Month: July 2014

Ever since 2012, when we first revealed that the biggest problem plaguing Europe’s financial sector is the $2 trillion+ in bad debt on the books of European banks (not our numbers, the IMF’s), it became clear that the only way Europe can avoid a complete financial meltdown coupled with currency disintegration, is if it can constantly keep rolling over said bad debt (obviously the only way to do that would be to create an epic debt bubble leading managers of other people’s money to do idiotic things like buy Spanish debt at 2.75%). This is why not only the BOJ launched its mega QE in 2013, but why Draghi also kicked in with NIRP a month ago: the logic – do anything and everything to reflate the biggest credit bubble possible as otherwise European banks will have no choice but to face up to their trillions in bad loans.

Unfortunately for some banks, especially those which operate in Europe’s supposedly highest-rated country, Austria, sometimes just being able to kick the can is not enough as on occasion a law will change, having the unintended consequence of forcing the bank to admit just how ugly its balance sheet truly is. That’s what happened overnight when Erste Group, Austria’s largest bank by assets, and the third biggest bank in Eastern Europe after UniCredit and Raiffeisen, announced that, oops, its earlier forecast about the amount of bad loans on its books is wrong, and will have to rise by a massive 40%, leading to what will be a record $2.2 billion loss, and triggering writedowns.

Shareholders, not used to being told the truth and instead preferring sweet, little lies, promptly took the stock to the woodshed.

Analysts, whose job it is to predict these things, were shocked:”This is a clearly bad surprise as it comes in addition to the already ‘badly surprising’ warning issued by the group at the beginning of this year,” Natixis Securities SAS analyst Steven Gould said in a note to clients. “These announcements hurt the management’s credibility going forward.”

What was the catalyst for the early recognition of the massive writedown? Bloomberg explains:

The provisions are caused by new rules due to be approved by Parliament in Hungary today, forcing banks to refund “unfair” loan fees, and by the Romanian central bank’s push for faster bad-debt reduction amid the European Central Bank’s bank health check, Erste said. Writedowns on goodwill and deferred tax assets, triggered by the loan-loss provisions, may reach as much as 1 billion euros.

 

“By taking these measures, we have done everything in our power to avoid one-off effects from 2015 onward,” Chief Executive Officer Andreas Treichl said in the statement. “We are convinced that these measures will also help us pass the asset-quality review and stress test comfortably.”

…

 

Hungary contributed to Erste’s loss with a new law forcing it to repay some loan costs to customers. New rules due to be approved by Parliament in Budapest today will require banks to refund certain expenses on as much as 6.5 trillion forint ($28 billion) of loans going back as far as 10 years, according to the draft bill.

 

Higher bad-debt provisions in Romania, the Black Sea country of 20 million where Erste bought Banca Comerciala Romana SA for 3.75 billion euros in 2005, were caused by the central bank’s pressure on banks to clean up their balance sheets as part of the ECB’s bank health check, Erste said.

Ironically, it is the poor Eastern European sovereigns themselves who are forcing banks to do what is effectively is the job of their regulator, the ECB. Needless to say, the last thing the ECB will do is force banks to clean up their balance sheets: if anything Draghi knows full well that Erste is just the harbinger and Europe is loading to the brim with banks that are in the same situation. Should the ECB actually force banks to either revealt the true state of their bad debt and/or take measures to remedy it, the entire financial system would implode overnight.

Which is why instead we have an annual confidence building farce known as the “stress test”, which in the past has seen Bankia and Dexia pass with flying colors, and this year would have also given Erste an AAA+++ grade as well:

The loss won’t hit Erste’s regulatory capital to the full extent, and the bank’s common equity Tier 1 ratio will reach about 10 percent by the end of the year without raising fresh capital, Erste said. That’s because goodwill, brand value and other intangible assets of its Romanian unit that Erste is writing down aren’t part of the regulatory capital.

Which also goes to show just how ridiculous Europe’s definitions of capital truly are.

As for Erste, it’s ok – the stock has been punished and now it is time for the BTFD algos to lift it right back to where it was, because as has been made very clear in the past 6 years, fundamentals are no longer relevant or matter when making capital allocation decisions. The only thing that does matter is how much more of a moral hazard will the central banks push the system into before one day what happened to Erste today takes place at the global level, and the can containing the entire modern financial system which is broken beyond repair can no longer be kicked down the street.

via Zero Hedge http://ift.tt/1lFddpt Tyler Durden

Anyone hoping for a resolution of the biggest economic conundrum of modern times will have to wait. What is the conundrum you ask? Simple: whether or not extreme adverse weather is positive or negative for GDP.

Recall that in the aftermath of Hurricane Sandy in October 2012, which caused some $70 billion worth of damages, the tenured econo-intelligentsia rushed to point out the silver lining, noting that courtesy of the idiotic broken window fallacy, at least US GDP would benefit. It is unclear if GDP did benefit, considering the latest Q4 2012 GDP print came barely at 0.1% suggesting ex-Hurricane GDP would have been negative. However what is clear is that the collapse in US GDP in Q1 2014 to -2.9% has not been blamed on Obamacare, or the collapse in global trade, or the ongoing decline in real wages, or the demise of the US middle class, or the fact that the US economy is still in a depression if one takes away the $10+ trillion injected by global central banks, and was instead blamed on “harsh weather.”

In other words, extreme weather conditions are positive to GDP if the lead to a lot of broken windows, but very negative if they result merely in people spending excessively on heating and warm winter clothing.

Hence conundrum.

