June 28, 2014
June 15, 2013
The Cyprus model of
theft “bail-in” bank collapses is slowly being adopted globally as the solution to enable bankrupt sovereign nation states deal with bankrupt banks. Japan is the latest country to consider such a move, even the EU is about to adopt the policy, but all eyes will be on the G20 in September. It’s strongly suspected that the G20 will announce theft “bail-ins” as the solution to deal with bank collapses. That countries (New Zealand, EU, Canada, UK) have openly being discussing such a drastic solution shows there is expected to be a raft of banks collapsing in the near future.
I have been reporting for some time now that a number of central banks have already published policy documents detailing how bail-ins would work. The Bank of Canada, Bank of New Zealand, and the FDIC and Bank of England jointly, have all published something on the issue.
At its heart is the idea that savers are, in fact, “unsecured creditors” of the banks, and therefore come second only to shareholders should their assets need to be confiscated in order to keep a failed bank going for a little while longer.
Yesterday, Nikkei highlighted that Japan’s Financial Services Agency will enact new rules to force failed bank losses onto “investors”.
The Japanese Parliament ratified the proposals yesterday.
Also yesterday, Sergei Storchak, a Russian Deputy Finance Minister stated that there would be a declaration by heads of state attending Septembers G20 meeting in St Petersberg which would bring an end to the policy of taxpayer bailouts. The implications of what he said was that the G20 would also be jumping on the bail-in policy instead.
The preparations for widespread confiscation of assets are nearly complete.
June 8, 2013
In light of all the money printing going on, including Japan going full retard with the printing press followed by the Nikkei index collapsing by 15% the question to be asked is, have the Central Bankers lost control? Although things went well in Japan initially, May has not been a good month and cracks are appearing.
The last couple of weeks have been very interesting. Remember that, certain regional differences aside, Japan has, for the past two-plus decades, been the global trendsetter in terms of macroeconomic deterioration and monetary policy. It was the first to have a major housing and banking bubble, the first to see that bubble burst, to respond with years of 1 percent interest rates, then zero rates, then various rounds of quantitative easing. The West has been following Japan each step on the way – usually with a lag of about ten years or so, although it seems to be catching up of late. Now Japan is the first developed nation to go ‘all-in’, to implement a no-holds-barred money-printing regime to (supposedly) ‘stimulate’ the economy. This is called Abenomics, after Japan’s new prime minister, Shinzo Abe, the new poster-boy of policy hyper-activism. I expect the West to follow soon. In fact, the UK is my prime candidate. Wait for Mr. Carney to start his new job and embrace ‘monetary activism’. Carnenomics anybody?
But here is what is so interesting about recent events in Japan. At first, markets did exactly what the central bankers wanted them to do. They went up. But in May things took a remarkable and abrupt turn for the worse. In just eight trading days the Nikkei stock market index collapsed by 15%. And, importantly, all of this started with bonds selling off.
Are markets beginning to realize that all these bubbles have to pop sometime and that sometime may as well be now? Are markets beginning to refuse to dance to the tune of the central bankers and their printing presses? Are central bankers losing control?
‘Sell in May and go away’
Let’s turn back the clock for a moment, if only just a bit. Let’s revisit April 2013 for a moment. At the time I spoke of central bankers enjoying a kind of ‘policy sweet spot’: they were either pumping a lot of liquidity into markets or promising to do so if needed, and all of them were keeping rates near zero and promising to keep them there. Some started to consider ‘negative policy rates’. Yet, despite all this policy accommodation, official inflation readings remained remarkably tame – indeed, inflation marginally declined in some countries – while all asset markets were on fire: government bonds, junk bonds, equities, almost all traded at or near all-time highs, undeniably helped in large part by super-easy money everywhere. Even real estate in the US was coming back with a vengeance. And then, in early April, central bankers got an extra bonus: Their nemesis, the gold market, was going into a tailspin. I am sure Mr. Bernanke was sleeping well at the time: financial assets were roaring, happily playing to the tune of the monetary bureaucracy, seemingly falling in line with his plan to save the world with new bubbles, while the cynics and heretics in the gold market, the obnoxious nutters who question today’s enlightened policy pragmatism, were cut off at the knees.
But then came May and everything sold off.
However, that is not quite how the media presents it. Here, one prefers the phrase ‘volatility returned’, as that implies that everything could be fine again tomorrow. And it certainly can. Maybe this is just a blip. But what if it isn’t? And, more importantly, what is driving it?
