Financial, Real Estate, Stock Markets Trends and Current Affairs

As my readers now, I have been declaring recessions and depressions in Europe for some time now, to wit:

• It's Official & As I Foretold Years Ago, Greece Is Now In A True Depression As Reality Hits Greek Banks
• Greece Sneezes, The Euro Dies of Pneumonia! Yeah, Sounds Bombastic, Yet True!
• As the Sell Side and MSM Sing The Praises of European Insurer "Street Cred" and 
• When (Not If) Germany Slows, The Whole House Of Cards Collapses!!!

Now there is corroboratig anecdotal evidence coming out of the woodwork: Gartner reports Western Europe desktop shipments down in Q2 2012

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I present this article in the usual manner of challenging the ENTIRE sell side of Wall Street to offer analysis anywhere near as cogent, honest, straightforward, accurate, complete and credible. Or put more succinctly, the Goldman and Morgan Stanley clients can tell their advisers that Reggie Middleton advised them to kiss his A.

Axa, France's largest insurer, reported last week and both its share price and MSM media "cred" spiked. See 

• Axa's First-Half Operating Profit Rises 3% on Health Insurance:  Businessweek-Aug 3, 2012 Net income fell 36 percent to 2.59 billion euros after last year's results were boosted by 1.4 billion euros of gains from asset disposals, Axa said.
• Europeans shun risky investment for safe life insurance Reuters
• AXA H1 earnings fall, beat forecasts
• Europe's Big Insurers Post Solid Results

As paying subscribers recall, I released a full forensic review of Axa and the insurance industry in general as a drill down of my overall view of the FIRE sector for 2012 - reference Reggie Middleton Sets CNBC on F.I.R.E.!!! Those subscribers who haven't reviewed this material are recommended to do so now via the links at the bottom of this article.  Of particular interest is the deft skill at which Axa management has managed to handle both their portfolio and PC/life/health operations during this malaise. Subscribers (click here to subscribe) can reference Insurance Cos. Operational Stress and professional/institutional subscribers should reference pages 10-13 of AXA Report_122511 - Professional/Institutional edition to get an idea of what we saw coming late last year and how this may unfold. 

Of more interest is Axa's performance in its portfolio. We have uploaded a capital gains analysis for all subscribers -  AXA Q2 2012 Capital Gains analsysis. This analysis needs to be held in the light of our professional/institutional level forensic analysis (AXA Report_122511 - Professional/Institutional edition), particularly the stress test and accompanying pages (reference 2 through 10). Now, on to the other headlines gracing the MSM this morning...

• France's Rich Prepare to Flee the Country on 75% Tax Rule: Companies are planning to move high-paid executives outside of France as the country's president wants them to “pay extra tax to get the country back on its feet again.” The New York Times reports. It's just a matter of time before the governments induce recession by overtaxing. After all, those capital holes must be filled, right? But how do you fill the if there's now economic activity to generate the stuff to fill the holes?

• French Economy May Shrink for Second Straight Quarter

Do you remember the post France, As Most Susceptible To Contagion, Will See Its Banks Suffer or Watch The Pandemic Bank Flu Spread From Italy To France To ... from this time last year, or any number of the dozens of posts I made on the topic (here's a Google search to illustrate the point)? Well, like clockwork....

•  Italy's GDP Shrinks by 0.7% q/q in Q2
• ISTAT estimates showed the Italian economy continuing to contract in Q2 2012 with output declining 0.7% q/q (-2.5% y/y), down from -0.8% q/q (-1.3% y/y) in the previous quarter and -0.7% q/q (-0.4% y/y) in Q4 2011. PMI, tightly correlated (relatively) with GDP, also point toward further deterioration in the Italian economy as, on August 3, the final estimates released by Markit showed, the services PMI decreased marginally as the index reached 43.0 in July from 43.1 in June—contracting for the 14th consecutive months since May 2011. 

• Expect the Italian economy to contract another 3.5% by this time next year!

