http://www.zerohedge.com/news/why-grexit-would-make-lehman-look-childs-play
Submitted by Tyler Durden on 06/02/2012 10:14 -0400
Submitted by Tyler Durden on 05/31/2012 19:36 -0400
By Stella Dawson
WASHINGTON | Thu May 31, 2012 11:27pm EDT
(Reuters) - The Obama administration is engaged in a fresh round of shuttle diplomacy to nudge European Union leaders into decisive action to prevent Europe's widening crisis from undermining the U.S. and global recoveries.
Officials in Washington believe the U.S. banking system is in sound enough shape, but they know from the collapse of Lehman Brothers in 2008 and the Asia crisis a decade earlier that financial crises have a nasty habit of delivering massive shocks they cannot anticipate and that ricochet worldwide.
The message to EU politicians from U.S. Treasury and International Monetary Fund officials hopscotching among European capitals and holding meetings in Washington is two-fold: recapitalize your financial system quickly to stabilize banks, and then lay out a clear plan for the political future of monetary union.The officials fear that a messy Greek exit from the euro zone or a bank run in Spain or Italy could unleash unknown consequences, weakening an already tepid U.S. recovery just months before Obama faces a tight U.S. presidential election.
U.S. officials are tight lipped on specifics of their advice to Europe. But international financial officials and experts in Washington who are in regular contact with the IMF and the U.S. Treasury said there is a sense here that time is running out for Europe."They're saying - Whatever you do, fix it, and this time fix it right," said one financial industry official.This urgency was echoed in Brussels on Thursday when Europe's highest ranking finance officials, European Central Bank President Mario Draghi and European Commissioner for Economic and Monetary Affairs Olli Rehn, issued blunt warnings that EU politicians must act boldly, or risk collapse of monetary union.
Spain too is pulling no punches. "It's about the future of the euro," Deputy Prime Minister Soraya Saenz de Santamaria told Reuters in an interview on Wednesday.Spain has become the new focal point of the euro zone debt crisis. Its banks face 184 billion euros in losses and Madrid has botched attempts to shore them up while it struggles to rein in its budget deficit. Markets have taken fright, pushing yields on Spanish government debt ever closer to 7 percent, the level that forced Greece, Ireland and Portugal into EU/IMF bailouts.
Saenz was making the rounds in Washington on Thursday. IMF Managing Director Christine Lagarde sent assurances that there were no plans afoot or any Spanish request for IMF financial support. Rather the focus of Saenz's talks appear to be on how to persuade Brussels to inject capital directly into its banks, an issue she said she had discussed with U.S. Treasury Secretary Timothy Geithner.
For months, U.S. officials have been telling their European counterparts that recapitalizing banks directly with federal money was an effective strategy it used to stabilize the U.S. banking system in the 2007-2009 financial crisis. The IMF in April called for direct EU capital injections.Germany has balked at the EU shouldering any more liabilities, aware that as Europe's largest economy, it would foot the bill. But the alternative that U.S. and IMF officials paint, deep recession and monetary collapse, could persuade them otherwise.
CLOCK TICKS
Time is clearly running short.
Money has rushed out of stocks globally and into the safety of U.S. Treasuries, pushing yields this week to historic lows, and the euro currency has tumbled over 7 percent against the dollar in the past month in a flight to safety.
Investors have lost confidence that EU leaders can muster the political will to fix two fatal flaws in monetary union - no centralized banking authority to prevent a bank run and no central fiscal authority to backstop banks or countries.Without these powers, the message coming from Washington is that a single market and a single currency will remain vulnerable, and that no amount of fiscal austerity, the preferred medicine from Germany, can save monetary union.
"The day of reckoning is arriving," said one Washington insider with deep experience in international finance.
After the G8 summit in Camp David two weeks ago, U.S. President Barack Obama hailed a broad consensus among European leaders around a four-pronged strategy for resolving the European debt crisis.
In perhaps the clearest path laid out publicly to date, he said Europe must recapitalize its banks; adopt a growth strategy to reinvigorate their economies; provide monetary support to help countries like Spain, Italy and Greece implement tough austerity measures; and continue with fiscal discipline.
Since EU leaders returned home, however, there has been little visible progress. A high-profile dinner in Brussels last week to discuss the path forward delivered no tangible results. Meanwhile the banking crisis in Spain has escalated.
No wonder markets have turned volatile, said Hung Tran, deputy managing director of the Institute of International Finance, the lobby for major banks which negotiated the EU/Greek debt restructuring.
"What is needed now is for leaders to agree on basics steps. They need to use the European Stability Mechanism (its new bailout fund) to recapitalize the Spanish banks. If that happens, it could calm market conditions," Tran said.Obama held a conference call on Wednesday with Germany, France and Italy to follow up on the G8 talks. And U.S. Treasury Under Secretary for International Affairs Lael Brainard is visiting Athens, Frankfurt, Madrid, Berlin and Paris this week in a pre-planned trip to offer U.S. advice on the crisis.
"We are there largely because this is a very active, live debate and people who are navigating their way through an extraordinarily complex range of challenges want us there," Brainard told Reuters in an interview this month.
In Athens, her message was stern. She told Greek parties running in fresh elections on June 17 that Greece faces no choice but to make the difficult economic reforms laid out in its EU/IMF bailout package, or its financing will be cut off, according to political and financial sources in Athens and Washington.
If Greece runs out of money, it would be forced to quit the euro, unleashing huge market uncertainties.Such a deep crisis might prove the catalyst for Europe to make big political changes needed to save monetary union, Washington insiders say. However, the shockwave would be substantial, and something the White House, Treasury and Federal Reserve would rather avoid.
In a foretaste of what could come, JP Morgan estimated on Thursday that since March alone, Europe's problems have spooked investors to the extent that stocks have fallen six percent, wiping out $1 trillion in U.S. household wealth. This loss of buying power, plus a stronger U.S. dollar, which hurts exports, has shaved roughly half a percentage point from U.S. GDP growth this year, it said."If the euro zone continues to unravel, not only will it have serious consequences for the euro zone, but it will have serious and even severe consequences for the entire global economy, including the United States," former Treasury Secretary Robert Rubin told the Council on Foreign Relations this week.
