Around the Globe 10.24.2013

Plans for Political Union Unravel in Europe – WSJ.com.

The talk of a European quickly subsided along with the periphery’s capital market distress.  Astute readers of Dareconomics have known for over a year that the FANG would not approve any plan that would cost more money:

Germans Will Not Pay for Banking Union

leaving the mainstream financial press way behind this story.  The Germans actually may consider a political union with a common budget, but only if the periphery agrees to draconian reforms and monitoring.  As long as the bond vigilantes remain at bay, the PIIGs have no reason to continue reforming their economies and cutting their budgets, and the process has inevitably slowed to a crawl.

Eventually, this impasse will resolve itself, because the euro is slowly dying.  Either these countries will join together or come apart in order to improve their lots.  Your guess is as good as mine as to when the denouement will commence.

 

Euro-Area Services, Manufacturing Unexpectedly Slow – Bloomberg.

Chinese data lifts shares, dollar stays weak | Reuters.

Markit released PMI numbers for the U.S., Eurozone and China today.  American and European output continued to grow but at a slower pace with China registering its best number in seven months.  By peering past the headlines, we observe a continued deterioration in world economic conditions.

In our first chart, we can plainly see that American manufacturing growth peaked in early 2010 and has been expanding more slowly ever since.  Even though this month’s number is undoubtedly lower due to the shutdown, the trend indicated by the red arrow is clear with consistently lower peaks in each mini cycle since 2010.

The second chart shows that even though the MFP is excited about Europe continuing to grow, the economy still remains in a labor market recession. German and French employment are stagnant with the rest of the Eurozone enduring contraction.  Employment has not expanded in the periphery since 2008 and no relief is in sight.

China is the subject of our last chart.  Manufacturing growth is basically flat, and considering the economic situation in its two largest trading partners, discussed above, is not likely to improve.

 

Home affordability sinks as housing slows.

Mortgage applications fall, even as rates drop.

Drops in the housing affordability index lead inexorably to lower sales.  The index is based on interest rates, incomes and house prices and is a pretty reliable indicator for future sales.  The precipitous drop in the index over the last few months has been based on rising rates and prices.  Based on its turn, we can forecast that housing sales are at or near peak levels for this “recovery.”

The banks have already begun slimming down their mortgage departments as refi activity has already reached a peak, but analysts have not yet adjusted their wildly optimistic profits projections.  For that matter economists have not revised their GDP forecasts either.  The fourth quarter is destined to come in below consensus.  Remember that you heard it here first.

China Bond Yields Soar – WSJ.com.

Spike in China money rates raises cash-crunch fears – FT.com.

 

China keeps attempt to rein in its financial system, but every time it tries to do something interest rates rise.  Note the steep rise in both the overnight repo rate and the government bond market over the last few days.  This rise in rates will place upward pressure on the yuan, which means that China will need to purchase more dollars to maintain the exchange rate.

The world central banks have seemingly painted themselves in a corner.  Recall that when Bernanke attempted to move away from crisis monetary policy, the markets reacted adversely.  At this juncture, it is reasonable to conclude that the markets will all fall in unison if these central banks stop printing money, and for just that reason they won’t stop.

Around the Globe 10.15.2013

Fewer US homes entered foreclosure track in third quarter.

 

The mainstream media loves its housing recovery narrative and fervently guards it against the data.  This is the lede from the article above:

The number of U.S. homes set on the path to foreclosure slid to a seven-year low in the third quarter, reflecting a gradually improving housing market and fewer homeowners falling behind on mortgage payments.

That statement is false.  Foreclosures are sliding because banks are keeping delinquent properties out of the foreclosure, whether by design to maintain higher prices or because they simply cannot work their way through the backlog.  I believe the latter explanation is more likely as incompetence trumps malevolence.  If the housing market were really on its way back to health, the number of delinquencies would have plummeted in lockstep with the foreclosures.  It hasn’t:

This second chart shows that defaulted mortgages have remained near recession peaks and historic highs. What is really happening here is that the zombie inventory of homes continues to grow keeping supply out of the hands of the 99% who pay inflated prices for homes and rents for apartments.

Citigroup results hit by bond trading slowdown.

Citigroup Results Hit by Weak Fixed Income Trading – WSJ.com.

