns were more in favour than city folk.
“I feel like I am attending a meeting of a religious sect here this morning. It’s as if the global revolution of 2016, Brexit, Trump, the Italian rejection of the referendum, has completely bypassed you.
You can’t face up to the fact that this bandwagon is going to roll across Europe in these elections in 2017. A lot of citizens now recognize this form of centralized government simply doesn’t work. … At the heart of it is a fundamental point: Mr. [name not recognized] this morning said, the people want more Europe.
They don’t. The people want less Europe. We see this again and again when people have referendums and they reject aspects of EU membership. But something more fundamental is going on out there. …. No doubt, many of you here will probably despise your own voters for what I am about to say because just last week, Chatham House, the reputable group, published a massive survey from 10 Europen states, and only 20% of people want immigration from Muslim countries to continue. Just 20%. … Which means your voters have a harder line position on this than Donald Trump, or myself, or frankly any party sitting in this Parliament. I simply cannot believe you are blind to the fact that even Mrs. Merkel has now made a u-turn and wants to send people back. Even Mr. Schulz thinks it is a good idea.
And the fact is, the Europen Union has no future at all in its current form. And I suspect you are in for as big a shock in 2017 as you were in 2016.”
I don’t buy the premise that this is all down to bigoted views. I honestly think that the sharp rise in poverty since 2009 is driving people’s fears of sustainable financial security. I wrote the same about Trump and why he’d win for over a year, despite being laughed at. Take Eurostat’s latest figures on poverty across the EU. Although there has been a minor improvement between 2013-14 across the EU-28 (mainly due to inter-EU transfers) many countries including Germany, Spain, Greece, France and Belgium saw poverty rates grow.
This is what poverty looked like in 2005 and 2007 across EU. I added in the 2014 figures to show clearly how poverty has risen in EVERY country since that time. The UK has jumped from 16% to 23%. Italy from 20% to 28%. Germany 14% to 21%. France 13% to 18%. Is it any wonder right wing parties are gaining traction from socialist governments who think they are going to win the battle by sharing in the pain. Gimme a break. People are already bleeding but EU parliamentarians think it is just a flesh wound.
However let us suppose that it is all down to racist, bigoted intolerance. If you were an asylum seeker why would you want to have the EU divvy you up into countries that ‘especially’ don’t want you period. Hungary held a referendum where c.95% of those that voted against forced immigration. What prospects would you have in Budapest when citizens are so open about their unwillingness to accept? Canada on the other hand believes diversity makes it stronger so why don’t EU countries subsidise Canada to take more if they think it is a great deal. A better use of the 90mn euro being proposed by Merkel to get those asylum seekers not in any danger to go home.
Should these citizens by punished for holding a negative view given what they see and experience in their daily lives? Then again don’t blame citizens for holding these views when governments downplay or try to hide facts surrounding terrorist attacks, rapes, sexual assaults and acts of violence committed by migrants. Yes, citizens commit crimes too but when German women are told to dress more appropriately to avoid attracting unsolicited attention or well-intentioned residents charged with violating privacy laws for releasing a video of migrant thugs kicking an innocent woman down subway stairs, the people will seek their own security first. German vigilantism is up sharp double digits because the authorities are too ashamed to admit what a failure their policy has been.
The German police have reported a significant increase in far-left violence nationwide in 2015, with politically motivated left-wing crimes jumping 18 percent to 9,600. The refugee influx is a root cause with far-right groups have reacting violently and far-left groups attacking them in response. In January this year 211 far-right extremists were arrested for hosting an anti-refugee rally in Leipzig complaining Chancellor Merkel is ruining their homeland after the cover up after the new year sexual assaults in Cologne.
The Interior Ministry revealed that 39,000 (+19%YoY) politically motivated crimes were committed in 2015, with 23,000 having a far right motive. Crimes against refugees have soared from 199 in 2014 to over 1,000 in 2015. German courts are also doling out multi €1,000+ fines for online racial taunts. Pegida’s founder Lutz Bachmann, was ordered to pay €9,600 for describing refugees as ‘cattle’
Of course not all asylum seekers are bad but it is in their long term best interests to push for more vigilance by governments to ensure the actions of a few bad apples doesn’t spoil the rest of those who really want to have a fresh start and give back to their community.
I (reluctantly) watched the Australian ABC Q&A program which is often a tax-payer funded melting-pot of regressive politics. Tasmanian Senator Jacqui Lambie fired off at the Muslim activist Yassmin Abdel-Magied about how Sharia Law will never happen under her watch and that Australian law is all that matters. She also made points about why she supported Trump’s proposals. Now I am not really a big fan of Jacqui Lambie on most things but I thought she was spot on and the audience surprisingly cheered. Abdel-Magied tried to sound sanctimonious over Lambie’s improper understanding of Sharia law and her uneducated views on the treatment of women in Islamic culture but she was having none of it and closed with “stop playing the victim, your ban got lifted, get over it.”
Instead of taking the point to heart, Muslim leaders, academics and activists are demanding the ABC apologise for airing Lambie’s “racist, Islamophobic and crude” views on its Q&A program. First of all Islam isn’t a race and to accuse the ABC of breaching its own standards (which is the norm) may I suggest they join the back of that long line.
