US Banking System In Trouble

Before we begin with today's brief update, we want to wish a Happy Thanksgiving to our US readers.  On this occasion, we also wish to extend our sympathy to the countless turkeys that will lose their lives today. Sorry birdies, but that is what you are for.



 


Picture of an obedient Thanksgiving dinner keeping an eye on the cooking progress.

 



Now on to a somewhat less happy topic, namely the US banks, especially the so-called 'TBTF' banks. As long time readers are probably aware, we have always held that people will tend to underestimate the 'stickiness' of the down cycle in real estate. However, there are a number of historical examples of which the most pertinent is probably Japan's experience since the early 1990's that show that burst mortgage credit and real estate bubbles are quite prone to lead to a persistent secular contraction, especially if the government continually intervenes in the market to prevent it from reaching clearing levels. As it has turned out, the US administration and the  Federal Reserve have in concert repeated precisely what Japan's government did when faced with a collapsing housing bubble. Not 'precisely' in the sense that the interventions are similar in all details, but in terms of the scope and intent it certainly appears that the US have cloned Japan's failed policies. It is quite amusing to think back to how US pundits, politicians and regulators kept admonishing Japan throughout the 1990's over such policies. Today the world's new Zombie Bank center is no longer Tokyo, but New York.

Readers may also recall that we have often talked about what we term the 'moving target problem'.  The banks may have been diligent in raising new capital and may have taken the odd write-off here or there, but in the meantime the value of their collateral keeps declining. The moment  they try to  expedite foreclosures it can be expected that their write-offs will increase sharply, as collateral values lurch even lower and losses currently held in accounting limbo abeyance are recognized (currently it takes nearly 600 days for a foreclosure to be  processed. Due to fresh uncertainties faced by lenders over the question of legal title to properties that are the collateral to loans that have been securitized, foreclosure activities have been slowed down even further).  Note here that US commercial banks still hold some $2.9 trillion in mortgage related assets.

As we have noted before, there are furthermore doubts as to the true extent to which US banks are exposed to the troubles in the euro area. The banks themselves say their exposure is negligible, but the data published by the BIS say otherwise. According to the BIS, US banks hold some $520 billion in derivatives exposure related to Europe. Naturally these are gross exposures, but one must always keep in mind that 'netted' exposure ultimately depends on the solvency of counterparties. As was seen in the AIG case, derivatives hedges are worth nothing if the counterparty to them blows up. If not for the involuntary conscription of tax payers courtesy of the Fed, Goldman Sachs and many others would have recorded billions in losses, far exceeding their 'netted' value at risk.

We suspect that US banks are among the biggest writers of CDS on euro-land sovereigns and that they are therefore exposed to far higher risk than they admit to. After all, there is a non-negligible chance that the euro area will indeed 'blow up', which could conceivably result in cascading cross-defaults of fractionally reserved banks across the continent.

Lastly, the stated book value of many US banks is highly dubious. One example is Bank of America, which sports $70.8 billion in 'goodwill' on its balance sheet, a sum that comfortably exceeds its depressed market capitalization. This goodwill is left over from the string of ill-advised acquisitions BAC's former CEO Ken Lewis engaged in, ranging from Countrywide (today the biggest albatross around the bank's neck) to Merrill Lynch. Both of these firms would likely have gone bankrupt if not for Mr. Lewis' generous takeovers. For instance, he paid $50 billion for Merrill Lynch. Had he waited another two or three months he could have gotten it for $1, and even then he would probably have overpaid.

 


 

Shares of Bank of America plunge to a new bear market low on Wednesday – click for higher resolution – click for higher resolution.

 


 

Considering the chart above, stock market participants evidently believe that BAC is in a  lot of trouble.

The growing doubts the markets have over the future of US banks are also once again finding expression in the credit default swaps market.

 


 

5 year CDS on BAC jump to a new high on Wednesday. Note that this is a new all time high, exceeding the worst levels of the 2008/9 crisis – click for higher resolution.

