Tag Archives: central bank policies

How Corporate Zombies Are Threatening The Eurozone Economy, by Tyler Durden

Part of capitlism’s survival of the fittest is allowing the unfit to die. Precisely what Europe has not done since the last financial crisis. From Tyler Durden at zerohedge.com:

The recovery in Eurozone growth has become part of the synchronised global growth narrative that most investors are relying on to deliver further gains in equities as we head into 2018. However, the “Zombification” of a chunk of the Eurozone’s corporate sector is not only a major unaddressed structural problem, but it’s getting worse, especially in…you guessed it…Italy and Spain. According to the WSJ.

 The Bank for International Settlements, the Basel-based central bank for central banks, defines a zombie as any firm which is at least 10 years old, publicly traded and has interest expenses that exceed the company’s earnings before interest and taxes. Other organizations use different criteria. About 10% of the companies in six eurozone countries, including France, Germany, Italy and Spain are zombies, according to the central bank’s latest data. The percentage is up sharply from 5.5% in 2007. In Italy and Spain, the percentage of zombie companies has tripled since 2007, the Organization for Economic Cooperation and Development estimated in January. Italy’s zombies employed about 10% of all workers and gobbled up nearly 20% of all the capital invested in 2013, the latest year for which figures are available.

The WSJ explains how the ECB’s negative interest rate policy and corporate bond buying are  keeping a chunk of the corporate sector, especially in southern Europe on life support. In some cases, even the life support of low rates and debt restructuring is not preventing further deterioration in their metrics. These are the true “Zombie” companies who will probably never come back from being “undead”, i.e. technically dead but still animate. Belatedly, there is some realisation of the risks.

Economists and central bankers say zombies undercut prices charged by healthier competitors, create artificial barriers to entry and prevent the flushing out of weak companies and bad loans that typically happens after downturns. Now that the European economy is in growth mode, those zombies and their related debt problems could become a drag on the entire continent.

“The zombification of the corporate sector and banks (is) a risk for future living standards,” Klaas Knot, a European Central Bank governor and the head of the Dutch central bank, said in an interview.

In some ways, zombie firms are an unintended side effect of years of easy money from the ECB, which rolled out aggressive stimulus policies, including negative interest rates, to support lending and growth. Those policies have been sharply criticized in some richer eurozone countries for making it easier for banks to keep struggling corporate borrowers alive.

To continue reading: How Corporate Zombies Are Threatening The Eurozone Economy


Mind the Junk—-This Ain’t Your Grandfather’s Capitalism, by David Stockman

The premium investors receive for buying the junkiest credit—the spread to high-rated debt like US Treasury bills, notes and bonds—is insanely small, hardly any compensation for the additional risk. From David Stockman at davidstockmanscontracorner.com:

The financial system is loaded with anomalies, deformations and mispricings—-outcomes which would never occur on an honest free market. For example, the junk bond yield at just 2% in Europe is now below that of the “risk-free” US treasury bond owing solely to the depredations of the ECB.

Indeed, madman Draghi has purchased $2.6 trillion of securities since launching QE in March 2015, and during the interim has actually bought more government debt than was issued by all the socialist governments of the EU-19 combined!

Euro Area Central Bank Balance SheetOutrunning Europe’s deficit-addicted welfare states is quite a feat in itself, but that wasn’t the half of it. The ECB’s printing press became so parched for government debt to buy that it has ended up owning more than $120 billion of corporate bonds. In some recent cases, the ECB has actually taking down 20% or more of new corporate issues—an action that surely leaves the fastidious founders of its Bundesbank prodecessor turning in their graves.

In turn, the ECB’s Big Fat Thumb on the investment grade scale stampeded fund managers into the junk market in quest of yield, especially for BB rated paper which makes up 75% of the European high yield market. So doing, these return hungry managers have crushed the the yield on the Merrill Lynch junk bond index, driving it down from 6.4% in early 2106 to an incredible 2.002% last week.

That is to say, leveraged speculators in European junk have made 100% plus returns over the last 20 months on dodgy paper that should be yielding double or triple its current rate.

In fact, the current lunatic euro-trash yield is completely off the historical charts. Euro-junk rarely yielded under 5% in the past, and had spiked to upwards of 10% at the time of Draghi’s “whatever it takes” ukase, which, in turn, was modest compared to the 25% blow-0ff high during the depths of the financial crisis.

