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Credit deflation and the reflation cycle to come.


DurhamBorn

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https://moneymaven.io/mishtalk/economics/state-of-european-banks-the-ecb-view-vs-reality-aNYLgio_z06rBjmFWcMwIg/

State of European Banks: The ECB View vs Reality

image.png.ec91c0f20d009f3bbcfb1fd3ff404b29.png

The ECB would like you to believe the European banking system is sound and banks are better regulated. They aren't.

Ten years after Lehman there are numerous statements from bureaucrats, academics, media and others that banks are now better regulated, more solid and liquidity problems vanished.

Reader Lars from Norway Emailed this assessment today.

Price/Book Ratio

Deutsche Bank trades at 0.30 on the low side and BNP Paribas at 0.70 on the high side. In between we have Commerzbank at 0.40, Unicredit at 0.50, and Society General at 0.50.

The verdict is negative.

Target2

Italian and Spanish bank require € 900 billion in liquidity support on a permanent basis.

This element is mostly ignored by academics and others because they do not understand the implications of Target 2 as a capital flight phenomenon. This is a hidden crisis.

The verdict is negative.

Nonperforming Loans

Italian banks would all be insolvent if NPLs were to be written off. In order to keep the facade, NPLs are kept on the books as if it's not a problem.

The verdict is negative.

Proprietary Trading and Derivatives

Some of the banks have huge portfolios, led by Deutsche Bank and BNP Paribas. As much as 45% of total assets.

Nobody knows what a strict mark-to-market exercise would lead to. Most of the derivatives are interest rate swaps that might suffer should rates rise.

The verdict is negative.

Emerging Market and Troubled Bank Exposure

French banks have huge exposures to Italy, and Italian banks have big exposure to Turkey.

The verdict is negative.

Contagion Risk

We learned from 2008 that interbank markets can freeze. Liquidity is no longer available. How much more than the € ,400 billion is the eurosystem willing to provide to insolvent Spanish, Italian and Greek banks?

Conclusion

Its a fools game to predict the future but to claim that banks in Europe are in good shape is far fetched.

Should Deutsche Bank fail we do not know the ramifications. Bundesbank may intervene but confidence will take a serious beating. And we know that everything is based on confidence.

Just a few thoughts from Oslo as a reaction to numerous naive statements out there on todays situation.

Regards

Lars

Thanks Lars

Mike "Mish" Shedlock

 
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13 hours ago, sancho panza said:

https://moneymaven.io/mishtalk/economics/state-of-european-banks-the-ecb-view-vs-reality-aNYLgio_z06rBjmFWcMwIg/

State of European Banks: The ECB View vs Reality

image.png.ec91c0f20d009f3bbcfb1fd3ff404b29.png

The ECB would like you to believe the European banking system is sound and banks are better regulated. They aren't.

Ten years after Lehman there are numerous statements from bureaucrats, academics, media and others that banks are now better regulated, more solid and liquidity problems vanished.

Reader Lars from Norway Emailed this assessment today.

Price/Book Ratio

Deutsche Bank trades at 0.30 on the low side and BNP Paribas at 0.70 on the high side. In between we have Commerzbank at 0.40, Unicredit at 0.50, and Society General at 0.50.

The verdict is negative.

Target2

Italian and Spanish bank require € 900 billion in liquidity support on a permanent basis.

This element is mostly ignored by academics and others because they do not understand the implications of Target 2 as a capital flight phenomenon. This is a hidden crisis.

The verdict is negative.

Nonperforming Loans

Italian banks would all be insolvent if NPLs were to be written off. In order to keep the facade, NPLs are kept on the books as if it's not a problem.

The verdict is negative.

Proprietary Trading and Derivatives

Some of the banks have huge portfolios, led by Deutsche Bank and BNP Paribas. As much as 45% of total assets.

Nobody knows what a strict mark-to-market exercise would lead to. Most of the derivatives are interest rate swaps that might suffer should rates rise.

The verdict is negative.

Emerging Market and Troubled Bank Exposure

French banks have huge exposures to Italy, and Italian banks have big exposure to Turkey.

The verdict is negative.

Contagion Risk

We learned from 2008 that interbank markets can freeze. Liquidity is no longer available. How much more than the € ,400 billion is the eurosystem willing to provide to insolvent Spanish, Italian and Greek banks?