• BNP Paribas on Preliminary Q2 GDP Estimates: "Unsurprisingly given the poor production data, Italy's economy as a whole also continued to shrink in Q2; today's preliminary GDP release for Q2 was in line with our expectations at -2.5% y/y, though the quarterly drop surprised slightly to the upside at 0.7% q/q against our expectation for a 0.8% q/q fall. We believe Italy faces another two quarters of negative GDP growth this year. With the forward-looking PMIs still pointing downward, there is little sign as yet of light at the end of the tunnel."
• Of course, BNP should be looking inward as well, as all readers and subscribers have witnessed through the article This Is Why BoomBustBlog Is THE Place To Go For Hard Hitting Research: BoomBust BNP Paribas?"
• Services PMI: "July PMI data pointed to recession in Italy’s service sector deepening at the start of the third quarter. New business intakes fell at a sharp monthly rate that has been exceeded only four times over the series history, all of which occurred" around the height of the global financial crisis. Furthermore, data on expectations showed sentiment at a record low, and gave no impression of an impending recovery. Not only did July see a further deterioration on the demand front, but input cost inflation also picked up from June’s recent low. At the same time, backlogs of work were still reduced at a marked pace, suggesting yet more scope for job cuts.”Analysis Markit Economic Phil Smith Aug 03, 2012
  
• Manufacturing PMI: "July saw the recession in the Italian manufacturing sector extend to a year. Moreover, the downturn was shown to have deepened as the PMI sank to its lowest level in three months, primarily reflecting a sharper reduction in staffing levels. A solid and accelerated decrease in stocks of purchases also dragged the headline index lower, and suggested that firms had grown more concerned about cash flow and were not anticipating a rise in production requirements in the near term. Average input costs meanwhile fell at the fastest rate for three years during July, an offshoot of weaker demand for raw materials and semimanufactured goods both at home and abroad. Data showed, however, that Italian manufacturers did not take full advantage of the opportunity to boost their competiveness, and instead dropped selling prices only slightly over the month.” Markit Economic Phil Smith Aug 01, 2012
  
• Rabobank: “After falling GDP of 0.2% q/q in 11Q3 and 0.7% in 11Q4, Italy’s economic contraction accelerated further, to 0.8%, in 12Q1. The deepening recession stands in contrast to the aggregate eurozone, which managed to avoid a widely expected second quarterly drop in output....Analysis Rabobank Tim Legierse Jun 05, 2012
  
• OECD: “Since late 2011, Italy has introduced significant structural reforms while making progress in fiscal consolidation. The economy has re-entered recession, under pressure from weak European economies and the short-term consequences of fiscal tightening. Activity seems likely to continue to decline over the next year but will turn up in late 2013." The OECD expects the economy to contract by 1.5% y/y in 2012 before witnesing no growth (0% y/y) in 2013.Analysis OECD May 22, 2012
  
• European Commission: "After inrporating the large GDP decline in the fourth quarter of 2011, economic activity entered 2012 with a negative growth impulse of 0.5 pp. It is set to continue to contract in the first half of 2012, as spending and investment plans of consumers and firms are held back by poor labor market prospects and still-high uncertainty in financial markets. Real GDP is expected to have declined by a further 0.7% q-o-q in the first quarter of 2012 and to fall by 0.4% in the second quarter. Under the assumption of no further worsening in financial market conditions and yields on 10-year Italian sovereign bonds slightly below 6%, output is expected to stabilise in the third quarter of 2012 and to start expanding only mildly as of the last quarter of 2012. As a result, real GDP is set to fall by 1.4% in 2012 and increase by 0.4% in 2013."Analysis European Commission May 11, 2012
  
• IMF:  “Italy’s growth is expected to continue at a modest pace. Staff projects Italy’s output to grow by 1% in 2011 and 1.3% in 2012, in line with most other forecasters. By end-2012, the Italian economy would have recouped only half of the output loss suffered during the crisis. Growth is expected to continue to be driven by exports and the resumption of investment from low crisis levels. However, it will likely be held back by subdued domestic demand and further fiscal consolidation. Such a modest pace of activty will not allow a significant recovery in employment. Persistent labor market weakness, sluggish income growth, a decrease in government transfers, and a rising cost of credit will curb household spending. A persistent competitiveness gap hindering export growth, and slow progress in structural reforms, will also limit growth.”Analysis International Monetary Fund (IMF) Apr 17, 2012 & Analysis IMF Jul 13, 2011

I'd like to take this time to comment on the sheer lunacy of taking the IMF's or the EC's word for ANYTHING EU sovereign debt-related. In 2010, I clearly outlined the joke that is the IMF/EC economic forecast in Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!, to wit we can see in big pretty charts how accurate the IMF and EC have been in regards to Italy since the crisis began:

This is Italy's presumption of economic growth used in their fiscal projections:

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For those that don't subscribe, there is still a lot of nitty gritty that I made publicly available on Italy here:Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Trust the Rest? 

