Posts Tagged ‘Abenomics’

Notes From Underground: Just Another Day So Let’s Review

February 2, 2016

First, tomorrow morning Goldman’s Lloyd Blankfein will be rolled out on CNBC to share his wisdom about the state of global markets. Maybe he will remind investors that Goldman and other banks are doing GOD’S WORK. I will write what I wrote recently: Noah and the flood were also GOD’s work so it is important for the world’s banks to signal which part of GOD’s work in which they are involved. The European bank stocks are under stress again. Deutsche Bank and many other EU money center banks continue to make new lows every day. What are investors fleeing from? Probably the huge amount of NON-PERFORMING LOANS that exist on bank balance sheet and will have to be met with NEW CAPITAL to meet the more stringent regulatory requirements from the European oversight authority, as well as increased capital requirements under Basel III. There is a great effort to initiate a FDIC-type of deposit insurance program for all of Europe–a single agency–but the Germans will not allow their CREDIT CARD TO BE USED UNTIL THE PRESENT BALANCE SHEETS OF ALL THE FINANCIALLY STRESSED INSTITUTIONS ARE PURGED OF INSOLVENT, ZOMBIE TYPE LOANS. The lack of any banking guarantee is creating an underlying tension throughout the European financial system and without a robust corporate bond market there is nothing to disintermediate the financial power of the banks. The ECB is vacuuming up all the high quality collateral so finding adequate borrowing instruments to facilitate lending is adding to the drag on the EU economy.

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Notes From Underground: Janet Yellen’s FOMC and a Biblical Approach to Monetary Policy

January 28, 2016

It seems that the FOMC meets in Noah’s Ark (Genesis Chapter 8;Verse 8-12): “Then he sent out the DOVE from him to see whether the waters had subsided from the face of the ground. But the DOVE could not find a resting place for the sole of its foot and it returned to him to the ARK, for water was upon the surface of all the earth …. He waited again another seven days, and again sent out the DOVE from the ARK. The DOVE came back to him in the evening and behold! an olive leaf it had plucked with its bill! And Noah knew that the waters  had subsided from upon the earth” (Artscroll Translation).

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Notes From Underground: Banking On A Growth Story

March 13, 2014

The pundits have been pontificating about the low valuations of European financial stocks–based on correlations to other developed-market financials–and proclaiming it’s time to purchase the “undervalued.” Why, this is the greatest no-brainer since sub-prime debt and Orange County Treasurer Robert Citron buying very risky inverse floaters prior to 1994 (sarcasm intended). The only problem with the pundits pushing European bank stocks is the following chart of Deutsche Bank. There is a great disconnect between the huge U.S. banks and Deutsche Bank. Even more significant is that the massive Swiss Banks (UBS and Credit Suisse) are holding their rallies despite settling with financial regulators in many different markets. What is wrong with the crown  jewel of Europe and Germany?

Deutsche Bank Stock Price (1-Year)

It is a similar problem for the large Japanese banks, which have been underperforming the Nikkei rally and the euphoria about the success of ABENOMICS. If Japan is on the road to some inflation and increased economic activity, the banks are supremely undervalued and efficient market theory maintains that it can’t be so. It appears that there is a major disconnect between reality and perception. The Japanese banks OUGHT TO BE outperforming all the global financials because of the aggressive action they have taken to offload their hoard of JGBs. Japanese banks are acting rationally by selling off a potential depreciating asset to the market’s largest buyer: the BOJ. According to a Bloomberg article by Finbarr Flynn and Monami Yui  from January 31, Sumitomo Mitsui cut its JGB holdings by 56 percent.