Submitted by Tyler Durden on 06/01/2012 16:32 -0400
Why A Grexit Would Make Lehman Look Like Childs Play
- AIG
- American International Group
- Belgium
- Bond
- China
- Deutsche Bank
- ETC
- European Central Bank
- Fail
- France
- Germany
- Global Economy
- Greece
- International Monetary Fund
- Ireland
- Italy
- Japan
- Lehman
- Portugal
- Reality
- Slovakia
From Peter Tchir of TF Market Advisors
Why A Grexit Would Make Lehman Look Like Childs Play
Maybe I’m wrong, but every time I look at the possibility of a Greek exit right now I see it spiraling out of control and dragging down the entire global economy. I hear and read the arguments of why it is controllable and they just don’t seem credible. They either link a Greek devaluation to other devaluations that have little, if anything in common. They also seem to ignore human nature and how the markets will likely respond. I think with planning and time, a Greek exit would be manageable but right now it would create chaos, first within Europe and then the globe.
The ECB, EFSF and IMF will take massive losses
The ECB has €50 billion of GGB bonds still on their books. Those would not get paid at par by Greece if this is an amicable breakup, but this is quickly heading to a pots and pans thrown in the kitchen sort of break-up. Why would Greece pay the ECB if they feel like the ECB drove them out? Don’t forget, not for a second, that most of the money Greece now gets goes to pay back the ECB and IMF. The EFSF is totally out of luck. The ECB might be able to offer something to a post drachma Greece, but the EFSF offers nothing. The IMF has more negotiating power, as their direct loans had more protection in the first place and they are likely to provide additional funds post exit, but quite simply Greece won’t be able to pay them in full on existing loans.
With the ECB, EFSF, and IMF all taking big losses, their credibility is hurt. Worse than that, they have exposure to Portugal, Ireland, Spain and Italy and the markets (if not the politicians) will become very concerned about those exposures. The IMF may see its alleged firewall crumble before it is ever launched. The ECB, integral to any plan to protect Europe will have lost credibility and many will question their solvency. The EFSF will be hung out to dry and immediately the market will attach all their risk to Germany and France, not making people in those countries particularly happy.
Preparation: The ECB in particular is acting like a profit center. Does it really need the current coupon it gets on its SMP portfolio? Does it need to be paid back at original scheduled maturity date? Paid back at par rather than cost? The ECB should work proactively with those countries to exchange their bonds for something that doesn’t cause a loss for the ECB but gives the countries a big benefit (maturity extension, rebate of bonds purchased at discount, and much lower coupon). Whatever message the ECB is trying to send by not doing this seems bizarre to begin with, but insane once you consider the real losses they will take upon a Grexit. The IMF and EFSF have less flexibility but can cut rates on their loans, as they too don’t need to generate a profit either. This takes pressure off all of the countries, has no real “cost” to any country, and sets a good tone for proper negotiations of what will happen upon a Grexit down the road.
European Trade Will Decrease Dramatically
Somehow people seem to believe that switching to the Drachma will increase exports for Greece. That somehow trade will grow. Just the opposite is likely to occur, and just like bank “runs” this will hit all the periphery countries immediately.
The standard image is of companies just waiting to buy new “cheaper” drachma goods from Greece. That just doesn’t reflect the reality of modern trade. Most companies have existing suppliers and contracts, so they may not even be able to switch to Greek suppliers in the short run. But the key word there is “contracts”. Companies depend on contracts. Do you really think companies will be busy trying to sign new deals with Greece, a country that just left a currency union, and only recently retroactively changed its laws for bondholders? Or do you think lawyers will be figuring out what it means for any existing business, not just with Greece but with all other periphery countries?
It will mean the latter. Companies will become extremely concerned with doing business with anyone who might leave the Euro. They will want to know what happens to their business arrangements. They will not provide any credit in any form to businesses in those countries. While someone might be some olives because they are now cheap, no company is about to buy components for bigger projects from Greece. If the earthquake in Japan taught manufacturers anything, it is how critical their supply chain is. You really think many CEO’s will take the risk of doing business in a country with an uncertain currency, laws that have been “bent” to serve the country? No, and that is the optimistic view, as it doesn’t include the risk that Greece faces major disruptions due to the high cost of things like, um, oil. Greek companies themselves will likely be mired in confusion over what the Grexit does for them.
The problem will hit Greece the hardest, but it won’t be isolated to Greece. If you think there is a real risk that Spain or Italy head down the same path, you will be reluctant to work with them. You may even be afraid of what exposure they have to Greek suppliers.
Preparation: Time. Contracts need to be reviewed. Changes need to be made that deal with the consequences. Alternative methods of trade finance need to be developed. Most importantly, Spain and Italy have to be doing well enough that the risk of them leaving is virtually zero. Getting Spain and Italy on a stable footing is a critical part of any plan to have Greece leave.
Other Devaluing Countries have been Resource Rich
While some countries have devalued successfully, they are typically resource rich. Not only do the countries typically have a lot of natural resources, with oil at the top of the list, those industries are typically government controlled. So while the economy adjusts to the devaluation, the governments typically impose restrictions on not just capital but on natural resources.Being able to subsidize individuals and company with raw materials at below market rates has been part of a typical EM country’s devaluation program. Greece is no shape to do that. Greece has to import virtually all of its energy needs. They are at the mercy of the markets and a devalued drachma is not going to help them. This is a huge difference that so far has been overlooked. Without its own supply of critical resources, Greece will be forced to spend inordinate amounts of money to keep the economy merely functioning. That will offset the alleged benefits of increased trade, with I believe in the near term are overstated to begin with.
Preparation: Stockpiling. Greece needs to build supplies of essential raw materials. It will eat up additional money, but better to buy in Euros than Drachma. Also, if the conversion can be done smoothly, maybe you only see a 10%-25% devaluation, making the risk lower and far better than some estimates of an immediate 50%-75% drop in value.
Other Devaluing Countries weren’t part of a Fragile Currency Union
It ultimately keeps coming back to Spain and Italy. If every other member of the EU was doing fine, the impact of a Grexit would be much lower. The impact on the ECB, EFSF, and IMF would be bad, but tolerable if they weren’t immediately going to take losses on Portugal and Ireland, and have to face potential consequences from Spain and Italy.
Trade with Greece would drop, but other companies wouldn’t be that concerned about continuing to do business with Spain and Italy on standard terms. While they are weak, prudent businesses will treat them more like Greece than might be warranted, but companies will be careful. What executive would want to lose money on a Spanish business venture when everyone will say in hindsight it should have been obvious they were also going to fail.