 


 

5 year CDS on BAC, long term. Here it can be seen that the market currently thinks that the bank is potentially in greater danger of insolvency than it was at the height of the 2008/9 crisis. To put it in 1984 big brother language,  this is doubleplus-ungood – click for higher resolution.

 


 

Other US banks and brokers are seen as slightly less vulnerable than BAC at present, but not by much.

 


 

Shares of Citigroup nosedive as well. We are fatally reminded of how Japanese bank shares acted after the bursting of Japan's real estate bubble. All recoveries proved fleeting and stock prices were cut down brutally from every recovery high they managed to make – click for higher resolution.

 


 

5 year CDS on Citigroup are still below their highs of early October, but this isn't looking very good either – click for higher resolution.

 



Morgan Stanley has been forced to deny over and over again that it sports potentially fatal levels of exposure to Europe, but once again we suspect that this is only the case if one ignores the growing counterparty risk that is given by the interconnectedness of the global financial system. Neither the stock market nor the credit markets seem to have been convinced by the denials.

 


 

Morgan Stanley's stock resumes its merry collapse with verve – click for higher resolution.

 


 

5 year CDS on Morgan Stanley are back above the 500 basis point level, but at 525 basis points still below the high of 582 reached earlier this year. Still, this is the worst looking CDS spread of a major US financial firm in absolute terms – click for higher resolution.

 


 

One of the reasons why we have decided to comment on US banks is because there are many analysts – inter alia the quite prominent bank analyst Dick Bove – who keep saying that everything is just hunky-dory with US banks and recommend that investors buy their stocks. So far this recommendation has been an utter disaster, so we want to provide an antidote. You don't have to take our word for it – here are a few recent headlines:

'Dick Bove: U.S. Banks Benefiting from European Crisis'

'What Problems? Bank Of America Is Fine, Bove Says'

'Bank stress tests nothing to worry about: Dick Bove'

If you google 'Bove' and 'banks' you will find page after page of similar headlines. It is of course always possible that the CDS market the and stock market have it totally wrong and only Dick Bove is right. The fact remains however that the message from the markets plainly contradicts all this loud singing from the  'everything is fine' hymn sheet. The markets are telling us that there are problems that may not be immediately obvious from listening to corporate presentations and looking at the opaque balance sheets of the banks. The markets are saying that the present dangers to the banks are on a par, or even higher, than the dangers they faced in the 'GFC'.

We happen to think that one of the reasons why the markets are so wary at this time is that it is no longer held to be absolutely certain that the 'TBTF' banks will be bailed out again. There are now significant political headwinds that suggest otherwise. It is quite conceivable to us that the Republican-led Congress would deny the treasury the funds to effect another bailout.

This leaves only the Fed. We would submit that one major reason why we lately keep hearing that the Fed is about to embark on 'QE3' and begin another large scale monetization program of mortgage-backed securities is precisely the sorry state the financial system finds itself in at present and the additional dangers it faces due to the euro area debt crisis.

 


 

The Philly Bank Index, weekly. Closing in on fresh three-year lows – click for higher resolution.

 


 

Euro Area – the 'Game Over' Meme Spreads

Our last report o the euro area was entitled 'Game Over?', and it appears that the idea is spreading. We have also said from the very beginning that the new 'leveraged' EFSF would turn out to be a flop – and so it has come. Consider for instance this recent headline at Reuters: 'Euro zone no closer to "bazooka-style" rescue fund'.


The euro zone is struggling to design a fired-up bailout fund capable of protecting Italy and Spain nearly a month after European leaders agreed on the plan, adding to concerns that the crisis has escalated too far for the fund to have an impact.

Finance ministers are expected to finalise details on how to extend the lending reach of the European Financial Stability Facility (EFSF) to as much as 1 trillion euros (1.02 trillion pounds) when they meet in Brussels next Tuesday, but the fund itself may not be operational for several weeks more.