So it was hoped that Hurricane Arthur, which made landfall overnight on the North Carolina coast, would provide some clarity, based on what happens to Q3 GDP because remember: after Q1 and Q2 GDP, originally expected to rise by over 2.5% have now tumbled, the great hope is that the “escape velocity” economic surge, originally penciled in for Q2 2013, then Q3, then Q4, then Q1 2014, then Q2 2014, would finally take place in the second half of 2014. Of course it won’t, because there is no economic recovery to speak of – there is simply propaganda to make the record Dow Jones appear modestly credible although lately even CNBC is largely laughing when trying to justify the 17,000+ print with the actual state of the economy – but at least a hurricane would be a great scapegoat to “explain” the latest delay to the “self-sustaining” recovery (recall that according to JPM, instead of “above-trend” 2.8% growth in 2014, the US economy is now expected to grow at the slowest pace since 2009). Or, alternatively, Arthur would have been just what the window breaking doctor ordered.

In any event, it appears that any expectation Arthur would devastate the east coast, with either positive or negative GDP consequences, has been cancelled. Because not only has Arthur just been lowered to a Category 1 hurricane from 2, but now appears to be moving away from the east coast entirely.

From CNN:

Arthur weakens to a Category 1 hurricane with maximum sustained winds of 90 mph.

 

North Carolina seems to have dodged a bullet. Hurricane Arthur did not dawdle over the coastline to vandalize neighborhoods for long. The storm accelerated its rapid trek north, the National Weather Service said, and was leaving land behind as the sun rose.

 

Once again, it’s churning over the Atlantic on a water-bound path parallel to New England’s coast.  A line of rain clouds is sweeping east overland to meet the hurricane as it climbs, dumping rain all the way up to Maine on Friday, downing trees and knocking out power long before Arthur is to arrive.

 

As Arthur leaves the South’s shores, hurricane watches and warnings are vanishing and resurrecting, as tropical storm warnings are posted farther north in anticipation of the storm’s gradual demise around Nova Scotia.

 

When Arthur came ashore with 100-mph winds at 11:15 p.m. Thursday, Robin Nelson’s house clattered and rumbled. She was right in the path of the eye wall.

 

The Category 2 storm made landfall between Cape Lookout and Beaufort, North Carolina, the National Hurricane Center said.

 

Nelson lives with her husband and two sons in Newport, right across the Newport River Sound from Beaufort.

And from NYT:

Hurricane Arthur began pushing away from the North Carolina coast on Friday morning after battering the shoreline with heavy rains and strong winds.

 

As the storm moved back into the Atlantic, the extent of any damage along the state’s coastline and areas just inland was unclear, and forecasters said the storm could threaten New England later on Friday.

 

At 7 a.m., the National Hurricane Center in Miami said that Arthur was powering its way offshore at 23 miles per hour. The hurricane had maximum sustained winds of 100 miles per hour, and its center was 65 miles east-northeast of Kitty Hawk. Although the storm was set to churn far from the American coastline for most of the day, forecasters said it could lash the Massachusetts coast with heavy rain on Friday night. A tropical storm warning was in place for Nantucket and Cape Cod, and forecasters extended it early Friday as far west as Woods Hole.

Still, there is some hope for a GDP “boost” however tiny: “Utility companies reported thousands of power failures. Tideland Electric Membership Corporation, which provides service in the Outer Banks, said more than 7,700 of its customers were without electricity early Friday. And Duke Energy reported that more than 11,000 of its customers in Carteret County, where Arthur made its landfall, lacked electricity.”

As for billionaire hedge funders hoping their weekend Hamptons retreat, where they impress 20 year old girls with the size of their mansions, will be sunny and bright, the following latest trajectory map from the NHC should provide the answer.

via Zero Hedge http://ift.tt/VmIDeG Tyler Durden

It was precisely 6 months ago, on January 3, when JPM, blissfully unaware of the powerful snowstorms that were raging outside its office, a condition which would later be branded with the technical economic term “harsh weather“, predicted that the US economy would grow by 2.5% in the first half and 3.0% in the second, leading to a solid 2.8% annualized growth for 2014, a growth rate which would mean the US economy would grow at the fastest pace since 2005.

Fast forward exactly six months later, when on July 3, “harsh weather” firmly in the rear view mirror (but blissfully unaware of the record drought slamming California, the monsoons about to crush India, and El Nino set to ravage the US in the fall, not to mention two regional civil wars, a China whose housing bubble has popped and whose rehypothecation scandal means Chinese GDP is about to fall off a cliff, and global trade generally grinding to a halt), JPM has just followed with a revised GDP forecast. Its latest (and certainly not least) prophecy for the full year GDP: precisely one half of what it expected 6 months ago, or just 1.4%, following a cut to Q2 GDP to 2.5% from 3.0% (which means negative growth for the entire first half, something in a less insane world would be called a recession), while keeping Q3 and Q4 GDP miraculously at 3.0% for both quarters.

From JPM:

GDP growth and job growth go their separate ways: The contrast between weak GDP growth and strong job growth in 1H14 only intensified this week. Real GDP growth in 1Q14 was -2.9% saar, and we are reducing our forecast for 2Q14 to 2.5% (from 3.0%). Real GDP appears to have contracted in the first half. At the same time, payroll employment averaged 231,000 in 1H14, the strongest six-month run of job growth in the expansion to date. The obvious result is a sharp decline in productivity in 1H14 and a surge in 1H14 unit labor cost estimated at about 5% saar.

In other words, instead of above-trend, “escape velocity” GDP, the highest in nearly a decade, in 2014 US GDP is now poised to grow just 1.4% – the lowest annual growth rate since the Lehman crash.

What a difference a snow storm makes!

 

via Zero Hedge http://ift.tt/1s8t1WU Tyler Durden

via Zero Hedge http://ift.tt/1jQiWcj williambanzai7