The horrible state of Portugal and Ireland, the weakened state of Spain and Italy, the ignored but dubious state of Cyprus, Slovakia and other small members make the ramifications of one country leaving that much more difficult to deal with. If Greece was truly an isolated case, then fine, but it isn’t. The countries are all too similar, all too tied to the ECB and EFSF, and ultimately those connections are what making a Grexit a far bigger deal than it would be otherwise.
Preparation: Determining which countries need to leave will be key. If Portugal really needs to leave as well, it should be done in conjunction with leaving. Spain and Italy have to be made to appear to be “rock solid” members of the EU. The contagion risk of doing anything while Spain and Italy are so weak is just too big. If they ultimately have to leave, then I think the planning and preparation is that much harder.
Currency Runs
This is already hitting. It isn’t just bank runs, it is the willingness of companies to do business with these countries. It is showing up in the bond markets. The activity has been frantic with huge amounts of money flowing out of countries that aren’t just weak, but out of those with perceived currency risk.
I don’t think anyone truly believes Belgium is a great credit. The Belgium 5 year bonds traded at 5.6% in November of last year. They are currently at 1.8%. This is Belgium, the home of Dexia, the land without a government, and yet they are trading much better than other members of the November 5% club. That is at least in part because people believe they will stay in the “good” currency union.
This currency risk is visibly playing havoc with the bond markets, and I suspect it is playing almost as much havoc in corporate board rooms we just don’t get to witness it on a daily and immediate basis.
This currency run is more than just a run on bank deposits. It is a run on doing business within countries. It’s an inability to get trade credit which is necessary to be competitive. It’s deals that aren’t getting closed because whether admitted to or not, the companies are nervous about the future.
The problem with “runs” is that they become emotional and self-fulfilling. It is relatively easy to take a stab at the solvency of a bank. The data isn’t great, but at some level you can convince yourself BBVA is safe. They have enough capital, enough support, etc., that their solvency risk is manageable. Spanish branches of Deutsche Bank are even easier to get comfortable with from a solvency perspective. Bankia, right now appears to be teetering on insolvency, but with recapitalization, the depositors can get comfortable again. Addressing solvency is painful because it will involve the governments taking stakes in banks, but it is relatively solvable. Dealing with conversion risk is much harder. If my money sits in a deposit account at BBVA, Bankia, or Spanish branch of DB, the currency conversion risk is the same. The only way to protect myself is to take the money out. It isn’t quite the same for companies doing business, but it isn’t that dissimilar.
Preparation: Getting the bank recapitalizations done would be helpful. Eliminating the immediate solvency risk would help. One of the many EU institutions (EBRD? EIB?) needs to come up with some new form of trade credit support. Not just for Greece, but for all of the at risk countries. Ultimately, getting Spain and Italy back from the brink is key, but finalizing the much talked about, little done, bank recapitalizations and ensuring the availability of trade credit would start to calm the tension.
Decoupling is a Myth
As we saw after Lehman and then to a lesser extent after the earthquake in Japan global trade is very fragile. A Grexit would immediately affect the entire periphery. It would disrupt supply chains (like Japan) and impact credit (like Lehman). From there it quickly spreads to the rest of Europe and the U.S. and China. Some of the contagion will be over concerns about the banks in those countries and their exposures, which won’t be calmed as easily by an ECB and IMF with huge volumes of bad loans on their books. It will also occur because their customers won’t be buying their goods.
A butterfly flapping its wings may or may not cause a rainstorm in New York, but a Grexit will make people look at the post Lehman collapse as the good old days.
A Grexit is So Bad That it Won’t Happen
Again, I fail to see the optimistic case of a Grexit. Every time I try and play through scenarios where the IMF and ECB come to the rescue, it seems like it will be far too little and far too late. Maybe the powers that be are smarter and have figured out a plan, but given their track record, that is hard to believe. The more they look at the situation, the more I am convinced they will see not only how potentially awful the situation becomes, but that the cost to avoiding it right now are relatively small, and with proper preparation a Grexit can be managed down the road.
I still think we should have had more Lehman moments. In fact, not letting the AIG moment occur was probably a bigger mistake, but most politicians have taken the lesson never to let a “Lehman” happen again, so once they see that Greece is Lehman on steroids, they will back down and figure out enough to give Europe and the markets a solid kick.
and as the derivative issues in europe dovetail with derivative mess in gold / silver consider these items from Harveys blog......
http://harveyorgan.blogspot.com/2012/06/poor-jobs-reportusa-treasury-closes-at.html
( note Harvey incorrectly deducts b/d data from nfp jobs for May which is incorrect )
Good morning Ladies and Gentlemen:
The price of gold rose yesterday by a monstrous $57.90 to close the comex session at $1620.50.
Silver finished the day up 76 cents to $28.50. The banking cartel drove gold lower by $10 overnight as conditions weakened terribly in China with a poor PMI and then the final European PMI put the nail in the coffin. The German 2 yr bund yield landed in negative territory joining Switzerland. UK manufacturing plummeted. The Spanish Credit Default Swaps also widened fearing a financial collapse there. If that was not bad enough, the USA delivered its jobs report and it showed a gain of only 69,000. However if you take away the plug B/D of 204,000 jobs we actually had a job disappearance of 135,000 jobs. The total amount of souls seeking jobs actually increased as students leave university to seek a summer job. The ISM numbers (manufacturing and service) released as well showed a dismal performance for the USA as the Dow followed Europe into the toilet, down 274 points.
The price of gold rose yesterday by a monstrous $57.90 to close the comex session at $1620.50.
Silver finished the day up 76 cents to $28.50. The banking cartel drove gold lower by $10 overnight as conditions weakened terribly in China with a poor PMI and then the final European PMI put the nail in the coffin. The German 2 yr bund yield landed in negative territory joining Switzerland. UK manufacturing plummeted. The Spanish Credit Default Swaps also widened fearing a financial collapse there. If that was not bad enough, the USA delivered its jobs report and it showed a gain of only 69,000. However if you take away the plug B/D of 204,000 jobs we actually had a job disappearance of 135,000 jobs. The total amount of souls seeking jobs actually increased as students leave university to seek a summer job. The ISM numbers (manufacturing and service) released as well showed a dismal performance for the USA as the Dow followed Europe into the toilet, down 274 points.
and....
The total gold comex OI fell by 3,336 contracts on Friday from 420,245 to 416,909. However of that total, 1204 contracts were delivered upon which lowered the OI. Still, the bankers were able to get some of our weaker gold longs to pitch their positions to the bankers . The front delivery month of June saw its OI fall from 9171 to 5878 contracts for a loss of 3293. It seems that some of the our longs rolled to August instead of waiting the entire month for settlement. The next big delivery month is August and here the OI remained quite stable rising by only 221 contracts from 224,279 to 224,500.
