2/8/2013: The Impossible Monetary Dilemma: July update

Two charts updating the Impossible Monetary Dilemma through July:

Good luck to all believing tapering will be enough to get monetary policy to mean-revert. Oh, and in case you wonder, mean reverting refers to historical mean - which is skewed downward by the period of historical lows of 2001-2005 and H2 2008- present. Even that historical mean is out of reach for any ordinary tightening.

29/6/2013: Banks-Sovereign Contagion: It's Getting Worse in Europe

Two revealing charts from Ioan Smith @moved_average (h/t to @russian_market ): Government bonds volumes held by Italian and Spanish banks:

Combined:

• Italy EUR404bn (26% of 2013 GDP) up on EUR177bn at the end of 2008
• Spain EUR303bn (29% of 2013 GDP) up on EUR107bn at the end of 2008

Now, recall that over the last few years:

• European authorities and nation states have pushed for banks to 'play a greater role' in 'supporting recovery' - euphemism for forcing or incentivising (or both) banks to buy more Government debt to fund fiscal deficits (gross effect: increase holdings of Government by the banks, making banks even more too-big/important-to-fail); 
• European authorities and nation states have pushed for separating the banks-sovereign contagion links, primarily by loading more contingent liabilities in the case of insolvency on investors, lenders and depositors (gross effect: attempting to decrease potential call on sovereigns from the defaulting banks);
• European authorities and nation states have continued to treat Government bonds as zero risk-weighted 'safe' assets, while pushing for banks to hold more capital (the twin effect is the direct incentive for banks to increase, not decrease, their direct links to the states via bond holdings).

The net result: the contagion risk conduit is now bigger than ever, while the customer/investor security in the banking system is now weaker than ever. If someone wanted to purposefully design a system to destroy the European banking, they couldn't have dreamt up a better one than that...

24/6/2013: The Great (Credit) Wall of China

China is now in the anteroom of the 'This Time is Different' sauna... hot seat awaiting:
http://blog.foreignpolicy.com/posts/2013/06/21/say_hello_to_chinas_brewing_financial_crisis

Keep in mind, in China total credit increased from USD9 trillion in 2008 to USD23 trillion now. Credit to GDP ratio went up ca 95% and now stands at 221% of GDP. In the US, in 2002-2007 period, credit/GDP ratio grew by 40 percentage points. And we have no real idea just how deep the real rabbit hole goes: http://www.economist.com/news/finance-and-economics/21578668-growth-wealth-management-products-reflects-deeper-financial-distortions

Here's the contagion trigger: once China gets seated on the hot bench in the TTisD sauna, Chinese purchases of US and euro area bonds will evaporate. With this, yields will be going up even if current QE is retained by the Fed. And what the cost? BIS estimated last 1 trillion. And with yields rising across the board, 15-35 percent of GDP can go up in smoke in France, Italy, the UK and Japan.

Meanwhile, the euro area banks are sitting on a massive pile of dodgy assets (http://trueeconomics.blogspot.ie/2013/06/1862013-size-of-eurotanics-bad-assets.html) backed by funding secured against... right... the aforementioned government bonds.

In this blog parlance, the Impossible Monetary Dilemma will then hit the Great Wall of China. And there are no airbags...