This has been a most dramatic week in Europe. The Greek crisis unfolded over a year, so by its (short term) conclusion we were all a bit inured to it.
Cyprus has been an entirely different matter. We’ve all been aware that Cyprus had problems, but the sudden deterioration of the situation has taken everyone by surprise. The tax on savings has caught most attention, but what is perhaps more telling has been the hard line stance taken by the ECB.
After moving heaven and earth to keep Greece in the Euro, the Cypriots are being given the hard shoulder. And then some!
No doubt there is much confusion in Nicosia at the perceived double standard, but my hope is that the ECB has learned from its mistakes with Greece and is sending the strongest possible message to Spain and Italy to get their houses in order. The pending German election will also have been influential.
Apart from the widespread shock and loathing at the prospect of a tax savings, there is also a feeling that Europe is playing a dangerous game. I’m not so sure. Continue reading
News this weekend that Cyprus is forcing a “bail-in” to save the nation’s banks on savers by taxing deposits saved in banks has caused uproar. For many this has come as a massive shock, but regular readers of Zerohedge will be familiar with this report by the Boston Consulting Group from 2011.
The severity of the bail-in has taken everyone by surprise. Even depositors with less than €100,000 are being taxed 6.75%. OK it is true that those affected are being “compensated” with shares in the banks being saved, but let’s face it those “investments” are most likely going to be shoddy at best.
Over the course of the day, the fury this proposal has elicited obviously shocked the politicians. There was meant to be a debate and presidential announcement today, which was put off until tomorrow and I’ve just read that tomorrow’s bank holiday has been extended to Tuesday.
A run on Cypriot banks now seems guaranteed no matter what happens. The political leadership is just desperately stalling for time. This move was always going to crush confidence and cause panic, but what was the alternative?
From what I’ve read so far it seems that bondholders are getting off extremely lightly. Continue reading
When I first started writing this blog in January 2008 one of my first posts boldly declared Britain was going to lose her AAA rating.
I had no idea what I was talking about.
The more I have written this blog the less I realise I know. Perhaps this insight will help me remain open-minded in the future. Although Britain has now lost her AAA, I can hardly claim this as a victory of foresight. Worse still, and more pertinently for this blog, had I formed an investment strategy based on my 2008 opinion I would have no doubt failed disastrously.
So what went wrong with my view?
Britain has been on shaky ground for a long time. Back in 2008 I intuitively understood the desperate plight the economy was in. I understood Britain had borrowed too much and the business environment was listless. The public sector felt too large and the private sector was struggling. I couldn’t possibly see how Britain could be viewed as one of the most environments to invest in.
I underestimated several factors. Continue reading
Picking up from Monday’s theme, I saw another heavy set of news items about the OECD’s cutting of its global GDP forecast.
Apparently further policy support is needed. Yep, that’s more printing!
The more I observe markets the more I can see that there are three great forces at play. Two currently oppose (balance?) one another and the other seems fickle and hasn’t really made its presence felt yet.
The first of these forces is economic performance. Logically this should be the primary driver of the stock market. However over the last few years we’ve seen an increasing disconnect between real world economics (e.g. the jobless rate, earnings’ growth, GDP etc.) and stock market performance.
The reason for this break is widely attributed to the second force at play, monetary policy. We’ve now been on the receiving end of at least $13trillion in stimulus. The real figure is probably far higher, but I think we’ve now passed the stage where anyone is even bothering pretend to count the amount. Although much of this money hasn’t filtered through to the real world, its presence is undoubtedly sustaining asset prices.
Arguably the current market is just another bubble which has been created by financial excess. Unlike other bubbles though, this bubble hasn’t been sustained by the euphoric consumption that has fuelled previous ones. Continue reading
On the face of it this chart is extremely dull. It just goes up.
However consider for a moment what this chart actually represents. The simple answer is of course the expansion of US consumer debt since the 1950s. After a bit of more detailed reflection this chart should, in fact, terrify you. Note the large expansion in the 1980s as consumer debt double. This trend was broken for a short while during the recession of the early 1990s only for it to resume with a vengeance from 1992 onwards.
Parabolic charts rarely end well when applied to the real world.
This one could be one of the most disastrous endings we all now face.
Where banks get bailed out, sovereigns print more money and bond holders losses get underwritten, consumers are expected to repay all their debts or woe betide them.
Somebody of influence, somewhere, must surely look at this chart and recognise this is a disaster waiting to happen.
Sadly I fear not.
A basic question seems to have eluded the overwhelming majority of those in charge. How exactly will all this money be repaid. Continue reading