Notes From Underground: We Were At It Again

Tonight I am posting today’s Santelli and Harris exchange (click on the image at the end of the post). (It is with gratitude that I thank Rick and his wonderful producer Lesley McKeigue for they keep providing me a with a platform to express views that are based on almost 40 of trading experience.) The Santelli Exchange has allowed me to meet and share views with some of the most respected minds in the financial community: Art Cashin, Jim Bianco and the list continues to go on and grow. Thank you my readers for allowing me time to deal in dialectic exchange and be challenged in a constructive method to enhance my knowledge. Remember, it is not validation but dialectic that I strive for in Notes From Underground.

The coming year will challenge all traders and investors as central banks realize that their policies are NOT ROCKET SCIENCE. As the QE programs of the ECB, BOJ and FED are further challenged by the vicissitudes of global politics, 2017 promises to be a year of volatility, which of course provides great opportunities as well as risks. Notes From Underground hopes to bring a clarity to the most pressing issues concerning the global-macro financial markets. Our focus will continue to deal with the UUUUUUUGGGGGGGGGGEEEEEEEEE amount of DEBT weighing on the balance sheets of developed and emerging market governments and corporations. Again, thanks for your indulgences and time.

In the November 17 blog post, “May The Circle Be Unbroken,” reader Pgrommit raised an interesting point. He said, “I guess we shouldn’t be surprised that stagnant wage growth almost never gets mentioned in the corporate-owned media as a reason for the slow growth economy (70%) is consumer spending, then lack of wage growth is a much bigger reason than corp tax rates or regulation. Especially so since profits–both nominal and as a % of GDP–have gotten higher than ever in this expansion.”

My response: Now factor in the growth in personal debt.T he argument that correctly laid out the long duration of the global financial crisis (hate this term) was Richard Koo’s balance sheet recession. The deleveraging of household balance sheets was what was going to keep demand stagnant. But as you certainly bring to the fore. If wages are stagnant and consumers are forced to borrow to consume then the day of repaying is always at hand. In economic terms, bringing forward demand keeps capital investment tepid as entrepreneurs are fearful of extending capital when the next crisis is around the corner.

This is what Bernard Connolly and others have written about for years: INTERTEMPORAL DISLOCATION. But your point is well taken and in my opinion weighs on Yellen’s desires for running hotter for longer. Nothing eases debt burdens like a good bout of inflation. Recently, I referred to the FT article about the rapid increase in auto repossessions even as we remain at full-employment.

At the end of today’s Santelli hit, Rick brings up the problem of middle-America wages not being able to keep up with inflation and therefore being a further drag on the economy. Rick and I didn’t finish the point but it is certainly of great importance. There are many analysts raising concerns about 1970s-type stagflation but something we haven’t heard is the term, WAGE-PRICE SPIRAL. The decline in the power of private sector unions–auto, steel,miners etc.–have limited the growth of wages as the threat of jobs leaving for lower-wage countries has capped labor militancy.

Maybe the Trump victory gives a voice to those that unions have previously spoken for–I am not considering the strength of public sector unions for that is a far different situation. But low wages with massive debt overhang may be the solution to Larry Summer’s puzzle of secular stagnation. Thanks and remember the solutions to complex problems are more than 2+2=4.

Yra & Rick, Nov. 22, 2016

Click on the image to watch me and Rick reveal my pick for Treasury Secretary

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16 Responses to “Notes From Underground: We Were At It Again”

  1. Blacklisted Says:

    Why is no one permitted to discuss the independent auditing of assets hidden in plain site on CAFR’s? Does anyone ever question why the public knowledge of CAFR’S are more unknown than George Soros?

  2. Stu f Says:

    Link to Santelli is really to Cramer.


  3. silverbug2155 Says:

    Yra, somehow that video link did not work.

  4. JTC Says:

    Love reading u brother .agree or disagree start my day running on high RPM. . U and your readers have a wonderful Thanksgiving JTC

  5. pgrommit Says:

    Yep, lack of union membership sure plays a role, and the disgusting public sector unions really don’t help the matter, as we in the Chicago area are well aware.