The estimated volume on Friday was very large at 282,866 as many piled into the metal once they realized that the situation in Europe was in dire shape. The confirmed volume on Thursday was more subdued at 193,618
The total silver comex OI is causing migraines galore to our bankers. It increased again by a rather large 2075 contracts despite the fall in silver price. The new OI rests this weekend at 118,102 from Thursday's level of 116,027. No doubt we will see the midnight oil burn inside JPMorgan's castle. They will invite their friends from Bank of America, Citibank, Goldman Sachs, and WellsFargo to join them in a "shiva" moment. The non official delivery month of June saw its OI mysteriously rise by 15 contracts despite 24 delivery notices yesterday. We thus gained 39 contracts or an additional 195,000 oz of silver standing.
The big July contract is 30 days away from first notice. Here the OI remained relatively constant at 58,617 a fall of only 25 contracts and that fall, no doubt, was the delivery notices settled upon. The estimated volume on Friday at the silver comex was extremely high at 64,260. The confirmed volume on Thursday was also extremely high at 51,839. The high volume and constant OI for the upcoming delivery month is of great concern to our bankers.
The estimated volume on Friday was very large at 282,866 as many piled into the metal once they realized that the situation in Europe was in dire shape. The confirmed volume on Thursday was more subdued at 193,618
The total silver comex OI is causing migraines galore to our bankers. It increased again by a rather large 2075 contracts despite the fall in silver price. The new OI rests this weekend at 118,102 from Thursday's level of 116,027. No doubt we will see the midnight oil burn inside JPMorgan's castle. They will invite their friends from Bank of America, Citibank, Goldman Sachs, and WellsFargo to join them in a "shiva" moment. The non official delivery month of June saw its OI mysteriously rise by 15 contracts despite 24 delivery notices yesterday. We thus gained 39 contracts or an additional 195,000 oz of silver standing.
The big July contract is 30 days away from first notice. Here the OI remained relatively constant at 58,617 a fall of only 25 contracts and that fall, no doubt, was the delivery notices settled upon. The estimated volume on Friday at the silver comex was extremely high at 64,260. The confirmed volume on Thursday was also extremely high at 51,839. The high volume and constant OI for the upcoming delivery month is of great concern to our bankers.
and.....
Eric Sprott: The Real Banking Crisis, Part II
- Bank Run
- Bloomberg News
- Bond
- Central Banks
- China
- Eric Sprott
- European Central Bank
- European Union
- Eurozone
- Futures market
- Gold Spot
- Greece
- Gross Domestic Product
- Hong Kong
- Hyman Minsky
- Ireland
- Italy
- Kazakhstan
- Mark To Market
- Mexico
- National Debt
- Nicolas Sarkozy
- Nominal GDP
- Portugal
- ratings
- Real estate
- Reuters
- Sovereign Debt
- Turkey
- Ukraine
- United Kingdom
- Wall Street Journal
From Eric Sprott and David Baker of Sprott Asset Management
The Real Banking Crisis, Part II
Here we go again. Back in July 2011 we wrote an article entitled"The Real Banking Crisis Part i" where we discussed the increasing instability of the Eurozone banks suffering from depositor bank runs. Since that time (and two LTRO infusions and numerous bailouts later), Eurozone banks, as represented by the Euro Stoxx Banks Index, have fallen more than 50% from their July 2011 levels and are now in the midst of yet another breakdown led by the abysmal situation currently unfolding in Greece and Spain. As Sprott emphasizes in great detail: "we have now reached our "Minsky Moment" where new debt can no longer we added to old debt. The economy spirals out of control.
(courtesy Eric Sprott/David Baker/Sprott asset Management)
The
(courtesy Eric Sprott/David Baker/Sprott asset Management)
The
EURO STOXX BANKS INDEX
Source: Bloomberg
On Wednesday, May 16th, it was reported that Greek depositors withdrew as much as €1.2 billion from their local Greek banks on the preceding Monday and Tuesday alone, representing 0.75% of total deposits.1 Reports suggest that as much as €700 million was withdrawn the week before. Greek depositors have now withdrawn €3 billion from their banking system since the country's elections on May 6th, seemingly emptying what was left of the liquidity remaining within the Greek banking system.2According to Reuters, the Greek banks had already collectively borrowed €73.4 billion from the ECB and €54 billion from the Bank of Greece as of the end of January 2012 - which is equivalent to approximately 77% of the Greek banking system's €165 billion in household and business deposits held at the end of March.3 The recent escalation in withdrawals has forced the Greek banks to draw on an €18 billion emergency fund (released on May 28th), which if depleted, will leave the country with a cushion of a mere €3 billion.4 It's now down to the wire. Greece is essentially €21 billion away from a complete banking collapse, or alternatively, another large-scale bailout from the European Central Bank (ECB).
The way this is unfolding probably doesn't surprise anyone, but the time it has taken for the remaining Greek depositors to withdraw their money is certainly perplexing to us. Official records suggest that the Greek banks only lost a third of their deposits between January 2010 and March 2012, which begs the question of why the Greek banks have had to borrow so much capital from the ECB in the meantime.5 Nonetheless, we are finally past the tipping point where Greek depositors have had enough, and the past two weeks have perfectly illustrated how quickly a determined bank run can propel a country back into crisis mode. The numbers above suggest there really isn't much of a banking system left in Greece at all, and at this point no sane person or corporation would willingly continue to hold deposits within a Greek bank unless they had no other choice.
The fact remains that here we are, in May 2012, and Greece is right back in the exact same predicament it was in before its March 2012 bailout. Before the bailout, Greece had approximately €368 billion of debt outstanding, and its government bond yields were trading above 35%.6 On March 9th, the authorities arranged for private investors to forgive more than €100 billion of that debt, and launched a €130 billion rescue package that prompted Nicolas Sarkozy to exclaim that the Greek debt crisis had finally been solved.7 Today, a mere two months later, Greece is back up to almost €400 billion in total debt outstanding (more than it had pre-bailout), and its sovereign bond yields are back above 29%. It's as if the March bailout never happened… and if you remember, that lauded Greek bailout back in March represented the largest sovereign restructuring in history. It is now safe to assume that that record will be surpassed in short order. It's either that, or Greece is out of the Eurozone and back on the drachma - hence the renewed bank run among Greek depositors.