To continue reading: Mind the Junk—-This Ain’t Your Grandfather’s Capitalism

The Kids Are Not Alright, by Robert Gore

Debt initially dazzles and deceives, then it disappoints, disillusions, devastates, and destroys.

The thing governments do best is borrow. Performance varies across the range of their purported functions—warfare, maintenance of public order, provision of goods and services, redistribution, regulation—but they all go into debt. The structure of governments and their underlying philosophies also vary, but there’s one commonality. They are set up to optimize their own borrowing. Thus, central banks are essential.

There is a cottage industry devoted to the minutia of central bank personnel, policies, and pronouncements and what they mean for humanity’s future. Actually, cottage industry is not a correct characterization. No cottage industry could generate the kind of money paid to central banking’s acolytes.

After months of speculation, President Trump named Jerome Powell as the next Chair of the Board of Governors of the Federal Reserve System. If you know why the Fed exists and how it operates, the speculation was so much dross. The Federal Reserve exists to “facilitate” the US government’s issuance of debt. Mr. Powell will do what Janet Yellen, Benjamin Bernanke, Alan Greenspan, Paul Volker, G. William Miller, Arthur Burns, and every chairperson has done on back to the first one, Charles Hamlin: make it easier for the government to borrow. All of the other candidates would have done the same.

Central banks, their fiat debt, and ostensibly private banking systems that either control or are controlled by governments (take your pick) have facilitated unprecedented global governmental indebtedness. Suppressed interest rates and pyramiding debt via fractional reserve banking, securitization, and derivatives have led to record private indebtedness as well. The totals so dwarf the world’s productive capacities as measured, albeit imperfectly, by gross domestic product figures that the comparison yields an inescapable conclusion: most of this debt cannot be repaid.

A debt instrument is a promise to pay interest over the life a loan and return principle at a date certain in the future. If a private debtor dies before that date certain, his creditor can look to his estate for satisfaction of its claim, which has precedence over the claims of heirs. However, the creditor cannot go after the assets of those heirs. A government that borrows, on the other hand, is pledging repayment from the income streams and assets of future generations, binding parties that may not even exist at the time the debt is incurred. Specious as it is for governments to bind present taxpayers to debt repayment with only their “implied” consent, it is odious in the extreme for them to bind future generations incapable of any kind of consent.

Compounding governments’ culpability, their increasing debt loads make it that much harder for those future generations to repay. Debt that funds productive investment can be considered a factor of production. Just like any other factor of production, it is subject to diminishing returns. At some point the gross return of debt is so scant that after debt service costs, the net return is negative. Additional debt actually reduces rather than adds to economic growth.

This is already happening with debt-funded productive investment, but that’s not the worst part of the story. The lion’s share of debt funds consumption, which generates no offsetting return at all. If you borrow $10 and buy $10 worth of goods, the proper accounting for your transactions is that you’ve increased both your liabilities and assets by $10. There has been no increase in either your income or your net worth. Had you invested the $10, there is a possibility that your income and net worth might increase in the future. When debt funds consumption, it is always a net negative, unless the debtor can borrow at zero or negative rates.

The national income accounting of the US and most other nation ignores debt, so when a government borrows $10 billion and buys $10 billion worth of goods and services, it adds to the gross domestic product, official national income increases $10 billion. Virtually every dime a government spends some politician or bureaucrat will label as an “investment.” However, the claimed returns are dubious or nonexistent; the lion’s share of developed country budgets funds consumption.

In the US, the increase in government debt has been larger than the increase in GDP every year since the 2008 financial crisis. Under the accounting standards the government mandates for the private sector, the US is going backward, getting poorer. Future generations will carry an ever-expanding debt load with a shrinking ability to repay it. The aging population and unfunded pension and medical liabilities—promises made by governments, but not technically debt—exacerbates this bleak scenario.

This year the world has become aware of Mohammad bin Salman, the Saudi Arabian crown prince and heir apparent to the throne. It will be a long time, if ever, before we know the full story behind his recent maneuvers to consolidate his power. However, 32-year-old Salman is emblematic of what will probably be the future’s most consequential conflict: debt-ignited intergenerational strife.

Saudi Arabia sits on one of the world’s largest pools of oil, which has funded a welfare state on steroids. The Saud tribe and its allies have arrogated unfathomable wealth. The benefits with which they buy off ordinary Arabs make work an unattractive option; laborers are imported from other countries. However, the sand is running on this happy state of affairs. Beneficiaries and their “needs” have expanded faster than oil revenues. The country’s foreign exchange reserves are shrinking. It has issued debt and is contemplating a partial sale of Saudi Aramco, the national oil company.

