A Little Goosing of the Money Supply and the World is Alright Again

We have pointed out for several months in these pages that the increase in the euro area's true money supply (+8% year-on-year) would likely produce further improvements in PMI data and other measures of economic activity in the euro zone. See for instance our June 5 article Euro-Area PMI Data Improve as Money Supply Growth Accelerates”.

This is not rocket science to be sure, but we have noticed that very few economists actually look at these data. In fact, if they look at monetary developments at all, most of them employ money supply measures that are essentially useless, as they include components that are not money. This is why they are continually 'surprised' when economic data are released.

 

In recent months the expected improvement in the data has indeed occurred, and now mainstream economists and sell side analysts are falling over each other adjusting their forecasts (which means in practice, shifting their rulers to extrapolate the most recent data points). One of the more extreme examples has just been delivered by Den Danske bank, which is 'calling off the euro area debt crisis due to improving PMI data'.

Come again? We have news for the analysts at Den Danske: the governments of the European welfare states are even more insolvent today than they were back when the crisis was still acute. They have all seen their debt loads increase further, in many cases at a stunning clip. Absolutely nothing has happened to alter this fundamental fact of de facto insolvency. A few months of improving PMI data are the functional equivalent of spitting into a hurricane in this context. Similarly, with their sovereigns bankrupt, virtually the entire euro area banking system, which sports uncovered deposit liabilities amounting to € 4 trillion, is just as bankrupt. These four trillion euros are overnight deposits the fractionally reserved banks owe to their depositors on demand and for which no reserves exist. If they are not insolvent, what are they?

Here are excerpts from Den Danske's assessment – at least they acknowledge in passing that there has been no reform worth mentioning yet, but as noted above, they are confusing a cyclical improvement in 'economic activity' that is largely due to  a bout of credit expansion ex nihilo  with an 'end to the debt crisis'.

 

“There are increasing signs that Europe currently is leaving the crisis behind much faster than most had expected … Today’s PMI data signal growth in both Italy and Spain. It’s now only Greece that appears to be stuck in recession for some time,” said Frank Øland Hansen, one of Danske Bank’s Europe analysts, in a note.

“It’s our assessment that the debt crisis is over. With that, we think there will be no more market panic, where uncertainty about one country spills over into others and creates fears for the entire survival of the euro zone,” he added.

“There will still be bumps along the road, but we’ve seen the euro area able to handle large obstacles, so we don’t expect smaller bumps will trigger renewed panic on the financial markets in the future.”

[…]

“The recovery is fragile and largely reflects that the rest of the world currently is improving. If the global recovery derails, it will look bad for Spain and Italy,” Hansen said.

“Reforms are still necessary, and there is in both countries a long way to go before the government-debt situation is under full control.”

 

(emphasis added)

Allow us to point out that the 'government debt situation' in these countries is not under any kind of 'control' at all – it is in fact completely out of control, especially in Italy.

And while Spain has seen an improvement in its competitiveness in terms of unit labor costs and an easing of current account related pressures, the housing bust continues. There is one home for every 1.7 inhabitants in Spain – it will be a long time before it lives down the after-effects of the bubble. Meanwhile, both Spain and Italy are facing ever more dire demographic challenges as well.

 


 

italy-government-debt-to-gdpItaly's public debt to GDP ratio continues to climb at a rapid clip – click to enlarge.

 


 

spain-government-debt-to-gdpThe same applies to Spain – click to enlarge.

 


 

Credit Markets

Both CDS spreads on sovereign debt and government bond yields in the 'periphery' have recently begun to rise again from a higher low.

Portugal has seen a sharp rise in its CDS spread to 520 basis points. This is actually level indicating intensifying crisis conditions. Moreover, the markets are increasingly wary of Eastern European countries in view of the recent currency and debt convulsions in  a number of emerging market countries.

Below are a few charts illustrating the situation. As usual, charts and price scales are color coded (readers should keep the different price scales in mind when assessing 4-in-1 charts). Where necessary we have provided a legend for the color coding below the charts. Prices are as of Tuesday's close.

 


 

pigs5 year CDS on Portugal, Italy, Greece and Spain – Portugal is racing ahead – again, we might add. It was one of the first countries to require aid when the crisis began – click to enlarge.