Meanwhile, in Spain, bank depositors have been pulling money out of the recently nationalized Bankia bank, which is the fourth largest bank in the country. Depositors reportedly withdrew €1 billion during the week of May 7th alone, prompting shares of Bankia to fall 29% in one day.8 The Bankia run coincided with Moody's issuance of a sweeping downgrade of 16 Spanish banks, a move that was prompted over concerns related to the Spanish banks' €300+ billion exposure to domestic real estate loans, half of which are believed to be delinquent.9 The Spanish authorities were quick to deny the Bankia run, with Fernando Jiménez Latorre, secretary of state for the economy stating, "It is not true that there has been an exit of deposits at this time from Bankia… there is no concern about a possible flight of deposits, as there is no reason for it."10 Funny then that the Spanish government had to promptly launch a €9 billion bailout for Bankia the following Wednesday, May 24th, an amount which has since increased to a total of €19 billion to fund the ailing bank.11 Deny, deny some more… panic, inject capital - this is the typical government approach to bank runs, but the bailouts are happening faster now, and the numbers are getting larger.
The recent bank runs in Greece and Spain are part of a broader trend that has been building for months now. Foreign depositors in the peripheral EU countries are understandably nervous and have been steadily lowering their exposure to Eurozone sovereign debt. According to JPMorgan analysts, approximately €200 billion of Italian government bonds and €80 billion of Spanish bonds have been sold by foreign investors over the past nine months, representing more than 10% of each market.12The same can be said for foreign deposits in those countries. Citi's credit strategist Matt King recently reported that, "in Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks."13 Spain and Italy are not immune either, with Spain having suffered €100 billion in outflows since the middle of last year (certainly more now), and Italy having lost €230 billion, representing roughly 15% of its GDP.14
As we've stated before, no matter what happens in the Eurozone, the absolute worst case scenario for the authorities is a bank run. It terrifies all involved, because they can spiral out of control faster than governments can react to stop them, save for the most Draconian measures. They also prompt banks to liquidate whatever assets they can, revealing the truth about what their "assets" are actually worth. In this environment, no one wants to find out what the market will really pay for them. We're seeing this now in Spain, where according to Bloomberg, "Many Spanish banks are avoiding property sales so they don't have to "mark to market" valuations. Instead, they're giving developers new loans to pay debt coming due to prevent defaults."15 Sound familiar? We're now at the point where a bank run in one Eurozone country could quickly seize up the entire system - not just in Greece or Spain, but throughout the entire Eurozone and beyond. Greek and Spanish banks are just like all the others; they operate with leverage ratios averaging 25x their equity capital. They are all so overleveraged that it takes very little in deposit withdrawals to cause instantaneous liquidity issues. This is why we'll likely see another ECB-induced printing program announced (with a new abbreviation, hopefully) before a broader bank run can take root. The Eurozone authorities simply cannot risk the consequences of bank runs in countries like Spain, Portugal or Italy, which are far too big to bailout for the over-stretched ECB. It's not about Greece staying or leaving the European Union anymore, it's about the bailout ability of European banking system to survive the impact of massive money transfers.
Nothing is really being solved here, and everyone knows it. We're essentially in the same place we were when the crisis erupted back in 2010, only now there's more total debt outstanding. Bank of Canada Governor Mark Carney remarked in a December 2011 speech that "the global Minsky moment has arrived", and it's now plain for all to see.16 The "Minsky moment" refers to the work of Hyman Minsky, a deceased American economist who developed theories on how debt accumulation eventually leads to financial crises. You don't have to be an economist to understand the crux of Minsky's theories. As an economy grows it takes on increasing amounts of debt. The point eventually comes when the cost of servicing that debt can no longer be met by that economy's productive capacity - that's the Minsky Moment, and we're watching it play out all over the world today. When Greek bond yields spiked back in February 2012, bond investors looking at the country's €368 billion of debt outstanding, its population of 11 million people, and its nominal GDP of $312 billion realized that it couldn't possibly work. There was no way Greece could pay the interest on its debt load. There was no way the bond market could keep pretending everything was ok, like it currently does with the UK, US and Japan… for now.
Greece clearly needs another large-scale bailout, and we think they'll get one. Greece's exit from the Eurozone represents a Lehman-like scenario to the global banking system - why wait to see what carnage it will unleash? It's always easier to print money, and printing another couple €100 billion is nothing compared to the trillions that have been printed since last November. Where this will get tense, however, is when the market acknowledges the Minsky moment in a larger EU economy, like Spain or Italy. As we go to print, Spanish bond yields are now trading back above 6.5%, signaling the market's non-confidence in the country's ability to back-stop its own banking system. Spain has a population of 47 million, a GDP of roughly $1.3 trillion, national debt of roughly $1.1 trillion, debt owed to the ECB and various bailout funds totaling €643 billion, and now, a banking system that also appears close to collapsing.17 Their Minsky Moment has already arrived, and it's simply a matter now of how the market will react to it, and how long it takes the ECB to come to Spain's rescue.
Without a doubt, the most counterintuitive aspect of the Greece/Eurozone debacle has been its impact on the price of gold. Gold is now back below $1600 for the third time since August 2011; each time has coincided with severe banking stress within Greece and the broader Eurozone. Some pundits have suggested that various European banks are selling gold to raise liquidity, and this would make sense if the Eurozone banks had gold to sell, but we cannot find any evidence of large physical sellers out of Europe. Also, ever since the unlimited US-dollar SWAP agreement was launched in November 2011, USD liquidity has not been the key issue in Europe - rising sovereign bond yields and deposit withdrawals have. On the contrary, the selling pressure in gold once again appears to be expressed primarily through the futures markets, which are highly levered and rarely involve any physical transactions involving actual bullion. The futures market sell-off also appears to be waning now, since the European banking crisis has provided central banks with a politically-palatable excuse to take action if it deteriorates any further.
The recent gold price has been particularly frustrating given the continuation of bullish demand trends out of China. China posted another record Hong Kong gold import number in March of 62.9 tonnes. Gold imports into China have now totaled 135.5 metric tonnes between January and March 2012, representing a 600% increase over the same period last year.18 We don't have to connect the dots here - China is stockpiling the precious metal while investors in the West scratch their heads wondering why the spot price is so low.
