by John Ward
We have all (myself included) been overly obsessed with the Brexit “process” over the past year. It’s time intelligent Brits and commercial opinion leaders focused on the disastrous global economic picture….and woke up to the last thing we should be on March 30th 2019: members of the European Union. Sometimes, the radical view is the responsible one. We are approaching one of those moments in history.
Two major econo-fiscal forces are, finally, making themselves felt. Such has been predicted in these columns over many months; they are the result of potty neoliberal economics in general, can-kicking that dates back to 2003, and the US Fed’s premature ejaculation of tightening measures during two years of believing its own publicity.
The first is the need for sovereigns and other blocs to raise more spending money (by stealth if necessary) in order to offset the growing shortfall in salarial taxes thanks to un(and under)employment. This has predictably produced demand falloffs (UK, French and German Christmas sales by margin are a bloodbath) and grassroots backlash à la Gilet Jaune in France.
The second is a dénouement of the oil price-fixing that has led to high bourse prices (tracked here regularly over four years). Nobody’s pockets are bottomless, and actual crude prices are now falling, while its futures are almost universally negative.
Other obvious symptoms will soon follow; indeed, some are already evident….largely ignored by commentators fixated by Brexit showboating.
Major forecasters are displaying dismal uniformity in predicting a growth slump in the second half of 2019. Their outlooks are the same as almost exactly ten years ago prior to the American sub-prime crisis-cum-crash of 2009.
But subprime hasn’t been abolished – or anything like it: investment banks and their clients are becoming markedly risk-averse: anything positioned as heading towards junk is attracting yield explosions – ranging from 130-280 basis points in the last ten weeks alone. The US house-price index has in turn dropped by 20% over the same period. I would urge every investor to keep well away from anything to do with US secondhand car derivatives.
Mario Draghi’s headlong dash to have his ECB fall in line with Fed tightening is now looking very sick indeed. Although Brussels threats have temporarily assuaged rising Italian truculence, they can’t stop that ailing country’s ever-rising borrowing costs and ever-falling real gdp. Indicators in France are at last reflecting the slowdown here upon which I’ve been reporting since 2016, and the sharp decline in Germany’s outlook is even steeper. The eurozone overall has seen similar rises in risk yields – of 145 basis points since the start of last month alone.
But if you think that rounds off the gloomy picture, think again. Nerves began jangling in November when Volkswagen – VW for heaven’s sake – struggled to raise a corporate loan of €5billion. Eurobanks don’t want to know about underwriting corporate debt at the moment – a sentiment not helped by (a) a collapse in their own valuations and (b) the withdrawal of Dollar liquidity to take “advantage” of President Trump’s tax reforms.
The knock-on effect of these developments is the return of the Grim Interbank lending Reaper. The secondary market valuation index for those banks trying to offload dodgy corporate lending business has dropped 7% over the last few weeks….and the decline is accelerating. The next logical step on from this is gossip about those banks rushing from pillar to post taking any discount they can get for those deadly liabilities banks revel in calling assets. It’s only a matter of time before such banks get frozen out. Several lenders in Italy are already in that position. Then Brussels will be faced with the need for a rapid volte-face on bailouts….and an attempt to get bailins through without serious social disorder.
Brussels, rapid decisions….um, no: I don’t think so either. Although you can bet the farm that Federica Mogherini will be tumescent at the thought of wheeling out her EU law & order army which was, a mere three years ago, a figment of UKIP’s imagination.
Looking at the numbers and making sensible guesstimates, my own feeling is that corporate and bank insolvencies are due to start surfacing in the eurozone around the middle to end of March 2019.
The 29th March 2019 is, of course, a date We The Brexiteers already have inked in our diaries. I hope this post serves as a warning to the Parliamentary Remainer majority keen to cancel it.
On verra.