Sometimes you wonder

What goes on in the heads of some of these guys? Barroso. You would have thought that he might have learned from his eurobond proposal fiasco, which the German constitutional court ruled as being illegal. Why did he then propose a eurobond? Now we have the financial transactions tax. His own EU Commission study has suggested the tax would lower long-term economic growth by between 0.53 per cent and 1.76 per cent of gross domestic product. ICAP has said it will quit the EU if it is imposed. Barroso should be sacked immediately. You can’t have people like this in important positions in the midst of the worst economic crisis since WWII spouting off this nonsense. I’ve kept a low profile recently because I’m just so exasperated with politicians like Barroso.

It looks like someone else has come to the same conclusions as me about Jamie Dimon. The psychopaths are in charge. They will wreck it for everyone. There’s a huge backlash coming against these guys. People are angry and I don’t blame them.

Careless talk costs lives

Note to Mr Schauble: be careful when telling the Americans to mind their own business. The Federal Reserve might pull its dollar swap lines to eurozone banks and then you really will be in trouble.

The market seems to think that the eurozone politicians really do understand the seriousness of the situation. I’d love to believe it but I’m not convinced. The only way ahead is a massive bank recapitalisation and some kind of debt forgiveness or controlled default. Even that will leave the structural issue of the competitiveness gap unaddressed. Perhaps the euro could be split in half, north and south at fixed exchange rate. While that will, at least temporarily, address the competitiveness issue, it would need capital controls to work. Which ever way you cut it, Germany will have to stump up a lot of money. German politicians need to be honest with their electorate over this. There’s just no easy answer and it will just get worse. It’s all too depressing!

Given that the Germans have recognised the democratic deficit at the centre of the EU, why aren’t the Tories building an alliance with the Germans to reform the governance of the EU? To my mind, there’s a huge opportunity to get away from the French command and control ethos of Brussels.

Mr Gobby

Clearly Jamie Dimon is not lining up a career in diplomacy if and when he finishes at JP Morgan. According to the FT he had a stand up row with Mark Carney, Governor of the Bank of Canada at a recent closed-door meeting, which was so bad that Lloyd Blankfein had to email Carney to try to smooth things over.  This is after he (Dimon) labelled the Basel III rules as “anti-American” in a recent interview.

JP Morgan has had a good crisis compared to many banks, however, Mr. Dimon appears to be getting too big for his boots. The new Basel III rules may disadvantage  US banks, but using emotive language like “anti-American” is not going to win over the regulators. There is a debate to be had over the value of mortgage servicing rights, although I’ve always viewed their treatment by US banks as verging on the aggressive.

Mr. Dimon ought to tone down his rhetoric and try diplomatic persuasion rather than aggressive and emotive language. He shouldn’t forget that central bankers and regulators hold the whip hand. He should also remember that his company is only in business because of the largesse of central bankers. A little humility wouldn’t go amiss, but then he is a Master of the Universe.

Another week, another crisis

Here’s a quick economic summary for last week. I am off walking the hills again next week. Let’s see if the politicos can do a better job while I’m away.

Central banks are worried

The announcement of coordinated action by central banks to ease the dollar funding crunch in Europe is a clear sign that monetary authorities have become very concerned about the banking system and financial conditions. The increasing difficulty for the French banks in funding dollar positions is the most public facet. Counterparty risk concerns have been increasing, leading to widening spreads in the interbank market and the ballooning of deposits at the ECB. US money market funds have become wary of lending to European banks and banks have become cautious about lending to each other. It feels like a re-run of the stresses seen in the lead up and aftermath of the bankruptcy of Lehmans. Hopefully this time central banks are wiser to the problems and consequences. While it doesn’t solve potential insolvency issues, pumping liquidity into the system buys some time for an orderly clearing process. It seems likely that there will be some further initiatives and perhaps quantitative easing, especially in the run up to the year end, which might give a further boost to the rally in asset markets. On the other hand, a lot of ammunition has been spent and investors might succumb to extreme fear again. A sustainable resolution of the eurozone crisis seems as far away as ever.