CHINA HONG KONG GOLD IMPORTS AND GOLD SPOT PRICE
Source: UBS, Bloomberg
Source: UBS, Bloomberg
Non-G6 central banks have also continued to accumulate physical gold, with the latest reports revealing another 70 tonnes of gold purchases completed in March and April by the central banks of Philippines, Turkey, Mexico, Kazakhstan, Ukraine and Sri Lanka.19 We won't bore you with the exercise of annualizing those numbers and comparing them to the annual global mine supply, but suffice it to say that the fundamentals still remain firmly intact. It's now simply a matter of improving sentiment towards gold in the West, and if the current banking crisis in Europe gets any worse, or if we see another large-scale policy response, it will likely happen on its own accord.
Although the last eight months have not played out the way we would have expected for gold, they have played out the way we envisioned for the banks. The question now is how long this can go on for, and how long gold can remain under pressure in a banking crisis that has the potential to spread beyond Greece and Spain? So much now rests on the policy responses fashioned by the US Fed and ECB, and just as much also rests on what's left of European citizens' confidence in their local banking institutions. Neither of these things can be precisely measured or predicted, but we continue to firmly believe that depositors in Greece and Spain will choose gold over drachmas or pesetas if they have the foresight and are given the freedom to act accordingly. The number one reason we have always believed gold should be owned, and why we believe it will go higher, is people's growing distrust of the banking system - and we are now there. We will wait and see how the summer develops, and keep our attention firmly focused of the second phase of the bank run now spreading across southern Europe.
and......
The European mess has now witnessed the USA involved for fear that a Greek and Spain default will throw Europe into a financial vortex and that may have a devastating effect on the USA.
Obama and Timmy are involved in trying to persuade Europe to proceed with a Eurobond issue, something of which Germany will never agree.
Obama and Timmy are involved in trying to persuade Europe to proceed with a Eurobond issue, something of which Germany will never agree.
(courtesy Reuters/ Stella Dawson)
U.S. shuttle diplomacy seeks to pull Europe back from brink
By Stella Dawson
WASHINGTON | Thu May 31, 2012 11:27pm EDT
(Reuters) - The Obama administration is engaged in a fresh round of shuttle diplomacy to nudge European Union leaders into decisive action to prevent Europe's widening crisis from undermining the U.S. and global recoveries.
Officials in Washington believe the U.S. banking system is in sound enough shape, but they know from the collapse of Lehman Brothers in 2008 and the Asia crisis a decade earlier that financial crises have a nasty habit of delivering massive shocks they cannot anticipate and that ricochet worldwide.
The message to EU politicians from U.S. Treasury and International Monetary Fund officials hopscotching among European capitals and holding meetings in Washington is two-fold: recapitalize your financial system quickly to stabilize banks, and then lay out a clear plan for the political future of monetary union.The officials fear that a messy Greek exit from the euro zone or a bank run in Spain or Italy could unleash unknown consequences, weakening an already tepid U.S. recovery just months before Obama faces a tight U.S. presidential election.
U.S. officials are tight lipped on specifics of their advice to Europe. But international financial officials and experts in Washington who are in regular contact with the IMF and the U.S. Treasury said there is a sense here that time is running out for Europe."They're saying - Whatever you do, fix it, and this time fix it right," said one financial industry official.This urgency was echoed in Brussels on Thursday when Europe's highest ranking finance officials, European Central Bank President Mario Draghi and European Commissioner for Economic and Monetary Affairs Olli Rehn, issued blunt warnings that EU politicians must act boldly, or risk collapse of monetary union.
Saenz was making the rounds in Washington on Thursday. IMF Managing Director Christine Lagarde sent assurances that there were no plans afoot or any Spanish request for IMF financial support. Rather the focus of Saenz's talks appear to be on how to persuade Brussels to inject capital directly into its banks, an issue she said she had discussed with U.S. Treasury Secretary Timothy Geithner.
For months, U.S. officials have been telling their European counterparts that recapitalizing banks directly with federal money was an effective strategy it used to stabilize the U.S. banking system in the 2007-2009 financial crisis. The IMF in April called for direct EU capital injections.Germany has balked at the EU shouldering any more liabilities, aware that as Europe's largest economy, it would foot the bill. But the alternative that U.S. and IMF officials paint, deep recession and monetary collapse, could persuade them otherwise.
CLOCK TICKS
Time is clearly running short.
Money has rushed out of stocks globally and into the safety of U.S. Treasuries, pushing yields this week to historic lows, and the euro currency has tumbled over 7 percent against the dollar in the past month in a flight to safety.
Investors have lost confidence that EU leaders can muster the political will to fix two fatal flaws in monetary union - no centralized banking authority to prevent a bank run and no central fiscal authority to backstop banks or countries.Without these powers, the message coming from Washington is that a single market and a single currency will remain vulnerable, and that no amount of fiscal austerity, the preferred medicine from Germany, can save monetary union.
After the G8 summit in Camp David two weeks ago, U.S. President Barack Obama hailed a broad consensus among European leaders around a four-pronged strategy for resolving the European debt crisis.
In perhaps the clearest path laid out publicly to date, he said Europe must recapitalize its banks; adopt a growth strategy to reinvigorate their economies; provide monetary support to help countries like Spain, Italy and Greece implement tough austerity measures; and continue with fiscal discipline.
Since EU leaders returned home, however, there has been little visible progress. A high-profile dinner in Brussels last week to discuss the path forward delivered no tangible results. Meanwhile the banking crisis in Spain has escalated.
No wonder markets have turned volatile, said Hung Tran, deputy managing director of the Institute of International Finance, the lobby for major banks which negotiated the EU/Greek debt restructuring.
"What is needed now is for leaders to agree on basics steps. They need to use the European Stability Mechanism (its new bailout fund) to recapitalize the Spanish banks. If that happens, it could calm market conditions," Tran said.Obama held a conference call on Wednesday with Germany, France and Italy to follow up on the G8 talks. And U.S. Treasury Under Secretary for International Affairs Lael Brainard is visiting Athens, Frankfurt, Madrid, Berlin and Paris this week in a pre-planned trip to offer U.S. advice on the crisis.
"We are there largely because this is a very active, live debate and people who are navigating their way through an extraordinarily complex range of challenges want us there," Brainard told Reuters in an interview this month.
In Athens, her message was stern. She told Greek parties running in fresh elections on June 17 that Greece faces no choice but to make the difficult economic reforms laid out in its EU/IMF bailout package, or its financing will be cut off, according to political and financial sources in Athens and Washington.
If Greece runs out of money, it would be forced to quit the euro, unleashing huge market uncertainties.Such a deep crisis might prove the catalyst for Europe to make big political changes needed to save monetary union, Washington insiders say. However, the shockwave would be substantial, and something the White House, Treasury and Federal Reserve would rather avoid.
and.....
