What next from the war on cash?

This morning the BBC has posted an article on a subject I was mulling last Wednesday.  As I walked into an appointment for some treatment for my knee the person before me was paying for his appointment by using his phone and transferring the money directly. I by contrast had put some cash in my pocket so I could pay in that fashion. If we move on from me suddenly feeling rather stone age and he being much more cutting edge there was one work related issue on my mind. What does paying by phone do to the money supply? It reminds us that the money supply also includes the ability to borrow and whilst everyone obsesses about banks also reminds us that it can now come from other sources. Or perhaps I should correct that to their being more potential routes these days.

Paying by phone

Here is an example quoted by the BBC.

Nikki Hesford, 32, is a convert to person-to-person payment (P2P) apps, using PayPal to pay for services and Venmo to pay back friends.

“The only time in the last year I’ve drawn out cash is for the school fete cake stall and to pay my manicurist,” says Ms Hesford, who runs her own marketing support company for small businesses.

“If I go for a meal with friends I can’t be bothered messing about with two, three or four cards,” she says.

“One person will pay on a card and the others will transfer through an app. It takes seconds rather than minutes fussing around with who owes what.”

PayPal has been around for some time but the likes of Venmo seems a real change and I can see the attraction. Who has not been out to eat with a group and been in a situation where the money collected in is short but everyone claims to have paid? For all our thoughts that millennials and Generation Z have it tough they may have stolen a bit of a march on the rest of us here. Venmo will by its very nature record each transfer and provide a type of audit trail.

In terms of scale then the position is building.

Zelle, one of the most popular payment apps in the US backed by 150 banks, launched in June 2017, but has already processed more than 320 million transactions valued at $94bn (£72bn).

A recent report by Zion market research suggested that the global mobile-wallet market in general is expected to top $3bn by 2022, up from nearly $600m in 2016.

The argument in favour is that it is quick and convenient,

Rachna Ahlawat, co-founder of Ondot Systems, a payment services platform, perceives a marked change in consumer behaviour.

“We want transactions to happen in an instant and at the click of a button,” she says. “Consumers not only want to operate in real-time, but they are looking for technology that allows them to play a more active role in how they control their payments, and are finding new ways of managing their financial lives.”

Financial Crime

The official and establishment view is that cash is a curse and the high priest of such thoughts Kenneth Rogoff wants this.

Why not just get rid of paper currency?

His opening argument is that cash is a source of crime.

First, making it more difficult to engage in recurrent, large, and anonymous payments would likely have a significant
impact on discouraging tax evasion and crime; even a relatively modest impact could potentially justify getting rid of most paper currency.

Yet we discover that even the new white heat world of person to person payments has you guessed it found that the criminal fraternity are very inventive.

“Malware injections and reverse engineering attacks can be used by hackers to understand the app’s code and silently trick you, going undetected by the typical security measures.”  ( Pedro Fortuna from JScrambler )

The truth is that whatever financial area we move into we take the criminals with us and sometimes there are already there waiting for us to make a mistake.

“With the increasing number of apps all requiring some form of authentication, it’s all too tempting to reuse passwords across multiple services. This increases the risk of your data being hacked.”  ( Sam Devaney from CGI UK ).

The banks

There is a very inconvenient reality for the likes of Kenneth Rogoff which is that so much financial crime is to be found at the heart of the system “the precious”.

Banks in Denmark, the Netherlands, Latvia and Malta have all been linked to criminal inflows from countries including Russia and North Korea. The EU has moved to centralize banking supervision, but money laundering has remained a national responsibility.

At the moment the European Union seems to be the weakest link in this area although of course it is far from unique. As an example the situation at Danske bank was so bad it even found itself being trolled by Deutsche Bank which claimed it was only accepting one in ten of past Danske bank clients. According to the Wall Street Journal around US $150 billion of transactions are being investigated according to Reuters the bank itself is discovering large problems.

the Financial Times cited the bank’s own investigation as saying the Danish bank handled up to $30 billion of Russian and ex-Soviet money through non-resident accounts via its Estonian branch in 2013 alone.

The European Union seems to be particularly in the firing zone in this area right now and much of it seems centred in the Baltic nations. That reminds me that back on the 19th of February I looked at the issues facing ABLV in Latvia which developed into a situation where the central bank Governor Ilmārs Rimšēvičs has been charged with taking a bribe.

Whilst the European Union is presently in the firing line we know that banking scandals of this sort occur regularly in most places. Yet the establishment ignore the way that the banks are the major source of financial crime in their rush to implicate cash.

Some new notes

A sign that there is indeed counterfeiting happen was provided yesterday by the European Central Bank or ECB although it chose to present it another way.

New €100 and €200 banknotes unveiled!

Sadly the excitement captured only a couple of journalists attention but the press release did hint at “trouble,trouble,trouble.”

The new €100 and €200 banknotes make use of new and innovative security features.

I think we know why! But there was another sign.

In addition to the security features that can be seen with the naked eye, euro banknotes also contain machine-readable security features. On the new €100 and €200 banknotes these features have been enhanced, and new ones have been added to enable the notes to be processed and authenticated swiftly.

It makes me wonder how many counterfeit ones are in existence. This seems likely to get Kenneth Rogoff to add those note to the 500 Euro ones he wants banned.

Comment

This is a situation which has a paradox within it. We see that technology is providing plenty of ways which provide alternatives to cash and in spite of presenting myself as something of a cash luddite earlier I find them convenient too. Yet we want more cash in the UK the £40 billion mark was passed in 2008 and now we have according to the Bank of England.

There are over 3.6 billion Bank of England notes in circulation worth about 70 billion pounds.

