Global economy - Future stock market collapse..

The Euro now firmly in the ‘danger zone’


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Nawazi Ali, of Western Union Business Solutions, reckons the euro is now firmly in the "danger zone" after it slumped to a 20-month low in early trade against the dollar.

It fell by as much as 0.4pc to $1.0518 - that's its lowest level since March 2015.

To put this into perspective, Ali points out that over the past two years the euro has traded in a 17pc range from about $1.2250 down to $1.0450 against the dollar.

Ali said: "Ahead of the Italian Referendum next Sunday, as investors attach a higher political risk premium to the single currency, the EUR/USD rate is trading very close to multi-year lows – levels that will probably be making European importers feel very nervous."


He adds that there's a 75pc chance that QE may create a "perfect storm".

"On the same day as the Italian Referendum on December 4, Austria may elect a new right-wing president. However, and perhaps more importantly, a Reuters poll of economists taken in November has attached a 75pc probability of the ECB expanding/extending QE on December 8 - just four days after the Italian and Austrian votes."

This is largely why the Euro is about to set its third straight weekly loss against the US dollar, a run that has seen the EUR/USD rate fall by some 5pc over that period.

Ali says: "On the one hand this fall does make the Euro look extremely cheap, and why we could easily see a sharp snap-back and recovery. But if we don’t, and downside risks persist, then parity is not actually too far away."
 
The Chinese outlook for 2017 is going to be extremely interesting. Just reading a report there where there are speculations of a bank bailout during 2017. Debt levels rising from substantially even in the past year, real estate bubbles and industrial overcapacity. There seems to be a lot of hairy developments recently, at the very least (not just in China of course, and not just economically. Socially, politically and territoriality).
 
https://www.janus.com/insights/bill-gross-investment-outlook


(...)

In 2003, though, central bankers had rarely contemplated the monetary policy instruments that could lower and then artificially cap interest rates. Although my notes correctly allude to "all means including 'ceilings' " to keep the cost of financing low, the expansion of central bank balance sheets from perhaps $2 trillion in 2003 to a now gargantuan $12 trillion at the end of 2016 is remarkable. Not only did central banks buy $10trillion of bonds, but they lowered policy rates to near 0% and in some cases, negative yields. All of this took place to save our "finance-based economy" and to raise asset prices upon which that model depends. As any investor would admit, these now ongoing policy panaceas have done just that - promoted higher asset prices and engendered a modicum of real growth. In the process however, as I have frequently written, capitalism has been distorted: savings/investment has been discouraged by yields/returns too low to replicate historic productivity gains; zombie corporations have been kept alive in contrast to Schumpeter's "creative destruction"; debt has continued to rise relative to GDP; the financial system has not been cleansed and restored to a balance where risk and reward are on a level plane; disequilibrium has replaced equilibrium, although it is difficult to recognize this economic phantom as long as volatility is contained.
But in order to control volatility, and keep a floor under asset prices, central bankers may be trapped in a QE-forever cycle, (in order to keep the global system functioning). Withdrawal of stimulus, as has happened with the Fed in the past few years, seemingly must be replaced by an increased flow of asset purchases (bonds and stocks) from other central banks, as shown in Chart I. A client asked me recently when the Fed or other central banks would ever be able to sell their assets back into the market. My answer was "NEVER". A $12 trillion global central bank balance sheet is PERMANENT - and growing at over $1 trillion a year, thanks to the ECB and the BOJ.

(...)

So what's wrong with financial methadone? What's wrong with a continuing program of QE's or even a rejuvenated U.S. QE if needed? Well conceptually at first blush, not much. The interest earned on the $12 trillion is already being flushed from central banks back to government fiscal authorities. One hand is paying the other. But the transfer in essence means that monetary and fiscal policies have joined hands and that the government, not the private sector, is financing its own spending. At an expanding margin, this allows the private sector to finance its own spending and fails to discriminate between risk and reward. $600 billion in the U.S. for instance goes into the repurchase of company stock, whereas before, investment in the real economy might have been a more lucrative choice. In addition, individual savers, pension funds, and insurance companies are now robbed of the ability to earn rates of return necessary to maintain long-term solvency. Financial Armageddon is postponed as consumption is brought forward and savings suppressed and deferred.

