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Well, the central bankers are really beginning to fail in a very public way. Kuroda has obviously made a complete shitshow out of the senior citizens colony known as Japan. Yellen has, so far, been given a free pass by the blinkered, pig-ignorant American public, who are too busy watching the Kardashians, but trust Tim on this, she will have her comeuppance.

Draghi, though, has become an embarrassment beyond my powers of elocution. Exhibit A is Deutsche Bank, shown below. As you can plain see, the stock price is – – and please let this sink in – – far lower than it was during the worst depths of the Financial Crisis. Try to imagine Goldman Sachs or JP Morgan being a single-digit stock these days, and you get the picture (of course, Yellen would never let that happen to the tribe. But I digress).

In any event, Draghi has mortgaged the future of his grandchildren, great grandchildren, and further descendents (his own infertility and/or impotence notwithstanding……..stay with me on this one) in exchange for the brief illusion of recovery. He. Will Fail.

via Zero Hedge http://ift.tt/1VAQbFI Tim Knight from Slope of Hope

Moments ago, ECB governing council member and Bank of Italy governor Ignazio Visco had some very troubling comments.

He said that while helicopter money is not currently part of the discussion in the Governing Council that “no policy tool within our mandate can or should be dismissed a priori.” The reason for this startling admission is “the importance of expectations of low inflation in determining wage outcomes, and thus giving rise to second- round effects, may be increasing.”

He cited Italy’s recently signed collective contracts where “it was agreed that parts of future pay rises will be revised downwards in the event that the inflation rate falls short of current forecasts” adding that a “a generalized adoption of this type of contract would significantly decrease the rate of growth of wages and this would in turn be reflected in the dynamics of consumer prices.”

He went on to defend existing monetary policy which has so far only resulted in savings hoarding, ongoing deflation and a slammed banking sector, saying that “Regarding Italy, the effects are estimated to be somewhat stronger: absent the monetary impulse, the Italian recession would have ended only in 2017; inflation would have remained negative for the whole three-year period.”

But back to helicopter money: Visco also said that: “such an extreme measure would undoubtedly be subject to operational and legal constraints.”

Is the ECB really this cloase to helicopter money? It appears so, because as he notes “the redistributive implications and the close ties with fiscal policy would all make it very complex, all the more so in the euro area given its institutional framework.” He concluded that a discussion on the measure “is noteworthy, not much per se, but because it underlines the concern that monetary policy is left to act in isolation.”

* * *

What catalyzed this dramatic shift in perception? It may be the following research note from JPM’s David Mackie titled “Helicopter money may come to a Euro area airport near you.”

In it JPM writes that “over the past few years, the ECB has provided monetary stimulus by cutting interest rates, providing forward guidance, purchasing assets, and making low-cost loans to banks. Even though these policies have been successful in helping to lift the real economy and sustain inflation expectations, there is widespread concern that we have reached a point of diminishing marginal returns. If this is correct, policymakers may need to consider other options in the event of a significant economic downturn. Helicopter money is one of the options that is often suggested.”

Here is how Mackie summarizes his thoughts:

• Helicopter money should be viewed as the combination of a fiscal expansion and an expanded QE program
• As such, it is possible to imagine helicopter money in the Euro area in the event of a significant downturn
• Fiscal and monetary coordination may be limited, but that may not matter too much
• Additional benefits would come from greater risk sharing across the ECB balance sheet, but this is uncertain

Some more highlights:

Against this backdrop, it was perhaps not surprising that at the March press briefing, ECB president Draghi was asked “theoretically, does your toolbox also include helicopter money, either in the form of direct financing of public investment, for example the EIB, or in the form of direct money to consumers?”

 

What was surprising was Draghi’s answer: “We haven’t really thought or talked about helicopter money. It’s a very interesting concept that is now being discussed by academic economists and in various environments. But we haven’t really studied yet the concept.” Clearly, Draghi did not dismiss helicopter money out of hand. 

 

A week later ECB chief economist Praet was asked, “In principle the ECB could print checks and send them to people?” To which he answered: “Yes, all central banks can do it. You can issue currency and distribute it to people. That’s helicopter money. Helicopter money is giving to the people part of the net present value of your future seigniorage, the profit you make on the future bank notes. The question is, if and when it is opportune to make recourse to that sort of instrument which is really an extreme sort of instrument.” Instead of dismissing helicopter money, Praet seemed to be sympathetic.

