Category: zerohedge

With Bank of America reporting that US corporate leverage just hit a fresh all time high…

… and with both Moody‘s and various restructuring bankers warning that the bond party is almost over, there is a distinct smell of corporate crisis in the air.

But what if the first domino to fall in the coming corporate debt crisis is not in the US, but in China?

After all, as part of China’s aggressive deleveraging campaign, there has already been a spike of corporate bankruptcies as banks shed more of their massive note holdings and de-risk their balance sheets. According to Logan Wright, Hong Kong-based director at research firm Rhodium Group LLC, there have already been least 14 corporate bond defaults in China in 2018, a shockingly high number for a country which until recently had never seen a single corporate bankruptcy, and which is set to increase as Chinese banks pull pull back from lending to other firms that use the funds to buy bonds, exacerbating the pressure on the market.

“You have seen banks redeeming funds placed with non-bank financial institutions that have reduced the pool of funds available for corporate bond investment overall,” Wright told Bloomberg, adding that additional bond defaults are especially likely among those property developers and local-government financing vehicles which have relied on shadow banking sources of funds.

As we discussed last year, as part of Beijing’s crackdown on China’s $10 trillion shadow banking sector, strains have spread from high-yield trust products to corporate bonds as the lack of shadow funding has choked off refinancing for weaker borrowers. Separately, Banks’ lending to other financial firms, a common route for funds and securities brokers to add leverage for corporate bond investments, declined for three straight months, or a total of 1.7 trillion yuan ($265 billion), since January according to Bloomberg calculations.

The deleveraging campaign is also depressing bond demand: “Unlike the U.S., where the majority of buyers of bonds are mutual funds, individuals and investment companies, in China, the key holders of bonds are bank on-and off-balance sheet positions,” said Jason Bedford, a Hong Kong-based analyst at UBS Group AG, who noted that Chinese banks are buying far fewer bonds as a result.

Putting the number in context, according to Bloomberg, China’s four largest banks held about 4.1 trillion yuan in bonds issued by companies and other financial institutions at the end of 2017, nearly 20% below 5.1 trillion yuan a year earlier; all Chinese banks held about 12 trillion yuan of corporate bonds on or off their balances sheets, some 70% of outstanding issuance, according to Citic.

It is therefore hardly surprising to see that Chinese corporate bonds, especially riskier issues, have been getting slammed in recent weeks. According to Chinabond data, as noted first by Bloomberg, the yield premium of three-year AA- rated bonds over similar-maturity AAA notes has blown out 72 bps since March to 225 basis points, the highest level since August 2016, an indication of the recent pressures on weaker firms. One can imagine what is going on with deep junk-rated corps.

Today, Bloomberg’s Sebastian Boyd points out that of all emerging markets, it is in China where the weekly Bloomberg Barclays global high yield index has seen the biggest drop (for the reasons why EM is getting crushed, read the lament by RBI governor Urjit Patel). Also worth noting: China is the biggest component by far in the various bond index aggregators, accounting for more than the next two countries, Brazil and Mexico, combined.

The deterioration accelerated over the past week when state-owned China Energy Reserve & Chemicals Group defaulted last Monday, blaming tighter credit conditions, slamming the performance of both the energy sector and wireline companies. Furthermore, as Boyd writes, “Chinese electricity-company bonds in dollars have widened an average of 125bps in the past week, led by Huachen Energy Co., a unit of Wintime Energy, after the Shanghai stock exchange queried its liquidity.”

The recent blow out in Chinese corporate bond spooked none other than the PBOC, which last last Friday announced that it will accept lower-rated corporate bonds as collateral for a major liquidity management tool in a move that analysts see as designed in part to restore confidence in the country’s corporate bond market.

Specifically, the central bank said that it had decided to expand the collateral pool for the medium-term lending facility (MLF) to include corporate bonds rated AA+ or AA by domestic rating agencies.  The central bank also added as collateral financial bonds rated AA and above with proceeds to support rural development, small enterprises and green projects, as well as high-quality loans supporting green projects and small enterprises, the PBoC said in a statement posted on its website.

