Thursday, May 28, 2015

28/5/15: ECB does a "Funny Me, Tearful You" Macro Risks Assessment

You have to love ECB analysts… if not for the depth of their insights, then for their humour.

Here are two charts, posted back to back in the latest (May edition) of the ECB's Financial Stability Review.

The above says what it says: risks are low in financial markets, in fiscal policy and in the banks.

Now, Chart 2:

The above says risk-taking is high in financial markets, sovereign debt markets (fiscal side), and the economy's real investment is weak (to which the banks are exposed just as much as to the Government bonds).

So which one is the true chart? Or is there even a concept of coherent analysis in any of this?

"The sharp increases in asset prices relative to the fundamentals have pushed valuations up, particularly in the fixed income market, but increasingly also in markets for other financial assets. Nonetheless, a broad-based stretch in euro area asset valuations is not evident. Moreover, the recent increases in asset prices have been accompanied neither by growing leverage in the banking sector nor by rapid private sector credit expansion."

Now we have it: things are fine, because there is little leverage. And they are even extra-specially-fine in fixed income (aka bonds) markets. Because there is little leverage. The ECB won't tell us that this 'fine' is down to ECB itself buying bonds, pushing valuations of debt up, and incentivising risk-taking in the financial markets by its own policies. Oh no… all is just down to relatively sound fundamentals. But, guess what: even though things are fine, there is a "rise in financial risk-taking". But bad news is that there is no corresponding rise in "economic risk-taking".

"Financial system vulnerabilities continue to stem not only from the financial markets, but also from financial institutions, spanning banks, insurers and – increasingly – the shadow banking sector." But, wait… there is little leverage in the system. So how can financial institutions be responsible for the rise in financial system 'vulnerabilities' (which are at any rate negligible, based on Chart 1 'evidence'). Ah, of course they can, because the whole pyramid of debt valuations in the secondary markets is down to the ECB-own QE buying up of sovereign debt and years of Central Banks' printing of easy money for the financial institutions, including via LTROs and TLTROs and the rest of the ECB's alphabet soup of 'measures'.

Stay tuned for more analysis of the ECB's latest 'stability' missive...

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