How it works mechanistically:

JPM’s take on the consensus view behind helicopter money:

Many commentators see helicopter money as the answer to the problem of limited traction of monetary policy. While monetary policy impacts spending indirectly, by changing borrowing costs and asset prices, helicopter money seeks to impact spending directly, by putting money straight into the hands of households and non-financial corporates. They could still save the money, but most proponents of helicopter money assume it would be spent, providing a direct boost to demand

How it will be pitched:

In our view, helicopter money should be viewed as the combination of a fiscal expansion and a QE program, essentially a money-financed fiscal expansion. The benefits relative to a QE program alone come from the fiscal expansion. There may also be benefits of a money-financed fiscal expansion compared with a bond-financed fiscal expansion, especially in an environment of elevated government debt. This could be particularly important in the Euro area. The benefits of helicopter money could be even larger in the Euro area if a money-financed fiscal expansion involved much more risk sharing than a bond-financed fiscal expansion, but that would not necessarily be the case. Risk sharing in the current QE program is limited.

 

Looked at in this way, the key constraint on helicopter money in the Euro area is on the fiscal side. The fiscal architecture is not well suited to a coordinated, area-wide fiscal expansion, especially given very elevated levels of debt in a number of countries. The ECB’s contribution via an expanded QE program looks straightforward by comparison. Some argue that an explicit coordination of monetary and fiscal policy is needed, perhaps as part of a signaling mechanism. Explicit coordination in the Euro area would be hard, especially if linked to the idea of the central bank becoming subservient to the fiscal authorities. In the event, explicit coordination may not be necessary to experience the benefits of helicopter money. Overall, in the event of a significant economic downturn, helicopter money as defined here would likely be implemented in the Euro area to some extent.

Of course, there are problems:

There are a number of perceived problems with bondfinanced fiscal expansions: crowding out through higher interest rates, Ricardian equivalence of future tax increases to redeem debt, and roll-over risks in refinancing operations. A money-financed fiscal expansion using irredeemable reserves overcomes these problems, even if interest is paid on the reserves. Money-financed fiscal expansions may also have a financing benefit if short-term interest rates are lower than long-term interest rates. In addition, in the Euro area there may be risk-sharing benefits if the risks of asset purchases by the central bank are spread out across the region in a way that sovereign bond issuance is not. However, risk sharing is not inevitable in the Euro area: risk sharing in the current ECB QE program is limited. But, it is very important to stress that helicopter money still involves the creation of a sovereign liability (central bank reserves) that will receive interest at whatever level the central bank sets for macroeconomic stability purposes unless reserve requirements are imposed.

JPM’s concluding thoughts as first the ECB, and then all other central banks, prepare to embark on the final lap before it all blows up:

For many, the key distinction between helicopter money and QE is that helicopter money is viewed as permanent whereas QE is viewed as transitory. It is the irredeemable nature of the reserves created by helicopter money that matters. While this may be important in theoretical macro models, we doubt that it has much relevance in the real world. The efficacy of QE over recent years has not been limited by a broad-based perception that the policy will be reversed, but rather by the headwinds from balance sheet deleveraging. Essentially, despite low borrowing costs and elevated asset prices, banks have been reluctant to lend and households and non-financial corporates have been reluctant to borrow.

 

For other advocates of helicopter money, it is the absence of paying interest on reserves that is the key benefit of helicopter money relative to QE, as occurs in the example of helicopter money with the central bank sending out checks. Essentially, the idea is that there is a free lunch to be had from the creation of non-interest-bearing money that can be distributed to households. This is often referred to as the creation of an asset for the private sector without a corresponding liability for the public sector. In our view, this free lunch does not really exist. We would argue that the lunch has to be paid for either by future non-inflationary seigniorage income, the inflation tax, or a tax on banks through reserve requirements.

 

Some advocates of helicopter money argue that it has to involve an increase in the inflation objective. This is partly where the idea of coordination between the monetary and fiscal authorities comes from: there is an idea that the central bank has to be made subservient to the fiscal authorities. We would disagree. In an environment where demand is depressed, and inflation is running well below the central bank’s objective, monetary and fiscal easing is warranted by the need to restore macroeconomic balance in terms of full employment and price stability. Policy efficacy does not require an increase in the central bank’s inflation objective.

 

In our view, the main argument for helicopter money is that there are benefits to be had from a money-financed fiscal expansion rather than a bond-financed fiscal expansion, even if interest is paid on the reserves that are created. The fiscal expansion is important because it adds directly to demand. The monetary financing helps to contain drags from crowding out and Ricardian equivalence, which may be particularly important in the Euro area where government debt is elevated.