The PBoC said the expansion of collateral would “help alleviate the financing difficulties of small companies and to promote the healthy development of the corporate bond market.”

CICC confirmed as much, writing in a note that “the expansion of collateral for MLF, to some extent, is intended to bolster confidence in lower-rated corporate bonds … and to avoid creating an apparent net financing gap which would impact the real economy.”

Translated: the PBOC is providing yet another backdoor bailout to China’s latest and greatest distressed sector in hopes of avoiding an avalanche of defaults as credit conditions become increasingly tighter as the PBOC hikes tit for tat with the Fed.

And while the PBOC intervention may delay the moment of reckoning for the world’s most indebted corporate sector, it will not eliminate it. One potential catalyst: Chinese companies have to repay a total of 2.7 trillion yuan of bonds in the onshore and offshore market in the second half of this year, and together with another 3.3 trillion yuan of trust products set to mature in the second half, the funding problems will get worse. As already more than eight high-yield trust products have delayed payments so far this year.

To be sure, Beijing will do everything in its power to avoid a default waterfall, but another emerging – pardon the pun – risk is that as Boyd concludes, negative sentiment towards Chinese corporates could become a major headwind for EM debt, even as the crises in Argentina, Brazil and Turkey appear to calm down, resulting in another significant capital outflow from Emerging Markets, and even more pained complaints from EM central bankers begging the Fed to halt its tightening, or else.

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The graduating 8th grade class of St. Cornelius in Chadds Ford, Pennsylvania got an unusual gift as they prepared to join the ranks of American high-schoolers – bulletproof plates for their backpacks.

The graduating 8th graders at St. Cornelius seemed unsure just what to make of their “welcome to high school” gifts.

“I never thought I’d need this,” one student explained.

As Fox29 reports, the “ballistic shields” were donated by a local company – Unequal Technologies, who developed the ultra-thin 10-by-12-inch plate that can slip into a backpack. 

“Handguns are useless against a product like this. Shotguns are useless against a product like this,” explained Rob Vito, Unequal’s president.

Unequal donated the ballistic shields to the graduating 8th grade class and 25 plates were given to school faculty. Vito’s daughter attends St. Cornelius.

In a clear sign that times have changed; while parents and guardians of students told the news outlet that a bulletproof backpack may be extreme, they pointed out that it’s necessary. 

“You hear about these school shootings almost weekly, and I can’t believe that’s where we are in our nation today, but that’s the fact,” said one great-grandparent who was attending the event.

Principal Barbara Rosini seemed happy for the help…

“Anything that we can do to protect our children and our staff, that’s what we have– that’s my job, to try to protect them and I try to do the best I can.”

While officials are offering firearms-training to teachers, and anti-gun protests continue around the country, one can’t help but wonder if this ‘gift’ was nothing but an uncomfortable piece of free promotion by the bulletproof pack provider – one look at the kids’ faces above as they received their ‘gift’ tells you everything.

As one commenter asked: “did the big pharma companies give them free adderall, ritalin, and prozac to get them through high school?”

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Senate Majority Leader Mitch McConnell has  issued a statement canceling the August recess, “due to the historic obstruction by Senate Democrats.”

McConnell Statement:

“Due to the historic obstruction by Senate Democrats of the president’s nominees, and the goal of passing appropriations bills prior to the end of the fiscal year, the August recess has been canceled.”

“Senators should expect to remain in session in August to pass legislation, including appropriations bills, and to make additional progress on the president’s nominees”

By way of background, Politico reports that a group of more junior senators are publicly urging McConnell to cancel recess to get the Senate’s work done – and to keep 10 vulnerable Democratic senators off the campaign trail.

A group of 16 senators sent McConnell a letter this month urging him to cancel the regular summer break.