"It is difficult to say today when the fund will be ready," said a senior euro zone official with direct knowledge of the negotiations. "Before Christmas would be an optimistic target from a technical point of view."

Another official said the leveraged fund should be working from January. "We need to take into account what investors want and what the politicians want," the official said.

January may already be too late, with evidence growing by the day of the crisis seeping into the heart of the euro zone. France's bond market is under pressure and Germany on Wednesday failed to sell a large chunk of 10-year bonds at an auction.

Euro zone leaders agreed on October 27 that the EFSF, set up in May 2010, should be leveraged to raise its firepower, focussing on a two-pronged scheme to provide bond insurance and attract outside funds to invest in euro zone bonds. With Germany rigidly opposed to the idea of the European Central Bank providing liquidity to the EFSF or acting as a lender of last resort, the euro zone needs a way of calming markets, where yields on Spanish, Italian and French government benchmark bonds have all been pushed to euro lifetime highs.

Once fully leveraged and operational, it is hoped the EFSF will be sufficiently large to provide emergency loans to Italy and Spain, should they find themselves unable to raise funds in the market, as others have done. The EFSF currently has a capacity of 440 billion euros, but it is already committed to providing assistance to Ireland, Portugal and Greece, and needs to set aside money in case it needs to help recapitalise European banks as well.

As a result, it only has about 250 billion euros available, not enough to help Italy and Spain, which together need to raise 570 billion euros next year in short and long term financing, according to ABN Amro.

Even as policymakers work to design a way of bolstering the EFSF, the crisis is worsening, making it ever harder to get on top of the problem. As problems expand, the probability that one of the euro zone's 17 member states will be forced to default on its debts increases. That in turn is likely to increase the demand from investors for EFSF guarantees on euro zone bonds.

The head of the fund, Klaus Regling, has already warned that the EFSF may not reach the 1 trillion euro level and scepticism is growing about the ability to achieve the leverage.

"No one's coming out and say 'let's abandon this' but I don't think at this point there are many investors who think this stuff is going to fly," said Malcolm Barr, an economist at JP Morgan in London.

"The failures of these mechanisms leaves the ECB as the last man standing and it is highly likely that the pressure will come on for the bank to do more to stabilise the situation."


(emphasis added)

We should add here, a friend who used to participate in German bond auctions in the past told us that the 'failure' of the last auction was really no big deal and that the sensationalism surrounding the event is unwarranted. However, even if that is the case, the more important fact is probably the market reaction to the news. German bond yields rose strongly right after the auction  concluded. Nervousness in all markets reached a new fever pitch. Investors no longer rationalize the finer points of bad news. Any news item that looks like it may indicate a worsening of the situation is adding to the growing sense of panic.

As the Globe and the Mail reports, 'Investors start to notice that Germany is part of the euro zone'. Indeed.

Meanwhile, German news magazine 'Der Spiegel' notes that 'Germany's Finances are Not as Sound as Believed'.


“In reality, German government finances are not nearly in as good shape as the chancellor and the finance minister would have us believe. The way that certain important indices are developing suggests that Germany may not retain its position as a role model in the long term. Government debt as a percentage of GDP is already at more than 80 percent, which compared to other European Union countries is by no means exemplary, but in fact average at best.

When it comes to their debt-to-GDP ratios, even ailing countries like Spain are in better shape, with values significantly lower than 80 percent. Critics, irritated by Merkel's and Schäuble's overly confident rhetoric, are beginning to find fault with Europe's self-proclaimed model country. "I think that the level of German debt is troubling," says Luxembourg Prime Minister Jean-Claude Juncker, whose country has a debt-to-GDP ratio of just 20 percent.

Despite the nascent criticism, Merkel and Schäuble will be patting themselves on the back once again at this week's final debate on the 2012 federal budget in the Bundestag, the German parliament. They will point out that Germany is in much better shape than its partners in the euro zone, not to mention the United States. They will also praise conditions in the labor market, rising tax revenues and the declining budget deficit.

