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.”
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.
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.
10 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.
10year 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.
And 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.
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
Most read in the last 20 days:
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- Don’t Blame Trump When the World Ends
Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook. One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- What is the Best Time to Buy Stocks?
Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity? Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...
- Silver Futures Market Assistance – Precious Metals Supply and Demand
Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday. Taking off for real or not? Photo credit: NASA Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...
- Unleashing Wall Street
To Unleash or Not to Unleash, That is the Question... LOVINGSTON, VIRGINIA – Corporate earnings have been going down for nearly three years. They are now about 10% below the level set in the late summer of 2014. Why should stocks be so expensive? Example of something that one should better not unleash. The probability that a win-lose proposition will develop upon meeting it seems high. It wins, because it gets to eat... Image credit: Urs Hagen Oh,...
- Boondoggles for the Swamp Critters
Monster or Mozart? BALTIMORE – Investors seem to be holding their breath, like a man hiding a cigarette from his wife. It’s just a feeling, and it’s not the first time we’ve had it... but it feels as though it wouldn’t take much to send them all running. Actually, they're not going anywhere yet... but there is a lot of overconfidence by those who were very worried when prices were a lot better - click to enlarge. Meanwhile... we’re coming to a deep...