(...)
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tl,dr: people complain about rising inequality but elect politicians, who inflate asset prices, which is one of the main reasons for increasing inequality. People who complain about austerity in Europe needs their heads checked.
 
PedroMendez said:
https://www.janus.com/insights/bill-gross-investment-outlook

tl,dr: people complain about rising inequality but elect politicians, who inflate asset prices, which is one of the main reasons for increasing inequality. People who complain about austerity in Europe needs their heads checked.
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I actually benefit from it, but I'll be the first to say its fecking ridiculous, and is a vicious cycle which only the right sort of political will on behalf of the population would ever offer hopes of a solution. As it stands no one will take a month of slower growth, and so the game just goes on and on. This was probably my greatest concern about society, up until a populist was elected POTUS.
 
rcoobc said:
Can you eli5?
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Over the last 25+ years governments turned the world into a big debt bubble that expanded from sector to sector and from (geographic) region to region. We are now at the point in time where almost all significant economies in the world are participating in this game. Politicians (encouraged by crazy economists) do that because they think that making debt leads to wealth creation (and handing out gifts gets them re-elected). During the last financial crisis one of these debt bubbles was bursting and the consequences of such an event are very very disruptive. Politicians had to make a choice: allow the markets to re-balance or try to contain the crisis. Understandably they tried to contain it (as much as this was possible), but the problem is that there is only one way of doing that: Adding more debt. So after 09 the central banks started to go crazy to "save" the economy. The crisis in 09 would have been far worse without this intervention (+ China started to add absurd amounts of debt).
Politicians hoped, that they could somehow solve this problem once the immediate crisis is over. Deflate bubbles without sacrificing economic growth; getting rid of debt without recession. It is a nice idea, but it doesn't really work. The Euro-Zone is a great example: They desperately try to balance their books ("austerity"), but they just can't do it; they fail to meet their objectives almost every year; it is just too painful. So we continue to bumble around and people in charge pretend that everything is okay.

As if all of that wouldn't be bad enough, the monetary fiscal and the economic policies that were created to keep the economy afloat all have (unintended) consequences like increasing inequality, massive hidden redistribution of wealth or a severe slowdown of productivity growth.
 
PedroMendez said:
Over the last 25+ years governments turned the world into a big debt bubble that expanded from sector to sector and from (geographic) region to region. We are now at the point in time where almost all significant economies in the world are participating in this game. Politicians (encouraged by crazy economists) do that because they think that making debt leads to wealth creation (and handing out gifts gets them re-elected). During the last financial crisis one of these debt bubbles was bursting and the consequences of such an event are very very disruptive. Politicians had to make a choice: allow the markets to re-balance or try to contain the crisis. Understandably they tried to contain it (as much as this was possible), but the problem is that there is only one way of doing that: Adding more debt. So after 09 the central banks started to go crazy to "save" the economy. The crisis in 09 would have been far worse without this intervention (+ China started to add absurd amounts of debt).
Politicians hoped, that they could somehow solve this problem once the immediate crisis is over. Deflate bubbles without sacrificing economic growth; getting rid of debt without recession. It is a nice idea, but it doesn't really work. The Euro-Zone is a great example: They desperately try to balance their books ("austerity"), but they just can't do it; they fail to meet their objectives almost every year; it is just too painful. So we continue to bumble around and people in charge pretend that everything is okay.

As if all of that wouldn't be bad enough, the monetary fiscal and the economic policies that were created to keep the economy afloat all have (unintended) consequences like increasing inequality, massive hidden redistribution of wealth or a severe slowdown of productivity growth.
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I think it's a bit reductive to blame it on governments alone. I don't know enough about the historical reasons. Let's assume that govt subsidised bad housing loans were the bottom of the rot that led to 2008. Dodd Frank was a limited attempt to curb the speculative behaviour that let the crisis grow from a few bad loans to englufing the entire sector. In fact regulations on risky behaviour have been scaled back since the 80s. This too has been under the advice of economists, combined with lobbying - from the banks themselves. Today, Dodd Frank is on its deathbed, with the stated aim of making borrowing great again (TM). This isn't being done by the party of "big govt" or "big spending", it's being done by a coalition of a fake populist with Ayn Rand-worshippers.
 
berbatrick said:
I think it's a bit reductive to blame it on governments alone. I don't know enough about the historical reasons. Let's assume that govt subsidised bad housing loans were the bottom of the rot that led to 2008. Dodd Frank was a limited attempt to curb the speculative behaviour that let the crisis grow from a few bad loans to englufing the entire sector. In fact regulations on risky behaviour have been scaled back since the 80s. This too has been under the advice of economists, combined with lobbying - from the banks themselves. Today, Dodd Frank is on its deathbed, with the stated aim of making borrowing great again (TM). This isn't being done by the party of "big govt" or "big spending", it's being done by a coalition of a fake populist with Ayn Rand-worshippers.
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I was asked to simplify the answer as much as possible, so I guess I achieved that.