We are far from alone as for example in 2017 the growth rate was 7% for the US and Canada and 4% for the Euro area and Japan. Yet the Bank of England confirms that the medium of exchange case has indeed weakened over time.

Cash accounted for 40% of all payments in 2016, compared to 62% in 2006

The Bank will have something of an itchy collar as it notes that the increased demand for cash will be as a store of value and the rise accompanies its era of QE and low interest-rates. Kenneth Rogoff is much more transparent though.

Although in principle, phasing out cash and invoking negative interest rates are topics that can be studied separately, in reality the two issues are deeply linked. To be precise, it is virtually impossible to think about drastically phasing out currency without recognizing that it opens a door to unrestricted negative rates that central
banks may someday be tempted to walk through.

As Turkish points out in the film Snatch “Who da thunk it?”

 

 

Advertisements

The Italian economy looks to be heading south again

Today has opened with what is more disappointing economic news for the land of la dolce vita. From the Italian Statistics Office or Istat.

In July 2018 the seasonally adjusted industrial production index decreased by 1.8% compared with the previous month. The percentage change of the average of the last three months with respect to the previous three months was -0.2.
The calendar adjusted industrial production index decreased by 1.3% compared with July 2017 (calendar working days being 22 versus 21 days in July 2017);

As you can see output was down both on the preceding month and on a year ago. This is especially disappointing as the year had started with some decent momentum as shown by the year to date numbers.

 in the period January-July 2018 the percentage change was +2.0 compared with the same period of 2017.

However if we look back we see that the push higher in output came in the last three months of 2017 and this year has seen more monthly declines on a seasonally adjusted basis ( 4) than rises (3). Looking ahead we see that things may even get worse as the Markit PMI business survey for manufacturing tells us this.

Italy’s manufacturing sector eased towards
stagnation during August. Both output and new
orders were lower, undermined by weak domestic
demand, whilst employment increased to the
weakest degree since September 2016……..Expectations were at their lowest for over five years.

This seems set to impact on the wider economic position.

At current levels, the PMI data suggest industry
may well provide a net negative contribution to
wider GDP levels in the third quarter of the year.

With Italy’s ongoing struggle concerning economic growth that is yet another problem to face. But it is something with which it has become increasingly familiar as the industrial production sector is still in a severe depression. What I mean by that is the peak for this series was 133.3 in August of 2007 and the benchmarking at 100 for eight years later (2015) shows what Taylor Swift would call “trouble,trouble,trouble” . The initial fall was sharp and peaked at an annual rate of 26% but there was a recovery however, in that lies the rub. In 2011 Italy saw a bounce back in production to 111.9 at the peak but then the Euro area crisis saw it plunge the depths again. It did respond to the “Euroboom” in 2016 and 17 but looks like it is falling again and an index of 105.2 in July tells its own story.

So all these years later it is still 21% lower than the previous peak. We worry in the UK about a production number which is 6.1% lower but as you can see we at least have some hope of regaining it unlike Italy.

The wider outlook

Italy’s economy is heavily influenced by its Euro area colleagues and they seem to be noting a slow down as well. From @stewhampton

The ECB committee that oversees the compilation of the forecasts now sees the risks to economic growth as tilted to the downside.

Perhaps they have suddenly noted their own money supply data! At which point they are some time behind us.  Also in the language of central bankers this is significant as they do not switch from “broadly balanced” to “tilted to the downside” lightly, and especially not when they are winding down a stimulus program.

So we see that the Italian economy will not be getting much of a boost from its neighbours and colleagues into the end of 2018.

Employment

Yet again this morning’s official release poses a question about the economic situation in July?

In the most recent monthly data (July 2018), net of seasonality, the number of employees showed a slight decrease compared to June 2018 (-0.1%) and the employment rate remained stable.

This modifies the previous picture which had been good.

The year-on-year trend showed a growth of 387 thousand employees (+1.7% in one year), concentrated among temporary employees against the decline of those permanent (+390 thousand and -33 thousand, respectively) and the growth of the self-employed (+30 thousand).

So more people were in work which is very welcome in a country where a high level of unemployment has persisted. We keep being told that the unemployment rate in Italy has fallen below 11% ( in this instance to 10.7%) but then later it gets revised back up again. Of course even 10.7% is high. I would imagine many of you have already spotted that the employment growth is entirely one of temporary jobs which does not augur well if things continue to slow down.

Some better news

Italy is a delightful country so let us note what some might regard as a triumph for the “internal competitivesness” policies of the Euro area.

Italy’s current account position is one of the country’s most improved economic fundamentals since the financial crisis. As the above chart shows, it improved by 6.2 percentage points to a sizable surplus of 2.8% of gross domestic product (GDP) last year—the highest level since 1997—from a deficit of 3.4% of GDP in 2010.

That is from DBRS research who in this section will have the champagne glasses clinking at the European Commission/

external cost competitiveness gains related to relatively slower domestic wage growth.

The Italian worker who has been forced to shoulder this will not be anything like as pleased as we note that some of the gain comes directly from this.

In response to the recession, nominal imports of goods declined significantly by around 5% a year between 2012 and
2013.

Also Italy has benefited from lower oil prices.

Since then, lower energy prices further contributed to the improvement in the current account, and Italy’s imported energy bill bottomed out at 1.6% of GDP in 2016, down from a peak of 3.9% of GDP in 2012.

Not quite the export-led growth of the economics textbooks is it? Still maybe there will be a boost from tourism.

Why everyone is suddenly going to Milan on vacation ( Wall Street Journal)

According to the WSJ Milan has  “been hiding in plain sight for decades ” which must be news to all of those who have been there which include yours truly.

