The European Economy Is a Pig with Way Too Much Lipstick

Markets have been pretty steady overnight. No real action. The central bankers have it all under control. Investor nerves have been sedated. Don’t look too closely and ‘she’ll be right’.

A passing glimpse at Europe tells you that, even with a facelift, Botox, mascara, liposuction, a liberal dose of lipstick and the lights dimmed, this economic pig is not a pretty sight.

Investors in Swiss bonds are prepared to accept negative returns for the next 50 years. What a great deal for the Swiss government — but a really dumb investment for investors. Can you imagine lending anyone — government, corporate or individual — money for the next 50 days, let alone years, where you pay them to have your money? Seriously, how stupid can this world of central banker distortion become before someone yells ‘they are all naked’?

Larry Fink, chief executive of the world’s largest asset manager, BlackRock, warns the UK faces a looming recession. In an effort to prove Fink and others wrong, recently appointed Chancellor of the UK Exchequer, Philip Hammond, and Band of England governor, Mark Carney, announced the ‘prospect’ of further stimulus…QE and reduced rates are on the way. The markets love it. The FTSE 100 is powering ahead. Brexit. What Brexit?

It’s been leaked that France’s left wing president, Francois Hollande, is spending US$10,000 a month in taxpayer money on a personal hairdresser. Hollande is being dubbed in sections of the media as the ‘shampoo socialist’.

Meanwhile, Hollande, without even a hint of embarrassment, is chastising former European Union Commission president, Jose Manuel Barroso, for accepting a role with Goldman Sachs. You may recall it was Goldman Sachs that advised Greece, for a very lucrative fee, on how to cook the books to enter the EU.

Hollande says Barosso’s acceptance of the lucrative gig at Goldman is ‘morally unacceptable’.

Yet somehow Hollande must consider spending US$300 per day (of taxpayer money) to groom his receding hairline as ‘morally acceptable’.

Hollande may be socialist (collectivist) in name, but he’s bourgeoisie (elitist) to his core.

And the elites scratch their heads and wonder why the person in the street is expressing their displeasure at the ballot box.

In addition to all of this, we have the sad and sorry saga of the Italian banks. The unfolding problem with the Italian banks is a serious challenge to the ruling class.

Front page of last Friday’s Financial Times carried the headline: ‘UniCredit’s new chief calls for EU leniency over Italy bank bailouts’.

UniCredit is Italy’s largest bank. The newly appointed Jean-Pierre Mustier is on a PR exercise to soften up the EU’s attitude towards bank rescues. He is well aware there is no political appetite in Italy to invoke the EU’s bail-in rules. Mustier also knows, after spending a few days going over the books, the Italian banks are pretty much insolvent. It’s the biggest open secret in the market.

According to the Financial Times article:

Italian officials are racing to come up with a solution for Italy’s weakest large lender, Monte dei Paschi di Siena, ahead of July 29 stress tests. Senior bankers expect the tests to show Monte dei Paschi, Italy’s third-largest lender, has capital shortfalls. Italy’s bad loan problem centres on the pricing of the loans on banks’ books at about 40 cents; the market price is about 20 cents.

“In the situation of Italy there is no extreme answer. There needs to be an ‘in between’ solution,” Mr Mustier said. “Experience has shown that you have to take into account the human component. You cannot change a company or a country from one day to another.”

In pre-empting the official manoeuvrings to change the EU rules, I wrote in the 13 July 2016 edition of Markets and Money:

What we have is a situation where [the Italian] Government doesn’t want to risk the ire of investors with a bail-in and the EU won’t release funds to recapitalise the banks unless there is a bail-in. While Nero fiddles, Rome burns.

A third option might be the EU, in its desperation, re-writing the rules. The whole situation in Europe keeps lurching from bad to worse.

The date to watch on this possibility is July 29. This is when the latest stress test report on European banks is due for publication from the European Banking Authority. If or most likely when the Italian banks fail to measure up, the EU may have the trigger it needs to waive its own rules.

This response is also straight from the central banker playbook…when a crisis hits, change the rules to be more accommodating.

Please allow me to interpret the following statement from Mustier: ‘In the situation of Italy there is no extreme answer. There needs to be an ‘in between’ solution. Experience has shown that you have to take into account the human component. You cannot change a company or a country from one day to another.

What Mustier is really saying is this:

In the past we could get away with the extreme measure of screwing over a smaller number of depositors to pay for the greed, avarice and incompetence of bankers. But with the magnitude of this problem, and the sheer number of deposit accounts we would need to pillage, if we do that this time, we, the ruling class, would be screwed. So on the pretence of taking into account the human component and actually seeming to care for the ‘man-on-the-street’, we’ll find an ‘in-between’ solution.

After the release of the EU bank stress test results on 29 July, it’s a pretty sure bet the EU rules are going to be relaxed…albeit the language surrounding the changes will make it look like a one-off, while imposing tougher conditions. These days ‘talk tough and act weak’ is pretty much modus operandi for the bureaucrats, especially when confronted with something a little larger than Cypriot or Greek-style banking meltdowns. Such is the prevailing social mood, the ruling political class is fighting for survival and relevance.

Against a background of bond market insanity, a gloomy economic outlook for the world’s fifth largest economy (UK), the growing disconnect among European elites, and troubles plaguing Italy’s banking sector, we have the US share market setting all-time highs.

You have to marvel at the crazy, mixed up world that central bankers and spineless politicians have created. It’s a freak show.

What we are witnessing is one huge social, financial and political experiment. Where the elements of morality, prudence, accountability and common sense have been diluted to the point where they are barely recognisable. What we have instead is this grotesque, disfigured, moody, irrational, greedy and heavily indebted manifestation…which is a direct reflection of what passes for leadership these days.

When the pendulum of social values swings back — as it always does — the pain of change will be unbearable for the majority.

The issuance of 50-year negative yielding bonds indicates to me that we are reaching the extremities of this economic distortion and disfigurement. Hang on tight for the swing back to normality.


Vern Gowdie,
For Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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