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Ron Paul shared the following post…

Vicious circle number one…

Here are five other vicious cycles:

Invade a country —> Destroy the country —> “Well, we can’t leave now.” —> Repeat

Government redistribution —> Poverty increases —> Government redistribution —> Poverty increases —> Repeat

Government failure –> Increase their budget –> Government failure —> Increase their budget —> Repeat

Republicans win –> Government grows —> Democrats win —> Government grows –> Repeat

Fed prints money —> wrecks the economy —> Fed prints more money —> wrecks the economy —> Repeat

There’s only ONE DOOR out of these vicious cycles:

Liberty. Voluntary interactions. No aggressive force. Sound money. Free markets.

That’s it!

There are no shortcuts. There are no work-arounds. There are no backroads. We either leave the vicious cycles, or we do not.

Government will continue to squeeze the life out of its citizens until (and not a moment sooner) the desire for Liberty dominates.

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In addition to being one the best quarter for corporate earnings growth since 2011 due to Trump’s corporate tax cuts and fiscal stimulus, Q1 earnings season was closely watched for another key reason – to see what companies are doing with the excess cash “unlocked” thanks to Trump’s repatriation holiday: would companies spend it on capex and growth, or would they continue to splurge on buybacks, dividends and other shareholder friendly actions instead?

Now, thanks to Bank of America’s credit team which has combed through Q1 public filings, we have an answer, and there is no contest: if Trump had indeed hoped that his tax reform would boost capex more than buybacks, then it has indeed been a failure. As BofA reports, amid high grade non-financial issuers of debt, share buybacks reached the highest level on record during 1Q (ex. Energy, Metals, Utilities) as companies spent repatriated foreign cash.

To be fair, investment in capex did increase, although at half the rate as buybacks, while spending on dividends was stable and spending on acquisitions declined relative to 1Q of last year.

Digging deeper, in Q1 share buybacks among IG issuers rose to an all time high $123BN, up from $82bn in 4Q-17 and $66bn in 3Q-17. The jump in buybacks was driven by companies spending repatriated foreign cash not on capex and higher wages as Trump may have intended (if only in public comments) but on shareholder friendly activity. Furthermore, as BofA adds, 24 high grade issuers with large foreign cash holdings accounted for two-thirds of the total increase in buybacks relative to 4Q.

So what about CapEx? The good news is that spending on long-term growth was $96bn in 1Q, not that much lower than what was spent on Capex. The not so good news is that while capex spending was up from $79bn in 1Q-2017 – a far more modest increase than CapEx – it was down from $103bn in 4Q. Overall the YoY increase in capex spending was 21% (on an issuer-matched basis). The 24 issuers with large holding of foreign cash accounted for over half of the increase in terms of dollars, and capex spending for that group jumped 57% YoY. This suggests that some foreign cash was also invested organically, even if the bulk was returned it to shareholders via buybacks.

The two other corporate uses of cash, spending on acquisitions and dividends, saw recent trends extend, and were thus not impact by Trump’s fiscal reform; Spending on M&A specifically continued to decline in 1Q, falling to $54bn from $64bn in 4Q-17 and the recent peak of $85bn in 4Q-2017. This reflects a relatively low pipeline of M&A deals with funding needs late last year. Finally, spending on dividends actually declined $74bn in 1Q from $78bn in 4Q (Figure 8). However, dividend payouts were up 4% on a YoY basis.

Then again, none of this should be a surprise: recall that last November, Gary Cohn explicitly asked corporate managers what they planned on doing with the newly released cash. “If the tax reform bill goes through, do you plan to increase investment — your company’s investment, capital investment?” He asked for a show of hands. Alas, as the camera revealed, virtually nobody raised their hand.

Responding to this “unexpected” lack of enthusiasm to invest in growth, Cohn had one question: “Why aren’t the other hands up?”

VIDEO: CEOs asked if they plan to increase their company’s capital investments if the GOP’s tax bill passes.
A few hands go up.
“Why aren’t the other hands up?” Gary Cohn asks.#WSJCEOCouncil pic.twitter.com/TD2oAlN27S

— Natalie Andrews (@nataliewsj) November 14, 2017

We now know why.