Citigroup results hit by bond trading slowdown | Reuters.

 

All of the TBTF banks are enduring lower profits due to smaller bond volumes and a decrease in mortgage applications.  This news has not mattered one iota to share prices as our chart of C shows.  A mild 50¢ sell-off at the open followed by a rally back to just about the pre-earnings level.  Corporate profits have ceased improving, so the current rally is exclusively beholden to additional multiple expansion.  The financial commentariat generally believes that this expansion is unlikely, but in light of the new Printmaster General’s dovish bonafides, I am not so sure.  The market is still far below record P/E levels, and the magic money machine isn’t finished yet:

Fed’s Dudley: Large Balance Sheet Increases Inflation-Fighting Discipline – Real Time Economics – WSJ.

Exclusive: Fed’s Fisher, outspoken hawk, sees no QE reduction this month | Reuters.

The printfest will continue because it cannot stop.  Once the Fed stops creating dollars by monetizing federal and mortgage debt, the market will cease its rise shortly thereafter.  Eventually, the policy of printing money to increase asset prices will lose its efficacy.  First, additional QE will stop inflating market prices, but it will still be able to maintain some sort of stability.  Next, well, no one knows what happens next.

Germany digs in heels as Europe moves towards banking union | Reuters.

 

The Eurozone has created a faux banking union, which should be sufficient to keep the bond vigilantes at bay for the moment.  There are several requirements for a real banking union as currently exists in the U.S. under the auspices of the FDIC, which you can read about in more detail here:

Cosmetic, Can-Kicking Banking Union Agreement in Play | DARECONOMICS

The sticking point is the money.  The rich countries refuse to become joint and severally liable for depository insurance and resolution costs with their poorer brethren.  What this means is that a euro in Germany is much safer than a euro in Spain, because the Germans have more money to bailout its banking sector.  Hence, the current agreement does not break the pernicious bank and sovereign link.  German banks will have money to lend to businesses, and the periphery won’t, so it will remain mired in stagnation.  This Nash equilibrium will remain until one of these countries decides to gamble on a euro exit.

Around the Globe 07.10.2013

Why China Delivered Such a Big Miss in Trade Data.

China Exports Unexpectedly Drop; Imports in Economy Drag – Bloomberg.

China warns of ‘grim’ trade outlook after surprise exports fall | Reuters.

China Trade Data Show Weakness – WSJ.com.

China’ Crude-Oil Imports Fell in the First Half – WSJ.com.

The Chinese economy is heading for a recession, and this has massive implications for the rest of the world.  Commodity prices except for oil will continue to tumble, and Chinese imports will also continue their descent restraining growth in the Eurozone and the entire industrialized world.

Economists believe that China will not enter recession because their models already include a provision for no export growth; however, exports are actually decreasing, and shrinking imports show that China is producing less no matter what the official numbers say.  Moreover, the PBOC’s efforts to control an inflating credit bubble will also crimp growth.  A worldwide recession is in the cards for 2014.  The trends illustrated on our charts are ominous and unmistakable.

EU Unveils Bank-Crisis Plan With 55 Billion-Euro Fund – Bloomberg.

EU Lays Out Single Resolution Proposals for Distressed Banks – WSJ.com.

The last thing the Germans and their FANG coalition members want is an independent European Commission deciding which banks need to be shuttered and resolved.  They oppose this power claiming that it would require a treaty change.  Keep in mind that since the Eurocrisis began, the EU and ECB have been ignoring all of those various treaty provisions, particularly the one against financing governments.

There are two real reasons that the Germans oppose granting the EU the power to shut failing banks.  First, the dodgiest bank on the Continent is probably Deutsche Bank.  The charts show that it is truly TBTF with a derivatives exposure of over 20 times the size of the German economy with assets of one-third of German GDP.  Second, the Germans will not create another contingent liability prior to elections.

Perhaps the Eurozone can use this delay to craft a better banking union.  As it stands today, there is no joint depository insurance scheme, and the resolution fund of €70bn is woefully insufficient.  Moreover, the bank-sovereign link remains intact because of rules that permit sovereign bonds to be held on the books at 100% of par value.  The Eurocrats could have used this relative market calm of the last year to craft a real solution to fix the monetary union and spur growth.  Instead, they have just persisted in their old habits borrowing and spending.

