Credit deflation and the reflation cycle to come.

[Barnsey]

29 minutes ago, DurhamBorn said:

As an edit,maybe Barnsey like you say if the curve flattens around the next hike that could trigger the PMs.I think once that happens recession is on,even before it inverts.I think the liquidity loss already ensures a recession that includes a debt deflation,but like you say it might be the next increase or the one after than really forces things.If so we should expect the US equity market to of already entered a bear market.Lets see how PMs and that curve goes from here.

The yield curve doesn't necessarily have to invert, it could be argued that we should be looking at the historical yield curve in Japan post 1989 (or US post great depression -> 1960's) for a fairer comparison of where we're at now, during which time there were many business cycles without an inverted yield curve due to economic stagnation, just as we've experienced since 2008.

I think far too many are reassuring themselves that they have at least 18 months before things noticeably worsen, but from everything I'm looking at I'd be impressed if we made it through next year unscathed, you never quite know in this new age of QE mania. 

[Bear Hug]

1 hour ago, DurhamBorn said:

...One other asset class hated right now is UK domestic companies.Some are very very cheap and not exposed to the China credit bubble etc,they will actually gain when it breaks from lower costs

What do you think of the argument that even though they are cheap, they would still follow US stocks down?

Is that the extent of the UK stocks' fall may not be as extreme and staying out of them could miss any upside pre-crash?

[Talking Monkey]

27 minutes ago, Barnsey said:

The yield curve doesn't necessarily have to invert, it could be argued that we should be looking at the historical yield curve in Japan post 1989 (or US post great depression -> 1960's) for a fairer comparison of where we're at now, during which time there were many business cycles without an inverted yield curve due to economic stagnation, just as we've experienced since 2008.

I think far too many are reassuring themselves that they have at least 18 months before things noticeably worsen, but from everything I'm looking at I'd be impressed if we made it through next year unscathed, you never quite know in this new age of QE mania. 

I was reading the BOJ were doing some market interventions this week, was that more QE or was it QT.

[sancho panza]

5 hours ago, Barnsey said:

I'm sure the yield curve will resume flattening alongside the next hike in September, inverted by end of year with the 2nd hike to 2.25%, and then it's just a matter of how 2019 pans out. If the recovery survives until then, it'll be the longest expansion in history, exceeding 91-01. Many indicators signifying otherwise of course, most recently this:

Been reading up algo passive trading, when this thing turns it could/will be frighteningly rapid vs previous market corrections. 

Love these tweets Barnsey.Twitter is beyond my technical ability but there's some incredible stuff on there.

15 hours ago, Democorruptcy said:

That's the idea in the article I posted earlier

 

That's an incredible piece talking about an issue we have here-that raising rates is crucial so the CB's can cut into the next recession.The 9-0 vote on the BoE shows how even the doves are worreid enough to hike

.#Two super charts on inflation adjusted house prices-US and yield curve that I couldn't transfer.

 

'"But controlling inflation isn’t the primary reason for the Fed to keep raising the short-term interest rate. Rather, raising the rate when the economy is strong will give the Fed room to respond to the next economic downturn with a significant reduction.

That downturn is almost surely on its way. The likeliest cause would be a collapse in the high asset prices that have been created by the exceptionally relaxed monetary policy of the past decade."'

"It’s too late to avoid an asset bubble: Equity prices already have risen far above the historical trend. The price/earnings ratio of the S&P 500 is now more than 50% higher than the all-time average, sitting at a level reached only three times in the past century. Commercial real-estate prices also are extremely high by historical standards.

The inevitable return of these asset prices to their historical norms is likely to cause a sharp decline in household wealth and in the rate of investment in commercial real estate. If the P/E ratio returns to its historical average, the fall in share prices will amount to a $9 trillion loss across all U.S. households."

 

 

4 hours ago, DurhamBorn said:

We have seen a few of the flash crash events already and the likes of the FANGS seeing 20% falls in a day.China is in serious trouble as well.I love the fact gold is so hated right now.Its been a currency with no counter party for 4000 years at least.The huge risk to wealth this end of cycle is counter party risk.One other asset class hated right now is UK domestic companies.Some are very very cheap and not exposed to the China credit bubble etc,they will actually gain when it breaks from lower costs

 

As an edit,maybe Barnsey like you say if the curve flattens around the next hike that could trigger the PMs.I think once that happens recession is on,even before it inverts.I think the liquidity loss already ensures a recession that includes a debt deflation,but like you say it might be the next increase or the one after than really forces things.If so we should expect the US equity market to of already entered a bear market.Lets see how PMs and that curve goes from here.