Those who are interested on a more realistic, unbiased and non-political view on Italy from that period should reference the BoomBustBlog subscriber documents:  Italy public finances projection 2010-03-22 10:47:41 588.19 Kb as well as the Italian Banking Macro-Fundamental Discussion Note. And back to the Hopium induced optimistic bullshit (the same Hopium induced optimistic bullshit we have witnessed in the US, btw BS At The BLS Leads To Profitable Short Opportunities As Hopium Smokers Get High Off Of Depreciated Dime Bags Of Manipulated Euphoria!)  

• Growth Revised Downward: Reuters (April 19th) “The assessment, a technical document which will be submitted to senior EU officials, comes after Italy said on Wednesday its deficit would be 0.5% of GDP next year, up from a previous forecast of 0.1%, which will be reached instead in 2014. The government forecast an economic contraction this year of 1.2%, almost in line with the Commission's forecast of a 1.3% drop in output."News Reuters Francesco Guarascio Apr 19, 2012
  
• UniCredit: “After the ugly 1Q, we can expect the pace of contraction in consumer spending and investment to ease in the remainder of the year, helped by receding financial tensions. Therefore, we are confident to leave broadly unchanged the q/q GDP path beyond 1Q, envisaging a stabilization in output already starting in the spring. As a result, we lower our full-year GDP estimate for 2012 to -1.0% from -0.3%.”Analysis Unicredit Bank Marco Valli Mar 09, 2012

As a matter of fact, there is only one MSM headline that I came across today, that seemed to hold any water, and that was from CNBC... Is the Market Rally Just a Set-Up for a Bigger 'Collapse'. Remember... Contagion Should Be The MSM Word Du Jour, Not Bailouts and Definitely Not Greece! What happens when you take the raw public debt exposure and you massage it for reality? Well, BoomBustBlog subscribers already know. Here's a sneak peak of just one such scenario...

(Click to enarge)

 thumb_Sovereign_Contagion_Model_-_Pro__Institutional_demonstration_of_Greek_default

•  Sovereign Contagion Model - Retail - contains introduction, methodology summary, and findings
•  Sovereign Contagion Model - Pro & Institutional - contains all of the above as well as a very detailed methodology map that explains what went into the model across dozens of countries.

BoomBustBlog subscribers, reference please reference the following insurance related documents:

AXA Report_122511 - Professional/Institutional edition

AXA Report_122511 -Retail edition

AXA Preliminary Observations

Insurance Cos. Operational Stress

Insurance cos. EU exposure 11-2011

The MSM has this as a leading headline today... Recession Stalks Germany as Breakeven Rates Drop: Euro Credit

In Sophisticated Ignorance Part 2: Pressuring Germany To Do The Wrong Thing Is A Short Seller's Dream, I stated:

This is general pressure to force Merkel to succumb to extreme short term thinking that will most assuredly bring the EU to its knees and potentially end the hegemony of what use to be the European empire - that is unless... You know.... This time is different! Yes, these are strong w.ords, strong words are necessary for a dire situation. Let's consider this a massive economic changing of the guard, shall we. And as such, these occurrences portend the potential for MASSIVE speculative investment gains as those financial bastions of faux capitalism come toppling down amidst massive short positions that the majority simply didn't have the foresight, temerity (or balls) to implement and hold on to.

The constant and consistent belief that Germany is a bullet-proofed save all is foolish at best. Germany lives in the same economic malaise roach motel as the rest of the EU, they simply rented the penthouse suite! Pushing them to build up more debt to push additional debt on over-indebted nations who clearly can't pay back their current debt is quite foolish. Recession and depression looms everywhere. As clearly articulated in the orginal "Sophisticated Ignorance" article...

This was the problem that I had with Paulson's original TARP idea. It just won't work because it doesn't solve the problem. Instead, it attempts to conceal the problem in fashion that pretends it never existed. Let's walk through this so a 5 year old can understand it.

Of course EU governments will try to bail out their banks again. The issue is that the bailout is not the question, neither is the success of said bailouts (this is rather a trick question, since the sovereign states simply cannot afford to bailout their banks any more than a 100 lbs man can lift a 400lbs man). The fact of the matter at hand is that they simply can't afford to bail them out. The banking system is just too big. 