 

In the event of a significant economic downturn in the Euro area, something that looked a lot like helicopter money as described here would likely take place. Despite the fiscal compact, there would be a move towards fiscal expansion. And, the ECB would expand its asset purchase program for both price stability and financial stability reasons. In order for the fiscal expansion to be meaningful, however, there would need to be either a broad-based rethink or a suspension of the fiscal compact. It is unlikely that there would be much explicit coordination between the monetary and fiscal authorities, due to sensitivities around the ECB’s independence, although it is not clear that this would be essential. Potentially very important is the issue of risk sharing. In the event of a significant economic downturn, automatic stabilizers would drive deficits wider and fiscal easing would add to this. With debt already very elevated in a number of Euro area countries, further increases in debt would be uncomfortable. Additional QE should make this much more comfortable. Greater risk-sharing in a future QE program would likely add significant additional benefits. Many in financial markets would view this as de facto equivalent to a eurobond.

In short, the final all-in bet is almost at hand.

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

Submitted by David Stockman via Contra Corner blog,

Even by The Donald’s standards his 95 minute long interview with the Washington Post was remarkable. He let loose so many stray shots as to leave the establishment press clucking in a chorus of disbelief. It undoubtedly started with the stink bomb he lobbied at the ” all is awesome” meme about the US economy and stock market:

Donald Trump said in an interview that economic conditions are so perilous that the country is headed for a “very massive recession” and that “it’s a terrible time right now” to invest in the stock market, embracing a distinctly gloomy view of the economy that counters mainstream economic forecasts.

 

The New York billionaire dismissed concern that his comments — which are exceedingly unusual, if not unprecedented, for a major party front-runner — could potentially affect financial markets.

Now there’s an irony. Presumably the last paragraph was written by Bob Woodward who was once the bête noir of the Washington/Wall Street establishment. But like nearly everyone else in the Imperial City he has been drinking the Cool-Aid for so many decades that he was shocked by Trump’s unfiltered bit of truth-telling about an economy that is failing 90% of the American public.

Worse still, Woodward was apparently dumbfounded that Trump didn’t self-censor his thoughts about the economic troubles ahead for fear of unsettling the Wall Street casino.

That’s right. The cult of the stock market and the notion that the Fed literally controls and powers the US economy through the transmission belt of Wall Street and soaring financial asset prices has gotten so deeply embedded in the establishment narrative that even the pedigreed left-wing of the journalistic establishment has been coopted into reflexively chanting the meme.

So imagine Woodward’s consternation when Trump – the very embodiment of a billionaire financial tycoon – let loose with the following counterpunch:

“I know the Wall Street people probably better than anybody knows them,” said Trump, who has misfired on such predictions in the past. “I don’t need them.”

Those last five words are what has the Washington GOP establishment in a cold sweat. The fact is, the Washington based apparatus of the GOP is beholden lock, stock and barrel to Wall Street and the broader financial services industry for sustenance. That is, PAC funds and the K-street influence peddling rackets which make life in the Imperial City so copasetic for careerist politicians and their apparatchiks.

Indeed, there is an obvious quid pro quo. The job of the Washington GOP leadership amounts to keeping the free market yokels who frequently get sent to Washington from the conservative provinces busy on everything except the core problem. That is, they are kept distracted whopping it up about neocon war missions abroad, vastly exaggerated terrorist threats at home, the supposed affliction of illegal immigrants who actually do much of America’s low-skill work and the pro-statist agenda of the right-to-lifers, anti-gays and sundry similarly projects of the red state bible-thumpers.

Meanwhile, capitalist prosperity is in existential crisis. The central bank’s free money is destroying honest price discovery in the financial markets, deforming the free market allocation of investment and other economic resources, crushing savers, retirees and real entrepreneurs and generating unspeakable windfalls to traders and speculators.

Indeed, if you are partial to tin foil hats you might even believe that the GOP leaderships’ kid gloves approach to the Fed had in mind the generation of a Bernie Sanders all along. Bernie has arisen because the sum and substance of Fed policy is massive inflation of financial asset values, and therefore a reverse robin hood redistribution of wealth to the 1%.

So what could be more convenient to mobilize the red state base and the blue state left-behinds than a socialist candidacy on the Democratic ticket? Or failing that, a desperate Hillary Clinton who sounds like one?

And do not doubt that the GOP establishment is in league with the Eccles Building and its Wall Street suzerains. Do you remember who was chief economic advisor to Mitt Romney?

None other than a Columbia business professor and Wall Street shill by the name of Glenn Hubbard. During the heat of the campaign he kept the candidate radio silent on the fundamental issue of our times—–the Fed’s usurpation of vast powers of monetary central planning—–and even averred that Bernanke had been doing a fine job. Said professor Hubbard, he should be considered for reappointment!