Agreed DB, the internals are flagging warning markers.UK builders are moving down as one at the minute if you use medium term indicators.CRE-by virtue of Next's high st sales slipping 5.9% etc etc-looks fubar.Whoever is buying Italian 10 yr instead of UST equivalent is a lunatic imho

Facebook is just a taste of what might happen when this blows.

3 hours ago, Barnsey said:

 

I think far too many are reassuring themselves that they have at least 18 months before things noticeably worsen, but from everything I'm looking at I'd be impressed if we made it through next year unscathed, you never quite know in this new age of QE mania. 

I am in the 2019 camp myself Barnsey but  see the strutural weaknesses in the market ie algo trading/investing as something that could black swan at any time.Once they start selling,there won't be much stopping.

2 hours ago, Bear Hug said:

What do you think of the argument that even though they are cheap, they would still follow US stocks down?

Is that the extent of the UK stocks' fall may not be as extreme and staying out of them could miss any upside pre-crash?

Although you're not asking me and history isn't always preisely repeated,the goldies hammered hard in 09 to then mulitbag in a couple of years................

[DurhamBorn]

Il copy this from Steve Kaplan because i agree with it,and all the signals are pointing to it again,for anyone who hasnt seen Steve's work id urge to read his blog,he is a vert talented contrarian going back to the late 70s.The highlighted is the main point.

http://truecontrarian-sjk.blogspot.com/

During the last bear market in 2007-2009, gold mining and silver mining shares were notable winners from the summer of 2007 through the middle of March 2008. In 2000-2002, this sector soared from the last week of November 2000 through early June 2002 before sharply sliding along with just about everything else in the final months of that bear market. In 1973-1974, gold mining and silver mining shares similarly enjoyed very strong gains until the final months of that bear market where they plummeted along with just about everything else. Other past bear markets have also experienced visible reallocation from previous favorites into the precious metals sector. There could be several reasons for this behavior including how investors behave when the U.S. Treasury yield curve is generally flattening or how investors tend to act prior to an impending recession. Rate hikes near the end of bull markets also tend to be accompanied by gains for precious metals and the shares of their producers. In my opinion, historic parallels are much more important than reasons. With a consistent pattern of this sector outperforming at some point during a bear market for U.S. equity indices, combined with the recent outperformance of these shares relative to bullion, a classic bullish setup appears to be underway.

[DurhamBorn]

For anyone interested in buying physical Gold,Silver or Platinum the Royal Mint now offers a great way to do so,

https://www.royalmintbullion.com/

You can set up and account and buy under their Signature system

https://www.royalmintbullion.com/Signature-Range

You can buy from £20 upwards and its stored in the Royal Mint Vault,fully insured and can be sold on the site.0.33% fee 0.5% +VAT a year storage fee and 1% when you sell.Thats not too bad considering.Iv opened an account and im going to buy some silver later this week to give it a trial.If anyone signs up and invests if they could say how they got on as well,or have a look over the service.It looks good to me though.

[Bear Hug]

49 minutes ago, sancho panza said:

 

Although you're not asking me and history isn't always preisely repeated,the goldies hammered hard in 09 to then mulitbag in a couple of years................

My question was more about general currently 'relatively cheap' UK stocks rather than goldies

[DurhamBorn]

3 hours ago, Bear Hug said:

What do you think of the argument that even though they are cheap, they would still follow US stocks down?

Is that the extent of the UK stocks' fall may not be as extreme and staying out of them could miss any upside pre-crash?

Its hard to say,but iv been happy to buy some UK stocks i think are very cheap and gain from the next cycle.If they take a 30% hit to already cheap prices il be buying more stocks as the dividends keep flowing in.I buy in four lots in -8% ranges usually so if i end up with a full allocation il be 24% down on the first,but much lower averaged.Its often frustrating that way,when things turn quickly,but over the years iv found it works for me well.

[Democorruptcy]

3 hours ago, sancho panza said:

.#Two super charts on inflation adjusted house prices-US and yield curve that I couldn't transfer.