Finally, buybacks and capex aside, BofA also looked at overall credit trends in the first quarter and finds that gross leverage for US public non-financial high grade issuers increased to 3.04x in 1Q from 2.98x in 4Q, while net leverage rose to 2.67x from 2.54x. Both gross and net leverage are now the highest on record, which is great as long as rates are near record lows, but will promptly become a recipe for disaster as rates keep rising.

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Authored by Adem Tumerkan via Palisade-Research.com,

The turbulence throughout the markets last week – thanks to Italy – has given investors their first taste of a frothy summer.

Especially the ‘smart money’- they’re bolting for the exits…

The Smart Money Flow Index (SMFI) is a leading-indicator in markets. That means when the SMFI drops sharply, usually the equity markets are right behind it.

And we haven’t seen the SMFI drop this much since the Great Recession of 2008 and the 2001 Recession. . .

What’s going on?

Last week I wrote about the forgotten economist – Hyman Minsky – and his excellent work about the Financial Instability Hypothesis (FIH), which details how an economy shifts through three stages.

From lowest risk to highest risk the stages are: hedged, speculative, and ponzi.

But probably the most important takeaway from the FIH is this simple sentence. . .

The periods of low volatility and market calm are the seeds for high volatility and market chaos in the future; then back the other way around.

Let me show you this using the last 10 years of the CBOE Volatility Index – the VIX – which gauges market volatility.

Like Minsky stated, the periods of market calm are breeding grounds for high market volatility.

Out of the last 10 years, roughly 85-90% of the time was peace and quiet. But the 10-15% were wild spurts of sharp chaos and turbulence.

What we can make out of this is “don’t confuse the current calm markets as signals everything is going to be OK.”

Unfortunately, that’s what the crowd is doing. . .

Things have gotten so peaceful that according to Goldman Sachs, Wall Street isn’t too far from record ‘quiet’ levels.

Looking at the single-stock ‘implied volatility’ throughout the S&P 500, it’s down 21% on a 3-month basis.

What’s implied volatility – informally known as iVol? This is the mathematical and artificial way to try and estimate how volatile something is – and will be – on the stock market. It’s most commonly used in option trading via the Black-Scholes Option Pricing Model.

Putting it simply, iVol is the estimated volatility of a security’s price and how traders price in the future price fluctuations.

For example, If the crowd’s bearish and expecting turbulent times, then the iVol will be higher – thus requiring more risk premium. But if they are instead optimistic and expecting calm markets, the iVol will be lower – settling for less risk premium.

So, with implied volatility down 21%, the equity markets are expecting calmer markets ahead…

This sort of ‘market complacency’ is where having optionality is key.

Borrowing ideas from the philosopher-esque former trader – Nassim Taleb – one needs to set themselves up with only ‘positive optionality’.

Positive Optionality is a situation where you have an asymmetric risk-reward setup; meaning unlimited upside with limited and fixed downside.

For example, buying car insurance offers this type of positive optionality. You pay small fixed premiums every month for complete protection during an unlikely chance of an accident.

Worst case scenario? You lose the small monthly premiums – no more, no less.

The upside scenario? There’s a freak-vehicle accident and your insurance company covers all your significant medical bills and replaces your totaled car with a brand new one – mountains more than what your small premiums cost you.

Negative optionality is the one writing the insurance – the one responsible for the huge payouts.

Remember that scene in The Big Short movie when Christian Bale’s character Mike Burry went to Goldman Sach’s and bought customized mortgage default insurance from the bank – and they laughed at him?

Unlike the bank that only wanted fixed monthly premiums and couldn’t see the bigger picture of risk – Mike actually understood positive optionality.

Later – during the crash of 2008 – Goldman Sach’s was on the hook to pay Mike a huge sum when the housing market bellied-up. Netting him a massive profit.