I also didn't say once that big government (compared to small government) in the traditional sense is the problem. Debt shouldn't be correlated with the size of the government; if you want to spend big, you need to tax big. The over-indebtedness is also not restricted to the public sector. (Parts of) the private sector are very much part of the problem. Non of this would be possible without government and central bank interference.
These Ayn Rand-worshippers seem to do a pretty bad job considering that government (with very few exceptions) didn't get any smaller since the 60s, while passing 10th of thousands of pages of regulations each year. You might equate the GOP with free-market ideology, but the reality is that they have a lousy record when it comes to balancing budgets (because they are too scared to reform the welfare state, while keeping taxes too low) or deregulation.

Responsible governments don't set incentives that encourage debt for consumption and balance their books. Oh, and they don't abuse monetary policy to hide their failings.
 
PedroMendez said:
https://www.janus.com/insights/bill-gross-investment-outlook




tl,dr: people complain about rising inequality but elect politicians, who inflate asset prices, which is one of the main reasons for increasing inequality. People who complain about austerity in Europe needs their heads checked.
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Do people still listen to Bill Gross? He's made so many bad macro calls in recent years and is hardly a spokesman for the underclasses, given his multi-million bonus lawsuit with Pimco.
 
Jippy said:
Do people still listen to Bill Gross? He's made so many bad macro calls in recent years and is hardly a spokesman for the underclasses, given his multi-million bonus lawsuit with Pimco.
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What were his bad macro calls ? As I understand it, his beef with Pimco is related to a feud with El-Ariyan.
 
Raoul said:
What were his bad macro calls ? As I understand it, his beef with Pimco is related to a feud with El-Ariyan.
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Check out his nasty gilts are sat on a bed of nitro-glycerine short- gilts rallied c19%. Few years back- he begrudgingly moved neutral at great cost after that.
Yep personal dispute but mainly over obscene bonus pool. He hasn't attracted the assets Janus hoped, but I guess he is what 73?
 
Jippy said:
Do people still listen to Bill Gross? He's made so many bad macro calls in recent years and is hardly a spokesman for the underclasses, given his multi-million bonus lawsuit with Pimco.
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he is certainly not a spokesperson for anyone but himself; me neither. If false predictions disqualify someone from arguing about economics, few people would be left. In the end it is all about the argument. That said, I actually didn't know that he lost so much money and should have checked that.

One thing, that should any critical person cause to pause for a second is that the current monetary policy regime was completely unthinkable before the crisis. Additionally many of the other policy steps simply don't meet their own targets. At least in many parts of the EU. The USA is a slightly different case with different problems. Banks and households were able to de-leverage a fair bit, but the national debt is not in a good place and Trump is the last person, who I'd trust to address this issue. You can't spend yourself out of a debt crisis.
 
PedroMendez said:
I was asked to simplify the answer as much as possible, so I guess I achieved that.

I also didn't say once that big government (compared to small government) in the traditional sense is the problem. Debt shouldn't be correlated with the size of the government; if you want to spend big, you need to tax big. The over-indebtedness is also not restricted to the public sector. (Parts of) the private sector are very much part of the problem. Non of this would be possible without government and central bank interference.
These Ayn Rand-worshippers seem to do a pretty bad job considering that government (with very few exceptions) didn't get any smaller since the 60s, while passing 10th of thousands of pages of regulations each year. You might equate the GOP with free-market ideology, but the reality is that they have a lousy record when it comes to balancing budgets (because they are too scared to reform the welfare state, while keeping taxes too low) or deregulation.