 US indicators still weak

Although the Philadelphia Fed Survey was stronger, it is still in negative territory. The NY Empire State Manufacturing Survey deteriorated slightly. Taken together it looks as though manufacturing could be showing signs of stabilising, but at a lower level. However, both the OECD and the ECRI leading indicators were weak. The semiconductor book to bill ratio also weakened. At least the Michigan consumer sentiment index rose slightly. All in all, the picture is still one of weakness in US economic activity.

 Not much to report in Europe

This week was quiet for indicators in Europe. There was a mixed picture in Italy with industrial production declining but a surprise trade surplus. What was encouraging was the rise in Italian exports. If there trade account is improving, it could take some pressure off the fears over Italian sovereign financing. Elsewhere, Spanish CPI declined to 3.0%, which is still higher than Germany. In the UK, CPI remains stuck at 4.5%, while unemployment remained at 7.9% and the trade deficit was also unchanged at £8.9bn.

 

Goodhart’s view

Charles Goodhart (and others) presenting to the Treasury Select Committee on the eurozone crisis. Worth a listen.

With clowns like this

So Barroso’s recipe for solving the euro crisis is issuing eurobonds. However, the German constitutional court has rejected the issue of eurobonds outright. So the Germans are going to change their constitution to accommodate Mr Barroso’s cunning plan? What planet is this guy on????

No wonder the world is looking on with despair. I think I’d rather have Baldrick in charge.

The emperor’s new clothes

The eurozone crisis feels a bit like a morality tale. Overweening politicians and bureaucrats believe that because they say something it must be true and that markets must bow to their superior wisdom. Of course this is nonsense. In the end, economics always trump politics, as someone has said.

Either there is fiscal union or the euro blows apart. It’s as simple as that. Sometimes “muddle through” is a viable policy option, but that time in the case of the euro is long past. The Germans are not going to accept “joint and several liability” for eurozone debt and fiscal transfers, so the automatic stabilisers that have enabled the United States of America cannot operate for the Disunited States of Europe.

Most of you will be closer to the market than me, but it seems like every day there is an increasing acceptance by those in business and markets that Greece will default (CEO of Standard & Chartered yesterday). The markets are not just passing their judgement on Greece , but increasingly on the European banking sector.

It is ironic that regulators have pushed banks to hold more sovereign bonds, the very asset class that is now causing the present angst. This is even more toxic when you consider the miniscule capital that banks have to hold against this risk. Reminds me of the Basel II rules on mortgages. Safe as houses, safe as government bonds? Think again.

Is there light at the end of the tunnel? Perhaps not in the short-term, as either the farrago continues or we really do get a default. Either way, it’s not going to pleasant in financial markets. However, perhaps in two or three years’ time, debts will have been written off, banks recapitalised and growth can restart. Don’t underestimate the resilience of economic systems. Once the distortions are removed, a new equilibrium can be achieved.

Europe may seem like a sclerotic old man with dementia, but underneath there is a highly skilled workforce, a lot of world-class companies and a resilience that has seen a recovery from two devastating wars. What Europe needs is a new grand bargain. It needs to be focussed on a free trade zone, respecting ancient historic sovereignties and a bonfire of bureaucracy. Free the people.

Will it happen? Well, if the crisis continues to develop, then the fury of the general populace against the donkeys of leadership might be so great that we will see real change. A disintegration of the EU into a looser alliance of nations might not be such a bad thing. I am encouraged that Germany is questioning the democratic accountability of the centre of Europe. If the UK can join forces with Germany, perhaps a different kind of Europe can emerge.

