21/1/20: US Deficits, Growth and Money Markets Woes

My article for The Currency on the effects of the U.S. fiscal profligacy on global debt and money markets is out: https://www.thecurrency.news/articles/7371/the-us-deficit-has-topped-1-trillion-and-investors-should-be-worried.

Key takeaways:

"As the Trump administration continues along the path of deficits-financed economic expansion, the question that investors must start asking is at what point will debt supply start exceeding debt demand, even with the Fed continuing to throw more cash on the fiscal policies bonfire?"

"In the seven years prior to the crisis of 2008-2012, US economic growth outpaced US budget deficits by a cumulative of $1.56 trillion. This period of time covers two major wars and associated war time spending increases, as well as the beginnings of the property markets and banking crises in 2007.

"Over the last seven years since the end of the crisis, US economic growth lagged, on a cumulated basis, fiscal deficits by $928 billion, despite much smaller overseas military commitments and a substantially improved employment outlook.

"These comparatives are even more stark if we are to look at the last three years of the Obama Administration set against the first three years of the Trump Presidency. During the 2014-2016 period, under President Barack Obama, US deficits exceeded increases in the country’s GDP by a cumulative amount of $226 billion. Over the 2017-2019 period, under  Trump’s tenure in the White House, the same gap more than doubled to $525 billion.

"No matter how one spins the numbers, two things are now painfully clear for investors. One: irrespective of the stock market valuations metrics one chooses to consider, the most recent bull cycle in US equities has nothing to do with the US corporate sector being the main engine of the economic growth. Two: the official economic figures mask a dramatic shift in the US economy’s reliance on public sector deficits since the end of the crisis, and the corresponding decline in the importance of the private sector activity."

13/5/2014: No, Johnny the Foreigner didn't do it... our own Government did...

Ah and so it rolls, Irish national media obsession with who (from abroad) pushed (presumably unwilling) Irish Government (so deeply concerned with national wellbeing) to guarantee bondholders (presumably the elderly investors from pension funds and teachers, nurses and fire(wo)men) back in September 2008 (because, you know, the Government did not beat the 'Great Irish banks Inviolable drum for the good part of 2008).

The latests instalment is on the role of Timothy Geihtner (based on his book) and it is available here: http://www.irishtimes.com/business/economy/timothy-geithner-keeps-it-short-when-it-comes-to-haircuts-1.1792498.

So we know the drill:

1. IMF called for haircuts. Well, I am not so sure. IMF does include haircuts in some of its 'rescues' and it is a part of the tool kit. But IMF never played an active part in Ireland or for that matter in the euro area. Just compare and contrast the Fund manhandling of Hungary against its waffling on in Greece. My internal IMF sources told me that staff was surprised Ireland did not burn the bondholders the way Iceland did. But then again, one's dismay is not Fund's advice, and Fund's advice is not Fund's order (oh, and IMF does issue 'orders').
2. ECB barked at the idea of haircuts. Again I am not so sure. We do know ECB opposed them, but that is not a reason not to try them, is it? The argument goes that if Ireland were to go against ECB's will, the skye would fall onto us and the moon will no longer exert its tidal push and pull force on the Irish sea, making the entire island uninhabitable. Truth is, we have no idea what ECB would/could have done. Stop funding of Irish banks? Lots of good that funding did to us, I'd say - apparently even with ECB lending we had to bankrupt the nation to mummify the zombies (you wouldn't call this a rescue operation, since our banks are still zombies five and a half years into the mess).
3. EU balked at the idea. Which means what? Olli Rehn had hiccups for breakfast? Both EU and ECB were, allegedly, powerless midgets incapable of stopping the spread of contagion from the inter-galactically important Irish banks (if they were just simple banks, why all the huff about their systemic importance) and thus needed Irish people to bite the missile (you would hardly call a guarantee the size of 2.5 times the nation's GDP a bullet) for them. So who exactly held the trump cards? 
4. US and UK went apoplectic (although as we now know, Geithner did not oppose haircuts in principle, though he was against their timing). I must confess, I noticed no such reaction from Treasury and BofE officials I encountered in briefings around the time of the Guarantee and there after.
5. Irish Government reluctantly, tragically, with tears in their eyes, was forced to introduce a guarantee of all liabilities. 