It is certainly true that Schäuble expects the German deficit to decline from 1.3 percent of GDP this year to less than 1 percent next year. But it's none of his doing. In fact, he wants to incur more debt next year than in 2011. It is only state and local governments that are slated to borrow less next year, thereby helping to reduce Germany's deficit. In contrast, Schäuble expects €26 billion ($35 billion) in net new borrowing in 2012, an increase of several billion euros over this year.

The reason for the embarrassing increase is a noticeable reduction in austerity efforts. Flush with cash, Germany's coalition government of the conservatives and the business-friendly Free Democratic Party (FDP) has rediscovered its taste for spending money. At their most recent meeting, the leaders of the CDU, its Bavarian sister party, the Christian Social Union (CSU), and the FDP approved new spending that will place a significant burden on the federal budget in the future.”


As we have previously noted, Germany is not in possession of the moral high ground just because its bond yields are low and just because the too low administered ECB interest rate has led to an unsustainable economic boom (that is already falling apart). On the contrary, the size of Germany's public debt  continues to be in violation of the limits set by the Maastricht treaty.

When listening to German politicians pontificate over fiscal offenders in the euro area, what comes to mind is “Quod licet Iovi, non licet bovi”.



 

The move in Germany's 10 year government bond yield after conclusion of the failed auction on Wednesday – click for higher resolution.

 



Meanwhile, Mrs. Merkel and Mr. Sarkozy promised to stop the embarrassing public sniping over the ECB's crisis role, while confirming their 'trust' in the unelected technocrat Mario Monti, who has emerged as the new Italian prime minister following the Berlusconi putsch.

We have a nagging feeling that this agreement to enter into a 'quiet period' over the ECB is the first step toward inflationary measures to be taken by the central bank. It paves the way because it helps to buttress the bank's image as an 'independent' entity.

After all, with the already preordained failure of the EFSF, there is no other emergency mechanism left (see the excerpt from the Reuters article above). Even Mrs. Merkel must know that her principles will be of little avail should Italy and Spain continue to be forced to roll over their debts at 7% and more. They simply cannot afford it and that means they will eventually throw down the gauntlet by saying: 'you either print or we will leave the euro and print and devalue ourselves'. Not necessarily because they would really want to do that, but because it will appear to be the only viable solution from the point of view of political expedience. A political leader will very likely prefer to preside over a euro exit to presiding over a default, that much we believe can be taken for granted.

There is in this context no mistaking the noises emanating from Spain's new government as it were. Spain is in a modern-day equivalent to the Great Depression, with unemployment approaching 23%, its banking system in tatters and vast tracts of real estate developments having become ghost towns that are slowly rotting away and blighting the landscape. At some point Spain's administration will inevitably come to the conclusion that it has nothing left to lose.


France and Germany agreed on Thursday to stop arguing in public over whether the European Central Bank should do more to rescue the euro zone from a deepening sovereign debt crisis.

President Nicolas Sarkozy and Chancellor Angela Merkel said after talks with Italian Prime Minister Mario Monti that they trusted the independent central bank and would not touch its inflation-fighting mandate when they propose changes of the European Union's treaty to achieve closer fiscal union.

They also demonstrated their confidence in Monti, an unelected technocrat, to surmount Italy's daunting economic challenges, in contrast to the barely concealed disdain they showed for his predecessor, media billionaire Silvio Berlusconi.

[…]

French aides had hoped Berlin would relent in its opposition to a bigger crisis-fighting role for the ECB after Germany itself suffered a failed bond auction on Wednesday, highlighting how investors are wary even of Europe's safest haven.

"There is urgency (for ECB intervention)," Foreign Minister Alain Juppe told France Inter radio before the meeting.