Gold-Oil Ratio Declines to Lowest Since 2008: Chart of the Day – Bloomberg.

Once again the mainstream media fails to… Wait a second.  Lo and behold, I wrote too soon.  This is actually a fairly accurate assessment of the oil and gold markets.  Oil prices have risen due to increased economic activity combined with the standard Middle Eastern crisis premium.  Meanwhile, the price of gold is sinking as people realize that the world will not end tomorrow or even next month.  Gold is probably done sinking for now, but oil could move upward if tensions you-know-where escalate.

Wholesale Inventories Unexpectedly Drop as U.S. Sales Surge – Bloomberg.

Wholesale inventories fall, likely drag on GDP growth | Reuters.

It is a mathematical fact that shrinking inventories subtract from GDP growth, which is one reason why GDP calculations are flawed.  Our chart shows the inventory/sales ratio, which is actually hovering around the lows seen during an expansion.  Perhaps, manufacturers will increase production to replenish inventories over the next few months leading to higher growth or maybe they are reducing production in response to falling orders with this trend continuing instead.  As you can see, economic indicators remain mixed.

In the Race to the Bottom, US Dollar Falls Behind.

The U.S. dollar is up over 10% from its pre-election lows.  A strong dollar is an excellent inflation fighter in our country at the expense of curtailing exports.  This is probably one of the reasons that new export orders have decreased two months in a row:

The strong dollar also causes inflation in emerging markets.  As these currencies weaken, food and energy become more expensive as these goods are priced in dollars.  This dynamic will continue to weigh on world growth.

Currency Controls in Cyprus Increase Worry About Euro System – NYTimes.com.

These controls were put into place almost four months ago, so it’s nice that the mainstream media is finally catching up to the rest of us.  Here is my March 26 post discussing the ramifications of capital controls in Cyprus:

Cyprus No Longer in Eurozone | DARECONOMICS.

The controls implemented as part of the 1st Cyprus bailout created a new de facto currency, the junior euro, J€.  The J€ is so far used only in Cyprus, but it will probably spread to other periphery trouble spots. J€’s give the market the illusion that the Eurozone will not break up so that institutions can continue buying gobs of that sovereign debt while presenting it to the ECB for cash to buy even more.  While this game of musical chairs is currently keeping the Eurozone afloat, it will make everything worse when the unwind actually begins.

Around the Globe 06.27.2013

Home Builder Sales at Risk Due to Rising Mortgage Rates.

Pending-Home Sales Surge to Six-Year High – WSJ.com.

Pending Sales of Previously Owned U.S. Homes Jumped 6.7% – Bloomberg.

from Bloomberg

The mainstream media loves its narratives, because they make journalism so easy.  All one must do is cherry pick data to fit into the narrative, and, voila, you have yourself a nice, brand new article ready for publication.

Pending home sales spiked in May, but there is a caveat.  Rising rates throughout the last couple of months are forcing people to buy now for fear of being left without an affordable mortgage.  In the coming months, this dynamic will fade, and pending home sales will begin decreasing.  Then, the msm will print the utterances of NAR shills telling us that the decline is nothing to worry about and that these other indicators, which are much more important anyway, point to the market’s strength.

If you do not believe that mortgage rates will not be a drag on the “housing recovery,” then you need to examine this chart:

Consumers Boost Spending – WSJ.com.

Consumer Spending in U.S. Rebounds as Incomes Increase – Bloomberg.

Rising rates may be spurring buyers to bring forward their housing purchases, and they may be having the same effect in other sectors.  The rise in consumer spending in May was driven by durable goods, primarily automobiles.  In the coming months, consumer spending will remain flat as purchases brought forward to take advantage of the cheap financing will subtract from future performance.

Euro zone economic mood rises to 13-month high in June | Reuters.

While the U.S. may be experiencing a tepid recovery, at least it’s a recovery.  Europe remains in the throes of a recession, which has metastasized to a depression in Greece and Spain.  The mainstream media is certainly happy that Eurozone confidence rose and is taking it as a sign that the recession is ending.  Perhaps, they should glance at the “Chart of Truth” above.  Everything is relative.  While there was a nice rise in business confidence, note that it is still below the figure from two of the last four recessions.  While the euros are more confident than last month, historically speaking they are not really confident at all.