Comment

The downbeat economic news has arrived just as things seemed to have got calmer regarding the new coalition government. Or as DBRS research puts it.

More recently, the leaders have reaffirmed their commitment to adhere to the European Union (EU) framework. In DBRS’s view, this is a positive development.

This has meant that the ten-year bond yield which had risen above 3.2% is now 2.75%. So congratulations to anyone who has been long Italian bonds over the past ten days or so and should you choose you will be able to afford to join the WSJ in Milan as a reward. However bond yields have shifted higher if we return to the bigger picture so this will continue to be a factor.

In DBRS’s view, total interest expenditure as a share of gross domestic product (GDP) may slightly narrow this year compared with the 3.8% of GDP recorded in
2017.

As new issuance has got more expensive than in 2017 I am not sure about the narrowing point.

Also there is the ongoing sage about the Italian banks which has become something of a never-ending story. Officially Unicredit has been the success story here and yet if it is such a success why were rumours like these circulating yesterday?

The other rumour was a merger with Societe Generale of France. Anyway the current share price of around 13 Euros is a long way short of the previous peak of 370 or so. This reminds us of the news stories surrounding the fall of Lehman Bros. a decade ago as it has been a dreadful decade for both Unicredit and Italy as we note the economy is still 5% smaller than the previous peak.

 

 

 

 

 

 

 

 

Sweden is a curious mixture of monetary expansionism and fiscal contraction

This morning has brought us a new adventure in the world of central bank Forward Guidance.

The Executive Board has therefore decided to hold the repo rate unchanged at −0.50 per cent. If the economy develops as expected, there will soon be scope to slowly reduce the support from monetary policy. The forecast for the repo rate indicates that it will also be held unchanged at the monetary policy meeting in October and then raised by 0.25 percentage points either in December or February.

You may already have realised that this is from the Riksbank of Sweden and that there is something awfully familiar about this as Martin Enlund highlights below.

There are a multitude of issues here. Let us start with the fact that the Riksbank was ahead of the game in offering Forward Guidance before the concept was formally devised. I guess that sits well with being the world’s oldest central bank. But the catch so typical of the way that Forward Guidance has developed is that it has proven spectacularly wrong! Indeed I cannot think of any central bank that has such a malfunctioning crystal ball. Ever since 2012 an interest-rate rise and indeed succession of rises has been just around the corner on a road that has been so straight even the Roman Empire would be proud of it.

One of the features of Forward Guidance is that it is supposed to allow businesses and households to plan with certainty. The reality here is that they have been consistently pointed in the wrong direction. Indeed their promises of interest-rate rises morphed into interest-rate cuts in the period from 2012 to 2016. Such that their forecasts if we try to average them, suggested the repo rate now would be of the order of 3-4%, rather than the actual -0.5%. If we look at the period when the repo rate has been negative they have consistently suggested it is temporary but it has been permanent so far, or if you prefer has been temporary as defined in my financial lexicon for these times.I think that there are two major possibilities here. The first is that they are collectively incapable of seeing beyond the end of their noses. The other is that it has been a deliberate policy to maintain negative interest-rates whilst promising to end them.

A more subtle suggestion might be that this is all for the foreign exchanges who do take a least some notice rather than the average Swede. After all if he or she did take notice of the Forward Guidance they have probably long since given up.

The Krona

We get the picture here from this from Bloomberg.

Sweden’s elections this weekend could spell more pain for an already floundering currency.

As ever I will skip past the politics and look at the currency. One cannot do so without first noting the role of the Euro here which is like a big brother or sister to its neighbouring nations. When it cut interest-rates it put pressure on them to cut as well. So let us look at the Krona versus the Euro.

What we see is a clear pattern. Essentially the monetary easing of the Riksbank has taken the Krona from 8.4 versus the Euro in the late summer of 2012 to 10.57 as I type this. So a gentle depreciation to add to the negative interest-rates in terms of monetary policy as we rack up the stimulus count.

We can take that wider by looking at the trade-weighted or Kix Index. If we do so we get a similar result as the 102 of late summer 2012 has been replaced by 121 now. Just for clarity this index operates in the reverse direction to the usual method as a higher number indicates a weaker currency.

If we switch to inflation prospects then some should be coming through as the Wall Street Journal reported yesterday.

Down 10% against the dollar, the krona has fallen more than any other developed-market currency. Among the 10 most heavily traded currencies in the world, it has undershot even China’s Yuan—itself under pressure from the trade conflict with the U.S.—and the U.K.’s Brexit-bruised pound.

So commodity prices will have risen in Krona terms from this effect.

QE

This has been another feature of the expansionary toolkit of the Riksbank

At the end of August, the Riksbank’s government bond
holdings amounted to just over SEK 330 billion, expressed as a  nominal amount .Net purchases of government
bonds will be concluded at the turn of the year, but principal  payments and coupon payments will be reinvested in the government bond portfolio until further notice.

So what has become regarded as a pretty regular QE programme which politicians love as it reduces borrowing costs for them. One generic point I would note is that these Operation Twist style reinvestments are only happening because QE has proven rather permanent rather than the extraordinary and temporary originally claimed. So far only the US Federal Reserve is attempting any unwind. Many argue this does not matter, but when you have redistributed both wealth and income towards the already wealthy I think that it does.

Money Supply

This has been an issue across more than a few countries recently, as we have been observing slow downs. This is also true of Sweden because if we look at the narrow measure or M1 we see that an annual rate of growth of 10.5% in July 2017 was replaced with 6.3% this July. If we look back we see that a major player in this has been the QE purchases because when the Riksbank charged into the bond market in 2015 the annual rate of growth in M1 went over 15% in the latter part of that year. Now we see as QE slows down so has M1 growth.