Sarkozy took a step towards Merkel this week by agreeing to amend the treaty to insert powers to change national budgets in euro area countries that go off the rails. Juppe cautioned that treaty change could take years because of the need for 27 national parliaments to ratify it. With contagion spreading fast, a majority of 20 leading economists polled by Reuters predicted that the euro zone was unlikely to survive the crisis in its current form, with some envisaging a "core" group that would exclude Greece.

Analysts believe that sense of crisis will in the end force dramatic action. "I think we are moving closer to a policy response probably, which could be either more aggressive ECB action or the idea of euro bonds could gain some traction," said Rainer Guntermann, strategist at Commerzbank.”


(emphasis added)

Evidently, the 'print or die' meme is also continuing to spread.

Meanwhile, S&P warns of further downgrades of euro area sovereigns 'if the euro area slips into recession', even while the IIF (Institute of International Finance, the main European bankster guild) says the euro area is already in recession.

Others no longer just warn, but issue new downgrades. Fitch has cut Portugal to 'junk' just as the country is hit by another general strike. As CBS reports:


Portugal's efforts to climb out of its economic crisis suffered a double setback Thursday as its credit rating was downgraded to junk status and a major strike gave voice to broad public outrage over austerity measures that have squeezed living standards. Portugal's deepening plight underlined Europe's difficulties in finding a way out of the continent's government debt crisis which has recently shown alarming signs of spreading to bigger nations, most notably Italy.

Like others in the 17-country eurozone, Portugal has embarked on a big austerity program to make its debts sustainable. Earlier this year, Portugal followed Greece and Ireland in taking a bailout to avert bankruptcy.

As in Greece, though, the government's tough medicine, which is required by international creditors in return for the €78 billion ($104 billion) in bailout money, is unpopular. The strike had a huge turnout, making it possibly the biggest walkout in more than 20 years. "They are trying to destroy the national health service, and salaries haven't gone up since 2004," striking doctor Pilar Vicente told Associated Press Television News.

Fitch blamed Portugal's "large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook" for its decision to cut the country's rating by one notch to BB+. Rival Moody's already rates Portuguese bonds as junk but Standard & Poor's rates them one notch above.

Fitch's decision to cut Portugal to a non-investment grade will likely mean it's even more difficult for the country, which is already mired in a deep recession and is witnessing rising levels of unemployment, to return to bond markets by its 2013 goal. That raises the unappetizing prospect that Portugal, like Greece, may need a second bailout.”


We have warned for some time that the market's focus would eventually return to Portugal. The Fitch downgrade may well provide the trigger.

Not surprisingly, there is yet another general strike in Greece coming as well. Meanwhile, Greek police are now clashing with protesters against the new property tax that is affixed to electricity bills to avert tax evasion.


“Riot police clashed with workers at Greece's biggest power producer PPC on Thursday as they staged a protest against a new property tax imposed as part of austerity measures to avert the country's bankruptcy.

Some 80 police scuffled with members of the company's labour union GENOP outside the entrance to the building in an Athens suburb. Police detained 15 people, a police spokesman said.

The union is trying to boycott the property tax that PPC has been charged with collecting via Greeks' electricity bills.

"We will not back down in our struggle. This fight is about the whole of Greek society. It is about not cutting power to the homes of the poor, the unemployed, the pensioners," Nikos Fotopoulos, head of GENOP, said before being detained. "The fight will continue till the end. This law will become invalid in practice, with the help of all the people."

The protest underscored the resistance conducted by labour unions to the austerity measures the new national unity government must implement to secure the release of loans needed to prevent Greece defaulting on its debts. Public sector unions representing about half a million workers plan to halt work for two hours later on Thursday in protest against the austerity measures and the government's 2012 draft budget now moving through parliament.”


We would suggest that if Greece's public sector workers go on strike, no-one will actually notice unless they concurrently hold a demonstration. In any event, this goes to show that it will prove politically impossible to continue on the austerity path. We believe Greece will eventually default and leave the euro area – and the markets evidently believe so as well.