If Abenomics is ultimately successful, why would any investor want to hold bonds that will be a negative yield as inflation levels rise? BUT IF BANKS LIKE SUMITOMO are raising cash by selling JGBs what are they doing with the cash? If the Japanese economy was indeed growing, domestic loans should be rising. Flynn and Yui report that domestic loans increased by only 4.3 percent last year. Also, Tokyo-based Moody’s analyst Graem Knowd notes: “Banks need to rebalance their portfolios away from JGBs. It it turns out that Abenomics hasn’t worked and only ended up leaving Japan with a bigger pile of debt” and a “doomsday scenario for JGBs isn’t a zero probability scenario.” Again, if the banks are invoking the correct policy, why has the market failed to raise their equity valuations. (I am buying some of the banks on a very slow and correction only basis–in my opinion this is a low risk valuation relative to the pricing of other global equities.)

Bringing more focus to the efforts of the Japanese banks to rebalance their assets away from JGBs is the recent discussions taking place in Japan over the issue of the Government Pension Investment Fund (GPIF). The Japanese public pension fund has 1.26 TRILLION DOLLARS in assets and targets a very conservative style of investment. Currently, the GPIF invests 60 percent in JGBs and 12 percent in Japanese equities, according to a March 5 Reuters article. Prime Minister Abe’s government is “… pressing the GPIF to buy more stocks and invest relatively less in bonds to generate higher returns for Japan’s fast-greying population.” The issue of maintaining a decent rate of return on its national pension will be a challenge for the administrators of the fund. If not JGBs, what will be the most efficient mix of assets? Regardless, the Japanese banks are pressing ahead and dumping questionable assets on the major buyer of last resort, the BOJ.

The theme of banks continues through an article from March 7 piece in the International Financing Review by Gore and Whittall, “Eurozone Banks’ Sovereign Exposure Hits New High.” This is a very serious issue for it creates the potential for an adverse feedback loop that can bring the European economy to a depression. “Banks in the region now hold about 1.75 trillion euros in government debt, equivalent to 5.7 percent of their assets, and the highest relative exposure since 2006, according to ECB data. In Italy and Spain, roughly one in every 10 euros in the entire banking system is now on loan to governments.” The Eurozone banks are loading up with sovereign bonds because under the Basel rules sovereign debt is deemed a “riskless” asset and therefore banks need not to hold reserves to protect sovereigns in case of a stress event.

Let’s remember that it was only 18 months ago that the European bond markets were under great strain and President Draghi announced that the ECB would do “whatever it takes” to secure the European sovereign debt market as well as the Euro currency itself. As the article goes on to say, “Banks’ holdings of government bonds have risen by 355 billion euros–or about 25 percent–since the liquidity injections in 2011 and early 2012. Banks in fiscally weak countries have increased their purchases the most, with Italian, Portuguese and Spanish banks increasing their holdings by 62%, 52% and 45%, respectively.” Look at the chart of Deutsche Bank again and one gets the sense of a negative feedback loop in full development, which should raise a yellow caution flag. Now, how about those sanctions on Russia?

 

Notes From Underground: SHIBOR, My View On Its Significance

June 20, 2013

Many want to believe the FED is the responsible party for causing the massive unwinding in all variety of markets. The deleveraging of all assets classes in a zero interest rate environment can and will cause massive pain for those who utilized ultra cheap money  to attain assets that looked so good riding the momentum wave, but the undertow from deleveraging can drowned many swimmers. But is the source of deleveraging Chairman Bernanke? Maybe. But the more important impact may be from the Chinese. The SHIBOR, or overnight lending rate similar to LIBOR in the western capitalist countries, has skyrocketed during the past week, rising to double-digit levels–almost 25% at some point. The impact on the Chinese markets has been devastating but more importantly it has caused fears of a major crisis in the Chinese financial system and a negative impact on the entire fragile global financial system.

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Notes From Underground: Did The Chinese Fudge The PMI???

May 23, 2013

First, Happy Memorial Day to all the readers of Notes From Underground. If you are a veteran of the U.S. Military, thank you for your service. If you aren’t a veteran, take the time to thank those who have served to fight for the freedom to write blogs and entertain the free interchange of ideas.

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