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As BoomBustBlog's above average prescience (see Pan-European sovereign debt crisis) and Reinhart and Rogoff, of This Time Is Different: Eight Centuries of Financial Folly have clearly demonstrated, the source of the sovereigns debt problems is related DIRECTLY to the attempt to bailout insolvent banks, taking private sector losses upon public balance sheets, and eventually bankrupting the public state while doing nothing to fix the problems of the private banks, and ultimately witnessing the private banks fail anyway.

I warned of this in the beginning of the year via my many proclamations on the FIRE sector (see Reggie Middleton Sets CNBC on FIRE!!! and First I set CNBC on F.I.R.E., Now It Appears I've Set and Greece Is Trying To Convince Portugal To Make F.I.R.E. Hot!!!) entities that I feel are primed to pop as this plays out, yet are not priced accordingly. We also warned in Deustche Bank as follows:

As derived and excerpted from  Euro Bank Sovereign Debt Exposure Final - Pro & Institutional (934.65 kB 2010-05-13 00:11:32):

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What is the result of throwing pound after pound of leveraged fiat currency meat into the hungry maw of an overweight European brown bear who is naught to give it back nor make good use of it? Let's ask one of the banks from year's report...

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The afore-linked document has Deutsche Bank's exposure to the PIIGS group oulined and detailed. There is another angle that we covered early last year as well. Reference Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional or Deutsche Bank vs Postbank Review & Summary Analysis - Retail.

Well,  look what we find in the MSM headlines this morning... European Banking Regulator Imperiled by Zombie Banks in Germany

Germany’s regulator balked last year when the European Banking Authority conducted stress tests on financial firms, objecting to the agency’s definition of capital and allowing one state-owned lender to withhold some results.

The refusal to go along with the European Union regulator reflects an aversion by governments to ceding control to a central authority that may doom talks about creating a banking union and thwart plans to shift the burden of bailing out Spanish and Irish lenders to other euro-area nations. 

“Germany didn’t let the EBA dictate any terms to its troubled banks, why would it now hand over controls to a new regulator?” said Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., a London consulting firm specializing in sovereign-credit risk. “The prospects of a new central authority are shaky at best.”

EU leaders agreed in June to use common funds to inject cash directly into banks once a new regulator is established. Until then, Spain will be on the hook for as much as 100 billion euros ($123 billion) it may need to borrow to recapitalize its banks. That means increasing the public debt level, already strained by budget deficits, a second recession in four years and regional governments strapped for cash.

Well, you can't say I didn't tell you s, re: Spain...

• CNBC Asks, "So Why Are Spanish Bond Yields are so Hgh, I Ask Why No One Considers Spanish Banks To Be Insolvent?

• You Have Not Known Pain Until You've Tried To Save Spain Jun 19, 2012 – The MSM reports Spanish Short-Term Debt Costs Reach Alarm Levels:Spain paid a euro era record price to sell short-term debt on Tuesday, 
  

• Beware The Day When The Bulging Bunds Go Bust ... Jun 29, 2012 – Bloomberg EU Eases Spain Debt Rules as Merkel Retreats and Euro Rises After EU Leaders Renounce Spain Loan Seniority Euro-area leaders.

• The Economic Bloodstain From Spain's Pain Will ... May 31, 2012 – Those that regularly follow me know that although I'm quite the mediocre short term trader, I have uncommon strengths that lie in the realm of ...
• European Insurer Needs Insurance As $6B Of Its ... -Jun 11, 2012 – So, Spain finally gets a bailout, as I pretty much guaranteed in The Economic Bloodstain From Spain's Pain Will Cause European Tears To Rain .
• The Spain Pain Will Not Wane: Continuing the ... Apr 16, 2012 – Just over two years ago I warned that Spain posed a significant threat to the EU area economies. This was a very unpopular stance, and since ..

Spain has crossed the rubicon, and entered into bad decision nirvana as it too decided to ban short selling, which has worked so well for all of those other smart countries which have done so. For instance, when the US did it in 2008, they helped their bank's shares float to the tune of -48%! Hey, with friends like that, who needs enemies. When will they learn that tempering/tampering with financial markets is not ever as good as it sounds. Keep in mind that short sales put a natural floor under weak securities by creating natural sellers at the end or a trade (whether the trade is successful or not). If the stock is truly overvalued (hear's to you European banks), then the shares are going to drop anyway as the holders of those shares sell to get out of them. Without shorts, there will be no buying on the way down as speculators and astute investors cover profitable short sales and the only bids you will get are at rock bottom where fundamental guys feel there "deals that can't be refused" (except for the occasional BTFD fools along the way). That is usually a bid that's much higher than would have been achieved through the short sale. Of course, nobody explained this to the Spanish.