And don’t even mention the clueless action of Senator McCain in 2008. The man actually suspended his campaign so that he could come back to Washington and help Bush and Paulson bail-out Wall Street; and to authorize the Fed to unleash a torrential spree of money printing that has virtually transformed Wall Street into a dangerous and unstable gambling casino.

Woodward’s snarky observation that Trump has “misfired on such predictions in the past” was especially ripe, but absolutely consistent with the establishment meme that all is fixed and getting better by the day.

Actually, when did the Fed and its gaggle of Wall Street camp-followers ever predict a recession and subsequent financial market crash? There was not a peep from those precincts in 2000 or 2007. It was all about tommyrot like the goldilocks economy, the Great Moderation and a supposedly minor subprime disturbance that was “well contained”.

Yes, most of what Trump has thrown into the debate is outlandish, regrettable, outright deplorable and just plain wrong. The Wall, the ban on Muslims, his call for more torture of enemies, his dog-whistling on race, his cop pandering, his know-nothing position against social security reform and his blatantly sexist name-calling fit some or all of the above categories.

And to the outlandish category, now add the blatantly stupid. To wit, Trump’s promise that he will eliminate the national debt in eight years!

Even there, however, he can perhaps be praised with faint damn. At least he recognizes that our current $19 trillion of national debt will be $22 trillion by the time the next President is in the saddle, and that its a short slide to national bankruptcy from there.

At the end of the day, Trump has petrified the Wall-Street Washington establishment for good reason. He loudly rejects the War Party consensus on foreign intervention. And he has tapped into a deep vein of main street alienation from the phony recovery and economic fixes promulgated by the Fed and its beltway henchman.

We had another jobs Friday celebration by the latter and it amounted to the same old, same old. That is, purportedly 100,000 new jobs in retail and bars and restaurants were added, but still no progress where it counts. There are nearly two million fewer full-time, full-pay jobs than there were when Bill Clinton was packing up his bags to leave the White House.

Even if the likes of Bob Woodward haven’t figured this out, the unschooled Donald Trump apparently has.  No wonder they fear Trump Unbound.

The full Washington Post Interview can be found here.

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

Once again, US equities have given up the 'great' jobs report gains and are plunging fast with The Dow sufferung its worst day in 6 weeks. European and US banks are tumbling as despite Dimon's bottom and the coordinated ease-fest of the world's central banks, investors prefer to sell a multi-trillion dollar opaque hole of derivatives debacle-ness that buy it.

Good jobs gains gone…

 

As Deutsche heads the same way as lehman…

 

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

How very ironic.

Over the weekend, just hours before the Panama Papers were released, we wrote a post that took “A Look Inside Iceland’s Kviabryggja Prison: The One Place Where Criminal Bankers Face Consequences.”

And then, minutes later, the Panama Papers were disclosed by the ICIJ, which had a clear target: to “expose” the “circle of friends close to Putin”, and of course, to reveal the dirty laundry of the Iceland Prime Minister, who resigned just two days after his shady offshore tax dealing were revealed to the world.

There was some “conspiratorial” speculation whether the explicit hit on ex-PM Sigmundur David Gunnlaugsson was precisely due to Iceland’s crackdown on the country’s criminal bankers. As a reminder, Iceland is the only nation that sent bankers found guilty of crimes resulting from the financial crisis, to prison.

It turns out there may have been something valid in said speculation, because moments ago, Iceland Monitor reported that three bankers from the defunct Iceland bank Kaupthing are to be released from jail today – after serving just one year of their 5-year sentences.

Magnús Guðmundsson, Ólafur Ólafsson and Sigurður Einarsson were one of four men jailed in 2015 in the so-called ‘Al-Thani case’ on charges of breach of trust and market abuse.

Sigurður Einarsson, former chairman at Kaupþing, received a sentence of four years, while Magnús Guðmundsson, former CEO of Kaupthing Luxembourg, and Ólafur Ólafsson, who was the bank’s second largest shareholder at the time, both received a sentence of four and a half years.

They will be taken to a halfway house today, where they will be fitted with ankle tags and released under electronic supervision.

Hreiðar Már Sig­urðsson , Sig­urður Ein­ars­son and Magnús Guðmunds­son.

* * *

Case closed, but the question lingers: is the Panama Papers merely a warning to anyone in government who dares to put bankers in prison to make sure that their own financial documents are in pristine condition, or else?