Responsible governments don't set incentives that encourage debt for consumption and balance their books. Oh, and they don't abuse monetary policy to hide their failings.
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Ok, fair enough for most points.
The fact remains that both in terms of rhetoric (balanced budgets) and actions (privatising and cutting govt schemes), the GOP is far closer to a Rand-ian vision that probably any other major party. Of course, their addiction to tax cuts and the military means balanced budgets aren't likely to happen (though Rand herself wanted to preserve the military budget, and was no fan of tax). Whether the lower taxes/stronger military part of their agenda is cynical vote-pandering, or their balanced budget rhetoric is the cynical part is up for debate. But they are literal Rand-worshipers: one of them named his son after her (Ron/Rand Paul), the other is a member of the Atlas Society (Paul Ryan), and another has said that a capital strike was the natural response to Obama's policies (Boehner). Just like Russia and not Catalunya will forever be the image of Communism, so will the popular image of right-libertarianism be Paul Ryan, not Rothbard.
 
berbatrick said:
Ok, fair enough for most points.
The fact remains that both in terms of rhetoric (balanced budgets) and actions (privatising and cutting govt schemes), the GOP is far closer to a Rand-ian vision that probably any other major party. Of course, their addiction to tax cuts and the military means balanced budgets aren't likely to happen (though Rand herself wanted to preserve the military budget, and was no fan of tax). Whether the lower taxes/stronger military part of their agenda is cynical vote-pandering, or their balanced budget rhetoric is the cynical part is up for debate. But they are literal Rand-worshipers: one of them named his son after her (Ron/Rand Paul), the other is a member of the Atlas Society (Paul Ryan), and another has said that a capital strike was the natural response to Obama's policies (Boehner). Just like Russia and not Catalunya will forever be the image of Communism, so will the popular image of right-libertarianism be Paul Ryan, not Rothbard.
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I can't argue that they aren't a major face for the whole set of ideas, much more than any academic economists or others who first came up with them. But that shouldn't discredit the ideas per se. In the same way that I can argue why I don't think high income taxation will work, without bringing up the Soviet Union, so should financial reform proposals be argued without bringing up the GOP. Of course there is a next step, which is when you think about what will happen to your precious proposal once it meets the reality of politics. But if all we have is politics and rhetoric, then we really don't stand a chance (and in recent years, about the over-leverage, low productivity gains and asset price inflation, the truth is that rhetoric is all we've had so the problem persists).
 
berbatrick said:
Ok, fair enough for most points.
The fact remains that both in terms of rhetoric (balanced budgets) and actions (privatising and cutting govt schemes), the GOP is far closer to a Rand-ian vision that probably any other major party. Of course, their addiction to tax cuts and the military means balanced budgets aren't likely to happen (though Rand herself wanted to preserve the military budget, and was no fan of tax). Whether the lower taxes/stronger military part of their agenda is cynical vote-pandering, or their balanced budget rhetoric is the cynical part is up for debate. But they are literal Rand-worshipers: one of them named his son after her (Ron/Rand Paul), the other is a member of the Atlas Society (Paul Ryan), and another has said that a capital strike was the natural response to Obama's policies (Boehner). Just like Russia and not Catalunya will forever be the image of Communism, so will the popular image of right-libertarianism be Paul Ryan, not Rothbard.
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Rothbard was an idiot, so it is a good thing that most people dont know him. Rand was not just for small government, but also a fierce advocate of strict rationalism and atheism. It just doesn’t hold up that the GOP is actually following her ideas. Some individuals might do that, but the majority position is something entirely different.
Additionally I agree with MTF that being the face of something means very little. It is not really up for debate, that their “balancing budget” talk is dishonest, because they frequently failed to do that in the past (in states and when they had the presidency).

Here a short paper that looks into the quantity of new regulation (it includes new regulation that de-regulates:lol:): https://fas.org/sgp/crs/misc/R43056.pdf
 
PedroMendez said:
he is certainly not a spokesperson for anyone but himself; me neither. If false predictions disqualify someone from arguing about economics, few people would be left. In the end it is all about the argument. That said, I actually didn't know that he lost so much money and should have checked that.

One thing, that should any critical person cause to pause for a second is that the current monetary policy regime was completely unthinkable before the crisis. Additionally many of the other policy steps simply don't meet their own targets. At least in many parts of the EU. The USA is a slightly different case with different problems. Banks and households were able to de-leverage a fair bit, but the national debt is not in a good place and Trump is the last person, who I'd trust to address this issue. You can't spend yourself out of a debt crisis.
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Yeah Gross (and Hasenstab to an extent) have had some ropey years.
What do policymakers do though? Austerity doesn't work, so raise debt and try and inflate it away I guess.
 