Conclusion

Its a fools game to predict the future but to claim that banks in Europe are in good shape is far fetched.

Should Deutsche Bank fail we do not know the ramifications. Bundesbank may intervene but confidence will take a serious beating. And we know that everything is based on confidence.

Just a few thoughts from Oslo as a reaction to numerous naive statements out there on todays situation.

Regards

Lars

Thanks Lars

Mike "Mish" Shedlock

 
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Well .... on average Eurozones banks are well capitilaised.

Just like average EU growth is ~2%.

 

However .... when it comes down individual countries .... the good banks and growth is in a small number of Northern Euripean countries and the ba banks and fuckall growth are i nthe South.

 

But on average ......

 

 

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1 hour ago, Thorn said:

So if Vodafone sell off mast space to reduce a 31 billion debt pile.. is now a useful time to get some more shares, DB? 

Th trend is still down from my take on the chart.I'm waiting to build a hefty chunk of my portfolio.Still not bought my first tranche and my initla buy price was circa 175

50 minutes ago, spygirl said:

Well .... on average Eurozones banks are well capitilaised.

Just like average EU growth is ~2%.

 

However .... when it comes down individual countries .... the good banks and growth is in a small number of Northern Euripean countries and the ba banks and fuckall growth are i nthe South.

 

But on average ......

 

 

Yeah teh averages hide a lot of junk.But having said that,it's worth looking at a Deutche bank ten year chart.I'll psot one later.

I dread to think of what they're still sat on from the last time around,much like RBS.I mean there's only so many IO/BTL loans the Coventry can write on anet interest margin under 1%.

 

Edit to add-It's worth following Shaun Richards on the ongoing implosion of the Italian banks.

https://notayesmanseconomics.wordpress.com/2018/09/12/the-italian-economy-looks-to-be-heading-south-again/

'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?

*UNICREDIT MAY CONSIDER BBVA, ABN AMRO FOR POSSIBLE M&A: MF

— lemasabachthani (@lemasabachthani) September 11, 2018

 

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.'

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15 hours ago, sancho panza said:

Wolf arguing that default risk is related to the momentum in the housing market.Particualrly

' The paper warns: “Most importantly, higher leverage, and in particular a household being underwater on its mortgage(s), is a strong predictor of mortgage default and foreclosure.” '

Something i've always felt,that it's about the LTV more than the monthly repayment

 

https://wolfstreet.com/2018/09/16/what-can-cause-the-next-mortgage-crisis-in-the-us/

 

It's worth remembering that in the UK people can't walk away from their mortgages as they can in the US so even if their property is repossessed they will still owe whatever was left on the mortgage. 

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22 minutes ago, janch said:

It's worth remembering that in the UK people can't walk away from their mortgages as they can in the US so even if their property is repossessed they will still owe whatever was left on the mortgage. 

Exactly and thats why buying with HTB is such a disaster for younger people.They wont be able to take advantage of bargains and decent houses because they will have massive negative equity and be trapped in a shocking house.We have had below trend growth since the financial crisis yet houses at record highs.Some of my daughters friends have bought this year,one only a month ago,crazy prices and really bad estates with 20% social housing and thats before some revert to BTL as they sink.

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2 hours ago, Thorn said:

So if Vodafone sell off mast space to reduce a 31 billion debt pile.. is now a useful time to get some more shares, DB? 

I have no idea where they will bottom,like @sancho panza says they could continue a downtrend,but im happy to pick a few up at these prices and staircase in if they keep moving lower.They are very well placed for the next cycle.The debt pile is a worry of course,but their free cash flow should easily outpace interest rate increases.Im always happy to start buying into areas i consider under valued for the next cycle,but always consider sentiment can keep pushing things lower.If things turn before i get my full stake in then so be it.

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45 minutes ago, DurhamBorn said:

Exactly and thats why buying with HTB is such a disaster for younger people.They wont be able to take advantage of bargains and decent houses because they will have massive negative equity and be trapped in a shocking house.We have had below trend growth since the financial crisis yet houses at record highs.Some of my daughters friends have bought this year,one only a month ago,crazy prices and really bad estates with 20% social housing and thats before some revert to BTL as they sink.

The one positive that they will be able do to is write off/reduce signifcantly their equity loan portion. Silver lining and all that xD

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Nicolas Turgeon

Hi all, another anecdote from this weekend for you. Thank you all for the great information and insights that continue to be posted on here. A great thread!