 

via Zero Hedge http://ift.tt/1q9bDFT Tyler Durden

As of this moment, various European banks but most prominently Deutsche Bank…

… as well as Credit Suisse and RBS, have been crashing back to lows hit in early February and then all the way back to the March 2009 “the world is ending” lows.  We commented on this yesterday using, ironically enough, a note by Deutsche Bank strategist Jim Reid, in which we showed all the things that were not supposed to happen when Draghi unleashed his massive quad-bazooka QE expansion.

The problem is that now that global central banks are more focused on appeasing China and keeping the USD weaker (by way of a dovish, non-data dependent Fed), the pain for Europe (and Japan), and their currencies, and their banking sector, will likely only get worse. This is precisely the case proposed by Francesco Filia of Fasanara Capital, who explains below his “Short European Bank Thesis.”

Here is his note:

Here below, we update our views on negative rates and our consequential short European Banks equity and sub debt thesis. In a nutshell, we think that not only no bank is ever designed to survive in an environment of deeply negative rates for a prolonged period of time, but their business model is further impaired by negatively sloping interest rate curves. In a twisted unwelcome side-effect following ECB meeting, curves are ever closer to inversion in Europe. They recently became inverted in Japan, for the first time since 1994.

Drivers below, in no particular order:

1.    Deeply negative interest rates for a prolonged period of time.

Banks’ business model is at risk. If deeply negative interest rates is the way forward, it doesn’t matter consolidation or bad banks talks or country-specific policymaking (e.g. Italy or Europe): the business model is impaired, needs a rethink/restructuring, even before FinTech is taken into account. No bank is ever designed to function in durable negative rates environment. It is a profitability issue, not a balance sheet problem. Banks’ capitalisation then, however healthy it may seem today, may have to be looked at as no more but the number of years of negative profitability it can withstand before a recap is eventually needed. A fragile banking sector is the Achilles heel of the equity market overall, paving the way for gap risks to the downside.

2.    Inverted interest rate curves.

Now then, one more element is potentially adding to negative rates in impacting banks’ business: negatively-sloping interest rate curves. The spread between 10y JGBs and overnight rates turned negative in Japan last month. The same spread in Germany is only 20bps steep. Charts attached below. The curve steepness tightly correlates, in broad terms, to how much of a spread profit is left for banks when lending to good large businesses in Europe. No creditworthy business in Europe will accept borrowing for the longer term at much higher costs than that, especially when factoring in a weak-inflation environment. Incidentally, such business is better off borrowing for shorter terms, at more inverted curves, for then rolling-over such debt at a time when it has better visibility on how things evolve in the real economy and if the inflation outlook deteriorates from here or not.

3.    In  deflationary economy, demand for loans is anaemic.

By subsidising T-LTROs to the private business sector, Draghi was masterful in avoiding immediate damage to the banking sector. Banks’ agonising core business model was given a breathing space, in the name of helping the real economy. Surely a smart and well-thought system of incentives. However, as Keynes once wrote, quoting the old English proverb, “You can lead a horse to water but you can’t make him drink”. The lack of positive real expected returns dampens new investments in hiring plans, plant & machinery, and related borrowing and credit formation with it. Thus, making Draghi’s move just another artefact of financial leverage, not a game changer.

4.    No more safety net in the near term for markets.

If anything,  Draghi has now gone closer to full exhaustion of his arsenal of policy tools. Last year, we estimated for Central Banks to be 70% done; we may now argue for their arsenal to be more than 80% exhausted. Their lack of policy space from here is evident. The failed repression of volatility post ECB and the reaction of the EURUSD are there to testify it. Current policies can be expanded, new tools can be devised, but their marginal effectiveness is clearly free-falling. Next time around, a troubled equity market will have less of a safety net in the build-up of expectations into the subsequent ECB meeting.

* * *

In consequence of the risk assessment above, we resolve to stay out of banks equities and equity-like instruments (while we like banks’ senior debt) and equities in general, for limited upside is combined with the risk of a sizeable sell-off in the months ahead. We stay put. We keep dry powder ready should the market become way cheaper between now and September, as we expect.

* * *

Japanese 10yr JGB vs Japan Overnight Rate
The Japanese curve (10yr JGB’s minus overnight rate) is inverted

 

German 10yr Bund vs Refi Rate

 

Ratio of EU Banks / Eurostoxx vs German 10yr Bund
Banks tend to underperform the broader market index when interest rates fall

 

Ratio of EU Banks / Eurostoxx vs European Interest Rate Curve
Banks tend to underperform the broader market index when interest rates curves flatten/invert

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