 


 

10yrbonds10 year government bond yields on the same four countries. Note, Italy's yield shown here is the generic bid, the actual yield is at 4.56%, higher than Spain's – see the next chart – click to enlarge.

 


 

Italy, 10 yr. yieldItaly's 10 year government bond yield over the past three years – click to enlarge.

 


 

ee15 year CDS on Bulgaria, Croatia, Hungary and Austria – in Eastern Europe, spreads are rising – click to enlarge.

 


 

ee25 year CDS on Latvia, Lithuania, Slovenia and Slovakia – obviously, euro area member Slovenia is not out of the woods yet either – click to enlarge.

 


 

ee35 year CDS on Poland, the Ukraine and Estonia – the pressure in the Ukraine continues – click to enlarge.

 


 

eurobasisswapsThree month, one year, three year and five year euro basis swaps – the recovery is stalling out a bit – click to enlarge.

 


 

bondylds10year yields on UK gilts (yellow line), German Bunds (orange line), Austria's 10 year government bond (green) and Ireland's 10 year government bond (cyan). Gilt yields continue to misbehave and ignore Mr. Carney – click to enlarge.

 


 

mecdsAnd lastly, here are the 5 year CDS spreads on Morocco, Turkey, Saudi Arabia and Bahrain – with Turkey still the obvious standout. The rest of the region seems to be in the grip of Syria-related worries – click to enlarge.

 


 

Conclusion:

Things are not as calm in the credit market arena as one would expect if all it took to take the crisis off the table were a few improving PMI data. The surge in euro area money supply growth over the past year is already being undermined again, as bank credit growth has recently stalled and reversed, shrinking by 5.1% annualized over the past trimester. As Sean Corrigan recently pointed out, the improvement in PMI data likely also owes much to the inventory cycle, which is well known for delivering false dawns (just look at Japan's post bubble history).

We would argue that the crisis continues to be on an extended 'pause', but it may well flare up again once the troika's bean counters take their next close look at Greece, Portugal and Slovenia after Germany's election. In our opinion, the major wild card and probably the place that is most likely to create a serious aggravation of the euro area's simmering problems remains Italy. In Italy, no discernible improvements in the most important data points, namely public debt growth and unit labor costs, are in evidence yet. France will also continue to hover over the proceedings like the proverbial sword of Damocles unless its political leadership gathers up the courage to deliver much-needed drastic economic reform – an unlikely prospect considering the appalling economic illiteracy of Hollande and company.

Lastly, Germany may very well become the center of a new bubble if growth in credit and money picks up again (for details on this, see this previous article on Germany's bubble potential). Such a development would imply an even longer crisis pause, but it would be followed by an even worse bust once the boom falters. No credit expansion-induced bubble ends well.

 

 

 