Jippy said:
Yeah Gross (and Hasenstab to an extent) have had some ropey years.
What do policymakers do though? Austerity doesn't work, so raise debt and try and inflate it away I guess.
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well, austerity doesn't work, because the countries refuse to do whats necessary. Additionally the transmission mechanism from m0/1 to m2 broke down. To make it work, the governments would have to do all the spending and that never ended well....
 
PedroMendez said:
well, austerity doesn't work, because the countries refuse to do whats necessary. Additionally the transmission mechanism from m0/1 to m2 broke down. To make it work, the governments would have to do all the spending and that never ended well....
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Oh jesus your not one of those Hayek people are you ?
 
PedroMendez said:
Rothbard was an idiot, so it is a good thing that most people dont know him. Rand was not just for small government, but also a fierce advocate of strict rationalism and atheism. It just doesn’t hold up that the GOP is actually following her ideas. Some individuals might do that, but the majority position is something entirely different.
Additionally I agree with MTF that being the face of something means very little. It is not really up for debate, that their “balancing budget” talk is dishonest, because they frequently failed to do that in the past (in states and when they had the presidency).

Here a short paper that looks into the quantity of new regulation (it includes new regulation that de-regulates:lol:): https://fas.org/sgp/crs/misc/R43056.pdf
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I have a sort-of stalker on my facebook who aggressively questions every single thing I say, including when I attack liberals/leftists. He's a Rothbard worshipper so I assumed Rothbard was the gold standard (ha ha) for you guys.
 
berbatrick said:
I have a sort-of stalker on my facebook who aggressively questions every single thing I say, including when I attack liberals/leftists. He's a Rothbard worshipper so I assumed Rothbard was the gold standard (ha ha) for you guys.
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he is for the hard-core libertarians in the USA, but they are deluded idiots; at least a fair share of them.
 
Sweet Square said:
Oh jesus your not one of those Hayek people are you ?
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So what kind of people are you then?

berbatrick said:
I have a sort-of stalker on my facebook who aggressively questions every single thing I say, including when I attack liberals/leftists. He's a Rothbard worshipper so I assumed Rothbard was the gold standard (ha ha) for you guys.
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I hadn't even heard of him, if that's somehow and indicator of his notoriety...
 
PedroMendez said:
well, austerity doesn't work, because the countries refuse to do whats necessary. Additionally the transmission mechanism from m0/1 to m2 broke down. To make it work, the governments would have to do all the spending and that never ended well....
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The transition model is fundamentally flawed if you are asking banks to raise tier one capital.
 
MTF said:
So what kind of people are you then?
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Not a Hayek one if that's something(Although that bearded German bloke from 19th century seemed to be onto something). It was a meant to be a light joke but the stuff I've seen from the Hayek people the answer always seems to be just cut more and when that doesn't work just cut again.

Although my main problem is that the Hayek answers seem to come from people who would never suffer the consequences of their actions.
 
Sweet Square said:
Not a Hayek one if that's something(Although that bearded German bloke from 19th century seemed to be onto something). It was a meant to be a light joke but the stuff I've seen from the Hayek people the answer always seems to be just cut more and when that doesn't work just cut again.

Although my main problem is that the Hayek answers seem to come from people who would never suffer the consequences of their actions.
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The one who had a theory of history, and believed their would be proletarian revolution in the UK? That German bloke?

And my serious response is my same as before. Yeah, there's a bunch of so-called Hayek/Rand/etc followers out there legislating. My first point would be that Rand isn't even an economist, and Hayek is far back enough that his writings can serve mostly as theoretical backdrop. There is a mountain of writing since then, about general and specific issues, that hit much closer to the mark of our present societies. If we're going to just kick each piece to the side by saying "this is liberal, this is libertarian, this is marxist, etc", then we're not going to stand any chance of solving the issues (I already don't rate the likelihood too highly anyways, this isn't some optimistic message).
 
^ Related to which:



My impression, though, is that we've become almost dependent on getting our fix of QE every so often (at least since the financial crisis of the late-2000s).
 