While all of this is going on, some are beginning to prepare for the 'disorderly' break-up of the euro area. As Reuters reports, UK banks are now implementing contingency plans to that effect:


“Britain's banks are drawing up contingency plans in case there is a disorderly break-up of the euro zone or exit of some countries from the single currency as the sovereign debt crisis rages on, the Financial Services Authority said on Thursday.

Andrew Bailey, deputy head of the Prudential Business Unit at the FSA, said UK banks don't have large exposures to the euro zone, but must plan for the worst.

"We cannot be, and are not, complacent on this front," Bailey said at a conference. "As you would expect, as supervisors we are very keen to see the banks plan for any disorderly consequence of the euro area crisis.

"Good risk management means planning for unlikely but severe scenarios and this means that we must not ignore the prospect of a disorderly departure of some countries from the euro zone. "I offer no view on whether it will happen, but it must be within the realm of contingency planning," he said.”


At this stage, it seems the wise thing to do.


Euro Area Credit Market  Charts

Below is our customary collection of CDS prices, bond yields, euro basis swaps and several other charts. Both charts and price scales are color coded. Prices are as of Wednesday's close.

The massacre continues apace. We once again have a series of new highs in CDS, with Greek CDS trading at an absurd 9,537 basis points now and CDS on Spain, Belgium and France and several others all reaching new all time highs. The SovX is also at a new high as a consequence. 

Our euro-land bank CDS index made a huge 33 basis point jump to a new all time high as well.



 

5 year CDS on Portugal, Italy, Greece and Spain, all higher once again. Greece at 9,537 basis points is now well into the realm of the absurd. It makes no longer sense to hedge a bond position at such prices. One might as well just write it off. We believe this is the highest CDS price ever seen in the history of this market anywhere – click for higher resolution.

 


 

5 year CDS on France, Belgium, Ireland and Japan – once again, new highs for CDS on France and Belgium – click for higher resolution.

 


 

5 year CDS on Bulgaria, Croatia, Hungary and Austria – click for higher resolution.

 


 

5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – another string of new highs – click for higher resolution.

 


 

 

5 year CDS on Romania, Poland,  Lithuania and Estonia – this group is now breaking out as well – click for higher resolution.

 


 

5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey – click for higher resolution.

 


 

5 year CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns. SovX at a new all time high – click for higher resolution.

 


 

Three month, one year and five year euro basis swaps – the dollar funding horror-show continues for euro-land banks – click for higher resolution.

 


 

Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – another huge jump to a new all time high – click for higher resolution.

 


 

5 year CDS on two big Austrian banks (Erstebank and Raiffeisen) – new highs as well (for absolute levels divide prices by the divisors in the legend – these are indexed to 100 as of August) – click for higher resolution.

 


 

10 year government bond yields of Italy, Greece, Portugal and Spain – there's no let-up in sight – click for higher resolution.

 


 

10 year government bond yield of Austria, the 9 year government bond yield of Ireland, UK Gilts and the Greek 2 year note. – Austrian yields shoot higher, and the stay of execution for Ireland seems to be over as well – click for higher resolution.

 


 

10 year government bond yield of Belgium – yet another new high. This one has really taken off now that it has become known that the country won't be able to swing its share of the DEXIA bailout – click for higher resolution.


 


 

10 year government bond yield of Italy – as we noted on Wednesday, this one is now building a triangle, a bullish continuation formation – click for higher resolution.


 



 

Italy's 10-2 spread remains inverted – click for higher resolution.


 


 

10 year government bond yield of Portugal – this is a snapshot taken before Thursday's downgrade. It has jumped by 90 basis points following the downgrade and currently sits at 12.21% – closing in on the all time high set in July – click for higher resolution.


 



 

10 year government bond yield of Spain – another new high – click for higher resolution.

 


 

5 year CDS on the debt of Australia's 'Big Four' banks continue to rise in unison – click for higher resolution.


 


 

  

5 year CDS on China – recent worsening economic data are keeping the bid on this one alive as well (note this is also indexed to 100) – click for higher resolution.


 


 


The S&P 500 index – readers may remember our 'crash chart' that we presented a few months ago. It could well be that wave 3 down is now underway, only it began from a slightly higher level than originally anticipated. Another possibility is that the current down move is wave 'B' of what will become a second wave shaped 'A-B-C'. What really worries us is that sentiment data are at best middling, and there has not yet been 'panic volume' indicating a wash-out. These factors would argue for more downside to come – click for higher resolution.




Addendum:

 

Via Reuters, do your own euro area bank stress test!

 

 

 

Charts by: StockCharts.com, Bloomberg



 
 

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5 Responses to “Update on US Banks and the Euro Area – Things Look Grim”

  • ab initio:

    Considering the stress in the EMU banking system and the inability of Eurozone taxpayers to provide bailout’s due to their own impaired balance sheets – it is rather amazing at how resilient the Euro has been relative to other currencies.

    Is there a message there?

  • I think the MF Global case has just shown that the system can not really be trusted, and that is even more true in a systemic breakdown/emergency. Such emergency situations are almost always misused by some people in the right positions to steal money (see e.g. the famous transfer of a few 100 million euros from an Austrian bank to Refco over the weekend preceding its bankruptcy, or the famous transfer of a large sum of money from a German bank to Lehman literally hours before it declared bankruptcy. These were sophisticated thefts).
    Gold (and to a lesser extent other precious metals) within grabbing distance seems the only thing one can recommend without reservation, as it is the only thing independent of anyone’s promise to pay.
    As regards stocks, the stocks of solid industrial companies have survived a lot of upheaval in the past. For instance, in spite of the almost complete destruction of Germany at the end of WW2 (and the destruction Germany in turn had visited on other parts of Europe), shareholders in firms like Daimler to name one example saw their wealth resurrected. However: at the time people had their stock certificates lying in their own safes at home (or hidden in the attic at a later stage). There is a famous case in France, where a family found that their grandfather had hidden stock certificates representing a 10% shareholding in the country’s largest utility in the attic. They suddenly found out they were millionaires.
    Again though, these stocks were physical certificates, not just electronic blips at the DTCC.

  • worldend666:

    would somebody like to speculate what actually happens with the paper euros in my wallet if the euro collapses?

    Perhaps they will be exchangeable into local currencies, but only for a maximum of 10,000 euros per citizen?

    What’s the best strategic action now if one believes in a break up of the euro zone? Buried gold for sure.

    Are we likely to see equities vanish into thin air as banks in receivership use share certificates registered in the bank’s name on behalf of their clients to pay debts? I checked with my bank and in Switzerland this is not permitted, but in the US shares are pooled and guaranteed up to 0.5 million USD. The rest are the property of the bank it seems….

    • If I had to guess, the paper Euros would for a period of time still have value because we are watching the death of credit or at least a trip to the intensive care unit. Banks without capital can’t make loans or at least I would suspect their paper would be in doubt and they would immediately run into funding problems. The US currency states “This note is legal tender for all debts, public and private”. I have used this terminology in postings for many years now and note that Pater and Rothbard also recognize its importance. There are more debts than money to pay them. Government and banking are attached at the hip and the weak state of banking amplifies the weak state of government finance.

      That said, there are trillions in contracts payable in these notes and many have collateral. You take away the debts and the paper has little value at all. In fact, Lysander Spooner contended that money was valued in payment of debt and its current value is absolutely tied to the amount of credit available in the system. The value of gold on the market when there was a gold standard went up and down with booms and busts. Down in a boom, up in a bust. Of course it was always tied to the extension of credit by bankers.

      I believe the current value of gold has more to do with the fact that you can’t trust anyone to pay their debts at this point. My contention is the only way to solve this problem is the reverse of how they have done it. Break the banks and force the bond holders and depositor over a certain dollar amount to take the loss and recapitalize the banks. They would own the bank and all its stock and collateral. If Keynesian stimulus would work at all, it would only do so as a stimulus to get such a system up and running again. The perpetuation of debt or for that matter, the buying of junk debt with central bank credit is nothing but a dishonest attempt to maintain the status quo and transfer the losses from the bankers to the people. And, of course, to continue the high living of the political class itself.

      This is all mere speculation, namely because we haven’t seen a world wide government finance/banking collapse in history that I know of. There is plenty of anchor with paper because of the industries, inventories, real estate and other goods that serve as contractural collateral. It is the loan collateral that is the money behind the paper, instead of the gold we had 100 years ago. Bank money is on the other side of the ledger from depositors money, the whole matter an accounting trick that has become more complex as time has passed.

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  • trump-putin-1024Trump and Putin Narrowly Escape Assassination Attempt
      The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one.   The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
  • historical-photos-pt9-pepsi-factory-baltimore-1956-aUS Economy - Curious Pattern in ISM Readings
      Head Fake Theory Confirmed? This is a brief update on our last overview of economic data. Although we briefly discussed employment as well, the overview was as usual mainly focused on manufacturing, which is the largest sector of the economy by gross output.   Pepsi factory in Baltimore, 1956 Photo via pinterest.com   Readers may recall that we have pointed out for some time that there was quite a large gap between the data reported in regional Fed manufacturing...
  • escobarA Convocation of Interventionists, Part 2
      Pleas for More Deficit Spending We continue with our Jackson Hole post mortem – including remarks that were made by economists and monetary bureaucrats shortly before and after the pow-wow and seem to be connected to the discussions there.   Assembled central planners (we're not sure if this picture was taken at the conference, but most of the people in it were there). Photo credit: Getty Images   We should preface the following with a Mises quote, as the...
  • swing-voterWhy the Fed Destroyed the Market Economy
      What Have You Done for Me Lately? Swing voters are a fickle bunch.  One election they vote Democrat.  The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon.   The primacy of the wallet.   They don’t give a rip about questions of small government or big government.  Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care.  What’s important to the...
  • time-wastersHow is Real Wealth Created?
      An Abrupt Drop Let’s turn back to our regular beat: the U.S. economy and its capital markets. We’ve been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least.   Groping in the dark, Yellen-style   Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming. But each time, it turns out that the economy is not as robust as she had believed... and that a rate hike isn’t...
  • wallet-367975_960_720Janet Yellen’s Shame
      Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers.   In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
  • warren-buffett-gold-coinGet Ready for a New Crisis – in Corporate Debt
      Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on.   The new three dollar bill issued by the Apprehensive States of America.   We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
  • central bank HQs 2A Convocation of Interventionists – Part 1
      Modern Economics -  It's All About Central Planning We are hereby delivering a somewhat belated comment on the meeting of monetary central planners and their courtier economists at Jackson Hole. Luckily timing is not really an issue in this context.   Central bank headquarters: the Fed's Eccles building, the ECB's hideously expensive new tower in Frankfurt, and the BOJ's Tokyo HQ (judging from the people in the foreground, it may be a source of noxious fumes).   When...
  • silkroadHanjin Marooning in San Pedro Bay
      Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years.  The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years.  In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations.   A map of the main ancient Silk Road - click to...
  • 4-ip-and-non-def-capital-goods-ordersThe Economy, the Stock Market and the Fed
      John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices.   The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...
  • SamuelsonJohn Maynard Keynes’ General Theory Eighty Years Later
      The “Scientific” Fig Leaf for Statism and Interventionism To the economic and political detriment of the Western world and those economies beyond which have adopted its precepts, 2016 marks the eightieth anniversary of the publication of one of, if not, the most influential economics books ever penned, John Maynard Keynes’ The General Theory of Employment, Interest and Money.   The mere fact that the book is lauded by TIME magazine on the cover should give everyone...

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