 

They were also in his other recent housing specific article http://danielamerman.com/va/ccc/RErb1Price.html

[leonardratso]

2 hours ago, DurhamBorn said:

For anyone interested in buying physical Gold,Silver or Platinum the Royal Mint now offers a great way to do so,

https://www.royalmintbullion.com/

You can set up and account and buy under their Signature system

https://www.royalmintbullion.com/Signature-Range

You can buy from £20 upwards and its stored in the Royal Mint Vault,fully insured and can be sold on the site.0.33% fee 0.5% +VAT a year storage fee and 1% when you sell.Thats not too bad considering.Iv opened an account and im going to buy some silver later this week to give it a trial.If anyone signs up and invests if they could say how they got on as well,or have a look over the service.It looks good to me though.

did signature gold on there last year, they dont sell to you at spot and wont buy at spot when you sell back, pissed me off so i broke even and cleared out. Go physical i told myself, but i have nowhere to store it safely so i didnt bother.

 

[Bricks & Mortar]

46 minutes ago, leonardratso said:

they dont sell to you at spot

Despite them clearly stating they do.  I've just credited £100, and am at the buy screen for silver.  Seems their 'spot' has a spread.  £11.50 for buying and £12.25 for selling - and their fees are on top of this.
Although, to be honest, I was a bit worried when I heard they were offering spot, and fees of less than 1%.  That seemed too good to be true.  Like their goal was more to get money on their books than actually make a profit.  Started to worry what the end-game was.

 

[Bricks & Mortar]

Bought £95 of silver at £12.30/oz.  Left £5 to cover fees, which I think it said would be £0.14 every (can't remember how often).

Present value is £89.91, if I cash in immediately, but it'll cost me another 1% if I do.

Wonder how the pricing compares to bullionvault, or other similar service?

[leonardratso]

i played with a coupe of thousand, i think in the end i lost maybe 2 or 3 pound, but gold was on a bull run and  with the spread and fees i was never going to make much, they on the other hand would always make money, even on the storage fees. Its a great idea, but the welsh bastards dont half gouge on everything, even though you can bet theres no physical movement at all of any metal, ie it will all just be ledger entries in a software system, the gold bars or parts of them will never actually move anywhere. You cant deliver the signature stuff either as far as i remember. 

So basically its like the post office offering commission free forex, its nothing of the sort really their rate of exchange has already more than taken care of that commission, in fact it may be cheaper to get your forex elsewhere at spot and pay  commission.

[sancho panza]

hattip @DoINeedOne

Price deflation in action.Only one way EA fees are going? Their rents will likely follow.

https://wolfstreet.com/2018/08/03/uk-housing-downturn-pushes-biggest-real-estate-agency-with-10000-employees-to-brink-shares-collapse/

1 minute ago, sancho panza said:

'Countrywide, the UK’s largest real-estate services group with over 10,000 employees in 900 locations, saw its shares plunge over 60% on Thursday after the company asked investors to pony up £140 million of emergency funds to save it from collapsing under the weight of its own debt. At one point the shares were down over 70%. On Friday they fell a further 14%.

In the last three months, the stock has crumbled 86%, from £1.10 a share in early May to £0.15 on Friday. The firm’s market cap has plunged to a paltry £37 million — little more than the average house price on Britain’s most expensive street, Kensington Palace Gardens in London.

In a statement to the stock market, Countrywide said its problems had been exacerbated by a flagging housing market, particularly in London.

The volume of transactions in London is down 20% over the last four years, according to Residential Analysts, who calculated the figure using Land Registry and HM Revenue & Customs data. According to the real estate agency Right Move, London prices slipped a further 0.5% in the month of July and are now 1.7% lower than this time last year.

In the worst-hit sector, one or two-bedroom properties, where first-time buyers are most active, prices fell 3.5% from a year ago.

Countrywide is reeling not just from the ill-effects of the UK’s sluggish housing market, but also from rising competition from no-frills online agencies. Online agents are driving down fees, making it increasingly difficult for high street operators to pay their overheads. The UK’s biggest online agency, Purplebricks, has a market cap over 20 times the size of Countrywide’s, and is aggressively expanding its operations into markets in the US, Canada, and Australia. '

 

[Band]

19 minutes ago, sancho panza said:

hattip @DoINeedOne

Price deflation in action.Only one way EA fees are going? Their rents will likely follow.

https://wolfstreet.com/2018/08/03/uk-housing-downturn-pushes-biggest-real-estate-agency-with-10000-employees-to-brink-shares-collapse/

 

I can see people being distraught about this industry going to the wall in much the same way entire communities, towns, cities and regions were devastated by the destruction of the manufacturing base of the UK throughout the last few decades.