Perhaps the young prince is seeing the writing on the wall and has decided to do something about it. Get rid of the old farts, their multitudinous wives, mistresses, siblings, children, nieces, and nephews, the conspicuous consumption and the shopping jaunts to London and Beverly Hills. Seize their jets, yachts, and fat bank accounts, certainly quite a haul. Start diversifying the economy. Wars in Syria and Yemen cost money, it’s true, but youth is inconsistent. The prince probably does not want his generation’s future (he’s reportedly popular among the young) further mortgaged by a kleptocratic oligarchy.

If so, he’s not alone. Across the developed world, the younger generation faces a future already mortgaged by a kleptocratic oligarchy. Unlike the prince, they can’t do anything about it, and relatively few are even aware of it…yet. Debt initially dazzles and deceives, then it disappoints, disillusions, devastates, and destroys. The oldsters got the first two, the youngsters will get the last four. The former reassure themselves: we vote, the kids don’t, we’ll protect our benefits. Debt deceives. Mounting public pension problems are a harbinger: you can’t squeeze blood from stone, not matter how many vote for it.

A collapse of the debt skyscraper of cards is inevitable, the issue is who bears the losses. Amidst the devastation and destruction, the young may cast a gimlet eye on the benefits their elders have voted themselves, and decide they’re less than willing to fund them. They may decide a generational uprising is in order—perhaps outside the boundaries of the normal political process—and a reshuffling of the remaining assets. The developed world’s elderly could find themselves in the same position as the oleaginous old thieves who ran Saudi Arabia: bereft of power and wealth. Except their reduction in circumstances may not be quite as tolerable as house arrest in the Riyadh Ritz-Carlton.

Once upon a time…

You didn’t have to ask

the government’s permission




Caution: Slowdown, by NorthmanTrader

A lot of lights are flashing yellow on the economy. From the NorthmanTrader at northmantrader.com:

Many of you know I keep posting charts keeping taps on the macro picture in the Macro Corner. It’s actually an interesting exercise watching what they do versus what they say. Public narratives versus reality on the ground.

I know there’s a lot of talk of global synchronized expansion. I call synchronized bullshit.

Institutions will not warn investors or consumers. They never do. Banks won’t warn consumers because they need consumers to spend and take up loans and invest money in markets. Governments won’t warn people for precisely the same reason. And certainly central banks won’t warn consumers. They are all in the confidence game.

Well, I am sending a stern warning: The underlying data is getting uglier. Things are slowing down. And not by just a bit, but by a lot. And I’ll show you with the Fed’s own data that is in stark contrast to all the public rah rah.

Look, nobody wants recessions, They are tough and ugly, but our global economy is on based on debt and debt expansion. Pure and simple. And all that is predicated on keeping confidence up. Confident people spend more and growth begets growth.

But here’s the problem: Despite all the global central bank efforts to stimulate growth real growth has never emerged. Mind you all this is will rates still near historic lows:

And central banks supposedly are reducing the spigots come in 2018:

I believe it when I see it. In September the FED told everyone they would start reducing their balance sheet in October. It’s November:

I guess we’ll need to give them more time. After all it’s only been almost 9 years. 🙄

But let’s get into the actual data, and it’s all from the Fed’s own website.

To continue reading: Caution: Slowdown

Good Riddance And Look Out Below, by David Stockman

David Stockman wishes Janet Yellen a fond farewell. From Stockman at lewrockwell.com:

There is about to be a changing of the guard in the Eccles Building. That comes straight from the tweeter-in-chief, who actually verbalized his thoughts on the matter during interviews yesterday:

I tell you what, she was in my office three days ago. She was very impressive. I like her a lot. I mean, it’s somebody that I am thinking about……(but) I have to say you’d like to make your own mark….

We’ll take the bolded phrase as gold watch time for Janet Yellen upon expiration of her term in February. And with a full measure of Trumpian gusto, we’d also say: GOOD RIDDANCE!

When the story is finally written about how capitalism was strangled and America impoverished during the first quarter of the 21st century, Janet Yellen will rank high on the list of villains – right along with Ben Bernanke and Alan Greenspan.

Their unforgivable sin was to systematically falsify the most important prices in all of capitalism – the prices of money, debt and other financial assets.

They did so in the arrogant and erroneous belief that 12 mortals on the FOMC can improve upon the work of millions of consumers, producers, workers, entrepreneurs, savers, investors and speculators on the free market; and that it’s possible to centrally plan and manage a $19 trillion economy by fiddling with interest rates, manipulating the yield curve and massively and fraudulently monetizing the public debt.