    As to the average/lower level worker, isn’t it true that if they weren’t necessary and essential to creating those profits, they wouldn’t even be on the payrolls? If so, the meme that “if you work hard you’ll get rewarded” no longer applies to them. Does that not have an adverse affect on productivity? I mean, if the only ones getting rewarded are those at/near the top, why bother?

    Maybe I’m being too simplistic, but I think that gets to your point about “rocket science” and all the sophisticated econometric models.

  6. pgrommit Says:

    I forgot to add–yes, to your point, the only way for many people to keep spending now is to go ever deeper into debt, which (beating a dead horse) keeps the economy sluggish.

  7. AG Says:

    Personally, I can’t see how wage stagnation can improve when millions of people in emerging and frontier markets are eager to join the global workforce. As long as this pressure continues, job and wage growth in the US will remain under pressure. Which leads to the idea that repatriation of dollars from overseas will incentivize US corps to spend on CAPEX. Until demand improves no meaningful dollars will be spent on CAPEX.

  8. Frank C. Says:

    Here is a link to the Nov. 2016 ECB semi-annual Financial Stability Review which was relased today.

    Here is the link to today’s Press Releasefrom ECB.

    The Financial Stability Review provides an overview of the possible sources of risk and vulnerability to financial stability in the euro area.

    Its aim is to promote awareness of issues that are relevant for safeguarding the stability of the euro area financial system, both within the financial industry and among the public.

    The “Slides Presentation” link is near bottom of index and is a great summary.

  9. Arthur Says:

    So why the Fed wants more inflation?

  10. Arthur Says:

    So why the Fed wants more inflation?

  11. Frank C. Says:

    Financial Times

    Italian banks
    Fears mount of multiple bank failures if Renzi loses referendum

    Up to eight lenders risk being wound up if No vote triggers prolonged market mayhem
    Read next
    FT View
    Italy’s banking system needs intensive care
    Italy’s prime minister Matteo Renzi © Reuters

    by: Rachel Sanderson in Milan

    Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say.
    Sample the FT’s top stories for a week

    Mr Renzi, who says he will quit if he loses the referendum, had championed a market solution to solve the problems of Italy’s €4tn banking system and avoid a vote-losing “resolution” of Italian banks under new EU rules.

    Resolution, a new regulatory mechanism, restructures and, if necessary, winds up a bank by imposing losses on both equity and debt investors, particularly controversial in Italy, where millions of individual investors have bought bank bonds.

    The situation is being closely watched by financiers and policymakers across Europe and beyond, who worry that a mass failure of Italian banks could trigger panic across the eurozone banking system.

    In the event of a “No” vote and Mr Renzi’s exit, bankers fear protracted uncertainty during the creation of a technocratic government. Lack of clarity over a new finance minister may lethally prolong market jitters about Italy’s banks. Italian lenders have more than halved in value this year on concerns about their non-performing loans.
    FT view
    Italy’s banking system needs intensive care

    EU regulations are supposed to prevent crises, not encourage them

    Italy has eight banks known to be in various stages of distress: its third largest by assets, Monte dei Paschi di Siena, mid-sized banks Popolare di Vicenza, Veneto Banca and Carige, and four small banks rescued last year: Banca Etruria, CariChieti, Banca delle Marche, and CariFerrara.

    Italy’s banks have €360bn of problem loans versus €225bn of equity on their books after successive regulators and governments failed to tackle a bloated financial system where profitability was weakened by a stagnant economy and exacerbated by fraudulent lending at several institutions.

    But the market solutions, including a JPMorgan plan to recapitalise Monte Paschi and the efforts of a government-sponsored private vehicle Atlante to backstop problems at smaller banks, are looking shaky in the face of expected market turbulence if a “No” vote wins, said officials and bankers.

    Lorenzo Codogno, a former chief economist at the Italian Treasury and founder of LC Macro Advisors, argued that the “biggest concern” in the aftermath of the referendum is its impact on “the banking sector and implications for financial stability”.