Spect Billy Bragg is working on a song for them as we speak.

Sadly rents can only fall to whatever the govt agree to pay out in housing landlord benefit.

Edit - Fuck me they have 900 shops throughout the country and 10,000 employees they must have 10s of thousands of overpriced properties on their books. This will be absolutely wonderful when these shops shut, something like this could really help kick off a HPC with that many agents closing all at once, the message itll send to sellers will be crystal clear. Lets hope it falls this week.

 

[sancho panza]

24 minutes ago, Banned said:

I can see people being distraught about this industry going to the wall in much the same way entire communities, towns, cities and regions were devastated by the destruction of the manufacturing base of the UK throughout the last few decades.

Spect Billy Bragg is working on a song for them as we speak.

Sadly rents can only fall to whatever the govt agree to pay out in housing landlord benefit.

Edit - Fuck me they have 900 shops throughout the country and 10,000 employees they must have 10s of thousands of overpriced properties on their books. This will be absolutely wonderful when these shops shut, something like this could really help kick off a HPC with that many agents closing all at once, the message itll send to sellers will be crystal clear. Lets hope it falls this week.

 

It was low scale High St rents I was referring to.Local LL's will be decimated I suspect as after the the EA's go bust,the coffee shops will likely shut.

[Bricks & Mortar]

3 hours ago, leonardratso said:

i played with a coupe of thousand

The %-based system looks much more reasonable when you're in for lower amounts.  P&P and rate you get on Britannias quite prohibitive until you buy 25 or so.

[Lightscribe]

7 hours ago, DurhamBorn said:

Its hard to say,but iv been happy to buy some UK stocks i think are very cheap and gain from the next cycle.If they take a 30% hit to already cheap prices il be buying more stocks as the dividends keep flowing in.I buy in four lots in -8% ranges usually so if i end up with a full allocation il be 24% down on the first,but much lower averaged.Its often frustrating that way,when things turn quickly,but over the years iv found it works for me well.

I agree and think they’ll be some bargain UK stocks to be had, especially if we do enter into the financial headwinds, and also Brexit.

I’ll also be looking to get limited exposure to UK small caps. I’ll most likely use a proven track record active fund for this. I quite like the look of the Liontrust UK smaller companies fund, who seem to have outperformed the sector for some time.

http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR04RXV

[Band]

4 minutes ago, sancho panza said:

It was low scale High St rents I was referring to.Local LL's will be decimated I suspect as after the the EA's go bust,the coffee shops will likely shut.

Yes it amazes me the amount of people who have £3 to pay for a cup of hot flavoured water, that they fill full of sugar and milk; a new Starbucks drive through has opened near ... and there was me thinking coffee gave them energy, though obviously not enough to get out their f'en car.

But still if Cuntrywide do close soon which looks probable, all at once there will be 50,000-100,000 houses or however many they've got on their books needing to find someone new to flog it for them. The new agents certainly wont need to be getting them to price it at kite flying prices to get their custom.

[dgul]

1 hour ago, sancho panza said:

hattip @DoINeedOne

Price deflation in action.Only one way EA fees are going? Their rents will likely follow.

https://wolfstreet.com/2018/08/03/uk-housing-downturn-pushes-biggest-real-estate-agency-with-10000-employees-to-brink-shares-collapse/

  1 hour ago, sancho panza said:

'Countrywide, the UK’s largest real-estate services group with over 10,000 employees in 900 locations, saw its shares plunge over 60% on Thursday after the company asked investors to pony up £140 million of emergency funds to save it from collapsing under the weight of its own debt. At one point the shares were down over 70%. On Friday they fell a further 14%.

In the last three months, the stock has crumbled 86%, from £1.10 a share in early May to £0.15 on Friday. The firm’s market cap has plunged to a paltry £37 million — little more than the average house price on Britain’s most expensive street, Kensington Palace Gardens in London.

In a statement to the stock market, Countrywide said its problems had been exacerbated by a flagging housing market, particularly in London.

The volume of transactions in London is down 20% over the last four years, according to Residential Analysts, who calculated the figure using Land Registry and HM Revenue & Customs data. According to the real estate agency Right Move, London prices slipped a further 0.5% in the month of July and are now 1.7% lower than this time last year.

