A banking crisis radiating out from Europe?
While China, Hong Kong, and some other Asian markets celebrated the lunar New Year and wisely kept their markets closed, all heck is breaking loose in Japan.
The Nikkei had risen 1% on Monday and was down “only” 18.8% from its recent high in June 2015, thus dodging not only the rout of most other markets that day but also the ignominious fate of being pushed, like so many other markets, below the blue line in my infamous Global Bear-Market Progress Report. The blue line indicates a decline of 20% or more. But that was like so yesterday.
Today, the Nikkei plunged 919 points or 5.4%. It’s now down 23.1% from its recent high, in a solid bear market. Fears about global growth coagulated with fears about a banking crisis radiating out from Europe, and particularly its epicenter, Deutsche Bank.
So Japan’s four systemically important megabanks that will not be allowed to implode if at all possible got totally smoked today, and have gotten crushed since their highs last year:
- Mitsubishi UFJ Financial Group plunged 8.7%, down 47% from June 2015.
- Mizuho Financial Group plunged 6.2%, down 38% since June 2015.
- Sumitomo Mitsui plunged 6.2%, down 26% since May 2015
- Nomura plunged a juicy 9.1%, down 42% since June 2015
Hedge funds, particularly US hedge funds, that once had plowed into Japanese equities including the banks, hoping that Abenomics would perform miracles, have abandoned the cause. Japan’s Government Pension Investment Fund, upon the urging of the Bank of Japan, sold its mainstay investment, Japanese Government Bonds, to the Bank of Japan and loaded up with equities instead. This process is now mostly finished, and it too stopped buying equities. Other pension funds did the same. The artificial demand for stocks is dead. Now pension funds are left with stocks that have plunged.
And the megabanks are now trading at less than half the book value of their assets. But this book value of assets, as was learned during the Financial Crisis, can go up in smoke without prior notice.
In the credit rout rippling out from Europe, the costs of insuring Japanese corporate bonds against default surged to the highest level since June 2013, according to Bloomberg. And investors fled from corporate bonds and equities into government debt.
So Japanese Government Bonds became a safe haven of last resort, and they soared, and yields dropped into the negative. People were willing to pay for the privilege of owning them, with all maturities below 10 years sporting a negative yield.
But that too is like so yesterday. Today the 10-year yield too fell into the negative, for the first time ever. Now at -0.02%, driving the negative-yield absurdity to ever greater heights.
Negative yield up this far the yield curve is shaking the financial house of cards. For banks trying to make money or even break even on loans in a negative yield environment is an absurd endeavor.
And the yen has jumped again today, taking Japan’s carefully orchestrated currency war and tangling it up in contradictions and nuances of failure. Beating down the yen, manually if it had to, has been one of the big strategies of Abenomics. The idea was to allow Japan Inc. to increase exports and enhance the paper profits on activities and investments overseas, even if the resulting higher prices of imports would knock the wind out of household finances. At the end of January, it still took 122 yen to buy a dollar; now it takes 114.8. It rose 6% in a little over a week!
That’s a big embarrassment for the financial regime. So Finance Minister Taro Aso came out on Tuesday to express his displeasure. “The markets have shown rough movements lately. That is clear,” he said at a news conference when asked about the yen. So he’s “going to continue to closely watch foreign-exchange movements.”
Now if the Bank of Japan really wants to spook the markets, crash stocks, and speed up the toppling of the banks, it could just increase its QQE and push yields deeper into the negative, as some economists are already clamoring for. That would likely do the job.
And there’s a bitter irony. Read… Negative-Interest-Rate Effect already Dead, Central Banks Lost Control over Stocks
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Time for QQQEE
Funny how the central bankers have worked so hard against inflation when the real problem is deflation and the buck stops at the TOP but they will walk away Scott free.
“That’s a big embarrassment for the financial regime.” I don’t believe you fully believe this, Wolf. True, if it is possible, Japan would be where it would occur.
I decided the day I left home, that day when I was 16, that I’d find myself a hero, someone who’d not lie to my face or stab me in the back. Someone who’d notice tiny virtuous as promptly as they did the obvious. Someone I could count on saying in my presence what they had said in my absences. By the day I was 18, I had reasoned that no such person existed. Then one morning most unexpectedly, I met my hero while shaving.