Once again, victimology is never the way to go. If people want to change the aforementioned statistics of EU, America or Australia who show to be in favour of ‘vetting’, understand the cause. Whacking citizens for expressing concerns to deaf politicians is not the way to go. In Australia 18-C racial vilification laws have already shown how easy it is to abuse free speech. In Germany Merkel is cracking down on any form of ‘hate speech’ (as judged by the thought police). In Canada laws are being proposed to protect Muslims. After first passing a motion that condemns Islamophobia, last month, Iqra Khalid, a Member of Parliament (MP) from the governing Liberals, tabled Motion M-103 in the House of Commons. The motion demands that Islamophobia be treated as a crime without even bothering to define the offense. Hang on? What if Christianophobia is prevalent? Will Christians get the same rights if such hate crimes are committed against them? How is that diverse? How does that encourage equality by singling out one religion create tolerance? It beggars belief.
If tolerance and diversity are at the top of the list, where are these Islamic leaders trying to dissuade those who fear them?
You see there in lies the problem. Not only are citizens fearing job security they are now being silenced by acts of law to protest at where they see the problem coming from. As I wrote in ‘Staring at the dictator’ people are growing concerned about how to put food on the table. They see unhinged immigration with poor vetting a terrible recipe for helping them climb out of the trap they are in. The last thing they want is the odds cut. So before we point fingers let us get to grips with the ‘true’ state of the economy. I am willing to bet that if the world’s economy was in full swing, we wouldn’t hear a murmur about citizens wanting to ban particular immigrants.
In all my career in finance, never once was a behemoth financial out of the headline index of any country. Banks and insurance companies have always been like the muscular body-builders posing to girls on Venice Beach yet Deutsche and Credit Suisse have become the trodden on puny weaklings who are getting sand kicked in their face. Yes, these two former giants of the finance world have been relegated because their market caps have fallen under #75 for two months consistently.
It really paints a telling picture of how desperate things are becoming. Don’t give me this disrupter “fintech” malarkey. Markets, for as much as they are manipulated by government hands, are still barometers of trust and confidence. To that end the majority of pundits don’t trust these banks. The European stress tests were a forgone conclusion. I’d written what a basket case Italian banks already were. The bigger problem is the message. When the sector that greases the wheels of the economy is severely limping it is time to ask how bad the real economy is. I wrote a while back that some Chinese machinery companies have accounts receivable equivalent to 5 years of revenue. They AREN’T getting paid by customers.
Let’s look at how “non performing loans” in Europe have grown since 2008 and whether you’d agree outer central banks have it under control
Greece +15x, NPLs now 38% of all loans
Italy +3x, now 18% of all loans
Portugal +8x, now 19% of all loans
Spain +2x, now 7% of all loans
France +1.4x, now 4.2% of loans
Germany +1.8x, now 3.2% of all loans
Total EU non performing debt has essentially trebled to over €1 trillion.
Sure banks can fiddle around with assumptions to suppress the true state of NPLs because triggering the bailiffs creates a whole new can of worms. If the resulting asset fire sales cause a bank to mark-to-market other outstanding loans the torpedo to the balance sheet would sink them. Let’s not forget a chart I posted looking at the sharp rise in inferior rated companies on the US S&P500 over the last decade. On the far left we have AAA credit going all the way to the credit rated one notch above at the far right.
Now Australia has cut rates again I wonder at the personal debt edifice being run up and the state of banks with an overreliance on wholesale funding markets. At the moment it seems benign but if we get financial contagion in Italy markets will deprive debt. Central banks have done an admirable (not credible) smoke and mirrors job but we are coming to a dead zone where market forces, as weakened as they are, can still surprise. In a world drowning in debt, the authorities are ill prepared for the car crash that’s coming. The amount of complacency shown by markets to date is disturbing and that only means once the apple cart is tipped it will be multiple times worse, making GFC look a walk in the park.
As my mate Stu joked this morning, “Our kids are going to see some big changes to the Economics 101 textbooks by the time they get to study.” Never a truer word than that said in jest.
Brussels is set to fine Portugal and Spain for failing the austerity test. Both countries are guilty of running a budget deficit of more than 3% of GDP, contravening EU rules (see chart above). Interestingly in 2014, the UK, Croatia, Ireland, France, Greece, Poland and Belgium all failed this test yet fines were not dealt.
It begs the question, if Portugal and Spain have youth unemployment of 38% and 55% respectively, debt to GDP of over 100% and anaemic growth will tightening the noose help?. Austerity is clearly not helping these economies climb out from under the rock they are pinned under. We only need to look at Greece’s suffering under bleak austerity at great cost to its citizens of which over 1/3rd live in poverty. They need their own currencies and the freedom to set their own financial direction. Trapped in the EU they are glued to a system that is clearly not working for them despite being told it will.
One wonders though after Brexit, looming Nexit, Auxit, Frexit, Swexit, Dexit and many other -exit referendums is the EU serious about bullying its member states to comply with budget repair that are not helping it. While this is all to do with keeping confidence in the euro I would imagine the collapse of the Italian banks or another member state posturing for the exit will have a far bigger impact than this perception the EU is a functioning bloc.
Once again what is democracy if Brussels will deal out the terms of member states’ budgets? The EU has got to stop admonishing member states and start looking for solutions on a case by case basis. Different cultures, demographics, budgets, language, work ethic, views on retirement etc etc can’t be solved by a one size fits all approach. This is why as apolitical union, the EU will fail.