In the worst-hit sector, one or two-bedroom properties, where first-time buyers are most active, prices fell 3.5% from a year ago.

Countrywide is reeling not just from the ill-effects of the UK’s sluggish housing market, but also from rising competition from no-frills online agencies. Online agents are driving down fees, making it increasingly difficult for high street operators to pay their overheads. The UK’s biggest online agency, Purplebricks, has a market cap over 20 times the size of Countrywide’s, and is aggressively expanding its operations into markets in the US, Canada, and Australia. '

 

 

If you want to understand the problem with the economy it is this -- that an estate agent is collapsing due to debt.  Why does it hold debt?  It doesn't make sense.  It is an excellent example of a type of organisation that can be set up on a shoestring.  There is no need for training, capex, machinery, assets, anything.  A big engineering company could collapse due to debt.  Or a building firm, or a shop that holds lots of stock or a farm that's upgraded the sheds etc etc.  But an estate agent?  Bonkers.

Oh -- and want to know what's even more bonkers?  That an estate agent has built up enough debt to get into trouble over it, but that engineering companies, manufacturers, etc, around the country haven't been able to expand because the cost of the debt to expand was so prohibitive.

[leonardratso]

1 hour ago, Banned said:

Yes it amazes me the amount of people who have £3 to pay for a cup of hot flavoured water, that they fill full of sugar and milk; a new Starbucks drive through has opened near ... and there was me thinking coffee gave them energy, though obviously not enough to get out their f'en car.

But still if Cuntrywide do close soon which looks probable, all at once there will be 50,000-100,000 houses or however many they've got on their books needing to find someone new to flog it for them. The new agents certainly wont need to be getting them to price it at kite flying prices to get their custom.

you know i have a parallel at where i work, we were struggling a few years back, looked like we werent gonna make it, VR's ahoy, competitors cheaper/better service/ products, saturated market place etc.

Then a miracle happened, a major competitor who was crushing us decided to restructure and they fucked it right up, suddenly all their clients came over to us, another competitor decided to up their peices, we decided to just keep ours steady or drop them for big new comers, all their clients came over to us, we were awash with cash, started some heavy recruitment, opened and funded new channels for new revenue streams, spent a ton modernising.

So ironically a failure of countrywide could actually boost a competitor. Hopefully that competitor could do what we did, just piss it all the fuck away on shit and when the bad times bite we'll be back where we started from with massively more debt screwing us down. Its tough at the top, but worse at the bottom. I love EA's almost as much as i love car salesmen and recruitment agents and ambulance chasing shisters. Bunch of cunts the lot of them.

 

[sancho panza]

1 hour ago, Banned said:

Yes it amazes me the amount of people who have £3 to pay for a cup of hot flavoured water, that they fill full of sugar and milk; a new Starbucks drive through has opened near ... and there was me thinking coffee gave them energy, though obviously not enough to get out their f'en car.

But still if Cuntrywide do close soon which looks probable, all at once there will be 50,000-100,000 houses or however many they've got on their books needing to find someone new to flog it for them. The new agents certainly wont need to be getting them to price it at kite flying prices to get their custom.

There's a fw things inbound for the industry.Firstly,they face many years of reduced/subdued transactions.Secondly they face declining fees.Thridly,their lettings income will disappear.

That's what I call structural decline.

Coffee shops replaced pubs for the last decade.Shrewd companies like Whotbread saw that change ahead of the dying old pub co.s.Coffee shops will have theri day too,It's a very marginal purchase for most people.

The EA sector has been bloated for years on easy income.

ANd in their turn,local LL's have had their fill of easy money with no voids.Lot of people are facing the worng way on the property trade.

@DurhamBorn always pointing out how many retail punters are facing the worng way on PM miners,it's the same with local shops.

[MrXxx]

9 hours ago, sancho panza said:

hattip @DoINeedOne

Price deflation in action.Only one way EA fees are going? Their rents will likely follow.

https://wolfstreet.com/2018/08/03/uk-housing-downturn-pushes-biggest-real-estate-agency-with-10000-employees-to-brink-shares-collapse/

 

These chavs of the business world have literally cut their own throats due to their own greed...talk about killing the Golden goose!...and the upside is that when their jobs go they won't have any real marketable skills to apply to another profession, unless spivvyness is one...wait a moment, when is that BoE job becoming available?