For the average investor to think they can compete in this environment, of govt’s openly manipulating the markets, is crazy. It’s like a whale trying to attack a nuclear submarine. It doesn’t even understand what it is up against.
Whale? How about a minnow?
The whale and the minnow are equally inconsequential.
Alas – unintended consequences of CB experiments…
We now have super Mario’s EU, non-EU brethrens Swedes, Danes, Swiss and Kuroda-san jumping rather desperately to NIRP. Chinese after resorting to currency devaluation first may tip toe into it too.
Janet may soon follow with recent trial balloons about it but wait NIRP has real nasty consequences to the banksters (as seen by DB and BoJ).
Can someone offer a constructive alternative to all the foolishness the in which the CBs are engaged? Seriously. Back when I studied economics (a couple of lifetimes ago) I think the idea was that following bubbles there needed to be a period of economic readjustment where the economic inefficiencies that formed during the bubble needed to resolve. This of course would cause some overvalued organizations to get hurt, maybe terminally. But doing so would clear the air and reestablish a sound economy. That doesn’t seem to have occurred anywhere in the world. Is that what is needed in this country (and others) right now? And exactly what steps would bring this about?
Yes I recall reading Milton Friedman’s book when I was in college in the early 80’s for Econ class. He was astute, all for capitalism which allowed the failed ventures to close and dead again Keynesian wetdreams.
Go forward 30+ years and we have quasi-socialism where TBTF banks are bailed out with taxpayer’s $$$ in essence socialize the losses (but they get to keep all profits given under ZIRP, QEs, buy Treasuries/charge exorbitant interest rates on taxpayers with Fed’s ZIRP money). So the CBs and Feds are in the business to re-flate the bubble.
And lest we forget Keynesian wetdreams which BTW did not work in last Great Depression as Einstein once said – madness is doing same thing expecting different results.
Vespa – I agree with everything you said and my instincts are that current practices are terribly destructive for the bottom 99%. My question is this: What should be done instead of the present quasi-socialistic practice. Should the banks be left to fail?
Someone (don’t know who) has said that capitalism without bankruptcy is like Christianity without hell.
Well I don’t know as even GW panicked in 2008 thanks to Hank Paulson the ex-Goverment Sacks Treasury Secretary scare-mongering to save his bankster friends via TARP and even purchased/nationalized AIG to pay off the CDS to the banksters. We will never know if the government allowed the TBTF to fail but I think people didn’t want another bank run and failures like from the Great Depression.
I think QE I and to some extent QE II may have helped the economy but QE III was complete waste to help ObaMao get re-elected and in place too long (little over 2 yrs) resulting in the reflating of assets of all kinds. Sadly – the reflated bubbles will pop once again and the global CBs are out of QE and ZIRP ammos and now perilously dipping into NIRP the uncharted territories…
Next up may be outright confiscation of our money as look what happened in Cypress when their banks failed… The saver/tax payer took a haircut plus.
We learn history so as not repeat it
I believe that in 2008, the free market forces should have been allowed to work, and Uncle Sam has any made things worse by letting criminally operated banks continue.
For all the citizens with deposits in insolvent banks, the FDIC had their backs. Those banks that had pushed the Ponzi-scheme envelope too far needed to have their due fate handed to them; i.e. closing the doors and going out of business. The bond and stock holders of these banks deserved to lose their investments as the banks went belly up because that’s how an open and free market works. Anybody in the market should damn well be aware of this.
Yes, this would have been a rough stretch, but it would have allowed a re-found equilibrium to be had. The Fed is always there to lend to viable banks, and business in the USA would have continued. What we have now eight years later needs no commentary to anyone who’s paying attention.
Obama has Holder’s replacement to run the Department of Justice, Loretta Lynch, there to shield Wall Street from any criminal indictments. Lynch sat on the Federal Reserve’s Bank of New York Board of Directors from 2003 to 2005 for God’s sake. Timmy Geithner was the Bank’s President at that time.
As a result of not letting those that needed to perish die eight years ago, we’re screwed today!
in reply to Vespa 200E mentioning Cyprus:
The victims were mostly small business owners and relatively wealthy (not really wealthy) savers from the middle class who lost their life savings. Most of the real (international) elite got tipped by the Cyprus banksters to remove their cash just in time. For politicians this is a relatively attractive fix, very few voters are hurt (but they are hurt very badly, obviously).