Hmm. QE is really difficult to assess, because there are so many contradicting opinions about it and everyone can point to some data to support their claims. I recently read an interesting paper that highlighted the differences between QE in the US and in Europe/Japan. When Japan unwounded its QE1 in the mid noughties, nothing really happened, because the QE had no effect in the first place (due to its design; depending on buying assets from banks or from non-banks). The author argued that QE in the USA was different and had a real effect. So un-doing it should also have a negative effect.
That said, contrary to this opinion I’d argue that the FED de-facto sterilized their QE2&3 with the reverse-REPO rates. So the influence of reducing the balance sheet might not be on monetary supply, but it might function like fiscal policy. It is certainly interesting to see what it will do to the MBS market.
The FED can tighten monetary policy (slightly) as long as ECB and BOJ are continuing to ease. Just not too much.

I think we are at the point where nobody really knows what the feck is going on. Everyone (I include myself!) has his pet-theories, but that is mostly down to ideological pre-conceptions.

Anyway, Allison would be a brilliant appointment.
 
PedroMendez said:
Hmm. QE is really difficult to assess, because there are so many contradicting opinions about it and everyone can point to some data to support their claims. I recently read an interesting paper that highlighted the differences between QE in the US and in Europe/Japan. When Japan unwounded its QE1 in the mid noughties, nothing really happened, because the QE had no effect in the first place (due to its design; depending on buying assets from banks or from non-banks). The author argued that QE in the USA was different and had a real effect. So un-doing it should also have a negative effect.
That said, contrary to this opinion I’d argue that the FED de-facto sterilized their QE2&3 with the reverse-REPO rates. So the influence of reducing the balance sheet might not be on monetary supply, but it might function like fiscal policy. It is certainly interesting to see what it will do to the MBS market.
The FED can tighten monetary policy (slightly) as long as ECB and BOJ are continuing to ease. Just not too much.

I think we are at the point where nobody really knows what the feck is going on. Everyone (I include myself!) has his pet-theories, but that is mostly down to ideological pre-conceptions.

Anyway, Allison would be a brilliant appointment.
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Hey Pedro, can you give me a link for that paper, cheers.
Ditto on QE. We obviously saw the taper tantrum the other year, but if tightening becomes a progressive consistent policy will the markets baulk. You'd imagine they'd get used to it soon enough, but we do have a whole new generation of traders who've only known Zirp, so feck knows tbh.
 
Jippy said:
Hey Pedro, can you give me a link for that paper, cheers.
Ditto on QE. We obviously saw the taper tantrum the other year, but if tightening becomes a progressive consistent policy will the markets baulk. You'd imagine they'd get used to it soon enough, but we do have a whole new generation of traders who've only known Zirp, so feck knows tbh.
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that one is about japan's QE and how it differs from what the FED did:
https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2017/2/cj-v37n1-2.pdf
https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2017/2/cj-v37n1-2.pdf
that one might be helpful to get some further details about US QE:
https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2016/5/cj-v36n2-10.pdf
https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2016/5/cj-v36n2-10.pdf
 
PedroMendez said:
that one is about japan's QE and how it differs from what the FED did:
https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2017/2/cj-v37n1-2.pdf
that one might be helpful to get some further details about US QE:
https://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2016/5/cj-v36n2-10.pdf
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Cheers Pedro. We get comment pieces from John Greenwood, chief economist at Invesco Perpetual, but didn't realise he did more academic stuff too.
 
I just found this beauty (already 10 days old): http://www.reuters.com/article/us-eurozone-banks-italy-insight-idUSKBN15I2BW

If I understand this correct: Italy's (semi-private) quasi bad-bank (investment-fond) is taking a hit, because the debts that was shuffled around is just so worthless. They struggle make money out of it despite its discount. The whole charade was initiated to prevent “healthy” banks and the whole industry from contagion. Now these banks have to write it off. Well done. Now we learned that transferring debt from one account to another is not solving the problem. Who would have thought?
The whole thing is like a looped Ponzi-scheme.

A question: Anyone knows why senior non-preferred bonds (similar to the danish Resolution Notes) are so popular? It makes some sense to introduce this form of debt, but why are so many investors willing to invest their money into it? Isn’t that the kind of bond that looks good, as long as banks are in great shape, but would go down the toilet, if shit hits the fan?
 