A similar but less volatile pattern can be seen from the broad money measure M3. That was growing at an annual rate of 8.3% in July 2015 as opposed to the 5.1% of this July. So we see clearly looking at these why the Riksbank has just balked on a promise to raise interest-rates at today’s meeting. Taken in isolation that is sensible and in fact much more sensible than the Bank of England for example which has just raised Bank Rate into monetary weakness.

House Prices

I would like to present this in a new way. We have a conventional opening as according to Sweden Statistics house prices fell by 1.2% in 2012 ( they measure one or two dwelling buildings) which explains the about turn in monetary policy seen then. But if we switch to narrow money growth we see that it looks like there is a link. It peaked in 2015 as did house price growth (10.8%). It remained strong in 2016 and 17 as did house price growth ( 8.4% and 8.3% respectively). Okay so with money supply growth fading what has happened to house prices more recently?

In the last three-month period, from June to August 2018, prices rose by almost 1 percent on an annual basis compared with the same period last year.

Boom to bust? As ever we need to be careful about exact links as for example the latest couple of months have been stronger. But what if monetary growth continues to slow?

Comment

Readers will be pleased to discover that the Riksbank has investigated its own policies and given itself a clean bill of health.

The Riksbank’s overall assessment is that the side‐effects
of a negative policy rate and government bond purchases
have so far been manageable.

Where there is a clear question is a policy involving negative interest-rates, QE and a currency depreciation when the economy is doing this.

Activity in the Swedish economy remains high. GDP growth in the second quarter was surprisingly rapid and together with strong indicators, this suggests that economic activity is still not slowing down.

Inflation is also on target. So why is policy so expansionary? Perhaps Fleetwood Mac are correct.

I never change
I never will
I’m so afraid the way I feel

Should they reverse course and find the economy and house prices heading south thoughts will be a lot harsher than the “Oh Well” of Fleetwood Mac.

Oddly we find that fiscal policy is operating in the opposite direction as this from the Swedish Debt Office shows.

For the twelve-month period up to the end of July 2018, central government payments resulted in a surplus of SEK 109.6 billion. Central government debt amounted to SEK 1,196 billion at the end of July. This corresponds to 2.3 and 25.3 percent, respectively, of GDP.

We are in a rare situation where they could genuinely argue they have a plan to pay it all off. The catch comes with the fact that with a ten-year bond yield of 0.54% and a low national debt they have no real need to. So a joined up policy would involve ending negative interest-rates and some fiscal expansionism wouldn’t it?

 

 

The ongoing saga that is Deutsche Bank rumbles on

As the credit crunch unfolded the story so often found its way to the banking sector and the banks. But as we approach a decade from the collapse of Lehman Brothers I doubt anyone realised the story would still so often be about them. A headliner in this particular category has been my former employer Deutsche Bank. It has turned out to be like the Black Knight in the Monty Python sketch where all troubles are “tis but a scratch” and returns to the fray. If we look back it was not explicitly bailed out by Germany although of course there were a range of measures which implicitly helped it. For example the government programme to help interbank lending and the interest-rate cuts and liquidity supply programmes of the European Central Bank ( ECB). Come to think of it we would not have expected the ECB to still be pursuing monetary easing a decade later either. Both sagas are entertwined and indeed incestuous.

As in so many cases Deutsche Bank was able to avail itself of the US bank support structure as Wall Street Parade points out.

According to the Government Accountability Office (GAO), Deutsche Bank received cumulative loans totaling $77 billion under the Federal Reserve’s Primary Dealer Credit Facility (PDCF) and $277 billion in cumulative loans under the Term Securities Lending Facility (TSLF) for a total of $354 billion.

That now seems even more significant as we have had several periods where European and Japanese banks have been singing along with Aloe Blacc.

I need a dollar, dollar, a dollar that’s what I need (Hey Hey),
Well I need a dollar, dollar, a dollar that’s what I need (Hey Hey),
Said I need a dollar, dollar, a dollar that’s what I need,
And if I share with you my story, Will you share your dollar with me?

This is in addition to the gains at the time which were liquidity and US $354 billion is quite a lot of it even in these inflated times and a type of bailout from a below market interest-rate.

On the other side of the ledger Deutsche Bank has provided support to various taxpayers around the world via the fines it has paid as a type of compensation for its many miss-selling scandals. The initial claims that these were a few rotten apples turned out to be an organisation that was rotten to the core. According to FN London it has paid around US $8 billion in fines and agreed to compensate US consumers with US $4.1 billion. So has in a sense made some recompense for the liquidity received in the US although some of the Li(e)bor fines were received by the UK.

Share Price

This is a signal of trouble again as we see that this week it has spent some time below 10 Euros again.This is significant on several levels. It was considered a sign of trouble in the autumn of 2016 when Deutsche Bank was hitting the headlines for all the wrong reasons. It also pales considerably when we look back as I note this from back in February 2009 from The Guardian.

Deutsche cut the dividend from €4.50

Back at the peak the share price was more like 94 Euros according to my monthly chart. From a shareholder point of view there has also been the pain of various rights issues to bolster the financial position. These tell their own story as the sale of 359.8 million shares raised 8.5 billion Euros  in 2014 whereas three years later the sale of 687.5 million was required to raise 8 billion Euros. The price was in the former 22.5 Euros and in the latter 11.65 Euros.

Putting it another way shareholders stumped up 16.5 billion Euros in these two issues more than doubling the number of shares to 2.066.8 million for the company to now be valued at around 21 billion Euros at the current share price. As ever a marginal price may not be a good guide but in this instance I suspect the total price would be less and not more as after all if you wanted to buy the bank it should be relatively easy.