Europe strikes deal to push cost of bank failure on investors | Reuters.

Europe’s banks are over-leveraged, and everyone knows this.  What is keeping capital from fleeing the system is the set of implicit guarantees that the state would be there to bail everyone out in case of disaster.  In April, the Eurozone decided that to withdraw its implicit guarantee during the Cyprus bailout, and capital has been fleeing the country ever since:

From ZeroHedge

Note that the steep fall in the chart above occurred with capital controls in place.  Now that the state’s guarantee is gone, investors will reprice the banks’ credit risk accordingly and will demand higher rates of return.  When the banks require extra liquidity, investors will not be there leaving the job to the ECB.  Slowly but surely, the eurozone nurtures the seedlings of its destruction.

China Cash Crunch Spreads – WSJ.com.

Here’s the Real Crisis in Australia – Bloomberg.

From Yahoo Finance

Despite the PBOC’s assertions to the contrary, the Chinese cash crunch continues.  While various rates have improved, anecdotal evidence reveals a lack of liquidity throughout the Chinese economy.  The biggest loser here is Australia.  The lack of demand for its raw materials is crimping economic growth and driving down the value of the aussie.  The chart above is there to remind you exactly how far the currency has fallen and how much room it has to fall further.

Around the Globe 06.24.2013

Earnings Season Already Looks Like a Train Wreck.

From Zerohedge

Well, this won’t help.  Markets are already skittish due to the Fed admitting that it may stop printing money someday while the PBOC implicitly tightens the supply of yuan by cracking down on the shadow banking system.  According to the chart above, 2nd quarter earnings growth will be lackluster at best.  On the other hand, the chart above is from April, and the negative to positive guidance ratio remains around 7.  Perhaps, the market has already taken earnings into account setting us up for a relief rally in the coming weeks.

EU Leaders Try to Stave Off Bond Slump as Bank Talks Fail – Bloomberg.

From Bloomberg

PIIGS yields have been rising off recent lows since May. Today’s large, adverse move could indicate investors’ impatience with the EU’s stalled banking union negotiations.  Surprisingly, the bund and gilt actually had worse days in percentage terms.  Astute readers of Dareconomics have known since the inception of talks that the AAA rated FANG countries would never become joint and severally liable for financial system debts with the PIIGS.  There is no way that Merkel could sell adding contingent €1tr+ liability to the German balance sheet to voters right before an election.

This is what we call an impasse.  The FANG may accept joint and several liability with the weaker countries as long as they agreed to a severe reduction in national sovereignty, but this is a non-starter with those countries and France.

In order to resolve the impasse, there will be a typical EU compromise whereby a drastically watered-down banking union is introduced in an attempt to kick the can down the road a bit more.  Will investors buy it again?

Iran Rial Gains 15% Since Rohani Win on Optimism for Thaw – Bloomberg.

The chart above shows the official rate for the Iranian rial, which also surged following elections.  Apparently, the new president is a “reformer,” but that is all relative.  He is still a cleric, and religious Muslims in Iran are not exactly at the cutting edge of the progressive movement.  The rial’s move reflects the relief that an out-and-out hardliner was not elected, but Iran is still behaving like Iran, threatening Israel and supporting the Syrian regime.

Analysis: Another China central bank worry; companies push into lending | Reuters.

Mark Mobius: China’s Problems as Big as US Subprime.

China’s cash squeeze caused by shadow banking: Xinhua | Reuters.

The red line in chart above, B0, is the 7 day repurchase rate.  The market has calmed down since the latest spike late last week, but funding remains tight in China.  This is not a short-term phenomenon either as all of the longer term rates have risen since early May.

The PBOC has a conundrum on its hands.  The bank is refusing to add liquidity in the hopes that it will be able to control the huge credit expansion from the shadow banking system, but there are consequences to this action or inaction, technically speaking.  The lack of money will stop credit from expanding, but bad loans will also stop being rolled over creating many defaults across the system and so on.

Ultimately, the PBOC will blink, but it may be too late by then.  Regardless, it will be a rough ride over between now and the end of the quarter.

Exclusive: BOJ’s Iwata says won’t act on temporary market turbulence | Reuters.