So, what’s this all add up to?

With the ‘Smart Money’ leaving in droves, and markets becoming too complacent – this gives us a subtle opportunity – and warning.

Take advantage of the low-implied volatility the market is pricing in while ignoring the smart money rotating out of equities. The Smart Money knows that all this ‘peace’ will be followed by spurts of high turbulence – eventually.

During this period of mis-priced risk, complacent markets, and false confidence – be long anything with positive optionality.

Now, go re-watch The Big Short. . .

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Iconic fashion designer Kate Spade was found dead Tuesday morning in her NYC apartment, in an apparent hanging, TMZ reports.

Law enforcement sources told TMZ that Spade was found 10:20 AM ET, after hanging herself in her Park Avenue home. She was pronounced dead on the scene.

According to AP, Kate got her start in the ’80s working for women’s magazine “Mademoiselle” in Manhattan, when she moved in with Andy Spade, David Spade’s brother. She and Andy met in college while working at a clothing store.

Together, Kate and Andy launched Kate Spade Handbags in 1993, and it blossomed into a full-scale clothing and jewelry line. Kate and Andy got married in 1994.

Kate sold her company in 2007 and took some time off to raise her daughter, but got back in the game in 2016 by launching a new fashion brand called Frances Valentine.

Tapestry, which owns the Kate Spade name together with other brands such as Coach and Stuart Weitzman, dropped modestly on the tragic news.

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After he nearly scuttled the historic talks with North Korea by hinting that Kim Jong Un could face a fate similar to former Libyan leader Muammar Gaddafi, National Security Advisor John Bolton is being sidelined by President Trump ahead of the historic June 12 summit in Singapore, CNN reports.

According to the report, several senior administration officials have lost their patience with Bolton and his hawkish approach to North Korea, including Secretary of State Mike Pompeo, who has pushed to limit Bolton’s role in the upcoming summit, saying it would be “counterproductive” for Bolton to attend certain Oval Office meetings.

Like Trump, Pompeo was reportedly livid following Bolton’s now-infamous Fox News Sunday interview, and in an angry confrontation Pompeo accused the moustached neo-con of trying to scuttle the talks for his own selfish reasons.

Pompeo told Trump it would be “counterproductive” to allow Bolton to attend the Oval Office meeting with visiting North Korean official Kim Yong Chol, two people familiar with the matter said, citing an escalating feud between the top diplomat and Bolton. The simmering tensions between two of the President’s top foreign policy advisers reached a boiling point after Bolton went on television last month and cited the Libya model when talking about North Korea abandoning its nuclear program — and in doing so, also raising the specter of Libya’s subsequent invasion and its leader’s brutal murder.

North Korea reacted furiously, lambasting Bolton in a statement. It revived long-held criticism from the regime, most notably in 2003 when North Korean state media described Bolton as “human scum and a bloodsucker” during the Bush administration.

But the remarks about Libya also infuriated Pompeo, who angrily confronted Bolton in a heated conversation at the White House.

While the White House has sought to play down rumors about tensions between Pompeo and Bolton, CNN says the Secretary of State has the backing of other high-ranking White House officials – including Vice President Mike Pence and Chief of Staff John Kelly. Both men have come to rely on Pompeo for his ability to cajole President Trump.

White House chief of staff John Kelly has remained in line with Pompeo, and has come to rely on his ability to guide the President, an official said. Kelly greeted Kim Jong Chol at the White House diplomatic entrance on Friday and escorted him to the Oval Office.

[…]

“Secretary Pompeo has always been the president’s lead on the North Korea summit,” the spokesman said, adding that Bolton “continues to coordinate and integrate the interagency process and provide the President with national security options.”

This wouldn’t be the first time that President Trump has pitted two of his senior officials against one another – a management strategy that Trump has become famous for. And even though Bolton has been sidelined when it comes to North Korea, the president still has faith in his national security advisor, CNN said.