An additional issue is that the banning of short selling broadcasts a message that Spain should want to mute, and that is the message of FUD (Fear, Uncertainty and Doubt)! Why else would one make the normally legal and necessary action of selling bad stocks illegal? Fear of the facts! Of course, as word gets out it just makes situations that much worse...

From CNBC:

Spain's stock market regulator banned short-selling on all Spanish securities on Monday for three months and said it may extend the ban beyond October 23. 

The ban, which will not apply to market makers, will apply to any operation on stocks or indexes, including cash operations, derivatives traded on platforms as well as OTC derivatives, the regulator said in a statement.

European shares extended their losses following the move by Spain, which raised fears that the region's sovereign debt and banking crisis may be worse than expected.

Subscriber's related reading (click here to subscribe):

 The Spain Sovereign Debt Haircut Analysis for Professional/Institutional Subscribers

 Spanish Banking Macro Discussion Note

 Spain public finances projections_033010

Hopefully all remember my proclamamtions on the FIRE sector and France suffereing from Italian exposure. I also warned on Italy itself, two year ago (subscribers reference Italy public finances projection). Thus, in today's news...

Moody's downgrades three major Italian insurers:

(Reuters) - Moody's lowered the credit rating of three major Italian insurers on Tuesday, piling more pressure on the euro zone's third largest economy after a string of downgrades on Monday and a sovereign downgrade last week.

Italy's largest domestic insurer Generali Assicurazioni and its subsidiaries were lowered to Baa1, while Unipol Assicurazioni, and Allianz Spa had ratings cut by two notches each.

"The downgrade of Generali reflects the insurer's direct exposure to Italian sovereign risk in terms of both investment portfolio and business profile," Moody's said in a statement.

By the end of 2011, Italian government bonds represented 19 percent or 46 billion euros ($56.18 billion) of Generali's total fixed-income portfolio, or 253 percent of shareholders' equity, according to the statement.

Government bonds constituted 47 percent of the fixed income portfolio of Unipol Assicurazioni with 222 percent of shareholders' equity.

All the institutions mentioned in the statement were given negative outlooks.

Included in this group were the insurers that I cautioned on in 2010 (subscribers reference Sovereign Debt Exposure of European Insurers and Reinsurers (439.61 kB 2010-05-19 01:56:52)

My warning on the Italian banks have come to pass (subscribers reference Italian Banking Macro-Fundamental Discussion Note) as Moody's slashes ratings of 13 Italian banks: The move follows a cut in the Italian government's long-term issuer rating last week. Italian banks had previously been downgraded in mid-May, as part of an international bank rating review. Ratings agencies rarely rate banks higher than the country in which they are headquartered, as they assume that if the sovereign goes, so will the bank. Therefore, the downgrades aren't exactly surprising, but could increase pressure on the already troubled lenders.

As a result Italian yields went up a few days ago - Italian Yields Forced Higher on Rating's Cut Ahead of Debt Sale, and went even higher today as Bund yeilds were actually issued with negative yields pushing that spread/gap ever wider... Bunds rise as Germany sells debt at negative yields

Italian 10-year yields were four basis points up at 6.07 percent, with two-year debt underperforming, yielding 8 bps more on the day at 3.96

Mish (Mike Shedlock) adds... Italy GDP expected to contract by 2% globaleconomicanalysis.blogspot.com/.../

So, when are the alarms going to be sounded by anybody other then BoomBustBlog for France??? I have made this quite clear in the past, namely in Watch The Pandemic Bank Flu Spread From Italy To France To ... where I simply quoted the arithmetical obvious, then in French Banks Can Set Off Contagion That Will ... where I basically did the same.  Subscribers can reference French Bank Observations & Focus on...(519.21 kB 2012-06-28 08:36:37).  Part and parcel to this common sense update is recognition of the fact that Italy will bust French banks, causing France to do the socialist bailout thingy. See this chart from the report...

French bank Italian exposure 

French bank Italian Exposure: As Italy pops with outrageous funding yields (just like Greece), France will be forced to bailout its banks once again, leaving the socialist country facing the dilemma of potentially having to ask for a bailout itself. As you may know from my previous writings, the French banking system is bigger than France itself so a true bailout cannot practically come from within.

Subscribers, see also 

•  Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)
•  Sovereign Contagion Model - Pro & Institutional
•  Irish Bank Strategy Note
• Euro Bank Soveregn Debt Exposure Final -Retail
•  Euro Bank Soveregn Debt Exposure Final - Pro & Institutional

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LIeBOR is all over the MSM today...