TWTWTW*

OECD lowers growth forecasts

The OECD has slashed growth expectations for G7 countries. By 4Q11, G7 growth is forecast to slow to 0.2%, close recessionary territory. The US economy is expected to grow by 0.4% in 4Q11, while the German economy is expected to contract by 1.4% in response to weak export orders. The OECD cited weak industrial surveys and consumer confidence as the main reasons for the downgrade. They also expressed caution over the developing eurozone crisis and suggested that forecasts are subject to greater than normal uncertainty.

US numbers not as bad as expected

The general tone of economic releases was not as poor as recent weeks. The Non-manufacturing ISM was slightly better than expected. Although nothing to celebrate, it might indicate some stabilisation in the economy after the deterioration of the past few months. The job openings survey (JOLTS) was stable, alleviating, at least temporarily, concerns that a fresh round of labour shedding is underway. The Federal Reserve’s Beige Book painted a relatively stable picture of the economy. Although some areas were mixed, it did not paint a picture of a broad-brushed deterioration as some pessimists had expected. Lastly, consumer credit showed a strong increase, suggesting the caution exhibited in recent consumer surveys may be overdone.

A mixed to weak picture in Europe

Although industrial production numbers for Germany and France looked healthy, German manufacturing orders were very weak, suggesting the global slowdown is feeding through to manufacturers. UK industrial production declined slightly in July. Spanish lending numbers were weak. The decline in credit appears to be accelerating, reflecting increasing funding pressures in the eurozone, which bodes ill for GDP growth over the next few quarters. There were no surprises in monetary policy announcements by both the ECB and BoE, but the ECB appears to be edging towards lowering policy rates.

 *That Was The Week That Was

A day of remembrance

It is the 10th anniversary of 9/11. It seems like a lifetime away, but still seared into the memories of so many: the horror and the shock. My closest contact with 9/11 was Derek Sword of KBW, who died that day. While I wouldn’t say I was close to Derek, I’d met him several times and even had lunch with him. He was a sincere and hard-working Scot. Someone you could trust. It was a shock to find he had gone. Derek, rest in peace. My heart goes out to all those that lost loved ones.

This is the end

…beautiful friend.

Bloomberg two hours ago: Merkel prepares to support German banks if Greece defaults.

Once they start planning for a break up, it will happen. The market always forces the solution.

It will be one heck of a mess, but after the dust settles, there is hope.

A song for the eurozone

I thought this highly appropriate for the eurozone on many different levels:

 

[youtube:http://youtu.be/1b26BD5KjH0%5D

 

The curse of Continental Illinois

I love financial market history. The repetitions and rhymes of folly are fascinating. Over the weekend, the news of the FHFA suing various banks for malfeasance over mortgage securities prompted me to wonder whether Bank of America is about to become the Continental Illinois of this decade. If you would like the full gory details of the demise of Continental Illinois, the FDIC publication “History of the Eighties” devotes a whole chapter to the episode.

The interesting point about Continental Illinois is that it was a slow motion insolvency stemming from a badly judged asset purchase. CI had expanded aggressively throughout the 1970s with top of its class growth and profitability. In particular, it had heavy exposure to the Oklahoma oil and gas boom, especially through its relationship with Penn Square Bank. When Penn Square collapsed in 1982, CI bought assets from Penn Square, which would eventually lead to its own demise. The full story is on Wikipedia and the FDIC publication.

The interesting point is that it was obvious to many inside the banking system that Continental Illinois was at best stretched and at worst insolvent. Nevertheless, it took until mid-1984 for this insolvency to be crystallised through a liquidity crisis, when CI was forced to tap the Fed discount window and the game was up.

To many, it is looking increasingly like the acquisition of Countrywide by Bank of America is its equivalent of the Penn Square purchase by Continental Illinois. It looks like a toxic asset that could lead to the insolvency of BAC itself. One of the sure signs of distress is management disposing of liquid assets aggressively, leaving behind the toxic rubbish. Ring a bell?

