Category Archives: Europe

The Debt Chickens Are Coming Home to Roost

A story it today’s Us print edition of the financial times highlights a building ‘bubble’ of disquieting proportions. The article, ‘Britain’s Pizza Chain Boom Faces Debt Reckoning’, highlights how a large number of restaurant chains have been snapped up over recent years using debt. This might be by a private equity firm or a leveraged buy-out. In either and other cases, many acquisitions were executed using cheap debt which was facilitated by central bank policies such as near-zero interest rates and quantitative easing (QE), both of which massively distorted the price of corporate bonds and debt. Add to this public policy and pressure on banks to increase loans to help drive growth, you can see signs of a perfect storm.

The UK example is specific, but the problem is wide and applicable to most developed economies. The US has just come off a long-run marathon of high and record levels of corporate acquisitions, again much funded by cheap debt. There must be many organizations hanging by a thread, just waiting for interest rates to nudge up resulting in unsustainable debt burdens and interest payments. Unless growth drives the top-line of these businesses at a faster rate, the chances are many such firms will go to the wall.

This situation was created as an unintended consequence of near-zero interest rates for such a long time and massively price-distorting quantitative easing. Though most governments have ceased buying sovereign and corporate debt, the damage is done. Massive, trillion dollar, balance sheets at central banks need to be unwound in such a way as again, not upset the market. The act of creating the balance sheet did upset the market. In reducing their balance sheets, central banks will do it again.

And the sad part about all this, as it will play out? Smart investors with lots of money and a high risk-tolerance will hedge against such business failures and reap huge rewards. The rich investor-class will get richer, and the poor will just lose their jobs or otherwise miss out. Politicians will have a field day, calling out the failure of capitalism. Of course, it’s not a failure of capitalism since central banks and their policies are not part of any capitalist model: central bank operations are closer to a socialist model where the few take decisions to ‘help’ the many, as if they know better and how to help us.

Oh well, such is life. Just buckle down and wait the storm. The debt chickens will soon be home to roost. Maybe not by this Easter but expect them home by next year.

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Of Guns and Data

I compare two phenomena that are unrelated: the US and their guns and the Europeans and their data.

See Digital privacy rights require data ownership and Mark Zuckerberg apology: ‘I’m really sorry that this happened’.

The mass shootings in America are terribly sad.  The US is wracked with grief periodically and at the same time an inability to address the primary cause – guns are part of the way things are in this country; and access to them remains an big issue.  Guns are accepted, even respected, and are encoded into the country’s psyche via the Second Amendment.

At the same time many Europeans and others can’t understand the logic.  Many other counties have banned many kinds of firearms in their wider populations and such counties suffer far fewer mass shootings.  As such, those folks can’t get their heads around the argument for protection of the second amendment.  It is like two speakers in front of each other and neither understanding the other.  I have stood on both sides and seen the gap.

While in London, UK, this week I watched the frenzied coverage in the media about the Facebook data exploitation by Cambridge Analytica.  It seems, if one understands the story, that a vendor or app explored a loophole that came about due to a lapse in forward thinking by Facebook some time ago.  It seems the gaps have since closed, but the data trove had already been taken.

In Europe GDPR is big news: some recent surveys by Gartner showed that spending on governance related data and analytics initiatives have increased significantly in the last two years in the UK (as the example), far in excess of US spending habits.  The European media is incensed at the lazy attitude of American firms: how could they have allowed such a use of data without citizen consent?  The media is painting the US as Luddite-like for not realizing the obvious and for not reacting earlier to protect consumer data.  The US, at the current time, is reacting but more so in terms of the Facebook stock price rather than in media incredulity.

Even though there is no connection between guns and data, the intensity of the emotional response on both sides of the pond to each issue is palpable and an almost mirror image.  I have sat on both sides in each case and it is fascinating to observe.

One wonders if the US will ever adopt its own GDPR-like rules.  Harmonizing with the EU would be a logical and likely beneficial step, at some point.  Simplicity of equivalent rules would make business and IT costs bearable.  Should the US respond with different rules over time, costs will likley escalate as rules start to overlap and conflict.  But there are no signs the US – at a federal level – will seek anything like GDPR.  I just wonder if some enterprising, populist politician won’t pose a stalking horse.  I guess someone will, and of course it won’t survey engagement with reality.  But it might presage the first of many such attempts to test the popular perception.  Over the long haul, will the popular feeling converge with those of Europe?

As to the second amendment; I don’t think anything will change on that front for a long time.  It is a political argument – one steeped in a time long past when citizenry needed to arm itself from rampant enemies in the forests, and the possibility of a corrupt government.  Since democracy seems to be alive and very well, I am surprised that the Second Amendment has survived as long as it has.  But what do I know?

Trouble for The Eurozone with Trump’s Tax Deal

There was an excellent Opinion piece in today’s Wall Street Journal that calls out the less thought through implications of Trump’s domestic tax deal on international business. The piece, US Tax Reform Has Europe Worried, by Joseph C Sternberg, explores the writings of a German research group that details some thinking suggests some organizations will think twice about new investments in Europe – specifically Germany – with the new US corporate tax rates being leveled. The research piece is from ZEW and is here: Germany loses out in US Tax Reform. This is another dimension not modeled by US economists when they try to determine the impact of the tax reform on US growth.

