Monday, February 16, 2015

EU Leaders "Are Afraid The Syriza 'Virus' Will Spread Across Europe"

by Tyler Durden

As anti-austerity protests continue to build in numbers across Europe (and not just in Spain where Podemos now holds a commanding poll lead over the status quo) KeepTalkingGreece reports that Greek parliamentary spokesman for Syriza, Nikos Filis notes "The wave of protests indicates a new beginning... And it scares the dominant forces in Europe. Because Syriza virus can spread and in their communities." And we suspect that is indeed the Eurogroup's greatest fear...

Via AVGI (Google Translate),

The demonstrations of solidarity with the Greek people against the austerity policies and enrolled in a European perspective changes and upheavals. This scares the dominant forces in Europe. Because the "virus" SYRIZA can spread and in their communities,"said the parliamentary spokesman of SYRIZA Nick Phillis. 

"The wave of protests indicates a new beginning because SYRIZA virus can spread to the rest of Europe, as solidarity rallies in Greek people are against the austerity policies that degrade the lives of European citizens. The protests shall be entered in a European perspective changes and upheavals. And it scares the dominant forces in Europe. Because SYRIZA virus can spread and in their communities."

Commenting on Juncker statements and attitude of Europeans, in recent times, given the current Eurogroup for the Greek issue, Nikos Phillis speaks of "democracy deficit in Europe" and notes:

"They have behind them saying in recent days, seems to insist on completion of the Memorandum program harden their stance. This element is important to take account of people and Greece and Europe. Most likely not end today, having a horizon until 28/2. It is a political issue, not a technical one, because they put issues not related financial interest, such as labor. And on the part of creditors is not the issue of a minimum wage only, is subject a comprehensive, collective bargaining rights of a system, a European acquis in Greece is not the case. When elections take place in a country, we must respect the will of citizens, it is sovereignty issue. But the loan agreement is a bilateral relationship and the Greece and its creditors, the memorandum is a relationship that the Greece and has to do with the domestic legislation. Therefore, it says Juncker and others in Europe is not right, why do not question multilateral European treaties, but a treaty that its internal legislation. This raises issues of sovereignty and democratic representation. The negotiations should take into account the political change in our country. If not taken into account, this shows the perception in Europe for democracy, indicates lack of democracy in Europe ".

The Greek Solidarity anti-austerity protests are spreading...

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Monetary Aggregates Compared

by Pater Tenebrarum

The Fed has Provided the Bulk of Money Supply Growth since 2008

We have discussed the topic of money supply growth extensively in these pages over time. Below is a brief recap of how the system works in the US. Note that although fractional reserve banking and central bank-directed and backstopped banking cartels are in place all over the world, there are several “technical” differences between them. So the workings of the US system cannot be transposed 1:1 to e.g. Japan’s system or the euro system.

There are two possibilities of growing the fiat money supply: In “normal” times, commercial banks will extend loans which are partially “backed” by fractional reserves. These loans create new deposit money, which once again can serve as the basis of further credit creation, which again creates new deposit money, and so forth. It can be shown mathematically that based on a hypothetical fractional reserve requirement of 10%, extant deposit money in the system can be grown 10-fold (for a detailed discussion of the “money multiplier”, see here).

In actual practice, reserves have not represented a constraint for credit and money supply growth by commercial banks for quite some time. In the US banks can e.g. “sweep” money from demand deposits into so-called MMDAs (money market deposit accounts) overnight, letting these funds “masquerade” as savings deposits, which allows them to circumvent reserve requirements. Moreover, if credit demand is so strong that interbank lending rates (i.e., the Federal Funds rate) threaten to rise above the target rate set by the Federal Reserve, the central bank will supply additional reserves to the extent necessary to keep the rate on target. Thus the required fractional reserves will be supplied even if commercial banks don’t have sufficient excess reserves to lend to banks short of reserves.

None of this has been of importance since the 2008 crisis however, as “QE” has created such an overhang of excess reserves that interbank lending rates have continually wallowed close to the lower end of the 0.00%-0.25% Federal Funds target corridor. Moreover, up until late 2013/early 2014, commercial bank credit growth had slowed to a crawl anyway. So barely any money supply growth has come from the banking sector after the crisis. Enter the Fed, and “QE”.

In theory, if the central bank buys securities directly from banks, it would only issue bank reserves in payment (the selling bank receives a check drawn on the Fed, and upon depositing it, its reserves account at the Fed is credited). In actual practice however, QE in the US system concurrently also creates new deposit money at close to a 1:1 ratio. Most of the broker-dealers the Fed uses as counterparties in its open market operations belong to banks, but they are legally distinct entities (i.e., they are legally non-banks). Hence, when their accounts are credited, not only bank reserves are created, but new deposit money as well.

Our friend Ronald Stoeferle, one of the managers of the Incrementum fund in Liechtenstein, has mailed us an interesting chart that compares the growth rates of the official US monetary aggregates and total debt in system since 2008. It shows how the Fed really had to put the pedal to the metal to create money supply growth. System-wide debt growth meanwhile remained subdued (the government has grown its debt enormously and corporations have also expanded their debt load, households however have deleveraged):

1-Monetary Aggregates since 2008

Growth rates of US monetary base, M2, M3 and total credit market debt owed since 2008 – click to enlarge.

Note that the Fed no longer calculates M3, but several people have reconstructed it using alternative data sources (e.g. here is an article explaining how our friend Bart at Nowandfutures is calculating M3 these days. John Williams of shadowstats has also reconstructed the series).

Even though “QE” translates directly into deposit money (which is counted as part of the money supply; by contrast, bank reserves are not part of the money supply, as they remain outside of the economy), the smaller base from which the monetary base started out in 2008 meant that base money had to be expanded to a far greater extent in percentage terms to achieve the growth in the broad monetary aggregates depicted above.

It should be noted that all deposit money created as part of “QE” operations represents so-called “covered money substitutes”, as the bank reserves covering it have been created concurrently. By contrast, if new deposit money comes into being in a commercial bank credit operation based on fractional reserves, the bulk of the money substitutes (i.e., the deposit money) created in the process consists of uncovered money substitutes. If more than a certain percentage of depositors were to attempt to withdraw their demand deposits at the same time, they would find out that the money is actually not there. Due to QE, nowadays a far larger percentage of the deposit money in the system is actually of the covered variety than was previously the case (approx. 29% vs. about 5% in the pre-crisis era).

What Should be Counted as Money?

As readers know, we prefer the “Austrian” measure of the money supply, money TMS (which stands for “true money supply”) over the official broad money supply aggregates. As Murray Rothbard noted in his essay “Austrian Definitions of the Supply of Money”:

[…] money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods and services on the market.”

This seems straightforward enough and surely everyone would agree with this definition. In a fiat money system, we can differentiate between “standard money” – i.e., banknotes – and deposit money. Both are equally serviceable for effecting final payment for goods and services and hence form part of the money supply in the broad sense.

Why was it thought necessary to create the Austrian money measure TMS and what makes it different from the official monetary aggregates? It all comes down to the definition of money cited by Rothbard above. The official measures such as M2 contain components that are actually not money according to this definition, while excluding some that are.

The most important of the non-money components are money market funds. Since money market funds buy short term debt securities and issue share units to investors, they are merely a credit intermediary: The money they use in order to buy e.g. commercial paper shows up in the form of deposit money on the accounts of borrowers. Investors holding mutual fund shares aren’t holding money; they cannot use their mutual fund shares for payment. These shares must first be sold, and only thereafter the money received for them can be used in payment. Counting these money market funds as part of the money supply therefore results in double-counting.

For more details on which components of the money supply aggregates are not part of money TMS and which components that are not part of the “Ms” are included in it, readers should check out Michael Pollaro’s excellent and extensive article on the topic. The article also contains a list of references to essays by various other “Austrian” economists on the topic.

In terms of money TMS – this is to say actual money – the Fed has been a bit more effective in blowing up the money supply than is indicated by the growth of M2 and M3. At the beginning of 2008, the broad money supply measure TMS-2 stood at $5.3 trillion; as at the end of December 2014, it stood at approx. $10.703 trillion, in short, it has more than doubled.

We have recently show the chart of TMS-2 in a different context, but here it is again:

2-US money TMS-2

US money TMS-2 (broad true money supply) – click to enlarge.

The difference between the growth rate of TMS-2 and M2 is largely due to the latter’s money market funds component – M2 started from a much higher base in 2008, and due to the stock and bond market rally since 2009, money market fund investments have been drawn down in favor of investment in “risk assets”.

Note that while changes in money market fund holdings may occur on account of people replacing them with investment in stocks and bonds, this decision has no influence whatsoever on the amount of money in the system, as every purchase of securities is matched by a sale. All that happens is that the ownership of securities and the money used to pay for them changes.

This is also why the “money on the sidelines” argument often cited by stock market bulls really makes no sense. Whenever a trade takes place, there is as much “money on the sidelines” after it as there was before it. Only a change in ownership occurs. The only sensible thing that can be said in this context is that the overall supply of money has more than doubled since 2008 courtesy of the Fed’s electronic “printing press” – in that sense, there is indeed more “money on the sidelines”.

Recent Developments

Below is a chart showing the annualized growth rate in commercial and industrial loans in the US. The annualized rate of growth has recently accelerated to about 13.8%, which means that commercial banks have so to speak taken the baton from the Fed in terms of creating money supply growth:

3-C and I loans, y-y

Annualized growth rate of US commercial and industrial loans – click to enlarge.

These are actually typical boom time credit growth figures. They are counterbalanced a bit by a much slower growth rate in consumer credit. This is the main reason why the contribution of bank lending growth to money supply growth hasn’t been strong enough to achieve much more than keeping money supply growth roughly steady since the end of “QE”.

It remains to be seen whether the recent collapse in the oil price will affect these credit growth rates. A lot of credit has been pumped into the oil patch in recent years, and this activity seems now likely to grind to a halt. It seems therefore possible that the slowdown in the broad money supply growth rate in evidence since its 2010 and 2011 peaks will soon resume. Currently (i.e., as of year-end 2014), the year-on-year growth rate stands at 7.97%, which is down from the 16.7% and 15.67% peak growth rates in 2010 and 2011 respectively, but roughly still in the same range that has prevailed since late 2013 when “QE” was discontinued.

4-TMS-2 growth rate

TMS-2, year-on-year growth rate – click to enlarge.

As this chart also indicates, asset price bubbles tend to peak with a lag to peaks in money supply growth rates, usually after a certain (unknowable) threshold in the annual growth rate is undercut. The threshold just prior to the 2008 crisis was very low (less than 2%), but it was e.g. at about 5% in 2000 before the Nasdaq bubble broke. What level of money supply growth will be decisive this time around is something we will once again only be able to ascertain in hindsight, but the fact remains that such a threshold exists.


The Fed has been responsible for the bulk of money supply growth since 2008, but this has recently changed. For the moment, the commercial banks are “back in the game” and have replaced the effect “QE” had on money supply growth by ramping up their inflationary lending. Traditional bank credit growth has ergo once again become an important measure to watch. The sideways move in broad money supply growth that could be observed over the past year could still continue for a while, but we suspect that there will eventually be a further slowdown. If so, it will be bad news for the asset price bubble.

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Key Market Gauge Hits All-Time High

by Dana Lyons

You’ve heard me mention many times that we consider breadth, i.e., the number of stocks advancing versus declining, to be an important barometer of the market’s overall health. The more stocks that are advancing, the healthier the rally. One way to measure market breadth is by looking at indices on an “equal-weight” basis. Again, an equal-weight basis is just that: it places an equal weight on each of the components in the index as opposed to placing greater weight on those stocks with the largest market cap. This way, it is easier to tell if there is broad participation across the whole market or sector rather than perhaps just a few of the larger-cap issues leading the way.

Thanks to the Rydex/Guggenheim family of funds, we can easily monitor these equal-weight indices through ETF’s. We looked at one example the other day in the Equal-Weight Materials ETF (ticker, RTM). While the broad materials index has been lagging, RTM was hitting an all-time high. As of yesterday, we can say the same thing about the Equal-Weight S&P 500 ETF (ticker, RSP). It too is now at an all-time high.


As the chart shows, after moving sideways for the past few months, the Equal-Weight S&P 500 broke out to a new all-time high. This again is important considering it takes all constituents equally into account. Thus, if the ETF is at an all-time high, the majority of its components must also be doing well. This is good news for the broad stock market at the present time.

If there is a chink in the armor here, it is in the relative ratio of RSP to the S&P 500 (specifically, we are using the SPDR S&P 500 ETF, SPY). Despite the new high in RSP, its ratio versus SPY has not yet surpassed the high it made last June. We have seen this sort of divergence before (i.e., RSP goes to a new high but the RSP/SPY ratio does not), generally near tops in the market. For example, in 2007 (not shown) the RSP/SPY ratio peaked in February. Meanwhile, the RSP continued to make new highs into June. Of course, the market topped soon afterward.

We are not saying that the RSP/SPY ratio must confirm the new highs or else the market will collapse. If asked which was more important, the absolute price or the ratio, we would say the absolute price of the RSP. It is unquestionably a bullish sign to have it hitting all-time high ground. We are simply pointing out the fact that conditions are not “perfect” (when are they?), despite the breakout. The ratio divergence in the past has been a good warning sign of danger in the market. That’s why we bring it up.

The main takeaway, however, is a bullish one. The fact that a broad index like the equal-weight S&P 500 is making an all-time high suggests that the rally is healthy and that the market top is not imminent. Of course the market can top at any time. However, history would suggest that, like with the NYSE Advance-Decline Line, any market decline would likely result in at least 1 more eventual marginal new high in the S&P 500 before THE top is in.

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Greece and Euroland's Crumbling McMansion of Debt

by Charles Hugh Smith

All the gimmicks lenders press on borrowers to maintain the artifice that the loan is being serviced are financial frauds.

Sometimes the best way to summarize a complex situation is with an analogy. The Greek debt crisis, for example, is very much like the subprime mortgage crisis of 2007-08.

As you might recall, service workers earning $25,000 annually got $500,000 mortgages to buy McMansions in subprime's go-go days. The applicant fudged a bit here and there on income and creditworthiness, and lenders reaping huge profits from originating and selling mortgages were delighted to ignore prudent underwriting standards and stamp "low-risk" on the mortgage because it was quickly sold to credulous investors.

The bank made its money in transaction and origination fees, and passed the risk of default on to investors who accepted the fraud that the loan was low-risk.

The loan was fundamentally imprudent and risky because the borrower was not qualified for a loan of such magnitude. But since the risk was distributed to others, the banks ignored the 100% probability of eventual default and skimmed the profits upfront.

Greece was the subprime borrower, and its membership in the euro gave the banks permission to enter the credit rating of Germany on Greece's loan application. Though anyone with the slightest knowledge of Greece's economy knew it did not qualify for loans of such magnitude, lenders were happy to offer the loans at interest rates close to those of Greece's northern neighbors, and then sell them as low-risk sovereign debt investments.

In effect, the banks were free-riding the magical-thinking belief that membership in the euro transformed risky borrowers into creditworthy borrowers.

It's as if the $25,000/year worker wrote in a rich cousin's sterling credit score on his mortgage application. The lender and applicant conspired to fudge the numbers to lower the apparent risk of the loan. In the case of Greece, Greece and the lenders each fudged the numbers; there was no real penalty for doing so, and the rewards for doing so were substantial.

Marginal borrowers eventually default, and sure enough, both the subprime borrower and Greece soon defaulted. Life isn't perfect; people lose their jobs, get divorced, have medical emergencies, etc., and recessions lower GDP and national income.

Prudent lenders make allowances for these risks. But lenders who make big money originating loans and offloading them to others have no incentive to be prudent; rather, they have every incentive to make as many loans as they can, as quickly as they can, to maximize their profits.

Faced with massive writedowns, the lender has two choices: it can loan the defaulting borrower more money, with the explicit guarantee that the borrower will use the money to pay interest on the original mortgage. The total loan amount goes up, but the loan stays on the books at full value.

Or the lender can roll the mortgage into a lower-interest loan, effectively entering partial forbearance: the promised return on the mortgage plummets, but as long as the borrower makes small monthly payments, the loan stays on the books at full value.

Both of these strategies have been deployed in Japan for decades to keep impaired debts on the books at full value.

The last choice is to turn the mortgage into a zombie loan: the loan is neither written off nor listed as being in default: it enters a zombie state, not in good standing but not in default, either. The mortgage can stay in this netherworld for years, as the lender waits for the market to rise enough that the house can be sold without the lender absorbing a huge loss on the mortgage.

Unfortunately for buyers of sovereign debt, there is no house that can be sold to pay down the debt. Lenders can demand the debtor-nation sell off its assets to make good on the loans, but there is little recourse should the debtor-nation refuse.

When the borrower can barely make the monthly payment, he becomes a zombie. The loan principal barely budges, and so the future is unending penury. The borrower can cut expenses--bike to work, only eat beans and rice, only buy thrift-store clothing, etc.,--but this austerity doesn't change anything: he still can't afford the loan.

This is why austerity is a fake solution: no matter what the guy earning $25,000 a year does, he will never be able to pay down the $500,000 mortgage.

Meanwhile, the poorly constructed McMansion is falling apart. The loan didn't boost the borrower's productivity, or create a new income stream; the borrowed money was squandered on something that did nothing for the borrower that something much, much cheaper could have done just as effectively.

What did Greece get for its $300+ billion in debt? Did it transform the lives of all citizens for the better, fix all its dysfunctional systems, and build an economy for the 21st century? No; the borrowed money simply masked the dysfunctional systems and allowed the Status Quo kleptocracy to reap fortunes.

Greece's lenders want to keep the imprudently issued loans on the books at full value.They followed the strategy of loaning Greece more money, but only to make the interest payments. Now there is fevered talk of some version of partial forbearance: rolling the debt into new loans, perhaps writing off a chunk of the debt, etc.

None of this changes the fundamental fact that Greece was unqualified to borrow that much money. No matter what the guy earning $25,000 a year does, he will never be able to service the $500,000 debt in a way that frees him from zombie servitude to the lender.

So the hapless subprime borrower with the crumbling McMansion and Greece both have the same choice: decades of zombie servitude to pay for the crumbling structure, or default and move on with their lives.

All the gimmicks lenders press on borrowers to maintain the artifice that the loan is being serviced are financial frauds. They are simply new frauds piled on the initial fraud of issuing a visibly imprudent loan. The borrower was not creditworthy and the lender should never have offered him loans of that magnitude and at that low interest rate. The losses belong to the lenders, period.

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