A widely debated theory is that the prospect of the Fed ‘tapering’ its quantitative easing operation, of it oh-so carefully, ever-so slightly removing its unprecedentedly large and more than ever alcohol-filled punchbowl could end the party. There has for some time been concern about and even outright opposition to never-ending QE within the Fed. So there is, of course, a risk (a chance?) that the Fed may reduce or even halt its asset-buying program. (As a quick reminder, since the start of the year, the Fed has expanded the monetary base already by more than $340 billion, and at the present pace, the Fed is on course to create $1,000 billion by the end of the year.)
Ben Bernanke – tough guy?
However, I do not think that markets have a lot to fear from the Fed. Should a pause in QE lead to a sell-off in markets, to rising yields and rising risk premiums, then, I believe, the Fed will quickly revert course once more and switch on the printing press again. The critics inside the Fed will be silenced rather quickly. Remember that most of them seem to argue that additional QE is not needed; they do not appear to reject it on principle. Ultimately, nobody in policy circles is willing to sit on his or her hands when the markets seriously begin to liquidate. The ‘end’ to QE, if it is announced at all, is likely to be just an episode.
The last central banker who had the cojones to take on Wall Street was Paul Volcker. Ben Bernanke, as well as his predecessor Alan Greenspan, have been nothing but nice to the speculating and borrowing classes. Both subscribe to and have, on numerous occasions, articulated the notion that it is part of the central bank’s remit to bring good cheer to households and corporations by lifting their house prices and inflating their stock prices and executive option packages. What the country needs is optimism and what is more conducive to optimism than a rising stock market and happy faces on CNBC? Bernanke declared that boosting financial assets can kick-start a virtuous circle of borrowing, investing and self-sustained growth. David Stockman has aptly called this approach ‘prosperity management’ through ‘Wall Street coddling’. Of course, Greenspan tightened in 1994, and again very carefully in 2005, and yes, both times financial markets caved in. But this only serves to illustrated how unsustainably bloated and dislocated the financial system has become, and how addicted to cheap money from the Fed. I think the Fed will be very careful to reduce the dosage of its drug anytime soon.
Although he didn’t quite put it in those terms, global bond guru Bill Gross, founder and co-chief investment officer at asset management giant PIMCO, seems to see it similarly. In an interview with Bloomberg in the middle of May, he confirmed that he and his team saw “bubbles everywhere”, which certainly implied that everything could go pop at the same time. He also stated that the Fed would “not dare” to do anything drastic anytime soon as the system is so much more leveraged now than it was in 1994, when Greenspan briefly tried to play tough and tighten policy.
My conclusion is this: if market weakness is the result of concerns over an end to policy accommodation, then I don’t think markets have that much to fear. However, the largest sell-offs occurred in Japan, and in Japan there is not only no risk of policy tightening, there policy-makers are just at the beginning of the largest, most loudly advertised money-printing operation in history. Japanese government bonds and Japanese stocks are hardly nose-diving because they fear an end to QE. Have those who deal in these assets finally realized that they are sitting on gigantic bubbles and are they trying to exit before everybody else does? Have central bankers there lost control over markets? After all, money printing must lead to higher inflation at some point. The combination in Japan of a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation (indeed, that is the official goal of Abenomics!) are a toxic mix for the bond market. It is absurd to assume that you can destroy your currency and dispossess your bond investors and at the same time expect them to reward you with low market yields. Rising yields, however, will derail Abenomics and the whole economy, for that matter.
It is, of course, too early to tell. The whole thing could end up being just a storm in a tea cup. It could be over soon and markets could fall back in line with what the central planners prescribe. But somehow I doubt that this is just a blip – and interestingly, so does Mohamed El-Erian, Bill Gross’ colleague at PIMCO and the firm’s other co-chief investment officer. In an interesting article on CNN Money yesterday, he contemplated the possibility that markets were beginning to lose confidence in central bankers.
If that is indeed the case it won’t be confined to Japan but will rapidly reverberate around the world. This is a much bigger story than a modest slowing of QE in the US. Could it be the beginning of the end?
I think the central bankers may not be sleeping so well now.
March 3, 2013
It would come as no surprise to anyone that the US’s largest banks use dodgy accounting practises to hide a multitude of sins. The following from Washington’s Blog explores the myth that American banks are much smaller that their european counterparts. Truth is, they are much better at hiding under the existing US accounting standards. Were international standards to apply, the banks may actually be twice the size they claim to be.