I’m surprised I haven’t read about bankster or politician homicides in Cyprus, maybe the media is not allowed to report about this ;-(
The same will happen soon in Europe and maybe US later on: first they will go after ‘filthy rich’ people who have over 100K in the bank; the general public will cheer for such great government policy, no doubt about it. After those savings are stolen and handed to the banksters they will need more and come for the little guys, by then it will be too late to do something about it.
Frank Borman , American astronaut, is credited with this quote. Lately, Kyle Bass, Texas hedge fund investor, had used this quote as well.
IMHO the problem for the politicians is that letting the air out of the bubbles will not only hurt the banks and the 0.1%, but also pension funds (in Europe a huge part of the population depends on this for income) and all the voters who are leveraged to the max with their mortgages (many EU mortgages are still underwater, many more would go under if the biggest RE bubble in history finally pops). Economic readjustment is a sure way for politicians to throw themselves out of office and they will do everything to prevent this. Only a small minority will benefit from readjustment in the short run.
Of course, preventing readjustment will only make matters worse and in the long run everyone will be worse off (except maybe the 0.1%). But politicians, banksters and most voters only look at the present and the immediate future, as long as the system is running somehow they think can still grab their share and a majority is probably better off as long as the current government-banking scam continues.
nhz – Excellent point about the pension funds. I have long thought they distort the efficiency of those organizations whose stocks they own because of the focus on quarterly returns rather than long range returns as, say, Amazon has done. I have also wondered about the hidden pressure on the Fed to keep interest rates low, especially in this country, because of the huge national debt which I assume occasionally has to be rolled over. Increases in interest rates would exacerbate the size of the debt.
Read about The Worgl Experiment. It didn’t last long because it worked. The Central Bank shut it down.
Thanks for pointing out something I was not aware of Amanda. Fascinating example of central bank panic when faced with losing control.
When the Continental became worthless people fell back to using silver coins, notably Mexican pesos. I wonder if there’s enough silver stacked out there to be a viable bridge to whatever system arises Phoenix like out of the ashes. I still think it’s going to be very, very ugly.
Funny you should mention the Phoenix:
In 1988, The Economist ran an article titled, ‘Get Ready for the Phoenix’, in which they wrote, “thirty years from now, Americans, Japanese, Europeans, and people in many other rich countries and some relatively poor ones will probably be paying for their shopping with the same currency. Prices will be quoted not in dollars, yen or D-marks but in, let’s say, the phoenix. The phoenix will be favoured by companies and shoppers because it will be more convenient than today’s national currencies, which by then will seem a quaint cause of much disruption to economic life in the late twentieth century.”
The article stated that, “The market crash [of 1987] taught [governments] that the pretence of policy cooperation can be worse than nothing, and that until real co-operation is feasible (ie, until governments surrender some economic sovereignty) further attempts to peg currencies will flounder.”
Amazingly the author of the article adds that, “Several more big exchange-rate upsets, a few more stockmarket crashes and probably a slump or two will be needed before politicians are willing to face squarely up to that choice. This points to a muddled sequence of emergency followed by patch-up followed by emergency, stretching out far beyond 2018 – except for two things. As time passes, the damage caused by currency instability is gradually going to mount; and the very trends that will make it mount are making the utopia of monetary union feasible.”
Sounds like things are going exactly according to plan. Another controlled demolition ahead.
So where does the Yen go vs dollar from here?
BTW, great stuff with comments.
I agree that quasi socialism has taken over the world. These people voting for expansive government in US (both parties) have not learned a thing from their communists/socialist counterparts around world…or that it all ends the same….massive loss of wealth and quality of life. They should cancel all school subjects and teach only basic economic math…that and prayer will be only way we avoid the massive deleveraging and wars that are surely coming
In 2008 the distortions in the financial industry were only serious. Now they’ve become catastropic. Bush’s and Obama’s failure to nationalize, reorganize, and reregulate the TBTF banks guaranteed that the next meltdown wouldn’t just be a crash – it would be a collapse. The financial industry can’t rob the real economy enough to save its phony wealth this time, but it will do the best it can.
Where does money go when it dies?