Money, it’s a crime.

Mint – Blain’s Morning Porridge  - June 24 2013

Money, it’s a crime. Share it fairly, but don’t take a slice of my pie...

We've a difficult week in prospect. Asia markets in trouble. Credit wider. Peripheral Europe weakening. Spain through 5%! Treasury auctions, lots of economic data, innumerable speeches and briefings will likely to keep the markets volatile into the end of Q2. Many investors are nursing significant Q2 losses on the back of how quickly the underlying direction of markets swung from the bullish big ease into the shocked realisation the big ease may be over.

The mood won't be helped by the recent comments from the BIS warning central banks to cease and desist from further distorting asset values thru QE and balance sheet growth to stimulate economies. Despite the absence of visible inflation threat, the BIS perceives it to be a threat we should not neglect.

Scanning the write up in the FT this morning, one line in the BIS report caught my eye: "Central banks cannot repair the balance sheets of households and financial institutions." That pretty much says "nobody to blame but yourselves" and that extraordinary measures should be reserved for extraordinary circumstances... which may be coming.

The report is pretty blunt in what it implies. If interest rates continue rising then the debt crisis affecting over-levered families and firms will inevitably result in further bank losses as problem loans escalate. The social costs of families struggling with debt, and the negative consumption they generate because they have nothing to spend seem likely to spiral us further into recession. But haven't we been here before? Many recent analyst comments make the point ending QE sounds very similar to 1930s when premature tightening slowed the recovery after the Great Depression.

Perhaps the market to watch most closely will be Europe. Over the past few weeks we've seen a steady rise in peripheral debt yields on the back of the big ease concerns and that the era of QE is passing. Rates aren’t at crisis level yet, but with peripheral economies still in recession, and potential bank losses barely covered by the ESM's new found €60bn of possible bank rescue funds, you have to wonder what might happen when banks finally admit pretend and extend can’t continue and loan losses trigger new capital calls? (Some estimates of Europe’s banking black hole, like Wolfgang in the FT, go up to €1 trillion!)

Much of the market, the europhiles, will expect to see the ESM quickly raise the hurdles and be able to provide additional funds to stem a bank crisis (Draghi delivering on his promise to do whatever it takes). On the other hand, the europhobes will determine politically it’s going to be difficult to approve yet more ESM bank support, and the ECB and ESM will struggle to gain a new political consensus on advancing additional loans to a struggling European banking sector.

All of which screams stay away from European banks – if the capital risks are rising, recession remains most likely outcome and ESM funds are insufficient, then it's kind of obvious that bond holders will be on the hook. Moreover, the ECB has announced new stress tests for next year… and you just know they are going to be utterly bogus.

Bottom line is the bond rout we’ve seen on the taper and the new mood of the big ease ending puts Europe back in the spotlight. I’ve got a very bad feel about France and Spain..

Back to the UK where we’ve a raft of interesting views on new BOE governor Mark Carney – some still think he will relaunch UK QE, while others believe he will be more hawkish.

But talking to a sailing buddy at the weekend put the crisis of UK banking into context for me. My pal’s successful firm currently has a significant overdraft with a mainstreet UK bank – but he’s just been informed his business is no longer a priority/of interest to the bank and they want him to repay the overdraft immediately. When he demurred they promptly whacked up the interest rate, and still want repayment at the earliest opportunity.

 When I defended bankers against the revisionist recent banking report, perhaps I didn’t make clear there are aspect I agree with – and any UK bank, where we have a tax-payer stake in real or contingent terms, which is taking Funds for Lending is in breach of fundamental moral obligations when its actions are so clearly against the interests of its clients and society in general. I’ve offered my friend to go to a meeting with the bank as his corporate finance adviser. He’s mulling my offer– his concern being that he is in hock to the bank and is quite rightly concerned that peeving them could be financial suicide.. He knows he’s being bullied. That is definitely banking behaviour we don’t want!

Out of time.

Bill Blain

0207 786 3877

[email protected]

[email protected]