Another sign is management saying one thing and doing the opposite. “We don’t need to raise capital” and soon afterwards BAC issues a load of expensive capital to Warren Buffett. What credibility can you ascribe to BAC’s management? Answer: it’s small and round. The death knell will be a run by depositors. I don’t know when, but it looks possible at some stage over the next two years.

Now the really spooky thing is: what happened to the rump of Continental Illinois? Continental Illinois was renamed Continental Bank. It continued to exist, with the federal government effectively owning 80% of the company’s shares and having the right to obtain the remainder (ultimately exercised in 1989) if losses in the rescue exceeded certain thresholds. The federal government gradually disposed of its ownership interests in Continental Bank, completing the process on June 6, 1991. In 1994, Continental Bank was acquired by BankAmerica, Bank of America in its old guise!!

It is strange how over the years corporate history repeats itself, often in the same company or successor companies. Another example is Citigroup. If you delve back into the history of Citigroup, it was at the epicentre of the Wall Street Crash and the Great Depression. At that time it was called The National City Bank of New York and was headed by the infamous Charles E. Mitchell. In 1933 a Senate committee, the Pecora Commission, investigated Mitchell for his part in tens of millions dollars in losses, excessive pay, and tax avoidance. Senator Carter Glass said of him: “Mitchell more than any 50 men is responsible for this stock crash.”

The bank changed its name to The First National City Bank of New York in 1955, which was shortened in 1962 to First National City Bank on the 150th anniversary of the company’s foundation. In 1976, it changed its name to Citibank (the holding company became Citicorp). Fast forward to the early 1980s and Citi was effectively insolvent in the wake of the LDC debt crisis but survived. Fast forward to 2007, Citi was a major player in the CDO market and SIVs and was again effectively insolvent until it was bailed out by the Fed and TARP.

As they say in French: “Plus ça change, plus c’est la même chose.”

The fat lady is getting ready

Quote from the WSJ on Greece:

“I expect a hard default definitely before March, maybe this year, and it could come with this program review,” said a senior IMF economist who is keeping close tabs on the situation. “The chances for a second program are slim.”

Well, the fat lady is gargling!

A puzzling omission

There is a puzzling omission from the roster of banks cited in the FHFA law suit against banks involved in selling mortgage securities to the GSEs: Wells Fargo. It beggars belief that Wells (and Wachovia and Golden West, which it owns) adhered to much higher standards than its peers. I leave you to draw some conclusions on the reasons behind its omission. As Francis Urquhart used to say: “you might think that, but I couldn’t possibly comment”.

Another dismal week

It’s been another grim week for economic numbers.

Weak manufacturing PMIs

August global manufacturing PMI fell for the sixth consecutive month to 50.1, the lowest level since June 2009. Worryingly the new orders component fell below 50, suggesting further weakness ahead. The US ISM manufacturing fell less than expected to 50.6, but with poor new order and inventory trends. In Europe, PMI surveys were nearly all below 50 with the Spanish and Greek surveys being particularly weak. Almost every industrial survey around the world is showing signs of weakness, confirming the weak global trade figures seen last week. This bodes ill for economic activity in the current quarter and suggests that many economies are dangerously close to slipping back into recession.

Weak retail sales

Spain, Italy and Germany all reported retail sales numbers. Spanish retail sales fell by 6.0% YoY, while Italian retail sales declined by 1.2% YoY. Even German retail sales declined by 0.4% YoY, despite a bumper previous month. Germany is not proving to be the hoped for motor in the eurozone, even though German unemployment continues to fall. Consumer confidence numbers in from the eurozone and Italy confirm that consumption is likely to remain weak.

US employment disappoints

To round off a miserable week, US non-farm payrolls showed no change in August. Even if Verizon’s striking workers were added in, the results were disappointing. Adding to further to the gloom was lower hours worked and a decline in earnings. It’s very difficult to put a positive spin on these numbers and suggests that economic activity in the current quarter will be weak.