[sancho panza]

https://moneymaven.io/mishtalk/economics/debate-over-target2-continues-twilight-of-the-euro-5Y0kAA_qMUG1cKgaI6IWQg/

 

'The Target2 debate continues. Eurointelligence Promotes Still More Silliness.

 

I previously commented on Target2 in Eurointelligence Displays Stunning Ignorance Regarding Target2.

Eurointelligence blasts Faz for inaccuracies while spreading a pile of its own through the mouth of Mark Schieritz who says (translated) Do not be afraid of the trillions bomb.

Schieritz says: "The claims and the liabilities are fictional quantities. They exist virtually, in the balance sheets of central banks, not in the real world."

One can stop there knowing full knowledge that Schieritz's article is complete nonsense.

In the real world, Target2 imbalances are a measure of capital flight and loans that cannot be paid back. Even if there once was adequate capital for loans made by Italian banks, that capital vanished long ago.

Now, Italian depositors are very fearful of bail-ins and have pulled there money out of Italian banks.

That is the "real world". Real people have real fears, and they should. Anyone holding money in Italian banks is a fool. I gave the same warning about Greece well ahead of capital controls. I make the same case again now, regarding Italy.

New Eurointelligence Nonsense

Here are a couple of new clips from Eurointelligence to discuss.

Against Target2 Hysteria

Martin Hellwig joins the debate on Frankfurter Allgemeine's Sunday edition with a rejoinder to earlier columns by Hans Werner Sinn (which we covered) and Thomas Mayer (which we didn't) on the danger to the Bundesbank from its near-trillion-euro claims on the eurosystem, and on the danger to the eurosystem from its near-half-trillion claims on the Bank of Italy. Hellwig argues that Sinn confuses deliberately with the smoke and mirrors of double-entry book-keeping, and is whipping up an unjustified panic over Target2.

What would happen to the Target2 claims if Italy were to default on its payments? Nothing, says Hellwig. If the Italian state defaulted, it would affect Italian bonds but not liabilities between central banks or the payment traffic in the monetary union. The eurosystem would be affected mostly through the effect the defaulted bonds would have on the balance of the Bank of Italy. But the intra-eurosystem claims would not be affected. And the Bundesbank has contributed to causing the widening of the Target2 balances since 2015 by insisting that most of each country's bonds are bought by the respective central bank.

Nothing Would Happen?

That is ridiculous. The ECB would likely paper over the losses and that is against the treaty. The Euro would take a big hit. Third, everyone would be wondering what country would be next.

Norbert Häring, for Handelsblatt, asks When is a Trillion Euro Not a Trillion Euro?

Germany’s surplus with the European Central Bank hit a new record in April. Germany is currently owed around €950 billion ($1.12 trillion) under the ECB’s Target2 clearing system, which balances out cross-border financial movements within the euro zone.

Hans-Werner Sinn, the former head of Ifo Institute for Economic Research, a leading economic think tank, told Handelsblatt the figure was basically worthless — an “unsecured credit against the euro system, which cannot be called in and which debtor countries pay no interest on.” A private company would simply write off the amount, he added.

No one quite knows would happen to the Target2 system in the event of a high-deficit country leaving the euro system. Last year, ECB president Mario Draghi told the European parliament that any deficits would have to be repaid. But it appears that countries have no binding legal obligation to do so; it is simply “guidance” from the ECB.

If Italy were to withdraw from the euro zone, its banks’ assets and liabilities would be redenominated in its new currency, which would probably see a steep fall in value. The question then would not only be whether Italy should pay its Target2 deficit, but how it possibly could. The Bank of Italy would almost certainly default on a bill for half a trillion euros.

Twilight of the Euro

Hans Werner Sinn discusses Target2 in Are we seeing the twilight of the euro?

In May 1998, irrevocable conversion rates for the currencies that would be merged into the euro were implemented. In a sense, this makes the single currency just over 20 years old. The first decade of its life had the feeling of a party, particularly in Southern Europe; but the second decade brought the inevitable hangover. Now, as we enter the third decade, the prevailing mood seems to be one of increasing political radicalization.

The original party was a cornucopia of cheap credit, which capital markets happily issued to the countries of Southern Europe under the protection of the euro. For a while, these countries finally had enough money to increase public-sector salaries and pensions, as well as spur private consumption and investment.

