Just a few quick observations on the day.
I find it interesting that when you look at the European exchanges they stack up like this –
London -3.39
Paris -4.68
Frankfurt -5.02
Milan(MIB) -2.35
Madrid(IBEX) -2.44
While in the US the biggest loser was Bank of America. Though all the banks got rammed.
Why would by far the stronger economy, the leading exporter, Germany, suffer a greater decline than France? Why would both suffer more than the UK? And all suffer more than Spain and Italy. Surely this is back to front.
My take on this is that what we are seeing is a Support Uplift unwind. Remember Support Uplift is the amount of ‘support’ the ratings agencies, and the markets more broadly, think a bank will get from it’s home nation. I think we are seeing the markets now subtracting this ‘support’ and trading the banks naked of support uplift. Could it be that as far as the markets are concerned support uplift is no longer credible? If so then it says the markets are making a political as well as a financial judgement that the present arrangement of power is coming to an end. I have thought for a long time that this had to happen eventually. Could the markets finally be coming to the same conclusion?
If so, then the nations which have so far been seen as offering the greatest support for their banks will now suffer the most. At least till the playing field becomes level. Those whose banks have till now been sheltered behind sovereign support are now catching up with those who have long been valued without support.
German banks have been seen as completely safe, not because they don’t have huge losses hidden away, (they most certainly do) but because the German state has the deepest pockets and has up till now been perceived as the most absolute in protecting its own. The markets saw how even a monster like Hypo Real Estate was bailed and thought – Germany will absolutely protect its banks no matter what infernal mess they contain. And in the case of Deutsche this is still the case. But Commerzbanc? I don’t think so. The Landesbanks? Now there’s a problem. They are the ones which contain all the deposited cash and are also seen as part of the Federal structure of Germany itself with power and regional banking/funding jealously guarded by each region. On the other hand let a few totter and force the others to amalgamate and the Federal strength of Germany’s regions would be gelded. Perhaps not so unthinkable for the central government?
Today’s carnage in Frankfurt contrasts with Spain and Italy. But on the other hand the markets have already priced in the hidden debts of Spain’s regions and its rotten Cajas. Or at least they think they have. I have a feeling there is more sewage waiting to back up.
If I’m right and support uplift is unwinding then several banks are not long for this world. RBS, UniCredit, Commerzbank, Dexia, maybe Soc Gen or PNBParibas (one or other but not both and the the French will fight tooth and nail to save them out of sheer pride) and I cannot see any way Bank of America(CountryWide) gets saved. I think the decomposition has simply gone to far to be reversed.
In most countries if this collapse continues, and I think it will, we will get to a point were the governments will have to decide who gets saved and who they will let go as a way of purging some of the debt from the system. So, for example, if BoA goes, Wells Fargo can stay, It could be the other way around but I think BoA has already lost. Deutsche or Commerz. Soc Gen or PNB Paribas.
I am just guessing about this general unwind idea, but it does make some sense of an otherwise strange upside down day.
If I’m right then we are beginning to see the markets withdraw their suspension of disbelief. And when that happens in any performance of a work of fiction (which is surely what our markets have been for the last three years) the people usually start to leave the theatre is droves. Sometimes they even want their money back.
Once the illusion is shattered, what were convincing performances suddenly seem painfully insulting and unconvincing. Our politicians will not realize this till too late. They will continue to deliver their scripted lines in what they will still think are convincing tones long after people are looking for things to throw at them.
I think the illusions are breaking down and people are beginning to recognize how ugly the story and the performers actually are in reality. The riots in the UK are a sign of things to come.
I've been following live coverage of the so-called riots in London (Birmingham is the only other place that seems to be affected), and I'd be very cautious about suggesting a connection between them and the broader financial situation.
True, some of the areas affected are poor, but there's also been reports of youths with (non-looted) i-Phones and Blackberries, and cars driving up to take looted stuff away. This, imho, is different from what's happened in Greece, for example.
Golem,
once again a sharp analysis, thanks!
Deutsche Bank will not be left to fail if possible, Ackermann is a buddy too close to Merkel. It is the German Anglo in terms of government ties, and with its tentacles reaching out to every aspect of German finance I would guess that it is deemed as too risky to simply let Deutsche fail. Unfortunately Deutsche did already sell most their exposure of Greek bonds (etc) on to other holders (some Landesbanks, I think, but not sure whether I remember correctly).