Speaking from the south lawn of the White House on Friday, the president said he would temporarily set aside his push to exert “maximum pressure” on North Korea. But that doesn’t mean the White House won’t step up the pressure if Kim starts getting cold feet.

“I don’t even want to use the term ‘maximum pressure’ anymore because I don’t want to use that term because we’re getting along. You see the relationship. We’re getting along,” Trump told reporters after bidding farewell to his North Korean visitor, a former spy chief and currently the country’s chief nuclear negotiator. “So it’s not a question of maximum pressure. It’s staying essentially the way it is. At some point, hopefully, a deal — for the good of millions of people, a deal will be worked out.”

The administration insists that, for now, sanctions relief won’t come until North Korea takes firm steps toward abandoning its nuclear program.

[…]

Indeed, people familiar with the summit planning now say there is little expectation Trump will emerge from his meeting with Kim having secured the type of historic, detailed commitment on denuclearization that officials once said was a prerequisite for the talks.

Instead, Trump and his aides have suggested the most concrete product of the June 12 encounter could be a peace agreement formally ending the Korean War — a far cry from the commitment to immediate denuclearization that the administration once insisted would be required for Trump to come to the table.

However, administration officials have also cautioned that they won’t let North Korea off the hook from US sanctions until the process of denuclearization has started. For now, White House officials are saying all they can hope for at the June 12 summit is a broad declaration from Kim that he’s open to giving up his nukes. Such a declaration would give Pompeo and his allies in the White House enough momentum to continue pursuing a peaceful deescalation with North Korea.

However, if Kim suddenly balks, Bolton could find another opening to reassert a more hawkish approach to dealing with the Hermit Kingdom. Unless, of course, Pompeo has had enough of his neo-con rival and convinces Trump to ditch him. For now, Bolton’s odds of sticking around remain high… if only for the next three weeks. According to PredictIt, the contract “Will John Bolton be National Security Advisor at end of day June 30?” is currently pricing in 91% odds.

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Authored by Patrick Buchanan via Buchanan.org,

“There is no Republican Party. There’s a Trump party,” John Boehner told a Mackinac, Michigan, gathering of the GOP faithful last week. “The Republican Party is kind of taking a nap somewhere.”

Ex-Speaker Boehner should probably re-check the old party’s pulse, for the Bush-Boehner GOP may not just be napping. It could be comatose.

Consider. That GOP was dedicated to free trade, open borders, amnesty and using U.S. power to punish aggressors and “end tyranny in our world.” That GOP set out to create a new world order where dictatorships were threatened with “regime change,” and democratic capitalism was the new order of the ages.

Yet, Donald Trump captured the Republican nomination and won the presidency — by saying goodbye to all that.

How probable is it that a future GOP presidential candidate will revive the Bush-Boehner agenda the party rejected in 2016, run on it, win, and impose it on the party and nation?

Bush-Boehner Republicanism appears to be as dead today as was Harding-Coolidge Republicanism after 1933. And if Trumpism is not the future of the GOP, it is hard to see what a promising GOP agenda might look like.

A brief history:

In seven elections starting in 1992, Republicans won the presidency three times, but the popular vote only once, in 2004, when George W. was still basking in his “Mission Accomplished” in Iraq.

What fractured and overwhelmed the Bush-Boehner Republican Party?

First, demography. The mass immigration of Third World peoples that began with the 1965 immigration act, and the decline in the birth rate of native-born Americans, began to swamp the Nixon-Reagan New Majority.

Second, the collapse of the Soviet Empire and USSR removed the party’s great unifying cause from Eisenhower to Bush I — the Cold War.

After the Red Army went home, “America First” had a new appeal!

Third, faithful to the free trade cult in which they were raised, Republicans championed NAFTA, the WTO, and MFN for China.

Historians will look back in amazement at how America’s free trade zealots gave away the greatest manufacturing base the world had ever seen, as they quoted approvingly 18th- and 19th-century scribblers whose ideas had done so much to bring down their own country, Great Britain.