To my mind this is made an even bigger factor by the way that the current situation is so bank friendly. Monetary policy in the Euro area remains very expansionary and we have just seen a phase described as a Euroboom. If we return to Germany’s home base we see an economy that since 2014 has grown by around 2% per annum and according to the German Bundesbank house price index (127 cities) prices rose by 9% in 2016 and 9.1% in 2017, meaning the asset base of the mortgage book has strengthened considerably. Yet in spite of all this good news the share price not only fails to recover it has headed back to the doldrums.

Fixing a hole?

The Financial Times reported this on Tuesday.

To many observers in Frankfurt a tie-up between Deutsche Bank and Commerzbank is not seen as a question of if, but when.  The prevailing view among the banking cognoscenti in Germany’s financial capital is that the country’s two largest listed lenders are very likely to merge eventually.

Eventually?

There are two scenarios that could accelerate the potential merger. One is that Deutsche realises that it is unable to turn itself round under its own steam; the other is that a foreign peer tables a bid for Commerzbank, forcing Deutsche’s chief executive Christian Sewing to make a counter offer.

Forcing? I did enjoy the reference to Deutsche turning itself around under its own steam! How’s that going after a decade? As to the second sentence below it is hard not to laugh.

Assuming a 35 per cent premium on Commerzbank’s current market capitalisation, Deutsche would have to pay €14bn for its smaller rival. “There are different ways to structure this deal but it surely would not be in cash,” said a Frankfurt-based investment banker.

If Deutsche had access to €14 billion in cash it wouldn’t need to buy Commerbank.

Comment

There is quite a bit to consider here as we see that in spite of an economic environment that is very bank friendly Deutsche Bank never seems to actually recover. More money has been taken from shareholders who must be worried about the next downturn especially as the issue below has continued to fester. From Reuters in June 2016.

“Among the G-SIBs, Deutsche Bank appears to be the most important net contributor to systemic risks, followed by HSBC  and Credit Suisse ,” the fund said…….“The relative importance of Deutsche Bank underscores the importance of risk management, intense supervision of G-SIBs and the close monitoring of their cross-border exposures,” the IMF said, adding it was also important to quickly put in place measures for winding down troubled banks.

This is a reminder of the worries about its derivatives book and its global links. It was hard not to think of that yesterday as rumours spread about Germany offering financial aid to Turkey.

As to the proposed merger with Commerzbank has everybody suddenly forgotten the problems of Too Big To Fail or TBTF banks?

With €1900bn in total assets, a merged Deutsche-Commerzbank would be the third-largest European bank after HSBC and BNP Paribas.  ( FT)

Oh and as to the question posed by etfmaven in the comments the experience in the credit crunch era is a pretty resounding no.

Do two lousy banks make one good one?

Shareholders of Commerzbank may also acquire a liking for the Pet Shop Boys.

What have I, what have I, what have I done to deserve this?
What have I, what have I, what have I done to deserve this?

 

Euro area money supply data looks worrying again

One of the features of the credit crunch era is that conventional economics not only clings at times desperately to theories that do not work but also looks the other way from ones which do. I have been reminded of that this morning as I look at the money supply data for the Euro area and note that there is not many of us who publicise it on social media. That is a shame as it has been working pretty well as a signal for economic trends in recent times. The experiments of the 1980s especially in the UK where money supply data was taken very literally taught us to use it for broad trends rather than exact specifics. But the broad trends have sent accurate signals which brings us to this mornings clues as to what will happen next in the Euro area?

Broad Money

From the European Central Bank or ECB.

The annual growth rate of the broad monetary aggregate M3 decreased to 4.0% in July 2018 from 4.5% in
June, averaging 4.1% in the three months up to July.

So the opening salvo returns us to thoughts of an economic slow down. If we look back for a general trend we see that the monetary stimulus lifted M3 growth to around 5% and it rumbled on around that sort of growth in 2016 and 17 with several peaks at 5.2% the most recent being last September. But December 2017 gave a warning as growth fell to 4.6% and this year has seen a clear dip especially when growth fell below 4% in March and April. June gave a hint of a recovery and ironically has been revised up to 4.5% but July has sunk back to 4%.

The rule of thumb is that looking ahead this is the trend for nominal GDP growth which provokes an awkward thought. If 4% is the new trend and the ECB hits its 2% inflation target as it is roughly doing now then annual GDP growth should also be 2%. So the “Euroboom” will continue to fade. Also of note is the fact that in 2016/17 the ECB achieved a level of broad money growth which would be consistent with nominal GDP growth of 5% which we have seen several Ivory Towers make a case for. That may well have been the signal used for deciding the amount of QE bond purchases and other credit easing.

The overall growth can be broken down as follows.

 the annual growth rate of M3 in July 2018 can be broken down as follows: credit to the private sector contributed 3.3 percentage points (up from 3.2 percentage points in
June), credit to general government contributed 1.4 percentage points (down from 1.5 percentage points),
longer-term financial liabilities contributed 0.7 percentage point (down from 0.8 percentage point), net
external assets contributed -0.7 percentage point (down from -0.4 percentage point), and the remaining
counterparts of M3 contributed -0.8 percentage point (down from -0.6 percentage point).

I would counsel taking care with such numbers as this sort of mathematical economics is always advanced confidently by its proponents who in my experience become somewhat elusive when as happens so often it ends in tears.

Narrow Money

This is usually a much more direct line of impact on the economy of say a few months ahead as opposed to the a year plus of broad money. Accordingly this month’s release is not optimistic.

