What really caused the eurozone crisis?
BBC News, December 22, 2011
Having gorged on the fat pipe of cheap credit for much of the previous few decades, the last few years have rapidly and aggressively slapped the US (and indeed much of the world) from its stupor. All that growth, was it real? The speed of economic leveraging began to gain momentum in the early 1970s and accelerated sharply in the 1980s as the cost of debt began its decades-long decline. That leverage enabled consumption and capex to rise quicker and with less capital but obviously with more risk. With the current balance-sheet recession stymieing monetary policy and fiscal policy hardly supportive, it seems the private deleveraging hole will be difficult to fill with public borrowing excess. It seems that credit markets (the ubiquitous source of all that leverage) have again and again sung from a different song-sheet with regard to the way we escape from the inevitable deleveraging we are currently undertaking. Matt King, of Citigroup, provides a thought-provoking (and all-encompassing) slide-deck on the coming decade of deleveraging and how now is time for payback.
Payback Time: The Coming Decade Of Deleveraging
Matt King - Citi Investment Research & Analysis
1. The Bubble In Credit
Post Crisis Recoveries... Temporary Blip, or permanently altered trajectory?
The current recovery in context...Fine in some respects, but something seems broken
A Crisis of Demand? Not just a matter of lowering rates (the balance sheet-recession)
More Borrowing = More Growth? previous growth was founded upon borrowing - was it real?
How Much Have We Borrowed? More debt in more sectors in more countries than ever before
Wealth Effects - spending only possible because of high net worth
Leading To The Growth Triangle - But Don't Look Down!!!
Love Triangle or Pyramid Scheme?
2. Ways Of Deleveraging
Balancing Government's Books - Austerity works if offset by private leveraging
Assessing The Broader Economy...but the private sector is in savings mode too!
Whole Economy Deleveraging - much harder - unless you debase the currrency
The Effect On GDP - without FX, adjustment is extremely painful!
Bring On The Central Banks - But don't expect them to work miracles
3. Investment Implications
Saved, or Doomed? It's all a question of confidence!
Growth - Lower, but above all, more volatile!!
Expectations Management - Optimism is becoming harder to sustain
Real Estate - Deleveraging + Older Populations = Downward Spiral
Equities - The end of the equity culture?
Banks and Bankruptcies - Be wary of multiples on leveraged instruments
Fixed Income - low yields should eventually make for tight spreads...
Credit -...but only once the bankruptcies are out of the way
Structured Credit - Better the devil you know (EFSF anyone?)
And In Conclusion...
Debt Needs To Fall...
Asset Prices Likely To Go With It...
and Fixed Returns Beat Uncertain Ones...
Deleveraging Is More Difficult Than You Think
One of the long-term recurring themes both here and in other more objective media, has been the encroaching domination of the central planning regime, or monetary authorities, read central banks, in the domain of capital markets and overall broad sovereignty, to the point where there is neither technical nor fundamental analysis left, but merely the question of where is the next batch of excess liquidity going to come from. Welcome to the death throes of the fiat system. Artemis Capital has released an extended must read presentation that summarizes just how global changes in trade, currency exchange, global monetary excess liquidity in recent decades, and especially in the coming future, will increasingly determine and define risk, and more troubling, the centuries old anarchism of state sovereignty. Anarchism, because as Europe has demonstrated so very well, in the current world the only real actors are the central banks. And with each passing day they become ever more powerful players in the global capital markets arena, as confirmed by correlations that rise every higher, approaching 1.000 across all asset classes. Anyone wondering why the only fulcrum variable for the future of risk will be FX exchange rates, and why any and all wars in the future will be primarily in binary "currency" format, we urge a careful reading of the attached slideshow by Artemis Capital titled "Fall of the House Of Money: Changes in Global Trade and Currency Exchange."
None of this will come as a surprise to regular readers, but some of the concepts bear repeating.
Artemis' Chris Cole starts with the premise of "World War €urrency"
Countries are artificially devaluing their currencies to generate competitive trade advantages or to finance deficits
At its core, the primary source of tension, volatility and margina price influence is the relationship between the developed (debtor) and emerging (Creditor) nation.
What this underlying dynamic results in is a world in which asset prices are driven not by economic fundamentals but by the "Carry Trade" - i.e. who has the most and cheapest capital/liquidity.
The liquidity generated by the debtor nations, and which drives the above Risk ___ dynamics, has had another ominous side-effect: sending all correlations to all time record highs.
Doubt the carry trade is the stock market? Don't.
Naturally, the next point of debat is an observation of the biggest transgressor of all: the United States, and its central bank, whose sole purpose for its existence, has been to slowly devalue the dollar thus creating stealth inflation, and inflating the debt which not only in America, but across the entire developed world is now at an all time high. Alas, with ZIRP in place, and negative rates impossible, the only other option is to print ever more.
Nothing new there.
Yet the question remains: can currency devaluation be the basis of economic growth? The answer: it can create the illusion of economic growth... and that's it.
Even more stark is the following chart: it shows the S&P adjusted for the dollar's value destruction: seen this way the S&P is comparable to levels seen back in 1997! But because nobody considers the fact that all stock profits are paid out in dollars, and the dollar has lost so much purchasing power ever since the great moderation, instead gauging everything in nominal values, it is obvious that the Fed's plan continues to work.
So what is the conclusion:
And some advice from Artemis:
Full presentation:Fall Of The House Of Money: Artemis Capital On How €entral Banking Took Over Capital Markets... And The World: