Friday, April 5, 2013

Japan Steps Into The Abyss: Begins Largest Money Printing Experiment In History

The world is currently in the process of the largest and most important monetary experiment ever created. After the financial collapse of 2008, consumers around the world were unable to borrow further to keep the debt super cycle bubble expanding. Governments then stepped in and have taken their place, leveraging up their balance sheets around the world.

Many governments have already passed the point of no return that consumers reached in 2008 meaning there is no possible way the debt borrowed can ever possibly be paid back. The have already run the car over the cliff, but those driving in the car (who have not taken the time to look down) have not noticed any change. Why? Central banks have provided an unprecedented artificial force to keep it afloat and moving forward.


The most recent chapter in this saga came this week from the Bank of Japan. They announced a new program that (up until this point) is the greatest monetary expansion in history based on its size. They will inject $1.4 trillion of paper currency into their economy over the next two years, which will double their monetary base.

They are extending the maturity of their purchases out to 40 years and they are increasing their purchases of ETFs and REITS. In easy to understand terms: they are buying all financial assets with printed money.

Some may note that with the Federal Reserve currently monetizing $85 billion per month that the United States actually has a larger QE program in dollar size. This is true, but you need to look at these programs in relation to the size of the economy within that country. 

As Kyle Bass discusses in the video below, Japan has a program that is 75% the size of the Fed's, but their economy is only one third the size of the United States. Zero Hedge provided an excellent visual below showing what the size of the program would need to be in dollar terms if both economies were equivalent in size:


This is not to diminish the size of the Federal Reserve's current QE, which is both ridiculously large and a complete disaster in the making. The goal is to show just how much these leaders have lost their collective understanding of reality. They now truly believe that their are no consequences for their actions and that additional QE only means additional economic benefits.

When Japan's central bank governor, Haruhiko Kuroda, strode into the press conference this week he had a large smile on his face. It will like an athlete coming out of the locker room after winning the championship to talk to the press. A program like this should be put into place only under the most dire of circumstances and financial crisis, and the person making this decision should have a look of regret. Now it is done casually on an average week day, like walking down to the mail box for the morning news. 

Much more on this announcement from Kyle Bass:




For more on Japan's debt crisis see:

2013 Outlook: Japan's Government Debt Bomb Goes Off

Wednesday, April 3, 2013

Are Irish People More Intelligent Than Americans Or Do They Have Less Morals?

Michel Lewis published a book in 2011 titled "Boomerang: Travels In The New Third World," where he looked at the post 2008 financial crisis world and provided one of the first introductions to the new sovereign debt crisis world.

One of the chapters of the book was focused exclusively on Ireland. It showed the incredible build up to 2008 and the spectacular collapse that followed. Vanity Fair published the chapter in its entirety, which you can read here: When Irish Eyes Are Crying.

This morning Barry Ritholtz published the following chart on his site, which he called the single most insane chart he has ever seen. It shows the percentage of mortgage loans in Ireland that are 90 days past due. This number has now risen to 16% of all mortgages in the country.


The chart comes from an excellent article written this week from Quartz titled Welcome To Ireland, Where Mortgage Payments Are Apparently Optional. The article picks up where Michael Lewis left off and provides a real time update on the state of Ireland's banking system and sovereign debt crisis. I highly recommend reading both the chapter from Lewis and the article from Quartz.

What I want to do is go one step beyond their discussions and relate it back to what is taking place here in the United States.

The chart above shows those that are 90 days past due on their mortgages, meaning these Irish residents are living for free in their homes. Estimates are that 35% of those living for free are "strategic defaulters," meaning they have the ability to pay but choose not to. After reading about the law changes making it very difficult for Irish banks to foreclose on property, I would guess that 35% is a conservative estimate.

By the fourth quarter of 2009 in the United States nearly 7% of mortgages were delinquent, or 60 days past due. This was caused mostly by the unemployment rate rising and many families not having the ability to continue paying the mortgage. As the economy has improved, the number of delinquent mortgages has fallen back down to 5.19% - the lowest number in 4 years.

Here is what makes the story very interesting.

We know that well over 10% of the mortgages in America are still under water, meaning that the owner owes more on their mortgage than their home is worth. When you factor in the cost to sell a home (6% Realtor fee plus closing costs), the number of real under water Americans is far higher.

That means that at the most conservative estimate at least 5% of Americans with a mortgage are making their monthly mortgage payment while their home is under water (the real number is much higher).

This concept is just incredible to me. These people work extremely hard all week long to throw their money into a black hole. It is like taking their paycheck to the local check cashier every other Friday, then coming home and setting it on fire.

I understand that every circumstance is different and I'm not recommending that any individual stop making their monthly payments without considering all aspects of their personal situation. I am only talking in generalities.

People would say that the Irish are immoral for not making mortgage payments. I would say they are intelligent. I would assume that Americans continue to make their mortgage payments for the following two reasons (in order):

1. The are worried about the impact to their credit score

This is a valid argument. But what if you are 65 years old and have $1 million saved in the bank. You will never have to finance a purchase for the rest of your life. Your home is $100,000 underwater and you continue to make the payments every month. Why? Because of number two:

2.They believe it is the morally responsible thing to do.

I am willing to bet that if Americans took just a few hours to learn about how money is created or how the financial system worked, they would think much harder about making that payment every month.

When a bank lends you money that money is loaned into existence. The money did not exist before you signed the paperwork. There is not an old man somewhere who worked really hard, saved all his money, and opened a bank so he could lend you the money. Your loan is an electronic note on a ledger. It is an asset that was created out of thin air. If you do not understand this please see 2013 Outlook Addendum: Modern Money Mechanics.

Why are there hundreds of thousands of Americans who have been living for free in their homes for years? If the banks were to foreclose and sell the property they would be forced to take a loss on their balance sheet. If they do not foreclose then they can continue to keep the asset at full value on their books. Extend and pretend.

Welcome to zombie banking America. The only difference between what takes place here vs. what takes place in Ireland is that the Irish choose to keep their money. Americans feel it is their responsibility to send it back to the banking system every month. Then they go to dinner parties and talk about how unfair it is.

For a further discussion on homes held off the market, specifically in Las Vegas, please see:

Behind The Curtain Of The Artificial U.S. Home Market

Sunday, March 31, 2013

Cyprus Has A Better Option: Default, Devalue, & Depression

With the decision to accept the the bail out, Cyprus now becomes the fifth country in the Eurozone joining Greece, Spain, Portugal, and Ireland to take on more unpayable debt. The following graph shows the size of the Cyprus bailout compared to the other countries and the size of the bailout in relation to the total size of their economy (GDP).


At the very outset of the initial Eurozone sovereign debt meltdown there was heated discussion on whether Greece should accept that bailout or just remove themselves from the Eurozone, default on their debts, and devalue their currency.

Longer term readers know that I have been in the second camp since the beginning. I have stated all along that their pain would be far greater at the outset, but after a short period of time they would find a bottom and begin to recover. With insolvent banks liquidated, their government debts either defaulted or monetized, and their currency drastically devalued, they would then have the ability to become competitive with the rest of Europe through lower priced exports and assets that were now relatively cheap.

The only blue print we have of this tactic since the global financial crisis began in 2008 has been Iceland. They decided to let their banks fail and subsequently let their economy collapse. It was far more difficult for Iceland during 2008 and 2009, as their leaders had to make the tougher grown up decision for the longer term health of their country. The rest of the world looked at them as making the wrong decision, while I applauded it here. Iceland devalued its currency, cleansed itself of the toxic malinvestments, and is now growing under a strong and healthy foundation.

Greece today is faced with the exact opposite situation. They have piled on more debt that can never be repaid in order to try and keep their farce sludging forward. Their leaders made the cowardly choice at every step along the way, and the country has not even begun a recovery because like most of the developed world it has still not allowed its insolvent system to cleanse.

Unemployment in Greece now approaches 30% and youth unemployment approaches 60%. They are in a depression of the worst kind with no end in sight.


The fact that the bank runs in Cyprus have not been worse up to this point with the capital controls in place will be looked at as a "victory" for other countries in Europe watching on. If you have your money in a bank in Greece, Portugal, Ireland, Spain, or Italy, you are insane. There is no other polite way to say it.

Now Cyprus faces what will most likely be at least a 5 year contraction of their economy, which will continue to collapse under the weight of the new debt added in the bail out. When will a country say enough and make the correct decision to remove themselves form the shackles of the European Union? We may have the answer soon as the crisis moves back toward Spain, Italy, and France, where nothing has been resolved and grows worse by the day.