The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, decreased to 6.9% in July from 7.5% in June.

This is the lowest number for the series so far in this phase eclipsing the 7% of April. Overall the annual rate of growth has been falling for a while now. The double-digit growth of late 2015 and early 2016 drifted into single digits but it has been this year where a clear move lower has been seen. The 8.8% of January was followed by 8.4% and 7.5% and now we seem to be circa 7%.

The difference?

People ask for breakdowns and definitions of the above so here we go.

  • M1 is the sum of currency in circulation and overnight deposits;
  • M2 is the sum of M1, deposits with an agreed maturity of up to two years and deposits redeemable at notice of up to three months; and
  • M3 is the sum of M2, repurchase agreements, money market fund shares/units and debt securities with a maturity of up to two years. (ECB)

Putting that into numbers at the end of July M1 was 8050 billion Euros of which 1136 billion was cash/currency and the rest was overnight deposits. Moving to M2 brings us up to 11,486 billion Euros as we add in time deposits and more technical additions brings us to 12,130 billion Euros.

Negative Interest-Rates

The financial media often points us to the 0% current account rate of the ECB and looks away from the -0.4% deposit rate but some find it applying to them. From Handelsblatt.

Frankfurt Starting in September, Hamburger Sparkasse (Haspa) intends to charge private customers a fine of 0.4 percent for deposits of more than € 500,000. This applies to checking and overnight money accounts. The second largest German savings bank after Berlin reacts to the European Central Bank (ECB) , which in turn charges the banks negative interest-rates , which park money at short notice.

Handelsblatt goes on to tell us that around a dozen savings institutions are now applying negative interest-rates. There has been a slow spread of this since the first one to break ranks did so in the summer of 2016. This reinforces our theme that banks are in fact very nervous about what would happen to deposits if they fully applied negative interest-rates which has mean that relatively few have applied them. Also the way that they are usually applied to larger deposits means they are particularly afraid of applying them to the European equivalent of Joe Sixpack. In addition a lesson from the mortgage rates we looked at on Friday is that banks soon adjust margins to keep them out and usually well out of the negative zone as well.

Thus the fears about the profitability of “the precious” have proved mostly unfounded and in my opinion negative interest-rates would need to go deeper to change this. Past say -1% towards -2%.

Comment

The monetary data suggests not only that the “Euroboom” is over but that the trajectory looks downwards. As it happens that seems to coincide with monetary data for elsewhere in the world for July so a general trend may be in play as we wait a day or two for the UK data. For the ECB and its President Mario Draghi this has a couple of elements. The elephant in the room today has been the reduction in the QE ( Quantitative Easing) bond purchases which have fallen to 15 billion Euros a month from a peak of 60 billion. That has been a factor in the monetary slowing although how much puts us in a chicken and egg situation as it should be crystal clear but rarely is.

In a technical sense that may suit the ECB as it can slap itself on the back for its role in the better economic growth phase for the Euro area. But also it revives my argument that there has been an element of junkie culture here because if growth fades away as the sugar supply is reduced then all the talk of reform fades away too. With Germany running a fiscal surplus it will be less easy to fire up the QE engine looking forwards as there will be fewer bunds to buy and many are have remained at negative yields. There may well of course be plenty of Italian bonds to buy but that is a potential road to nowhere for the ECB.

Looking ahead the battle has begun to be the next ECB President but as the Bank of England may be about to show the earth can move in mysterious ways.

Carney reportedly asked to remain governor of BOE until 2020 ( @RANsquawk )

Although the ECB itself seems keen to emphasise other matters.

Welcome to the Netherlands house price boom 2018 version

As many of the worlds central bankers enjoy the delights of the Jackson Hole conference it is time for us to look what might be regarded as a measuring stick of their interventions. To do so we travel across the channel and take a look at the housing market in the Netherlands which was described like this on Tuesday.

In July 2018, prices of owner-occupied houses (excluding new constructions) were on average 9.0 percent higher than in the same month last year. The price increase was slightly higher than in the preceding months. House prices were at an all-time high in July 2018, according to the price index of owner-occupied houses, a joint publication by Statistics Netherlands (CBS) and the Land Registry Office (Kadaster).

So we see an acceleration as well as an all-time high in price terms and it is hard not to have a wry smile at this being the nation must famous for Tulips. Anyway for those who have not followed this particular saga it has been far from a story of up,up and away.

House prices reached a record high in August 2008 and subsequently started to decline, reaching a low in June 2013. The trend has been upward since then.

The timing of the change is a familiar one as that coincides pretty much with the turn in the UK. Although the exact policy moves were different his provokes the thought that central bankers were thinking along not only the same lines but at the same time. Of course there were differences as for example the Bank of England introducing the house price friendly Funding for Lending Scheme and Mario Draghi announcing “Whatever it takes ( to save the Euro) in the summer of 2012, followed by a cut in the deposit rate to 0% at the July meeting. As to synchronicity it was raised at the ECB press conference.

And my second question is: China also cut rates today and we had further stimulus from the Bank of England. We were just kind of wondering about, you know, how much coordination was involved. Was there any sort of contact between you and the People’s Bank of China and the Bank of England?

Actually the ECB move was more similar to the Bank of England’s actions than in may have first appeared as it too was subsiding the “precious”

 One is the immediate effect on the pricing of the €1 trillion already allotted in LTROs.

That sort of thing tends to lead to lower mortgage interest-rates so let us move onto the research arm of the Dutch central bank the DNB.

Average mortgage interest rates charged by Dutch banks have been declining for some time. Between January 2012 and May 2018, average rates fell by around two percentage points.