• The Must Read: Changing Barclays, Monetary Policy
• Wall Street Bank Investors in Dark on Libor Liability

I wonder how many realize how deadly this is to big western banks workwide. I have commented on this in detail in my most recent Max Keiser interview, which aired last night. Download the Barclays Submission, aka the "Smoking Gun".pdf for more insight to what happened. Here's a taste...

barclays email header

barclays email

Quick translation...

BOE inquires why Barclay's LIBOR rate was always so high,  realistic...

Barclay's asks BOE reps to brand the liars as liars...

BOE says, "are you out of your fucking mind???"

BOE rep says, this is coming from on top, lose the truth, or lose your ass! But you didn't hear that from me...

Of course the most daming part of this email is this "I asked [Tucker] if he could relay the reality, that not all banks were providing quotes at the levels that represented real transaction". This clearly shows that the BOE was on alert (as if they didn't already know, and probably orchestrated) of the fact that most banks were outright lying.

See my extensive comments on Max Keiser's show earlier this week, starting at 12:48 in the following video...

Additional (in depth) commentary can be found starting at 3:10 in this video with Lauren Lyster...

So, who are these other banks???

From Matt Taibbi's blog:

 The Royal Bank of Scotland is about to be fined $233 million (£150 million pounds) for its role in the Libor-rigging scandal. It joins Barclays as the first banks to walk the plank in what should be, but so far is not, the most sensational financial corruption story since the crash of 2008.

Many of the banks implicated in the Libor mess have also been targeted in the various municipal bond bid-rigging investigations, and RBS is no different – its subsidiary Natwest is also a defendant in the major civil lawsuit in the bid-rigging case. The cases aren't related, except in the sense that they both involve manipulation and anticompetitive cooperation. It's going to be harder and harder to make the case that the major banks do not routinely cooperate at the expense of the public when it serves their purposes to do so.

The news that RBS is involved comes with a perverse twist. This is from the Times UK:

The bank, which is 82 per cent owned by the taxpayer, is preparing for a political firestorm over the affair because it believes that it has no power to claw back bonuses from the traders responsible. Instead, the expected fines would be borne by the shareholders — largely the Government.

Libor manipulation is a crime that already robs the public to create bonuses for bankers. By artificially lowering interest rates, the banks caused cities, towns, countries, and other public entities to receive smaller returns on their variable-rate investment holdings. If it turns out that taxpayers end up paying the fine for RBS's crime of robbing taxpayers, how perfect would that be?

More importantly Matt, synthetically depressed LIeBOR rates artificially lowers the bar for economic profit, in layman's terms it makes the bank look more profitable and less risky than they actually are. As you stated, this leads to bigger bonuses funded by bigger taxes borne by financially smaller taxpayers. Hmmmm....

Who else is in the sights of the upcoming truth? Citbank, Bank of Lynch (robbing) America Coutrywide and JP Morgan! Have I commented on these big banks' risks ad nauseum? The litigation risks in these institutions are enormous, and are not discounted in their pricing - Banks face crippling Libor litigation costs

Not only do the share prices of these banks fail to reflect the true litigation risks, the bank management themselves are failing to come clean, despite astute BoomBustBlog analysis....

There's imprudent risk management litigation stemming from JP Morgan's massive derivative's exposure, first brought to light in 2009 by yours truly...

Listen Carefully and You Can Hear the Crumbling ....May 11, 2012 – First, pardon my tardy response to this JP Morgan news. ... Equity segment, net income (excluding Private Equity results and litigation expense) ...

In 2009 I noticed that JPM's exposure to Fraudclosure-gate and to a greater extent, mortgage putbacks, was much, much more than what was being reported by managment. There's much more, see:

JP Morgan & Other Banks Legal Costs Spike, Many Should Ask If It Was Not Obvious Years Ago That This Industry May Become The "New" Tobacco Companies

JP Morgan Purposely Downplayed Litigation Risk That Spiked 5,000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!!! Shareholder Lawyers Should Be Scrambling Now Mar 2, 2011 – JP Morgan Purposely Downplayed Litigation Risk That Spiked 5000% Last Year & Is Still Severely Under Reserved By Over $4 Billion!