Next question: what happens if Greece and Germany leave the euro at the same time?
Greece is forced out because funding has stopped and Germany leaves because they no longer can support funding for Spain and Italy. Interesting times!!
- (courtesy Mark Grant/out of the Box)
From Mark Grant, author of Out Of The Box
Gear Up!
Carry the battle to them. Don't let them bring it to you. Put them on the defensive and don't ever apologize for anything.”
-My fellow Missourian, Harry S. Truman
“Gear up!” That is what I say to you this morning. Open your closet door, drag out the flak jacket from 2009, lace up your boots, unlock your guns, bring out the ammo and get ready to go at it one more time because the placid fields of Verdun, long silent, finds the Germans and the French at it once again and we are all about to be dragged back into it; like it or not. There is quite serious business afoot and, just like in war, the political statements made are nothing more than propaganda to mislead the enemy and the enemy is YOU.
“A good battle plan that you act on today can be better than a perfect one tomorrow.”
-General George S. Patton
YOU are the portfolio managers and overseers of capital that the European politicians want to mis-direct, assure in the politest of terms and provide a constant barrage of made-up data to in the hope, and now in the last-ditch hope, that you will not abandon their playing field and withdraw your money. Some of the money in Europe cannot find another home because it is coerced or forced or beholden to Europe through a variety of spider webs concocted by various nations and the European Union. That money, then, is locked up and cannot withdraw. The money that can be withdrawn though is fleeing now as the dangers grow with the passing hours and the denials of various governments, the IMF and the EU and the pitch of the denials only enforce my rational fear that various crises have, in fact, spun out of control. Having lived through and predicted the calamities in Greece, Ireland, Portugal I hear the distinct echoes of days past right before the Falls of Empire that are rebounding off the mountain peaks once again. Listen! Hold your ear to the breeze and you too may hear the screams of anguish; the faint calls to battle.
“The bugle-call to arms again sounded in my war-trained ear, the bayonets gleamed, the sabers clashed, and the Prussian helmets and the eagles of France stood face to face on the borders of the Rhine.”
-Clara Barton
Just because you can only vaguely hear the battle nor see the encampments does not mean that that the fight has not begun. It is the socialist countries on the left and the austerity bastion, the countries with money, on the right and they are locked in the push and shove of dominance. The have-nots want the riches of the haves to be employed and the nations with higher standards of living do not wish to give up their place in the world order to support the weaker nations and to see their standards of living decreased by the process. The European Central Bank is caught in the middle and yesterday’s pleas by Draghi represent the squeeze of the vise grips in which they are caught. The ECB has been forced to accept collateral, securitizations that have a value of pennies while other claims are made but loans are now coming due and not being paid, Real Estate values have plunged in many countries and are not being recognized and the assets on the books of the ECB are nowhere near what is being publically touted and Mr. Draghi is more than well aware of the implications and consequences and is screaming out into the void in frustration. It may not be yet that the financial markets in Europe are locked-up but I can assure you that the political markets are already locked-up as no one wants to admit anything or take the hits necessary to bring the valuations back from fantasy land to the land of reality where the actual cannot be denied.
It is to be, as I have stated many times before, Treasuries up, equities down, the Dollar up against the Euro, credit spreads out and risk off, off and off. Counterparty risk must be assessed again and again and don’t just look at the bed sheets but peer under the bed with a real seriousness of purpose. Just because there is no place to hide, and there is not, does not mean that preparation is not called for once again. Greece, Spain, Portugal and Italy are all worsening infections and the diagnosis, having been wrongly made, and mostly being ignored out of the fear of having to use the prescription, will lead to the wrong medicine and the medicine being wrongly applied.
and.....
This came out late Friday night as Egan Jones downgrades Italy to B+ from BB and the outlook negative. The markets are Monday are not going to be happy campers especially after the performance of the Dow on Friday with an ugly jobs report:
(Dow Jones newswires)
Egan-Jones Downgrades Italy To B+ From BB; Outlook Negative
By Michael Casey Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Ratings firm Egan-Jones on Friday downgraded Italy's country rating to B+ from BB, a company representative said.
The firm also left the outlook on Italy's rating at "negative."
The move comes amid mounting concerns over the risk of financial contagion in heavily indebted member countries of the euro zone, especially in Spain. It also follows Egan-Jones's move Tuesday cutting Spain's rating two notches to B from BB-. It was the third time in a month that the firm had cut Spain's rating.
and....
The USA debt has now increased by another 54 billion usa to 15.77 trillion.
The debt ceiling is 16.4 trillion. The USA is generally adding 125 billion dollars per month which will put the debate for raising the ceiling at the end of October. If Timmy decides to borrow from Federal pensions so it would not interfere with the election, then it will be up to a lame duck session to deal with it. That would require front row seats:
(courtesy zero hedge)
US Debt Soars By $54 Billion Overnight, Closes May At Record $15,770,685,085,364.10
There was one thing that the Roller-Upper-Of-Sleeves-In-Chief forgot to mention in his 1 pm rehearsed oratory today: the highlighted number below. And certainly the chart below showing the relative change in US GDP and debt. Since we can only assume the president was too busy pontificating on other very important things, we are happy to fill in the hole.
As of May 31:
Source: DTS
And the bigger picture:
Fed Will Likely Weigh Rosengren’s Call For Stimulus
By Joshua Zumbrun and Jeff Kearns - Jun 1, 2012 3:50 PM ET
Federal Reserve policy makers this month will consider joining Boston Fed President Eric Rosengren’s call for renewed stimulus after a report today showed unemployment rose to 8.2 percent in May, economists said.
Rosengren said the Fed should further its full-employment mandate and extend beyond June a program known as Operation Twist, which lengthens the average duration of bonds on its balance sheet. He spoke before the Labor Department today said the U.S. added 69,000 jobs in May, the fewest in a year, pushing the yield on 10-year Treasury notes to a record low.
“The May report does significantly raise the odds of further easing from the Fed,” said Dean Maki, chief U.S. economist at Barclays Plc in New York and a former Fed economist. “There will be a case made at the June meeting for easing.”
By calling for new stimulus, Rosengren aligned with the view of Chicago Fed President Charles Evans. Any setback in the job market is also a chief concern of Chairman Ben S. Bernanke, who said in April the Fed may provide more accommodation should unemployment fail to make “sufficient progress towards its longer-run normal level.” Fed policy makers plan to meet June 19-20.