When Internationally-Accepted Accounting Methods Are Used, American Banks Are the World’s Largest
We have extensively documented that failing to break up the big banks is destroying America because:
- The size of the big banks is – literally – destroying the rule of law
- They aren’t interested in making loans to Main Street, and their control over the banking system prevents smaller banks from making such loans
- The failure to break up the big banks is dooming us to economic downturn
In the face of such overwhelming criticism, apologists for America’s largest banks say that they are smaller than their European and Asian competitors … and that they have to be big to compete.
Current Vice Chair and director of the Federal Deposit Insurance Corporation – and former 20-year President of the Federal Reserve Bank of Kansas City – Thomas Hoenig destroyed that argument earlier this month.
Specifically, Bloomberg reports:
Warning: Banks in the U.S. are bigger than they appear.
That label, like a similar one on automobile side-view mirrors, might be required of the four largest U.S. lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. Applying stricter accounting standards for derivatives and off-balance-sheet assets would make the banks twice as big as they say they are — or about the size of the U.S. economy — according to data compiled by Bloomberg.
“Derivatives, like loans, carry risk,” Hoenig said in an interview. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”
U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books.
Using international standards for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co. (JPM), Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. (C) would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.
JPMorgan, Bank of America and Citigroup would become the world’s three largest banks and Wells Fargo the sixth-biggest. Their combined assets of $14.7 trillion would equal 93 percent of U.S. gross domestic product last year, the data show.
U.S. accounting rules for netting derivatives allow banks to erase about $4 trillion in assets, the data show. The lenders also can remove from their books most mortgages they package into securities, trimming an additional $3 trillion.
Off-balance-sheet assets and derivatives were at the root of the 2008 financial crisis. Mortgage securitizations kept off the books came back to haunt banks forced to repurchase home loans sold to special investment vehicles.
The U.S. Financial Accounting Standards Board and the International Accounting Standards Board pledged a decade ago to converge the two bookkeeping systems. After six years of meetings, they remain divided. Proposed rules for how much money banks need to set aside for loan losses may make European and U.S. lenders even less comparable.
“Having no uniform standard is challenging for issuers and users,” said John Hitchins, head of U.K. banking and capital markets at PricewaterhouseCoopers in London. “Analysts and investors can’t compare companies’ financials across borders. Banks have to prepare multiple versions of their financial statements in different countries where they have units.”
If the banks used international standards for derivatives and consolidated mortgage securitizations, the ratio for JPMorgan and Bank of America, the two largest U.S. lenders, would fall below 4 percent. It would be just above 4 percent for Citigroup and Wells Fargo.
That would make the biggest U.S. banks look no better capitalized, or worse, than European peers such as HSBC at 5.6 percent or France’s BNP Paribas SA at 3.9 percent at the end of last year. It also could require them to raise more capital. Spokesmen for all four banks declined to comment.
“The U.S. leverage ratio doesn’t capture off-balance-sheet risks,” said [former FDIC boss] Bair, now chairman of the Systemic Risk Council, a private regulatory watchdog. “Once U.S. banks start publishing the new Basel-mandated ratios, more off-balance-sheet assets will become obvious.”
Bair said she favors raising the simple capital ratio as high as 8 percent. Hoenig, the FDIC vice chairman, has called for 10 percent. U.S. regulators are still debating how to implement the rules. Because Basel isn’t an international treaty, each country needs to adopt its own version.
Progress on common standards slowed after Mary Schapiro became SEC chairman in 2009 and faced lobbying by companies opposed to what they said would be costly accounting changes, according to four people with knowledge of the discussions who asked not to be identified because the talks were private.
After failing to agree on common standards for derivatives netting and consolidation of securitizations, rule-setters are now heading in different directions as they debate how to account for loan-loss reserves.
Source: Washington’s Blog
February 9, 2013
December 22, 2012
Its hard to disagree with this article from MoneyWeek that central banking has been a complete disaster for mankind. But to put all the blame at the feet of central banking would be wrong. Politicians, the media and of course our own ignorance has played a major hand in where we find the global economy. The days of CBs focusing on taming inflation via interest rates is long gone. Instead we get endless bubbles, and now the biggest bubble of all the debt bubble and a big unavoidable shit pile up ahead.
Central bankers are throwing caution to the winds
There’s a revolution going on in the central banking world.