Charts by: Bloomberg, Tradingeconomics, BigCharts


 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How to Stick It to Your Banker, the Federal Reserve, and the Whole Doggone Fiat Money System
      Bernanke Redux Somehow, former Federal Reserve Chairman Ben Bernanke found time from his busy hedge fund advisory duties last week to tell his ex-employer how to do its job.  Namely, he recommended to his former cohorts at the Fed how much they should reduce the Fed’s balance sheet by.  In other words, he told them how to go about cleaning up his mess.   Praise the Lord! The Hero is back to tell us what to do! Why, oh why have you ever left, oh greatest central planner of all...
  • India: Why its Attempt to Go Digital Will Fail
      India Reverts to its Irrational, Tribal Normal (Part XIII) Over the three years in which Narendra Modi has been in power, his support base has continued to increase. Indian institutions — including the courts and the media — now toe his line. The President, otherwise a ceremonial rubber-stamp post, but the last obstacle keeping Modi from implementing a police state, comes up for re-election by a vote of the legislative houses in July 2017.  No one should be surprised if a Hindu...
  • Moving Closer to the Precipice
      Money Supply and Credit Growth Continue to Falter The decline in the growth rate of the broad US money supply measure TMS-2 that started last November continues, but the momentum of the decline has slowed last month (TMS = “true money supply”).  The data were recently updated to the end of April, as of which the year-on-year growth rate of TMS-2 is clocking in at 6.05%, a slight decrease from the 6.12% growth rate recorded at the end of March. It remains the slowest y/y growth since...
  • What is the Buffet Indicator Saying About Gold?
      Chugging along in Nosebleed Territory Last Friday, both the S&P 500 and the Nasdaq composite indexes closed at record highs in the US, with the Dow Jones Industrial Average only a whisker away from its peak set in March. What has often been called the “most hated bull market in history” thus far continues  to chug along in defiance of its detractors.   Can current stock market valuations tell us something about the future trend in gold prices? Yes, they actually...
  • The 21st Century Has Been a Big, Fat Flop
      Seeming Contradiction CACHI, ARGENTINA – Here at the Diary we have fun ridiculing the pretensions, absurdities, and hypocrisies of the ruling classes. But there is a serious side to it, too. Mockery makes us laugh. And laughing helps us wiggle free from the kudzu of fake news.   Is it real? Is it real? Is it real? Above you can see what the problem with reality is, or potentially is, in a 6-phase research undertaking that has landed its protagonist in a very disagreeable...
  • A Cloud Hangs Over the Oil Sector
      Endangered Recovery As we noted in a recent corporate debt update on occasion of the troubles Neiman-Marcus finds itself in (see “Cracks in Ponzi Finance Land”), problems are set to emerge among high-yield borrowers in the US retail sector this year. This happens just as similar problems among low-rated borrowers in the oil sector were mitigated by the rally in oil prices since early 2016. The recovery in the oil sector seems increasingly endangered though.   Too many oil...
  • Will Gold or Silver Pay the Higher Interest Rate?
      The Wrong Approach This question is no longer moot. As the world moves inexorably towards the use of metallic money, interest on gold and silver will return with it. This raises an important question. Which interest rate will be higher?   It’s instructive to explore a wrong, but popular, view. I call it the purchasing power paradigm. In this view, the value of money — its purchasing power —is 1/P (where P is the price level). Inflation is the rate of decline of...
  • Rising Oil Prices Don't Cause Inflation
      Correlation vs. Causation A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see first chart below).   Gushing forth... a Union Oil Co. oil well sometime early in the 20th century   But is it valid to...
  • Warnings from Mount Vesuvius
      When Mount Vesuvius Blew   “Injustice, swift, erect, and unconfin’d, Sweeps the wide earth, and tramples o’er mankind” – Homer, The Iliad   Everything was just the way it was supposed to be in Pompeii on August 24, 79 A.D.  The gods had bestowed wealth and abundance upon the inhabitants of this Roman trading town.  Things were near perfect.   Frescoes in the so-called “Villa of the Mysteries” in Pompeii, presumed to depict scenes from a...
  • A Bumper Under that Silver Elevator – Precious Metals Supply and Demand
      The Problem with Mining If you can believe the screaming headline, one of the gurus behind one of the gold newsletters is going all-in to gold, buying a million dollars of mining shares. If (1) gold is set to explode to the upside, and (2) mining shares are geared to the gold price, then he stands to get seriously rich(er).   As this book attests to, some people have a very cynical view of mining...  We would say there is a time for everything. For instance, when gold went ...
  • Silver Elevator Keeps Going Down – Precious Metals Supply and Demand
      Frexit Threat Macronized The dollar moved strongly, and is now over 25mg gold and 1.9g silver. This was a holiday-shortened week, due to the Early May bank holiday in the UK. The lateral entrant wakes up, preparing to march on, avenge the disinherited and let loose with fresh rounds of heavy philosophizing... we can't wait! [PT]   The big news as we write this, Macron beat Le Pen in the French election. We suppose this means markets can continue to do what they wanted...
  • The Knives Come Out for Trump
      A Minor Derailment GUALFIN, ARGENTINA – Yesterday, stocks fell. And volatility shot up.   When too many people have too many knives out at once, accidental cubism may result   Reports Bloomberg:   The Dow Jones Industrial Average tumbled more than 370 points, Treasuries rallied the most since July and volatility spiked higher as the turmoil surrounding the Trump administration roiled financial markets around the globe. Major U.S. stock indexes...

Support Acting Man

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com