Today’s employment report “does change the game, certainly in terms of Operation Twist,” said John Silvia, chief economist at Wells Fargo & Co. in Charlotte, North Carolina. “Because the slowdown in the economy has been fairly rapid compared to what they expected, they’ll go ahead and extend Operation Twist.”
STOCKS SLUMP
The yield on the 10-year Treasury note fell below 1.5 percent for the first time to 1.46 percent as of 3:22 p.m. in New York, from 1.56 percent yesterday. The yield fell to as low as 1.4387 percent. The Standard & Poor’s 500 Index fell 2.3 percent to 1,279.25.
Rosengren said low interest rates are not a barrier to further Fed action, and that more easing could help reduce the borrowing costs for types of debt other than Treasuries, including mortgages.
Paul Ashworth, chief U.S. economist for Capital Economics in Toronto, said further Fed stimulus may spur stocks by encouraging investors to seek higher-yielding assets.
“It’s not just about whether it’s going to drive Treasury yields lower, it’s about whether it can provide a boost to other riskier asset classes, including equities,” Ashworth said.
BALANCE SHEET
The central bank started Operation Twist in September to reduce longer-term interest rates without expanding its balance sheet. Under the program, the Fed sold $400 billion of Treasury securities with maturities of three years or less and used the proceeds to buy $400 billion of Treasuries with maturities of six years or more.
The Fed’s leadership will probably detail its outlook next week, with Vice Chairman Janet Yellenscheduled to speak on monetary policy in Boston on June 6 and Bernanke planning to testify before Congress on the economy on June 7.
The Fed has two options should it decide to take further action with its balance sheet, saidStuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. It could renew Operation Twist by selling more of its short-term debt and buying more longer-term securities, or it could buy more bonds in a third round of quantitative easing.
Rosengren said in a Bloomberg News interview that he would support the option of extending Operation Twist at the Fed’s June meeting. Another round of quantitative easing would be an option if the Fed wanted to do something “more substantial,” he said.
‘PROMOTE GROWTH’
“If you were looking for something that would promote growth but didn’t have an impact on our balance sheet, then certainly extending the maturity extension program would be a viable way forward,” Rosengren said. Such a move “would be a positive step that would provide some additional support to the economy and hopefully promote somewhat more rapid growth overall.”
Signs of weakness in the U.S. economy, and the debt crisis in Europe, also have increased the odds the Fed will ease further, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. inNew York, said in a note.
“The loss of momentum in the domestic economy and the gathering global storm raise the likelihood of further policy easing at the next meeting,” he said.
The economy has not had two consecutive months of jobs growth under 100,000 since July and August of 2011, a period that prompted the Fed to begin Operation Twist.
“It’s close to a game-changing report,” said Capital Economics’ Ashworth. “We’re not quite at that level of desperation as last summer, but we’re getting pretty close, particularly when you think about the deterioration elsewhere in the world.”
To help reduce unemployment and spur the economy, the Fed cut its benchmark interest rate to near zero in December 2008 and purchased $2.3 trillion of securities in two rounds of large-scale asset purchases.
To contact the reporters on this story: Joshua Zumbrun in Washington atjzumbrun@bloomberg.net
and....
I will leave you this weekend, with this great report from Wolf Richter on the jobs numbers. It is self explanatory:
(courtesy Wolf Richter)
Squeezing The Fed From Both Sides
FRIDAY, JUNE 1, 2012 AT 7:35PM
The ugly jobs report gave Mitt Romney’s campaign what it had been waiting for: a huge boost. And they’re out making hay. Romney called it "devastating news for American workers and American families.” An army of Republican talking heads swarmed over the land and pounded President Obama with the jobs report. And just as Republicans see victory edge closer, shrill voices are now calling for the Fed to launch the next round of quantitative easing.
On Thursday, Romney, in California to rake in the big bucks with a series of high-dollar fundraisers, took some time out for a news conference in Fremont, in front of a weedy property dominated by a shuttered office building. Parched hills in the background. “Solyndra” a sign said. The company isn’t famous for its special thin-film solar cells that proved to be uncompetitive, but for the scandal surrounding the $535 million in federal loan guarantees it had received as part of the stimulus package. It was one of the ballyhooed "green tech" outfits that were going to revolutionize the American industrial scene, create gazillions of "green jobs," and conquer the world.
“A symbol of a serious conflict of interest," Romney called it as he recapped the sordid affair, one of the worst debacles, though not the only one, of the stimulus bonanza, which, if I recall correctly, had been a bipartisan concoction. When Solyndra went bankrupt, taxpayers had to pay off the loans that the government had guaranteed. The promised green jobs remained elusive.
And there certainly weren’t any signs of them in the jobs report (BLS PDF). Instead of the 165,000 jobs that the Wall Street hype machine had proffered, a mere 69,000 jobs were created in May—corroborating recent data of a wobbly economy. And worse: the April number was whacked down from the original and already disappointing 115,000 to 77,000 and the March number was trimmed from 154,000 to 143,000. The recent trend looks awful:
The headline unemployment rate ticked up a notch to 8.2%, and U-6, the broadest measure that includes the underemployed and those marginally attached to the labor force, ticked up three notches to 14.8%. While the Employment-Population Ratio improved a smidgen to 58.6%, it depicts better than anything else the tragedy of the American employment scene.
After World War II until 1975, the Employment-Population Ratio bounced between 55% and 58%. As women entered the workforce in greater numbers, it edged up; and after the recession of 1983, it went on a bull run that peaked in April 2000 at 64.7%. Then it declined. Whatever the reason. Outsourcing, innovation, off-shoring, tax laws, technological progress, corporate shortsightedness, cheaper labor elsewhere. When the housing and construction bubble took off in 2004, it recovered a bit, but in 2006, it all fell apart. Since the jobs crash of the Great Recession, the ratio has remained close to the lows last seen in 1984.
And this, despite years of gyrations by the Fed as it printed trillions of dollars and inflicted its zero-interest-rate policy on savers, bondholders, and pension funds, thus creating an era of financial repression where investing in relatively safe instruments produces a guaranteed loss after inflation. These policies have led to capital misallocation and outright capital destruction: for a fiasco that has burned through untold billions of borrowed dollars and that is now coming to a head, read.... The Natural Gas Massacre Gets Bloodier.
end
I guess it is time to say goodbye for today.
I wish you all to have a grand weekend and I will see
you Monday night.
all the best
Harvey
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