When the cult of independent central bankers took hold, their main enemy was inflation. They all had to keep inflation rising at a gentle pace of around 2% a year.
They didn’t care about asset price inflation. The price of a house could rocket as much as it liked. And they were quite relaxed about the soaring price of energy as long as this was offset by a drop in the price of music players, for example.
All in all, they managed to stick to the inflation target pretty well. Meanwhile the economy still overheated massively, then collapsed in on itself under the weight of all the debt everyone had taken on.
CBs new recipie for success. It doesn’t involve worrying about inflation, thats just for the little people.
That approach clearly didn’t work. So what’s the new recipe for success?
The Federal Reserve in America has thrown caution over inflation to the winds. It is now emphasising employment over price changes. The Fed has become even more aggressive in its monetary policy, even as the US economy seems to be healthier than it has been in a long time.
In the UK, the Bank of England governor-in-waiting, Mark Carney, says he’s a fan of NGDP targeting. You can read more about this from my colleague Seán Keyes here: Should we replace Mervyn King with a robot? In short, it means you target a certain level of nominal economic growth. If that means tolerating inflation at 5%, while ‘real’ growth is at 0%, then so be it. In other words, it’s a way to go soft on inflation without breaking your rules.
And in Japan, the new party in power has sworn to stop deflation. The Bank of Japan may end up with a new inflation target of 2%, double its current target.
In short, central banks have decided that inflation doesn’t matter any more. Fretting about this target is holding them back from taking the decisive action needed to resuscitate our ailing economies. 2013 is going to be all about taking monetary policy to the max.
We sense disaster looming.
Central banks have a bad record – why trust them now?
Central banking might just work, if it was genuinely independent. If you had central bankers who were willing to do the whole ‘counter-cyclical’ thing, we might have a more stable economy. In other words, if central banks were willing to raise interest rates to temper booms, rather than just slash them to alleviate busts, then they might do some good.
But this is never going to happen. Central banks argue that it’s impossible to see asset bubbles inflating. This is nonsense. The fact is that they don’t care about bubbles.
All that matters to them is that the economy keeps chugging forwards. It doesn’t matter whether it’s chugging towards the promised land or towards a cliff edge – all growth is good growth. So they will never act to rein in a boom, regardless of whether it’s ‘healthy’ or not.
This is because central banks are political institutions. They are not independent. And as long as you understand this, then it’s easy to see why we’re trapped in this self-destructive cycle of bubble-blowing.
Politicians will always pursue ‘boom and bust’ policies because they always think they’ll get out on time. Voters love a boom. Taking the punch bowl away during the boom time is not the way to win votes. And by the time the bust arrives, it’ll be someone else’s problem, with any luck.
This central bank bias in favour of ‘easy’ money lies at the heart of all the bubbles we’ve seen in recent decades. The tech bubble inflated, then burst. Interest rates were slashed. The property bubble inflated, then burst. Interest rates were cut to near-zero, and central banks started buying government bonds. So we now have a bubble in government debt.
There is one thing that is more toxic for bond prices than anything else – inflation. And right on cue, across the world, central banks are falling over themselves to abandon inflation targeting.
Is there a method in their madness? Or are they just pursuing growth at any cost? Past performance is no guide to the future, we’re always told. But I think anyone who believes that central bankers are going to get it right this time is being almost deliberately naïve.
So what can you do about it? A bond market blow-up would be nothing short of disastrous for most asset classes. We can’t know when it’s going to happen. But it’s one good reason to make sure you have a well-diversified portfolio.
We’ve been knocking about some ideas for setting up a long-term, cheap-to-run, core ‘retirement’ portfolio at MoneyWeek recently. We’re looking for something that allows you to sleep at night without sacrificing a big chunk of performance.
We’ll have more details on this in the New Year, but it’s certainly made me think a lot about how investors can survive and even make money with this potential disaster looming in the background.
Loosely speaking, I’d suggest having some money in cheap stocks (Japan in particular – see here for more), very little – if any – money in bonds (except perhaps index-linkers), some gold, and a decent amount of cash. The cash is there to give you the opportunity to snap up cheap assets if and when the bubble finally bursts.
Some interesting quotes relevant to Central Banking
“It is no coincidence that the century of total war coincided with the century of central banking.”
– Ron Paul
“the last duty of a central banker is to tell the public the truth.”
– Alan Blinder (former Fed Reserve Board Vice Chairman)
“It is no coincidence that the century of total war coincided with the century of central banking.”
– Ron Paul