Mrs. T has some friends in Brighton and we went to a bbq there at the weekend. Also there were two friends of the host who run a small building business together in the area. They were talking about a set of 4 flats they'd built to a really high spec - super-insulated, heat pumps, solar panels, ovens with webcams in 9_9 etc. They showed me the photos. They have been struggling to sell any of them despite being in a great area for this sort of thing. When I asked them how they were feeling about the current housing market they said they were extremely worried - extremely. They also needed to sell at least one flat so they could carry on with the next project they were half way through.

They also mentioned the estate agent they were using. One of the lads had been in to see the agent late one Saturday to drop off some papers or something, and the agent said that it had been the quietest day EVER in the shop - no-one came in, no phone calls, no emails. They'd never had a day with absolutely nothing. Ever.

Can't say I feel too sorry for the EA!

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6 minutes ago, Nicolas Turgeon said:

Hi all, another anecdote from this weekend for you. Thank you all for the great information and insights that continue to be posted on here. A great thread!

Mrs. T has some friends in Brighton and we went to a bbq there at the weekend. Also there were two friends of the host who run a small building business together in the area. They were talking about a set of 4 flats they'd built to a really high spec - super-insulated, heat pumps, solar panels, ovens with webcams in 9_9 etc. They showed me the photos. They have been struggling to sell any of them despite being in a great area for this sort of thing. When I asked them how they were feeling about the current housing market they said they were extremely worried - extremely. They also needed to sell at least one flat so they could carry on with the next project they were half way through.

They also mentioned the estate agent they were using. One of the lads had been in to see the agent late one Saturday to drop off some papers or something, and the agent said that it had been the quietest day EVER in the shop - no-one came in, no phone calls, no emails. They'd never had a day with absolutely nothing. Ever.

Can't say I feel too sorry for the EA!

if you tell me where it is i can go and petrol bomb it for insurance purposes, that should liven up their day, especially if they are still in it. £450 cash. Cheaper than purple bricks.

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4 hours ago, janch said:

It's worth remembering that in the UK people can't walk away from their mortgages as they can in the US so even if their property is repossessed they will still owe whatever was left on the mortgage. 

It's not quite that. In some US states you can and others you can't. Wolf Street makes a convincing case as to why it doesn't matter anyway

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52 minutes ago, leonardratso said:

if you tell me where it is i can go and petrol bomb it for insurance purposes, that should liven up their day, especially if they are still in it. £450 cash. Cheaper than purple bricks.

Of we could just drop in, laugh and then walk out.

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9 minutes ago, Errol said:

Of we could just drop in, laugh and then walk out.

i have practically done just thatin the past, which got me immediately black listed from the estate agent, so i started using made up names and held a cloth ov er the phone. They sent different agents so they never twigged that it was always the same piss taker. Havent bothered going to view anything for years though, and from the look of it neither has anyone else around here.

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6 hours ago, janch said:

It's worth remembering that in the UK people can't walk away from their mortgages as they can in the US so even if their property is repossessed they will still owe whatever was left on the mortgage. 

There are only 12 or 13 walkaway states iirc

 

5 hours ago, DurhamBorn said:

I have no idea where they will bottom,like @sancho panza says they could continue a downtrend,but im happy to pick a few up at these prices and staircase in if they keep moving lower.They are very well placed for the next cycle.The debt pile is a worry of course,but their free cash flow should easily outpace interest rate increases.Im always happy to start buying into areas i consider under valued for the next cycle,but always consider sentiment can keep pushing things lower.If things turn before i get my full stake in then so be it.

I'm really excited by the long term prospects for Vod.All the lower price means is that I'll get more for our money.It's global spread of assets,utility status,growth potential are all attractions.Generally,I think the market is heading down,if I can start buying at £1.60 or below I'll be pleased .

2 hours ago, Nicolas Turgeon said:

Hi all, another anecdote from this weekend for you. Thank you all for the great information and insights that continue to be posted on here. A great thread!