The Rating Agency Endorsed BoomBustBlog Big Bank Bash Off ... Feb 16, 2012 – JP Morgan (as well as Bank of America) is literally a litigation sinkhole. See JP Morgan Purposely Downplayed Litigation Risk That Spiked ...

You see, what many believe to be a UK bank thing can drag these big American banks deeper, much deeper, into the quagmire. Beware, the F.I.R.E.! The F.I.R.E. Is Set To Blaze! Focus On Banks, part 1

Yesterday, I posted The Difference Between Money and Wealth and Why You Can Easily Print One But Must Actually Create The Other, and as if on cue, global inkjet nozzles 'round the world started whizzing - to wit:

• ECB Cuts Rate to Record Low of 0.75%, Deposit to Zero and Bank of England Prints Money Again to Boost Economy
• China Cuts Rates for Second Time in Month and China Set to Post Worst Growth Since 2008 Crisis
• BOE Restarts QE Amid Euro Crisis

Why such rampant printing? The whole world's afraid Europe's impending implosion will engulf global economies. They very well shoud be, this was quite evident 3 years ago (Pan-European sovereign debt crisis) and the can kicking is nearing the end of its useful cycle... ECB's Draghi: We See Now a Weakening of Growth in Whole Euro Area

Here's the secret that BoomBustBlog subscribers know yet seems to be lost on much of the European powers that be: cutting rates and printing will absolutely NOT prevent the nuclear winter in Real Assets. Since loans behind real assets are anywhere between a vast chunk and the majority of bank loans, when this thing goes the European banking system goes with it. This will manifest itself stateside (see sidebox), but the Europeans will get hit harder, at least initially... The reason? Well, it doesn't really matter how low interest rates are - if banks don't lend, borrows will not gain access to capital. Banks are too weak and skittish to lend despite "so-called" record profits, billions in bonuses and compensation, and trillions in bailouts. I repeat, and I repeat again, the only solution is to let the insolvent fail.

Reference the quite informative post from which the graphics below were excerpted: Watch As Near Free Money To Banks Fails To Prevent Nuclear Winter For European CRE

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 So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

• •   Debt Analysis, Blog Subscriber Edition
  •  Preliminary Download

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Fastforward to today, and NIEUWE STEEN INVESTMENTS N.V. - NSI (one of our shortlisted REIT) suffered the most due to revaluation of their Dutch office portfolio. It therefore witnessed 26% decline in last 4 months.

NSI

NSI is simply a microcosm of what's to come for many larger real asset investors. I have warned that the Dutch, with what many consider to be a strong and relatively stable economy, was not immune to the European contagion, reference Are The Ultra Conservative Dutch Immune To Pan-European Economic Contagion...

Many lay persons are misled by terms such as money printing. This misdirection is easily understood and stems from a basic misunderstanding of what money is, versus actual economic value. Let's assume we have a pie called the EU (or US?), with a 1 trillion euros of economic value. This is the European economic pie. The EU get's in trouble and the banks start to run out of money. Now, the fact of the matter is that those same banks failed to make incremental gains to their actual economic value (true profit) and everyone who's paying attention knows it, hence they faced a problem getting funding. So, they go crying to the central bank, who basically printed euros through various mechanisms in order to push new and additional little pieces of digital paper throughout the system. This is what the layperson sees as money appearing out of nowhere at the behest of the financial bailout gods of the governmental powers that be.

The problem with this viewpoint is that the money appeared out of nowhere, but said money was not backed by actual economic capital. Hence more euros (or dollars) are available in the system, but each of those euros/dollars are simply worth that much less.

This is not economic progress boys and girls. What we need to move forward is to bake bigger pies, not cut the existing and steadily shrinking economic pies into more pieces!!!

Economic pie 

Bloomberg EU Eases Spain Debt Rules as Merkel Retreats and Euro Rises After EU Leaders Renounce Spain Loan Seniority

Euro-area leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy as an outflanked German Chancellor Angela Merkel gave in on expanded steps to stem the debt crisis.
After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels today, chiefs of the 17 euro countries dropped the requirement that taxpayers get preferred creditor status on aid to Spain’s blighted banks and opened the way to recapitalizing lenders directly with bailout funds once Europe sets up a single banking supervisor. Stocks and bonds in Spain and Italy rallied and the euro posted its biggest gain this year.