But the credit flooding into these countries created inflationary bubbles, which burst when the 2008 financial crisis in the United States spread to Europe. As capital markets refused to extend further credit, Southern Europe’s previously halfway-competitive but now overpriced economies soon ran into serious trouble.

By mid-2018, the net amount of payment orders to Germany through the Target system had risen to €976 billion. As a perpetual overdraft drawn from the Bundesbank, this money was not unlike the International Monetary Fund’s Special Drawing Rights, except that there is much more of it — a sum greater than all of the funds IMF countries are willing to loan to one another. Spain and Italy alone drew down about €400 and €500 billion, respectively.

Despite — or because of — this windfall, Southern European countries’ manufacturing sectors are still a long way from regaining competitiveness. In Portugal, for example, the output of the manufacturing sector is still 14 percent below what it was in the third quarter of 2007, after the first breakdown of the European interbank market. And for Italy, Greece, and Spain, that figure is 17, 19, and 21 percent, respectively. Meanwhile, youth unemployment is above 20 percent in Portugal, more than 30 percent in Spain and Italy, and almost 45 percent in Greece.

In view of these facts, even the most committed euro enthusiast cannot honestly say that the single currency has been a success. Europe has quite plainly overextended itself. Unfortunately, the great sociologist Ralf Dahrendorf was right to conclude that, “The currency union is a grave error, a quixotic, reckless, and misguided goal, that will not unite but break up Europe.”

Acting man

Acting Man referred to me and he gets the last word in TARGET-2 Revisited

Acting Man discusses Capital Flight vs. The Effect of QE. He also noted the growing Target2 liability of the ECB itself.

The ECB is a supranational entity and in terms of the payment system it is treated as if it were a country of its own. Most of the debt purchases under the QE program are conducted by NCBs – in particular, every NCB is tasked with buying sovereign bonds issued by its own country of domicile.

However, the ECB is also engaged in direct bond purchases, and these create TARGET-2 liabilities as they necessarily involve the flow of central bank money from the ECB to various NCBs in whose jurisdictions it buys bonds. If the NCBs concerned have a positive TARGET balance, total TARGET balances will increase*.

As Draghi notes in his press conferences, roughly 40% to 50% of the purchases under the APP are from non-resident institutions (which may in turn act on behalf of their customers). Most of the trading with such institutions takes place in the largest financial centers in Europe, with Frankfurt in Germany a particularly active one.

One could also say: as long as the APP is underway, it is actually difficult to tell to what extent a rising TARGET-2 balance is driven by QE or by capital flight. For instance, it inter alia seems likely that recent political upheaval in Italy has given fresh impetus to capital flight from there. In fact, the political situation in Italy was fraught with uncertainty ever since the resignation of the Renzi government, and the growth of Italy’s TARGET-2 liabilities has accelerated since then.

However, there is another important point which Mr. Draghi neglects to mention when he insists that growing TARGET-2 imbalances are merely an APP-related technicality.

It is certainly true that when the Bank of Italy purchases Italian government bonds in Frankfurt from international banks which access TARGET-2 through the BuBa, the above mentioned effects on claims and liabilities in the payment system will arise – but why do they just continue to grow?

Why are the sellers of these bonds not using the proceeds to purchase other investment assets in Italy? Or putting it differently: What does this represent, if not capital flight?

It seems to us it doesn’t really matter that the purchases are conducted under the APP – if no offsetting capital flows into Italy take place subsequently, it still means that someone got out of Dodge and decided not to return.

Bottom Line

Claims that none of this matters and that there would be no consequences if Italy left the Eurozone and defaulted are as ridiculous as ever.

The harder people attempt to come up with reasons that none of this matters, the sillier they look.'

[Democorruptcy]

On 04/08/2018 at 18:58, Bricks & Mortar said:

Despite them clearly stating they do.  I've just credited £100, and am at the buy screen for silver.  Seems their 'spot' has a spread.  £11.50 for buying and £12.25 for selling - and their fees are on top of this.
Although, to be honest, I was a bit worried when I heard they were offering spot, and fees of less than 1%.  That seemed too good to be true.  Like their goal was more to get money on their books than actually make a profit.  Started to worry what the end-game was.

 

Your post seems to be 18:58 Saturday. I've never used Royal Mint so don't know if that spread is their norm but on other places the spread is wider at the weekend when there is less activity. See if it improves day time  midweek?