Mrs. T has some friends in Brighton and we went to a bbq there at the weekend. Also there were two friends of the host who run a small building business together in the area. They were talking about a set of 4 flats they'd built to a really high spec - super-insulated, heat pumps, solar panels, ovens with webcams in 9_9 etc. They showed me the photos. They have been struggling to sell any of them despite being in a great area for this sort of thing. When I asked them how they were feeling about the current housing market they said they were extremely worried - extremely. They also needed to sell at least one flat so they could carry on with the next project they were half way through.

They also mentioned the estate agent they were using. One of the lads had been in to see the agent late one Saturday to drop off some papers or something, and the agent said that it had been the quietest day EVER in the shop - no-one came in, no phone calls, no emails. They'd never had a day with absolutely nothing. Ever.

Can't say I feel too sorry for the EA!

I have known a few small developers over the years.The tail end of bull markets can be brutal as they tend to spread across a few projects with a cashflow crisis inbound.

2 hours ago, Cattle Prod said:

If its not selling, it's the wrong price. I'll never get why people fail to grasp that. I guarantee you that if the drop the price 5k a week, a week will arrive where offers come in.

Ok course that won't be the price they've set in their own head, which is the ridiculous cost they've sunk plus a handsome markup.

Goodbye markup - get out at cost if you can.

As Jim teh Realtor used to say on his videos

'Price fixes everything'.

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Good video of Peter in the article.

 

http://www.kitco.com/news/video/show/Kitco-News/2082/2018-09-06/Peter-Schiff-The-Perfect-Storm-For-Gold-Is-Coming#_48_INSTANCE_puYLh9Vd66QY_=http%3A%2F%2Fwww.kitco.com%2Fnews%2Fvideo%2Flatest%3Fshow%3DKitco-News

Peter Schiff: The “Perfect Storm” For Gold Is Coming

Guest(s): Peter Schiff CEO, Euro Pacific Capital

The economy is headed for the “biggest bust ever” and investors should absolutely be piling onto gold right now, said Peter Schiff, CEO of Euro Pacific Capital.
“The dollar is going to fall into a vacuum. I think the only buyer is going to be the Federal Reserve, but that just means that we have to deal with all the inflation that we’re creating. We can’t export it to our trading partners, so I think this is going to be the perfect storm for gold,” Schiff told Kitco News.
Schiff noted that people are oblivious to the signs that the U.S. economy is slipping into recession, while markets are seemingly ignoring any bad news.
“As this reality rears its head, gold prices are going to start to rise,” he said. (show less)

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3 hours ago, darkmarket said:

 

Cross post from the Aussie thread.It's a proper bear dinner.Very sobering.

Part one

predicts 40% drop called by experts

EA talks about foreclosures in his section of Sydney West being up 600% as well as prices down 20%

Data analyst talks about too many people on one side of the trade.65% of Aussie bank loans are on real estate,the highest in the Western world.

 

Part two

2 mins 30.BTLer with a chain of 6 or so  IO mortgages that the bank has jsut returned to IO plus prinicipal repayment leading to his repayments going up 57%

Few things

1) this is effectively a margin call.

2) looks like little notice was given

3) normal crying to camera about poor retirees having to re engineer their retirement plans

4) reporter states that the banks know an epic crash is coming or something to that effect.

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1 hour ago, Admiral Pepe said:

Does Schiff still own or have anything to do with Goldmoney?

Precious metals are redeemable in bullion bars at vaults, or in a selection of coins and bars that can be shipped to clients via Schiff Gold.

I have an account with them but never recalled the physical.

Fees are fairly reasonable and you can buy very close to spot. 

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8 hours ago, sancho panza said:

It's a proper bear dinner.Very sobering.

Recalls some of the RTE documentaries as the Irish crash began unfolding.

In terms of deflation / reflation, not expecting their response to contain signals of what's to come elsewhere but the time is getting closer for them to play their hand at least.

The deflation here certainly looks brutal, and the only family case study was with grown-up children. Worse to come once the foreclosures pick up pace.

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Yellow_Reduced_Sticker
9 hours ago, sancho panza said:

Cross post from the Aussie thread.It's a proper bear dinner.Very sobering.

Part one

predicts 40% drop called by experts

EA talks about foreclosures in his section of Sydney West being up 600% as well as prices down 20%

Data analyst talks about too many people on one side of the trade.65% of Aussie bank loans are on real estate,the highest in the Western world.

 

Part two

2 mins 30.BTLer with a chain of 6 or so  IO mortgages that the bank has jsut returned to IO plus prinicipal repayment leading to his repayments going up 57%

Few things

1) this is effectively a margin call.