Oh yeah, that's a damn good idea. Take a murky pool of depreciating, hard to value, illiquid assets and make them even murkier, harder to value, yet easier to pledge since it's now acceptable to look in the other direction as you receive said "trash assets". To make matters even worse, the Europeans are now attempting to perfect their method of throwing good money after bad by denying preferential status to the only money that can save (or at least buoy) these zombie banks. Of course, no lender will want to go in knowing that they can be instantly subordinated, but then again when the only lender that can realy make a difference goes in, why should it take a bow to anyone else. Trust me on this one... Taxpayers will offer loans and see that money disappear... Poooffff!!! Don't believe me? Reference CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?"

Bloomberg also reports  Spain Gets Relief as Europe Leaders Outflank Merkel in Bid to Blunt Crisis. Listen, pressuring Germany, the one remaining relatively stable/robust large economy in the union is a recipe for disaster. There's no wonder why 16 or so failing economies are in opposition to the wants and desires of the 1 or so successful economies. See any common threads here. Germany is far from bulletproof, as the same MSM page sports this headline...

German Retail Sales Unexpectedly Fell for a Second Month in May on Crisis
German retail sales unexpectedly fell for a second month in May as the sovereign debt crisis worsened, damping the economic outlook.

Germany is a net export nation whose primary trading partners range from extremely hard landing to recessionary to outright depression. Exactly where is all of the economic growth going to come from to fund the world, or at least the European version of the world. I have written extensively on this... Sophisticated Ignorance Part 2: Pressuring Germany To Do The Wrong Thing Is A Short Seller's Dream

Things are so predictably dead beat that I don't even have to write new material anymore. Seriously! Let's just cut and paste from the BoomBustBlog archives: Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead

I have broached the argument in the past that the ECB is not god, or even close to it, and that it can only play the bond buying ponzi for but so long before negative consequences occur. Reference: 

• ECB As European Lender Of Last Resort = Institutional Purveryor Of A Pan-European Ponzi Scheme 
• Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!

 

Below is my mini-debate with Doug Kass on Twitter. Let it be known that I have respect for Doug, for he called the market turn in 2009 with precision, an did it publicly. Of course, I can't agree with him on this latest proclamation though...

Douglas Kass ‏@DougKass
The EU initiatives reduce tail risk (a crash) but dont address the deep structural issues - buy the rumor, sell the news. What I will do.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass How does the EUinitiative reduce risk/crash? Still not funded? Simply shifts dirt from 1 hole to the next, much dirt still missing

Douglas Kass ‏@DougKass
@ReggieMiddleton yes reggie... and it worked in the U.S. four years ago. Dont be dogmatic.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass Stocks did double, though. Unfortunately neither economic output or asset quality nor true economic profit bothered to follow suit

ReggieMiddleton ‏@ReggieMiddleton
@DougKass It all depends on how you define "worked". US banking system is still a mess. Lending is sparse. We never really left recession..

ReggieMiddleton ‏@ReggieMiddleton
@DougKass ex. of how well it worked for banks: BAC,/C/MS/Manfinancial, soon GS, JPM, et. al. Its anathema to say, prices aren't everything.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass In essences, that means that stock prices went one way, and actual value failed to follow.

ReggieMiddleton ‏@ReggieMiddleton
@DougKass Stocks did double, though. Unfortunately neither economic output or asset quality nor true economic profit bothered to follow suit

ReggieMiddleton ‏@ReggieMiddleton
@DougKass It all depends on how you define "worked". US banking system is still a mess. Lending is sparse. We never really left recession..

ReggieMiddleton ‏@ReggieMiddleton
@DougKass Taxpayers will offer loans without which banks will fail, yet don't get preferential status. that money will disappear

And a supplementary tweet from Tyler: Last Night's Critical Phrase "No Extra Bailout Funds" tinyurl.com/7nstlg2

Anyway, back to the Bloomberg story. So, now taxpayers will cough up and additional several hundred billion euro to be absolutely incinerated and vaporized once it hits that gaping oven of insolvency needing at least 500 billion euro to make a difference. Translation: Central banks will take another very big hit and not get paid for it. 

Speculators should have alreday started selling French and German bonds because they are the major contributors to the ECB. I've discussed France in detail earlier this week in Now Is The Time To Prepare For The (Next) French Bailout Of Their Banking System & Potential Bailout Of France. The French are not particularly well situated. I also took a find toothed comb to Germany as well, as archived... The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You... You see, as you read through this last link, if Germany's Bunds so much as return to trendline, it absolutely wrecks EU insurance, bank HTM and pension portfolios. I mean negative equity everywhere.

Finally, check this out. If you don't want to watch the whole thing then start at 2:38...