From Bloomberg

The head of the BoJ is telling markets that he will not increase the unprecedented level of easing to fight market volatility.  It is unclear why he said this.  Since Draghi’s pledge almost a year ago, the only word that seems to work is “unlimited.”  What he should have done is jawboned.  A vague promise to print as much as necessary may be one way to get the 2% inflation he desires.  Of course, no one will like what happens if that goal is attained.

Financial instability should figure into policy-making: Fed’s Dudley | Reuters.

When the Ben and Beijing party comes to an end | Reuters.

Dudley opened his mouth to prepare the investors for Fed action in case this sell-off runs off the rails.  While a correction is not a problem, a sustained sell-off most definitely is.  The Fed will probably not increase its bond buying, but it will deploy other tactics to prevent a rout.  Keep in mind that each round of easing is returning less bang for the buck.  Fed intervention may be a given, but its efficacy is not.

Slow U.S. Economic Recovery Is Gaining Momentum – WSJ.com.

There is no factual basis to support the headline above.  The recovery is not picking up momentum, and the chart above supports this view.  The fact that the consensus view of “indepedent” economists and the Fed is that growth is accelerating should be of no solace at this juncture and is actually more of a contrarian signal.  With slackening Chinese and European demand in the picture, don’t be surprised if the U.S. economy actually begins weakening in the 2nd quarter.

 

Around the Globe 06.21.2013

China Money-Market Turmoil Poses Test for New Leaders: Economy – Bloomberg.

Charting China’s Cash Crunch – Real Time Economics – WSJ.

What’s Really Behind China’s Cash Crunch.

China central bank holds line on shadow banking as rates spike | Reuters.

China’s Cash Squeeze Eases—for Now – WSJ.com.

The PBOC is attempting to slow the growth of credit by starving the shadow bank system of liquidity.  Chinese banks have been using loans from the PBOC and each other to speculate in financial markets, and the PBOC is not pleased with this.  In response, the PBOC ceased providing liquidity injections forcing banks to turn to the interbank market. The dearth of available overnight funds took the banks by surprise, and they bid rates up while fulfilling their liquidity requirements.

The PBOC is playing with fire.  There is a very thin line between a liquidity crunch and a full-blown market panic.  While the crunch is under control for now, this may be just a temporary respite until banks require funds prior to the end of the quarter next week.

Bullard Says New Fed QE Outlook Plan ‘Inappropriately Timed’ – Bloomberg.

Bernanke Bond Announcement Was Poorly Timed: Fed’s Bullard.

Bernanke bond announcement was poorly timed: Fed’s Bullard | Reuters.

Bullard is a well-renown hawk in the circles of finance and central banking.  Indeed, he has been critical at times of the unprecedented monetary easing that has taken place since the onset of the GFC in 2008.

His resume makes him the perfect person to restate the Fed’s policy agenda in the wake of the taper tantrum of the last few days.  What Bullard said was that disinflation/deflation remains a concern and that the Fed should make it clear that they will continue easing to attain their goal of 2% inflation.  Bullard believes that monetary policy should be based on the economy and not a calendar.

No matter the reason, Bullard’s appearance throughout the financial media two days after the Wednesday debacle is meant to deliver the message that printing will continue as scheduled.

Update****Analysis: Markets Might Be Misreading Fed’s Messages – Real Time Economics – WSJ. A Hilsenrath special to save the day.  Mr. Hilsenrath is emphasizing the dovish components of the FOMC release in his piece.

 

Bernanke Makes Life Even More Difficult for the Euro – MoneyBeat – WSJ.

In this article, the mainstream media has fully bought into the Eurozone recovery meme that it has created.  The article tells the story of a Eurozone slowly emerging from recession and financial turmoil only to have victory snatched away by the fickle hand of the Fed.  Must the Fed be blamed for everything? A more reasonable analysis of the evidence is that the Eurozone is still mired in a recession with no signs that growth is about to start.

PMIs still show a contracting economy, and well-performing markets were a result of cheap liquidity flooding the planet.  Take away the liquidity, and you’re left with a basket case.  Don’t blame Uncle Ben because the markets are once again revealing the cold, hard truth of a poorly designed currency union.

Mediobanca Shares Fall as Stake-Selling Unveiled – MoneyBeat – WSJ.

