Janet Yellen of the Federal Reserve likes to tell us that the U.S. economy is getting stronger thanks to Fed monetary policy. So, in response, here is a little tour of reality.
The CEO of Deutsche Bank (DB) has a message for you: The balance sheet is strong, liquidity is good and there is no need of an equity infusion. He may be right but it absolutely does not matter. Once a bank loses confidence, the worst fears are always realized. Your stock falls, your bonds drop, depositors leave, other banks refuse to do business with you, and down you go. That’s the reality of a fractional banking system whose assets are long term and illiquid, leaving the bank dependent on overnight access to funds to meet daily requirements.
American corporations continue to pile on the debt to buy back shares and acquire each other while earnings are now down six quarters in a row. Is this bothering anyone else?
European bank stocks were very weak on Friday. The catalyst was the fact that the U.S. Department of Justice wants Deutsche Bank to cough up a $14 billion fine, which is going to be rather difficult since the company only has a market cap of about $17 billion. But the problems go much deeper than one bank. The biggest issue is in Italy.
Jeff Gundlach of DoubleLine Capital, one of the smartest minds in the money business, said last week that after nearly 35 years, the bond bull market has ended. Interest rates have stopped going down. In fact, he says July 5 marked the top in bonds (bottom in yields). If so, this has major implications for all markets. Why? Rising rates mean that central banks are losing control of the credit markets, governments may have more trouble running deficits and the stock market is on borrowed time.
Last Thursday, Wells Fargo was fined $185 million (including a $100 million penalty imposed by the Consumer Financial Protection Bureau, its largest penalty ever) for engaging in pervasive fraud. What they did will shock you. Since 2011, the bank opened 1.5 million bank accounts and “applied” for 565,000 credit cards that were not authorized by their customers. Bank employees created fake email accounts and issued fake PIN numbers to sign up customers for online banking services and new credit cards without the knowledge or authority of customers.
In March 2015, the European Central Bank (ECB) began its journey into Quantitative Easing, setting up to buy €60 billion in bonds monthly. The total was soon raised to €80 billion per month. In the 18 months since, the ECB has now purchased over €1 trillion in government (and corporate) bonds, bringing the ECB balance sheet to nearly Federal Reserve levels as this chart shows.
As I wrote two days ago, the world’s central bankers have spent the last seven years pushing interest rates toward zero and below. In response, millions of financial operators and capital users have scoured the globe looking for ways to profit from the lowest interest rates in history. Their favourite method was to create and sell higher yielding debt to institutional and individual investors desperate for income, thereby creating the next sub-prime take-down that will be worse than 2008.
The world’s central bankers have spent the last seven years pushing interest rates toward zero and below. At the same time, millions of financial operators and capital users have scoured the globe looking for ways to profit from it. Their favourite method was to create and sell higher yielding debt to institutional and individual investors anxious for income.
Last Friday we got the latest wisdom from Janet Yellen, Fed Chair, in a speech to the Jackson Hole conference for central bankers and other assorted Marxists. It was a wonderful example of how to confuse and baffle markets.