    “The capital increases of Italian banks due to be announced right after the referendum may become even trickier than currently perceived in the case of a “No” vote”,” Mr Codogno said.
    Monte dei Paschi di Siena is among eight Italian banks known to be in various stages of distress © Bloomberg

    Senior bankers and officials said that the worst-case scenario was where a failure of Monte Paschi’s complex €5bn recapitalisation and bad-debt restructuring demanded by regulators would translate into a wider failure of confidence in Italy and imperil a market solution for its ailing banks.

    Under this scenario, officials and senior bankers believe that all eight banks could be put into resolution. They fear that contagion from the small banks could threaten a €13bn capital increase at UniCredit, Italy’s largest bank by assets and its only globally significant financial institution, planned for early 2017.

    Senior bankers argue that, irrespective of the referendum result, there is little incentive for investors to put fresh capital into Monte Paschi, Carige or the Veneto banks when Italian listed mid-sized banks are on average only trading at about a quarter of tangible book value.

    “The issue is whether Siena gets done or not,” said a senior official, reflecting how Monte Paschi has become a proxy for the Italian financial system. “Without Siena on the line, I am not worried. With Siena on the line, I am worried.”

    This person added that, should Monte Paschi’s deal fail, “all theories are possible” including “a resolution of the eight banks”, especially if a “No” vote led to Mr Renzi quitting office and a period of protracted political uncertainty.
    Martin Sandbu’s Free Lunch
    Who’s afraid of Italy?

    The country is on firmer ground than you think

    Spreads on Italian government bonds versus German Bunds rose above 190 points on Friday, a level not seen since October 2014, as markets priced in expectations of turbulence.

    The prospectus for the recapitalisation of Monte Paschi, which includes a debt for equity swap that begins on Monday, warns that the vote weighs on its chances of success. The Bank of Italy has warned of market volatility around the vote. Critics of Mr Renzi have accused the central bank of fear-mongering ahead of the vote.

    But the threat of resolution has loomed large in his premiership as it has coincided with the advent of the single banking supervisor that has taken a tougher stand on Italy’s non performing loans.

    Bankers and officials can envisage a technocratic government agreeing with Brussels and Frankfurt a systemic “bail-in” of vulnerable Italian banks which emerged among Europe’s weakest in stress tests two years ago and again this summer. Under a bail-in, which forces losses on bond holders, Brussels could allow for some compensation for vulnerable retail investors, officials said.

    Nicolas Véron, senior fellow at think tank Bruegel, argued that “if anything the ECB has been very lenient in addressing the system-wide banking situation [in Italy] that has been very visible since the comprehensive assessment two years ago”.

    “It is a very difficult moment but it is not sustainable. The problem of banking fragility is not going away. It is not something that resolves itself with time,” Mr Veron said.

    Copyright The Financial Times Limited 2016. All rights reserved. You may share using our article tools. Please don’t cut articles from and redistribute by email or post to the web.

    • Yra G Harris Says:

      Frank–nice post –you are getting ahead of me as my readers are of course readers—this is right on que and represents an attempt by the Davos elite to scare-monger about the effects of shunning Renzi.I would argue the COUNTERFACTUAL–couldn’t resist–that if Renzi loses he will stya in office and blackmail the ECB and Merkle into better terms for Italy.Did these problems for Italian banks just surface.NO,look at the stocks .The Davos crowd will stop at nothing to secure their extended stay in office and power.I think the Wolfgang Munchau piece is the corollary to this fear mongering article

  12. ShockedToFindGambling Says:

    Yra- You said ” Nothing eases debt burdens like a good bout of inflation”

    Yes for borrowers (unless they need to soon refi at higher rates).

    But no for the economy as a whole, especially one built on low coupon (highly volatile debt).

    As inflation goes up, the low interest rates supporting auto sales, real estate, and the stock market will disappear, and will pressure at least 3/4s of the economy.

    Add to this the large capital losses on low coupon debt issued the last 5 years…………

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