2) looks like little notice was given

3) normal crying to camera about poor retirees having to re engineer their retirement plans

4) reporter states that the banks know an epic crash is coming or something to that effect.

GREAT FIND SP!

"Bricks and slaughter"   xDxDxD     LOVE it..!

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9 hours ago, sancho panza said:

Cross post from the Aussie thread.It's a proper bear dinner.Very sobering.

Part one

predicts 40% drop called by experts

EA talks about foreclosures in his section of Sydney West being up 600% as well as prices down 20%

Data analyst talks about too many people on one side of the trade.65% of Aussie bank loans are on real estate,the highest in the Western world.

 

Part two

2 mins 30.BTLer with a chain of 6 or so  IO mortgages that the bank has jsut returned to IO plus prinicipal repayment leading to his repayments going up 57%

Few things

1) this is effectively a margin call.

2) looks like little notice was given

3) normal crying to camera about poor retirees having to re engineer their retirement plans

4) reporter states that the banks know an epic crash is coming or something to that effect.

The buy to letter in the second part is also in the first part, moaning that he’s been trying to sell a property for 18 months. Clearly asking too much.

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Yellow_Reduced_Sticker
14 hours ago, Nicolas Turgeon said:

Hi all, another anecdote from this weekend for you. Thank you all for the great information and insights that continue to be posted on here. A great thread!

Mrs. T has some friends in Brighton and we went to a bbq there at the weekend. Also there were two friends of the host who run a small building business together in the area. They were talking about a set of 4 flats they'd built to a really high spec - super-insulated, heat pumps, solar panels, ovens with webcams in 9_9 etc. They showed me the photos. They have been struggling to sell any of them despite being in a great area for this sort of thing. When I asked them how they were feeling about the current housing market they said they were extremely worried - extremely. They also needed to sell at least one flat so they could carry on with the next project they were half way through.

They also mentioned the estate agent they were using. One of the lads had been in to see the agent late one Saturday to drop off some papers or something, and the agent said that it had been the quietest day EVER in the shop - no-one came in, no phone calls, no emails. They'd never had a day with absolutely nothing. Ever.

Can't say I feel too sorry for the EA!

 
I was suffering for depression when i got up, then I read ya post AND I'm now 100% BETTER...so THANKS!:D
 

With these sorts of news snippets from real on the ground folks - we are NOT far from a FULL ON Housing CRASH! :Jumping:

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7 minutes ago, Yellow_Reduced_Sticker said:
 
I was suffering for depression when i got up, then I read ya post AND I'm now 100% BETTER...so THANKS!:D
 

With these sorts of news snippets from real on the ground folks - we are NOT far from a FULL ON Housing CRASH! :Jumping:

Il send one of Tesco's reduced sticker guns to the EA who does the local HTB estate.First take off 25%,then 50% and 3 hours before closing 75%.Anything unsold send to charity (local social housing).

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1 hour ago, darkmarket said:

Recalls some of the RTE documentaries as the Irish crash began unfolding.

In terms of deflation / reflation, not expecting their response to contain signals of what's to come elsewhere but the time is getting closer for them to play their hand at least.

The deflation here certainly looks brutal, and the only family case study was with grown-up children. Worse to come once the foreclosures pick up pace.

Agreed.Thanks so much for posting.I wasn't expecting such an honest appraisal of the situation-to used to the UK MSM.When the liquidator said the 'only thing to do is sell while you can', I nearly choked on my horlicks.

We've been discussing the debt deflation for a while. and this pretty much lays out the framework you need for one to occur.

Start with a banking system that creates credit via a balance sheet that sets assets(the loan) versus liabilities (current accounts/time deposits).

Loans start going sour or people pull cash out,hence banks draw in credit creation forcing prices of the main assets (let's remember 65% of Aussie banking assets are real estate loans) down which in turn forces banks to rein in credit creation leading to price decreases.

 

 

It's an old saying but markets move at the margins first.Whilst everyone has been getting carreid away with the US stock markets over the last year,most of the rest of the world has been lucky to stay flat.

I think the Aussie market is more exposed than the UK due to the fact they've had 26 years without a recession meaning that as Minsky would have argued stability has become inherently a lot more unstable than most of the rest of the world.

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