Actually the fall was pretty much complete by the autumn of 2016 and since then Dutch mortgage rates have been ~2.4%. That pattern was repeated in general across the Euro area so we see like in the UK mortgage rates were affected much more by what we would call credit easing ( LTROs etc in the Euro area) than by QE which inverts the emphasis placed on the two by the media. Also slightly surprisingly Dutch mortgage rates are higher than the Euro area average which according to the DNB are topped and tailed like this.

Rates vary widely across the euro area, however, with the lowest average rates currently being charged in Finland (0.87%) and the highest in Ireland (3.11%).

In case you are wondering why we also get an explanation which will set off at least some chuntering amongst Irish readers.

Households in Finland tend to opt for mortgages with a short fixed interest period, in which the rates are linked to Euribor. Irish banks charge relatively high margins when setting mortgage interest rates.

 

Saving the Dutch banks?

You may wonder at the mimicking of Mario Draghi’s words but if we step back in time there were plenty of concerns as house prices fell from 120.9 for the official index in August 2008 to 95 in June 2013. Consider the impact on the asset base of the Dutch banking sector is we add in this from the DNB.

Almost 55% of the aggregate Dutch mortgage debt consists of interest-only and investment-based mortgage loans, which do not involve any contractual repayments during the loan term. They must still be repaid when they expire, however.  ( October 2017).

Actually it was worse back then.

. Since 2013, the aggregate interest-only debt has decreased by over EUR 30 billion, and it currently stands at some
EUR 340 billion………. Between 1995 and 2012, virtually none of the mortgage loans taken out involved any contractual repayments during the loan term.

Also back then it was permitted to have loans of more than 100% of the value of the property so the banks faced lower house prices with an interest-only mortgage book some of which had loans larger than the purchase price. What could go wrong?

Several years ago, the economic
slowdown and the housing market correction were mutually reinforcing.

As to the level of debt well that is high for the Dutch private sector according to the DNB.

 In the third quarter of 2017, household and corporate debt came to 106% and 120% of GDP respectively, which is high from an international perspective.

Comment

The “Whatever it takes” saga is usually represented as a move to bail and indeed bale out places like Greece,Ireland, Portugal and Spain and that was true. But it is not the full story because some northern European countries had previously behaved in what they would call a southern European manner and the Netherlands was on that list. We have seen already how the central bank described the housing markets troubles as being in a downwards spiral with the overall economy so let us see if that is true on the other side of the coin. Now house prices are booming what is going on in the economy?

According to the first estimate conducted by Statistics Netherlands (CBS) based on currently available data, gross domestic product (GDP) expanded by 0.7 percent in Q2 2018 relative to the previous quarter…….According to the first estimate, GDP was 2.9 percent up on the same quarter in 2017.  ( Statistics Netherlands )

How very British one might say. If you were thinking of areas in the economy affected by the housing market well……

Output by construction companies showed the strongest growth in Q2 2018………Investments in residential property, commercial buildings, infrastructure and machinery increased in particular.

Also higher house prices and possible wealth effects?

In Q2, consumers spent well over 2 percent more than in Q2 one year previously. For 17 quarters in a row, consumer spending has shown a year-on-year increase.

So the housing market turned and then consumption rose. Of course correlation does not prove causation and other factors will be at play but should Mario Draghi read such numbers his refreshing glass of Chianti will taste even better.

Is this an economic miracle? The other side of the coin is represented by Dutch first time buyers who will be increasingly squeezed out especially in the major cities. There we see something familiar as international investors snap up property ahead of indigenous buyers just like London and so many other cities have seen. The official story is familiar too as they are told because of lower mortgage rates affordability is fine but of course the capital burden relative to income rises and that matters more in a country where interest-rate only mortgages are still 40% of new borrowing. At least most borrowing seems to be fixed-rate now but more fundamentally as we look at this we see a familiar refrain which is can any meaningful rise in interest-rates be afforded now? On that road we see why Mario Draghi has kicked any such discussion into the lap of his successor.

 

 

 

Greece still faces a long hard road to end its economic depression

This morning has brought a development that many of you warned about in the comments section and it relates to Greece. So with a warning that I hope you have not just eaten let us begin.

You did it! Congratulations to Greece and its people on ending the programme of financial assistance. With huge efforts and European solidarity you seized the day. ( President Donald Tusk)

There was also this from the European Union Council.

“Greece has regained the control it fought for”, says Eurogroup President as today exits its financial assistance programme. 

There is an element of triumphalism here and that is what some of you warned about with the only caveat being that the first inkling of good news was supposed to be the cause whereas that is still in the mix. So there is an element of desperation about all of this. This is highlighted by the words of the largest creditor to Greece as the European Stability President Klaus Regling has said this and the emphasis is mine.

 We want Greece to be another success story, to be prosperous and a country trusted by investors. This can happen, provided Greece builds upon the progress achieved by continuing the reforms launched under the ESM programme.

What is the state of play?

It is important to remind ourselves as to what has happened in Greece because it is missing in the statements above and sadly the media seem to be mostly copying and pasting it. As you can imagine it made my blood boil as the business section of BBC Breakfast glibly assured us that a Grexit would have been a disaster. Meanwhile the reality is of an economy that has shrunk by around a quarter and an unemployment rate that even now is much more reminiscent of an economic disaster than a recovery.

 The seasonally adjusted unemployment rate in May 2018 was 19.5%…..

The youth (15-24)  unemployment rate is 39.7% which means that not only will many young Greeks had never had a job but they still face a future with little or no prospect of one. Yesterday the New York Times put a human face on this.

When Dimitris Zafiriou landed a coveted full-time job two months ago, the salary was only half what he earned before Greece’s debt crisis. Yet after years of struggling, it was a step up.