For want of a better term, we refer to this entire, misbegotten Greenspan-Bernanke-Yellen doctrine as Bubble Finance. That’s because in an open world economy flooded with cheap labor and capital, current Fed policy ultimately generates destructive financial bubbles on Wall Street, not sustainable prosperity on main street.

To continue reading: Good Riddance And Look Out Below

Pentagon Worried about Hackers Causing Stock Market Crash, by Wolf Richter

Governments and central banks are fine with equity markets being manipulated upward. However, manipulation downward would be a national emergency. From Wolf Richter at wolfstreet.com:

The Pentagon?! But no one’s worried when stocks get manipulated higher.

It’s funny, the all-out government effort to prevent a major decline of the stock market, or of individual stocks, via manipulation or hacking. Now even the Pentagon is looking into it.

What’s funny is that everyone cheers when manipulation, hacking, and other shenanigans cause the market or individual stocks to soar. It’s just declines they’re worried about at these precarious levels.

Manipulating stocks higher is a time-honored game that routinely receives kudos from all around. The Fed printed nearly $4 trillion and cut rates to zero for eight years – no matter what the damage to the real economy – for the sole purpose of manipulating up asset prices including stock prices. “Wealth effect,” Ben Bernanke called it. Corporate executives and analysts exaggerate future earnings only to deflate them at the last minute, because stock prices are “forward looking” and fake future earnings is all that matters, even if reality now sucks. And on and on. Whatever it takes to push stock prices up, by hook or crook, is cool. These are our heroes.

But when some lonely dude might hack into high-speed stock trading systems or spook the trading algos, quant-fund managers, and high-speed traders and throw algorithmic trading off track to where prices might actually fall in a major way, all heck breaks loose, and the Pentagon feels empowered to step in.

Trading by automated systems, such as used by quant funds and high-speed traders, is beginning to dominate stock trading. The risk of hacking into those systems or manipulating those systems in other ways is a real issue – but it should cut both ways. And the systems themselves are designed to manipulate prices, so….

Nevertheless, the Pentagon’s research arm, the Defense Advanced Research Projects Agency (Darpa), is working with “dozens” of high-speed traders, quant-fund managers, “people from exchanges and other financial companies,” executives, and “others” from Wall Street to figure out how hackers “could unleash chaos in the US financial system.”

To continue reading: Pentagon Worried about Hackers Causing Stock Market Crash

ECB Suffers from “Corporate Capture at its Most Extreme”, by Don Quijones

Like the Federal Reserve, the European Central Bank (ECB) is a banking cartel. From Don Quijones at wolfstreet.com:

Many of these banks are implicated in the biggest financial crimes.

No single institution has more influence over the lives of European citizens than the European Central Bank. It sets the interest rates for the 19 Member States of the Eurozone, with a combined population of 341 million people. Every month it issues billions of euros of virtually interest-free loans to hard-up financial institutions while splashing €60 billion each month on sovereign and corporate bonds as part of its QE program, thanks to which it now boasts the biggest balance sheet of any central bank on Planet Earth.

Through its regulatory arm, the Single Supervisory Mechanism, it decides which struggling banks in the Eurozone get to live or die and which lucky competitor gets to pick up the pieces afterwards, without taking on the otherwise unknown risks.

In short, the ECB wields a bewildering amount of power and influence over Europe’s financial system. But how does it reach the decisions it makes? Who has the ECB’s institutional ear?

The ECB has 22 advisory boards with 517 seats in total that provide ECB decision-makers with recommendations on all aspects of EU monetary policy. A new report by the non-profit research and campaign group Corporate Europe Observatory (CEO) reveals that 508 of the 517 available seats are assigned to representatives of private financial institutions.

In other words, 98% of the ECB’s external advisors have some sort of skin in the game. Of the nine seats not taken by the financial sector, seven have gone to non-financial companies such as German industrial giant Siemens and just two to consumer groups, according to the CEO report.

In response to questions by CEO, the ECB said that its advisory groups help it to gather information, effectively “discharge its mandate”, and “explain its policy decisions to citizens.”

The 508 finance industry representatives sitting on these 22 groups represent a total of 144 companies and trade associations and are made up of a variety of financial market agents including banks, investment funds, insurance firms, clearing houses and central securities depositories.

To continue reading: ECB Suffers from “Corporate Capture at its Most Extreme”