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PedroMendez said:
I just found this beauty (already 10 days old): http://www.reuters.com/article/us-eurozone-banks-italy-insight-idUSKBN15I2BW

If I understand this correct: Italy's (semi-private) quasi bad-bank (investment-fond) is taking a hit, because the debts that was shuffled around is just so worthless. They struggle make money out of it despite its discount. The whole charade was initiated to prevent “healthy” banks and the whole industry from contagion. Now these banks have to write it off. Well done. Now we learned that transferring debt from one account to another is not solving the problem. Who would have thought?
The whole thing is like a looped Ponzi-scheme.

A question: Anyone knows why senior non-preferred bonds (similar to the danish Resolution Notes) are so popular? It makes some sense to introduce this form of debt, but why are so many investors are willing to invest their money into it? Isn’t that the kind of bond that looks good, as long as banks are in great shape, but would go down the toilet, if shit hits the fan?
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I have no clue as to 'why', but if it comforts you any I've heard the similar argument from a very senior banker, looking to exploit the return differential from these unhealthy european banks and healthier banks in other jurisdictions, where the country risk is higher, but the performance and health of specific banks is much better than these EU ones.
 
Without anyone really reporting about it (I havn’t found any trustworthy article in English) the head of the ECB, Mario Draghi, changed the definition of what he considers to be the Inflation target during his last PK (already a month ago). That is quite interesting, because he interpreted the rather clear (“between 0 and 2%” target) in a less restricted way. One of the things he said was:

Draghi: Now, the answer to the first question lies in what we define as our objective. We define our objective first of all in the medium term, over a medium-term horizon. That's the relevant policy horizon. Second, it has to be a durable convergence, so it cannot be transient. Third, it has to be self-sustained. In other words, it has to stay there even when the extraordinary monetary policy support that we are providing today will not be there. Fourth, it has to be defined for the whole of the eurozone.
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In the end all that will be used to continue loose monetary policy even if inflation picks up in some countries. HVPI spreads seem to increase, which puts the ECB in a difficult situation anyway. Still that is a quite consequential statement and almost nobody reported it.

I also read an interesting interview with Hans-Werner Sinn, the former head of the IFO-institut (one of the most important german economic research centers); sadly it is just in German and print, so I can’t link to it. Some of his claims were that the Euro is ~25% undervalued for the German exporting industry into other countries of the Eurozone and an additional ~20% against countries outside the EU. That makes the German export industry way too cheap, which explains, why this industry is booming. So in a very crude way Trump was actually right when he said that the Euro is undervalued for German exports. In some ways that dynamic is a bit like price dumping and there is no way that industries in southern Europe can ever compete with that. It was discussed a lot in 09/10/11, but nothing changed.

It creates unemployment in the southern Europe, German exporters are selling its good under value and it penalizes German importers. Another way to look at it is: Europe (including Germany) is subsidizing the German exporting industry, which allows companies that wouldn’t be competitive in a free market to stay alive.
 
Wouldn't EUR undervaluation also favor Southern European nations that are in the zone (i.e. Greece)? Or are we talking about non-Euro countries?
 
MTF said:
Wouldn't EUR undervaluation also favor Southern European nations that are in the zone (i.e. Greece)? Or are we talking about non-Euro countries?
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yes. His argument is that German goods are two times undervalued. In the European area and additionally, the euro itself is undervalue. He doesn't talk about the impact of the undervaluation of the Euro (compared to e.g. the US$) for the southern European countries, but logically one would assume, that it helps their exporting industry. That said considering the huge differences in productivity that might not be enough for them. Additionally it is questionable if smaller countries can build up industry that exports globally, when they are not really competitive in the European area. I had to look at the data, but I think that Italy is doing very well with their exports.
 
PedroMendez said:
yes. His argument is that German goods are two times undervalued. In the European area and additionally, the euro itself is undervalue. He doesn't talk about the impact of the undervaluation of the Euro (compared to e.g. the US$) for the southern European countries, but logically one would assume, that it helps their exporting industry. That said considering the huge differences in productivity that might not be enough for them. Additionally it is questionable if smaller countries can build up industry that exports globally, when they are not really competitive in the European area. I had to look at the data, but I think that Italy is doing very well with their exports.
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Greece doesn't produce oil though, so it's getting hammered on import costs.
 
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