“Now, our family has zero money left over at the end of the month,” Mr. Zafiriou, 47, a specialist in metal building infrastructure, said with a grim laugh. “But zero is better than what we had before, when we couldn’t pay the bills at all.”

The consequence of grinding and persistent unemployment and real wage cuts for even the relatively fortunate has been this.

A wrenching downturn, combined with nearly a decade of sharp spending cuts and tax increases to repair the nation’s finances, has left over a third of the population of 10 million near poverty, according to the Organization for Economic Cooperation and Development.

Household incomes fell by over 30 percent, and more than a fifth of people are unable to pay basic expenses like rent, electricity and bank loans. A third of families have at least one unemployed member. And among those who do have a job, in-work poverty has climbed to one of the highest levels in Europe.

The concept of in work poverty is sadly not unique to Greece but some have been hit very hard.

Mrs. Pavlioti, a former supervisor at a Greek polling company, never dreamed she would need social assistance…….The longer she stays out of the formal job market, the harder it is to get back in. Recently she took a job as a babysitter with flexible hours, earning €450 a month — enough to pay the rent and bills, though not much else.

She provided quite a harsh critique of the triumphalism above.

“The end of the bailout makes no difference in our lives,” Mrs. Pavlioti said. “We are just surviving, not living.”

The end of the bailout

The ESM puts it like this.

Greece officially concludes its three-year ESM financial assistance programme today with a successful exit.

The word successful grates more than a little in the circumstances but it was possible that Greece could have been thrown out of the programme. It was never that likely along the lines of the aphorism that if you owe a bank one Euro it owns you but if you owe it a million you own it.

 As the ESM and EFSF are Greece’s largest creditors, holding 55% of total Greek government debt, our interests are aligned with those of Greece……..From 2010 to 2012, Greece received € 52.9 billion in bilateral loans under the so-called Greek Loan Facility from euro area Member States.

That is quite a lot of skin in the game to say the least. Because of that Greece is not as free as some might try to persuade you.

The ESM will continue to cooperate with the Greek authorities under the ESM’s Early Warning System, designed to ensure that beneficiary countries are able to repay the ESM as agreed. For that purpose, the ESM will receive regular reporting from Greece and will join the European Commission for its regular missions under the Enhanced Surveillance framework.

Back on February 12th I pointed out this.

 It is no coincidence that the “increased post-bailout monitoring” is expected to end in 2022, when the obligation for high primary surpluses of 3.5 percent of gross domestic product expires.

As you can see whilst the explicit bailout may be over the consequences of it remain and one of these is the continued “monitoring”. This is a confirmation of my point that whilst there has been crowing about the cheap cost of the loans in the end the size or capital burden of them will come into play.

Borrowing costs will rise

After an initial disastrous period when the objective was to punish Greece ( something from which Greece has yet to recover) the loans to Greece were made ever cheaper.

Thanks to the ESM’s and EFSF’s extremely advantageous loan conditions with long maturities and low-interest rates, Greece saves around €12 billion in debt servicing annually, 6.7% of GDP every year.  ( ESM)

So Greece is now turning down very cheap money as it borrows from the ESM at an average interest-rate of 1.62%. As I type this the ten-year yield for Greece is 4.34% which is not only much more it is a favourable comparison as the ESM has been lending very long-term to Greece. This was simultaneously good for Greece ( cheap borrowing) and for both ( otherwise everything looked completely unaffordable).

For now this may not be a big deal as with its fiscal surpluses Greece will not be in borrowing markets that much unless of course we see another economic downturn. There is a bond which matures on the 17th of April next year for example. Also the ECB did not help by ending its waiver for Greek government bonds which made it more expensive to use them as collateral with it and no doubt is a factor in the recent rise in Greek bond yields. Not a good portent for hopes of some QE purchases which of course are on the decline anyway.

Comment

The whole Greek saga was well encapsulated by Elton John back in the day.

It’s sad, so sad (so sad)
It’s a sad, sad situation
And it’s getting more and more absurd.

The big picture is that it should not have been allowed into the Euro in 2001. The boom which followed led to vanity projects like the 2004 Olympics and then was shown up by the global financial crash from which Greece received a fatal blow in economic terms. The peak was a quarterly economic output of 63.6 billion Euros in the second quarter of 2007 (2010 prices) and a claimed economic growth rate of over 5% (numbers from back then remain under a cloud). As the economy shrank doubts emerged and the Euro area debt crisis began meaning that the “shock and awe” bailout so lauded by Christine Lagarde who back then was the French Finance Minister backfired spectacularly. The promised 2.1% annual growth rate of 2012 morphed into actual annual growth rates of between -4.1% and -8.7%. Combined with the initial interest-rates applied the game was up via compound interest in spite of the private sector initiative or default.

Any claim of recovery needs to have as context that the latest quarterly GDP figure was 47.4 billion Euros. This means that even the present 2.3% annual rate of economic growth will take years and years to get back to the starting point. One way of putting this is that the promised land of 2012 looks like it may have turned up in 2018. Also after an economic collapse like this economies usually bounce back strongly in what is called a V-shaped recovery. There has been none of this here. Usually we have establishments giving us projections of how much growth has been lost by projecting 2007 forwards but not here. The reforms that were promised have at best turned up piecemeal highlighted to some extent by the dreadful fires this summer and the fear that these are deliberately started each year.

Yet the people who have created a Great Depression with all its human cost still persist in rubbishing the alternative which as regular readers know I suggested which was to default and devalue. Or what used to be IMF policy before this phase where it is led by European politicians. A lower currency has consequences but it would have helped overall.