Now, just for nanosecond give this a thought: the Irish Government, that spent a good part of 9 months prior to the Guarantee staunchly defending the banks and since around July of 2008 - covering up their repeated violations of regulatory requirements (liquidity ratios etc), the same Government that apparently had no desire to know what was going on in the banks shares support schemes and didn't give a damn about abuse of derivative instruments to prop up the banks valuations, the said Government that had lost no sleep over the silencing of whistleblowers pointing to systemic problems in the banks… that Government today is being painted as having been 'bounced' into the Guarantee and subsequently the Troika bailout?..

Are we serious? Let's take a hard look into the mirror. The Guarantee was an act of the Irish Government to protect and secure Irish banks connected to the Irish elite's interests. Full stop. That it rescued a bunch of unsavoury bond holders and investment funds was a cherry on the proverbial cake, not the main spoiler of the 'benevolent Government' intentions.

That we did not exercise a sovereign right to, in a national emergency, impose losses on whoever we wish to impose them is not a corollary - it is a direct evidence of intent to rescue the banks at any cost to the nation. This is further collaborated by the fact that following the guarantee, the Irish Government (not the ECB or US Treasury or the EU Commission) sat back and did absolutely nothing to impose any terms and conditions onto the banks. It is evidence by the fact when our Government at the time was forced to start doing something about reforming the banks, it went about it in the following order:

• First, losses were imposed on borrowers. Borrowers who are still (after numerous 'powder over the gaping wound' reforms of insolvency and bankruptcy codes) being milked by the banks to the loud approval from the Central Bank for every penny they might have or will have in the future.
• Second, banks were given token targets on governance reforms (changes of boards, senior executive ranks, salaries caps etc). The banks blew past these like a boy racer blows past the '30 km/h' speed sign.
• Third, the State created Nama which underpaid for the banks assets in order to secure brighter future for itself and its consultants and vulture funds (the latter now expect returns of 20% per annum and more on the assets they are buying from Nama, which Nama claims to be selling at a profit).
• Fourth, more cash was injected into the banks to cover the hole blown in them by Nama. Cash was taken off the same taxpayers, many of who are the said borrowers being pursued by the banks with the blessing of the State.
• Fifth, the banks were subsidised and protected from any competition - and still remain such: we have a massive penned up demand for credit (allegedly from top-quality SMEs and corporates and households with healthy balancesheets that everyone - from IBEC to myhome.ie claims exist all over Ireland) and we have rising lending margins, and yet we have not a single foreign bank coming into the country or expanding its operations (beyond PR releases) here. Why?

Do tell me that anything in the above suggests that the past Government shed a single non-crocodile tear in guaranteeing the banks? I simply can't believe that. It does not correspond to the facts at hand.

So to tidy things up: let's continue digging for the evidence that some Johnny the Foreigner 'bounced' Ireland into the Guarantee and the bailout and the rest of the mess we are in. Let's even keep digging for the evidence that the Martians are responsible for the original mishap of two Luas lines not being connected to each other.

But let's also remember - as a sovereign State, Irish State had choices. It made them. It made them to suit all of the objectives of supporting the banks that were consistently and persistently pursued by the State prior to the Guarantee. Subsequent to the Guarantee, Irish Government officially and repeatedly stated that it will provide all and any support needed by the banks, unconditionally, unreservedly and unceremoniously. Whatever Johnny the Foreigner did or did not do in such circumstances is secondary - interesting, important, intriguing, but still secondary. Primary is the fact that we were flushed down the proverbial banks sewer by our own.

5/10/2012: How you spell easy money?

Nice chart from Citi Research:

Easy Money - US Treasuries & German Bund 10year yields:

Pretty much times equities too...