Mediobanca announced that it would be selling stakes of Italian companies to raise capital.  Of course, it was vague about needing capital, but the markets saw through the ruse and knocked the stock down almost 10% today.  If the recent swoon in Italian sovereign debt continues, it may have to raise even more capital.  This problem is shared by virtually every Italian and Spanish bank.  They are all stuffed to the rafters with dodgy sovereign debts, and as the sovereign deteriorates do their balance sheets.  It will be a long, hot summer for the Eurozone.

EU Finance Ministers Struggle With Bank Rules – WSJ.com.

Another sticking point has emerged in the endless banking union talks.  The eurocrats still have not figured out a way to pay for resolution authority and depository insurance, and now it seems that each country is attempting to water down the resolution rules so that politically preferred groups do not lose their money when the banks begin failing.

If banks resolutions are treated differently throughout the eurozone, entities will move their money to the jurisdiction with the most favorable rules and the strength to finance the consequences of those rules.  In other words, there will not be a single market for banking service, hence no banking union.

Greek Coalition Partner Pulls Cabinet Ministers – WSJ.com.

Greek party quits coalition over state TV debacle | Reuters.

Greek markets rattled by political disarray – FT.com.

Greece remains dysfunctional.  The Democratic Left has withdrawn from the government removing its cabinet ministers in an empty gesture.  The grand coalition of PASOK and New Democracy will continue its Euro-1st, Greece-2nd policies as these two parties are who got the country into trouble in the first place.

A game of brinkmanship is developing regarding the next bailout payment in late July.  With each member of the troika digging in its heels, the Greek government better be strong enough for tough negotiations and more concessions over the next month.

Around the Globe 06.13.2013

RBNZ Holds Key Rate as Wheeler Targets Strong Kiwi, Housing – Bloomberg.

From Bloomberg.com

The Royal Bank of New Zealand continues to communicate to markets its belief that the kiwi is too strong.  As such, the RBNZ is maintaining a low interest rate posture that is fueling a housing bubble with New Zealand housing up almost 10% from May to May.  The major world central banks have forced monetary easing on everyone else.  Of course, there is no need to worry, Kiwis.  I’m sure that your housing market will have a soft landing and not cause a banking crisis.

Traders Pay for an Early Peek at Key Data – WSJ.com.

Please don’t act surprised, and don’t act outraged either.  This activity is perfectly legal.  Private organizations earn income by selling information to the highest bidder.

The best way to avoid getting soaked in this game is not to be a sucker.  Being a short-term trader is an expensive, time-consuming job.  If you do not wish to pay for primary access to information and spend the time observing markets to learn about the vagaries or supply and demand, then you are just gambling.

The professional speculators will always beat the amateur gamblers in the long-term.  The system is and always will be  unfair.  If you do not like it, don’t make short-term market bets.

Nikkei Enters Bear Market – WSJ.com.

Nikkei Plunges 6.4%; Re-Enters Bear Market.

As the red line in the chart indicates, the Nikkei has completed a round trip from 12,500 at the onset of 2-2-2 to 16,000 during the height of exuberance in May back down to 12,500 as investors realize that Japan is still Japan.  The country is a victim of both a demographic disaster and the Cantillon Effect.  The country cannot be awoken from its torpor with money printing or any other intervention, because it is not sleeping.  Japan is dying.

Trichet Says ECB’s Monetary Transactions Perfectly Legal – Bloomberg.

This guy was in charge of the ECB throughout the entire boom to bust cycle of the new euro, 2003-2011.  He claims that the OMT program is legal.  It is not, though it is certainly necessary.  The only thing holding up those periphery bond prices is the ECB.  One day, the emperor will be shown to have no clothes, but today is not that day.

Emerging Markets Act to Stem Capital Flight – Bloomberg.

We have been monitoring the emerging market situation for quite some time now.  Nothing has changed since our May 2 inflection point.  Capital is slowly jogging out of emerging markets and into… I really don’t know.  The usual havens are not showing massive inflows.

The chart above shows the plight of the Philippine peso.  Note that this is basically the same pattern experience by all emerging markets.  Since May 2, their currencies, bonds and stocks have been weakening in lockstep.