Between 1997 and 2017, the EU ran up, at America’s expense, trade surpluses in goods in excess of $2 trillion, while we also picked up the bill for Europe’s defense.

Between 1992 and 2016, China was allowed to run $4 trillion in trade surpluses at our expense, converting herself into the world’s first manufacturing power and denuding America of tens of thousands of factories and millions of manufacturing jobs.

In Trump’s first year, China’s trade surplus with the United States hit $375 billion. From January to March of this year, our trade deficit with China was running at close to the same astronomical rate.

“Trade deficits do not matter,” we hear from the economists.

They might explain that to Ohio, Michigan and Pennsylvania.

And perhaps someone can explain the wisdom of handing 4 percent of our GDP each year to an adversary nation, as U.S. admirals talk tough about confronting that adversary nation over islets and reefs in the South China Sea.

Why are we enriching and empowering so exorbitantly those whom we are told we may have to fight?

Fourth, under Bush II and Obama, the U.S. intervened massively in the Near and Middle East — in Afghanistan, Iraq, Libya, Syria, Yemen. And the forces that pushed up into those conflicts, and so disillusioned the nation that it elected Barack Obama, are back, pushing for a new war, on Iran. They may get this war, too.

Yet, given the anti-interventionist and anti-war stance of Trump’s winning campaign, and of the Bernie Sanders campaign, U.S. involvement in Middle East wars seems less America’s future than it does her past.

After his 16 months in office, it appears as though the Trump presidency, no matter how brief, is going to be a watershed moment in U.S. and world history, and in the future of the GOP.

The world is changing. NATO and the EU are showing their age. Nationalism, populism and tribalism are pervasive on the Old Continent. And America’s willingness to bear the burden of Europe’s defense, as they ride virtually free, is visibly waning.

It is hard to see why or how Republicans are ever again going to be the Bush-Boehner party that preceded the rise of Trump.

What would be the argument for returning to a repudiated platform?

Trump not only defeated 16 Bush Republicans, he presented an agenda on immigration, border security, amnesty, intervention abroad, the Middle East, NAFTA, free trade, Putin and Russia that was a rejection of what the Bush-Boehner Party had stood for and what its presidential candidates in 2008 and 2012, John McCain and Mitt Romney, had run on.

If the Republican Party is “napping,” let it slumber on, undisturbed, for its time has come and gone. We are in a new world now.

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Following newly-minted prime minister Giuseppe Conte’s first speech, which did nothing to appease Brussels’ hopes for normalization, Italian bond yields, spreads, and bank stocks are showing notable signs of stress once again.

Just when you thought it was safe… Conte used the speech to the Senate on Tuesday to promise “a new wind of change” based on a program of fiscal expansion drawn up by the euroskeptic Five Star Movement and League that risks breaching European Union budget rules; reiterating the government’s radical policy program, including a “citizen’s income,” (UBI), and tax cuts.

“Eliminating the difference in the economic growth between Italy and the European Union is one of our objectives, which must be pursued within a framework of financial stability and market trust,” said Conte, flanked by Five Star leader Luigi Di Maio and League chief Matteo Salvini. Conte was confident about his government’s “negotiating power,” because Italy’s interests match Europe’s.

As we detailed earlier, defending populism as “the ruling class listening to the people,” Conte promised the citizen’s income for the poor and the jobless, a two-tiered flat tax, and a boost in health spending — while also promising to reduce the public debt “by making our wealth grow, not through austerity measures.”

Conte also vowed “revolutionary measures” to overhaul the tax system, to review bankruptcy laws, crack down on big companies “hiding their wealth in artificial havens” and cut the perks of politicians.

Sending Italian bond yields and risk, relative to Bunds, surging…

And as goes bonds, so go Italian banks…

“Some may have hoped for some watering down after the market moves we saw last week,” said Jan von Gerich, chief strategist at Nordea Bank AB. “But Conte talks about revolutionary measures.”

And broadly speaking, European bank stocks are suffering…

 

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