As to what's happening in the cities of the UK, I think its just an expression of anger and frustration, comparable to the riots in the ghettos of Paris in 2005. Those guys simply found a vent to let go of the steam that has been building up, and sure when the government is looting, why shouldn't the people? And boom, now it has developed a dynamic of its own…
Not that I like it or applaud it, but I think I may be able to understand it from a certain perspective (as I would imagine would the people here who follow your blog or read your book).
Golem
I think it's bluff calling time for the ECB . The euro is all but finished, maybe weakening the German market is a bid to weaken its want to keep it all going. after all if they start to feel the pain directly themselves are they really going to want to give over their reserves to another nation to save its ass? I don't think so. They are the super power in Europe so hit them where it hurts and the rest are easy pickings. Gold has hit $1749 in the last while, these are interesting times, the rush to the bottom is on!
Britain is waking up battered, bruised and somewhat confused.
Worryingly, this will be the state of the nation for many years ahead.
The most troubling outcome of the riots, is the widening divisions between people trying to understand what caused the problem and what should be the nations response.
The article below has a cogent analysis, somewhat surprising for the Telegraph:
"The real causes are more insidious. It is no coincidence that the worst violence London has seen in many decades takes place against the backdrop of a global economy poised for freefall. The causes of recession set out by J K Galbraith in his book, The Great Crash 1929, were as follows: bad income distribution, a business sector engaged in “corporate larceny”, a weak banking structure and an import/export imbalance."
Yep. We’ve got all those symptoms – and SuperSized too!
But sort the comments by "Highest Rated" and see the mass jingoism of the working & middle class Right:
http://www.telegraph.co.uk/news/uknews/law-and-order/8630533/Riots-the-underclass-lashes-out.html
looting by the elite,
looting on the street:
as above, so below
The difference is that when the banks and the financial elite loot there are nods of aproval and murmurs of, "We have no choice. There is no alternative."
When the poor and disgruntled loot we have righteous cries of "Send in the riot police and the Army. This is just pure lawlessness."
What pray tell was it when the banks lied about how sound their finances were, how solid their loan books were or how much they owed to each other?
Goose and Gander! Our lords don't like it when people break the law and burn shit down? It's messy and innocent people get harmed. Then enforce the law equally upon the rich as you would do on the poor.
Otherwise, as a billionaire said not long ago to the ranks of the poor – "Suck it up."
These yoofs are mere amateurs.
White collar Looting is far more endemic:
In 1993 Akerlof and Paul Romer brought forth Looting: The Economic Underworld of Bankruptcy for Profit, describing how under certain conditions, owners of corporations will decide it is more profitable for them personally to 'loot' the company and 'extract value' from it instead of trying to make it grow and prosper:
"Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations. Bankruptcy for profit occurs most commonly when a government guarantees a firm's debt obligations."
Yves Smith argues in her book "Econned" that Akerlof and Romer's "Looting" theory applies to the subprime mortgage crisis and the Financial crisis of 2007-2010. She argues that the 'Looted' companies in this case are banks and others who were 'looted' by certain traders and executives within those companies.
http://en.wikipedia.org/wiki/George_Akerlof#Looting
See also pg7 of my ICB submission:
http://forensicstatistician.files.wordpress.com/2010/11/icb-submission-nov-2010.pdf
The evidence is there for all to see, yet no regulators, police, politicians or the public seem to care.
One Hackney woman's view of the riots: http://opendalston.blogspot.com/2011/08/one-hackney-womans-view-of-riots.html .
Meanwhile, here's a set of debt charts on the Economist website at http://www.economist.com/blogs/dailychart/2011/07/world-debt-guide .
Some unexpected (to me) results (Ireland isn't included):
1. Of those countries covered, Britain is top for overall debt (495%), followed by Japan (492%), with the US at 288% and Germany at 282%.
2. Government debt: Japan 210%, Italy 110%, followed by France, Germany, US and Britain.
3. Household debt as % of GDP: Switzerland 118, Britain 99 (approx.).
4. Financial debt as % of GDP: Britain 205, Japan 119 (approx.).
5. Non-financial debt as % of GDP: Spain 136, France 118, Britain 116 (approx.)
Forensic Statistician, I agree 100% about white-collar looting.
On the US front, it's useful to recall a piece by the excellent Matt Taibbi: http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216 .
Closer to home, of course, we have Whistleblower.irl's experience. All this is part of the Augean stables that desperately need to be flushed out.
But really taking on the power of feral global capital calls for a global political solution, and I don't see one in the offing, despite the financial crisis. I hope I'm wrong.