Insight: The big money bails on Argentina – again | Reuters.

If you ever invest money in Argentina, then you deserve whatever happens to you.  Argentina has been a rogue financial state for over a century now.  As recently as the early 1900’s, the country had living standards comparable to the U.S., but it has been a basket case since then.  The consensus among economists is that Argentina will have another financial crisis soon foretold in the exchange rate chart above, but they all believe that it will not be as severe as the last crisis.

I glean two pieces of information from the consensus views of all those economists.  First, either Argentina will have a crisis that puts the 2001-2 to shame, or it will not have one at all.  If you agree with the latter statement, reread the first line of this post.

Greeks strike over state TV closure, PM offers talks | Reuters.

As Juvenal imparted to us over two millenia ago, the keys to ruling are bread and circuses.  The Greek government was able to remain in power (and alive) despite cutting off bread to a great deal of the population, but it may not be able to survive the elimination of the circuses.  The largest protests in months were spurred by the PM unilaterally shutting down Greek public stations.  Let’s hope that our government never makes the same mistake.  We can accept optional wars, scandals and Big Brother monitoring our communications, but don’t you dare take those Kardashians or the NFL away from me!

Euro Zone Closes In on Bank Plans – WSJ.com.

The mainstream media loves touting the Eurozone banking union and never takes a moment to critically analyze what the eurocrats are telling them.  In this case, the elephant in the room is the paltry sum available to resolve failed banks, €60bn. This amount of money is simply not sufficient.  The Spanish banks alone will probably require this much capital within a year, not to mention all of those dodgy Italian and French institutions.  The bottom line is that if these countries want to preserve their euro, they better open their wallets.

ECB Rolls Out Plan To Reduce Eurozone Unemployment

ECB to Hire Hundreds of Supervisors – WSJ.com.

The ECB is preparing to add 800 permanent staff members in order to commence the supervision of Eurozone banks in July of 2014.  These 800 new jobs are just the start for ECB jobs creation plan.  Up to 2,000 full-time staff will be required by 2017 for the ECB to assume full supervisory duties.

Mario Draghi’s plan to save the euro is beginning to take shape.  First, he promised to do “whatever it takes.” Then, he rolled out a bond-buying scheme to keep distressed sovereigns and the banks that hold their debt afloat.  Now that these banks have not failed, the ECB needs to hire employees to supervise them.  Pure genius.

With 2,000 employees being required to supervise 6,000 banks, the ECB hopes that easy lending terms will encourage the creation of 57 million more banks so that the 19 million unemployed people in the Eurozone could be hired to supervise them.

It is not all good news on the banking union front.  There still has not been an agreement on how the Eurozone countries will pay for a joint depository insurance scheme and resolution authority.

FANG Will Not Assume PIIGS Sovereign or Banking Debts

Disparity between the haves and have-nots in the Eurozone banking system.

Euro-Zone Bank-Rescue Deal Faces Hurdles – WSJ.com.

It was only two months ago that the mainstream media was proclaiming the start of the eurozone recovery with banking unions, green shoots and everything.  Frequent readers of this site knew that the banking union was just hype, because the countries continued squabbling over the most important component of the banking union— the money.

A true banking union like that existing in the United States would assist in ending the the sovereign and financial sector link that has already bankrupted Ireland, Spain, Cyprus and Greece and threatens to take down other countries.

During the Great Depression, bank failures exacerbated the economic slowdown in the U.S.  The regulatory model was failing, and a new framework was needed to break the link between failing banks and the poor economy, similar to the situation in Europe today.

Each state was responsible for regulating its own banks.  Some states imposed strict capital requirements and sensible rules on their banking sectors, while others used a laissez faire approach.  Officials soon realized that no matter how healthy their own banks were, failing banks in other states would drag down their institutions.  The solution was centralized regulation with a depository insurance scheme and resolution authority paid for by all of the states through the federal government in the guise of the FDIC and the old FSLIC.

The Europeans cannot agree on a version of the FDIC, the indispensable piece of a banking union.  Americans are one people, and states do not mind being joint and severally liable for each others debts through the federal government.  Europeans do not share the same solidarity.  While the debtor countries would love to have Germany and the northern tier on the hook for their banking systems and large government debt load, these countries are reluctant to share their surpluses.

During the June Euro Summit, the eurozone supposedly agreed to a banking union with joint and several liability among the countries.  The plan was to allow the ESM to recapitalize failing banks directly so that the bailout money would not raise the debt to GDP ratios of the effected countries.

Three months later, the Bundesbank head, Jans Weidmann, began giving interviews stating that countries could borrow from the ESM for bank bailouts but would be liable for the costs.  This was an important change of course, because it left the bank-sovereign link in place.

Germans believe that private investors should shoulder the losses for bank failures.  Their concern is that removing the liability from countries for their bad banks creates the incentive for them to inflate credit bubbles, the moral hazard problem.

Eurozone officials have begun towing the German line:

Asking for direct recapitalization by the ESM would be regarded by the markets not as a sign of financial strength of a certain sovereign, but that the sovereign is signaling “I need some outside assistance.”

These reasons are merely pretexts for the creditor countries refusing to pay for the scheme.  Currently, the ECB has LTRO and OMT programs in place, which are keeping ailing banks afloat.  These programs both create moral hazard and have the potential to signal that the banks are weak, but none of the creditor countries object to these actions, because turning on the money machine appears to be free. Voters are not getting angry at ECB handouts, because they do not understand that they are on the hook for this money just as they are when their countries promise to contribute to the ESM, EFSF or some other euro-scheme.

Stark political calculus determines exactly what the creditor countries will continue to do.  They will allow the ECB to use the printing press to maintain the current eurozone stability but will not overtly contribute additional sums.  That is why you will never see a banking union or joint eurozone bonds.

As soon as monetary policy proves to be insufficient to maintain stability, the northern countries will have a choice to make.  They will either have to assume the liability for trillions of dollars in debts from sovereigns and banks in the periphery or allow the eurozone to dissolve.  While Super Mario has vowed to do “whatever it takes,” Merkel has yet to utter or back up a similar pledge.

Here are all of the links for prior banking union articles.  They will quickly bring you up to speed with this part of the eurocrisis:

Eurotalk is Cheap

Germans Delay & Water Down Banking Union

European Banking Union Delayed and Unfunded

No Agreements on Euro Banking Union

Banking Union is a Pipe Dream

Negotiations Ongoing on Euro Banking Union

Germans Will Not Pay for Banking Union

Cosmetic, Can-Kicking Banking Union Agreement in Play

Taxpayers to Pay Trillions for Banking Union

Germans Still Will Not Pay For Banking Union

FANG Exhibits 2nd Thoughts on Banking Union

FANG Exhibits 2nd Thoughts on Banking Union

Lighter colors indicate more leverage

Data from World Bank

Euro-Zone Bank Plan Could Get Watered Down – WSJ.com.

In the heat of the crisis in June, FANG governments would agree to anything to stabilize markets, and they did. Once markets stopped gyrating, the ECB stepped in with promises of money printing, and no one was looking, they changed their tune quickly.

The FANG countries started backing away from their June agreements on September 27, when Bundesbank head Jan Weidmann denied that bank recapitalizations would proceed directly from ESM funds breaking the destructive link between the sovereign debt and banking crisis. This was a complete about face from the perceived agreement, which I covered in detail here:

Eurotalk is Cheap

As J.P. Morgan said, “A man always has two reasons for doing anything: a good reason and the real reason.” The good reason the Germans and their FANG allies are using for not allowing the ESM to recapitalize banks directly is that the ESM will be able to leverage its funds three to one by forcing countries to take loans from its facility to be used for bank bailouts rather than having these bailouts come directly from the fund.

The real reason is that the FANG does not want to be joint and severally liable with the PIIGS. This does not bode well for a joint depository insurance scheme, as well.

The only way there will be a genuine banking union in the Eurozone is if there is joint and several liability for all Eurozone banks among the members. If each country remains solely liable for its financial system, you will not have a banking union; hence, the balkanization of the European financial system will continue with FANG banks being perceived as stronger as PIIGS banks.

Whenever a commentator proclaims an end to the eurocrisis, keep these facts in mind.  If the euro is to survive, the Eurozone countries will need to have a unified banking system in addition to a closer fiscal union. These two schemes require lots of core country money. Until the FANG decide to ante up, there isn’t a plan, just a lot of talk.