The more important point however in Mr. Sternberg’s piece comes toward the end of his excellent article. The author suggests that US tax reform highlights a different opinion for taxation from an ideological perspective. This point needs to be talked about more since we have lost our Mojo for ideology in favor of a left-right populist dichotomy. The US reform is being used to alter tax incentives to drive growth, investment and job creation. Most of Europe, with is more socialist (and Democratic-leaning) policies, uses tax incentives mostly as a redistributive process for sharing an assumed pie. There is much less effort in driving growth or influencing investment to grow jobs. This is the dialog we had in the 1980s and it leads to the dialog about big government versus small government.

It is about time ideology got a fair crack again!

EU Intransigence in Brexit Negotiation Echoes Trump: Putting EU First

In today’s US print edition of the Financial Times there was a Comment piece by Jean-Claude Piris, former director-general of the council of the European Union’s Legal Service. It is titled, The Myth and Delusion over Single Market Access. In the piece he argues that Britain does not understand what access to the “free market” means. As Britain seeks a unique relationship, he claims that Britain is ignoring facts and should drop such ideas and focus on what the EU offers. This Comment is political posturing and not in fact true.

His key point is this: “…[T]he single market is based on the free movement of goods, services, capital and people, and choosing among these freedoms is not permitted.” This maybe a rule enshrined in EU law but it is just that. Many other enshrined EU laws, created for its benefit, have been negotiated way – such as France and Germany both violating the budget deficits.

The free market can be whatever it needs to be. It can exist between the free movement of goods and services, and capital. It does not require the free movement of people. That adds a social-cost and social-layer of bureaucracy that is the main reason why Britain left in the first place. It is this argument, that the EU cannot separate the components of this “law”, that will undermine the Brexit negotiations and sits at the heart of the success of the EU.

Before the forerunner of the EU was founded, the EEC, Britain was closely involved in the original concept of the “United States of Europe”. While Churchill may have implied both an economic and political model, he did not imply political union – even though this had been offered in a desperate moment some years before in 1940 to France at the point of collapse under the weight of the German Army.

But just as the original ideas for a barrier-less trade framework was being explored, Britain exited the dialog and so the French and the Germans continued the work. It was still mostly an economic model – but Britain’s withdrawal from those early stages were fatal. The EEC formed up and without Britain to act as a counter weight, France and Germany – for different reasons – pushed forward with ever greater economic and creeping-political alignment.

So it’s disingenuous for EU leaders and others to say what the free market is and is not. All is possible. It is purely a negotiating ploy to try to trump an argument. It is no different than saying, “Put EU First” just as Trump says, “Put America First”. No different.

UK Election Results Capture Political Schism

In under two years since the country stunningly voted to leave the EU, the same electorate shifted yet again and leant away from the idea of a clean break with Europe and threw the whole thing now into chaos. The youngest of voters sided with Labour, who were selling polices in a throw-back to those last seen in the 70s that, if followed, would lead the country to financial ruin. Corbyn’s plan is not even realistic; yet the youngest among us just have no memory of such irresponsibility. Only the old do, and so they voted Conservative.  

Now hostage to a 10-seat minority of the DUP, Theresa May will be saddled with a back-seat driver at negotiations with the EU. Decision making responsibility will not fall to May; she will have to keep ‘calling home’ to get approval.

Worse of all, the result of this election shows how the entire political system is corrupted. We have the worst of both worlds: a disenfranchised and ignorant electorate (e.g. Most of the young) that falls for platitudes and made-up promises. Of course, the left calls such things as false truths or fake news if the right puts such things out.

Britain will now have a much riskier time with Brexit. All we can hope for is a bank run that requires a bail-out or for the IMF to drop Greece ‘in it’ and a run on the Euro. It’s a matter of time. But now we need it sooner rather than 

The EU – Creaking at 60

The title of this blog is the title of the Economist Special Report last week. The title refers, of course, to the 60th anniversary of the Treaty of Rome, the founding of the EU at its source, being celebrated by EU members, less the U.K., last week. Oddly the U.K. is still a member but since she wants out, political correctness prevents Albion from upstaging proceedings.

The Economist special report is really good. It is well balanced and actually concludes that Europe needs a multi-speed system to respect all the differing political and economic challenges across the EU. What is irksome though is that while a two-speed or multi-speed approach has been proposed before, why is it now that the Economist has finally woken up to reporting it and making it the basis of its views regarding the success of the EU?

It is as if the Economist has woken up just in time to see the final deck chair arrangement on the titanic. Correctly the special report calls out the weakness and fallacy of the EU’s monetary policies for all members and now current monetary union is flawed. We all knew this a while ago. If this had been addressed perhaps the U.K. vote for Brexit might never have happened!

But ignoring my cryptic criticism, the article is very up to date and very down to earth. It’s just a shame that it took Brexit and the near break up of the EU, and continuing mess in Greece and Italy to come to the conclusion we needed four years ago.

US Government Sets Up Next Financial Crisis & Brexit Not the Risk at All

Two articles came accross my desk this week – one caused consternation on my part and the other seemed to offer a sanity check.  The former concerned the US economy and specifically how there are signs that consumers, and lenders, are returning to the same behavior that led to the financial crisis at the source or our current economic challenges.  The latter concerned the hype and over blown concern with Brexit and its impact on Britain’s economy.

In the US print editions of the Wall Stree Journal (Wednesday January 11th) there was an article titled, “New Loans, Same Old Dangers“.  This front page article described a government-led initiative (Property Assessed Clean Energy) that provides subsidies loans to encourage homeowners to buy energy saving devices.  The article gives an example of a homeowner who is not able to afford the loan is still encouraged to take it out.  As is common practice this loan is then sliced up with other loans and sold on as a bond – what is called securitization in the financial industry.  This is analogous to the risky mortgage loans offered, and taken up by people who should have known better, and sold on to governments in Iceland as “AAA” opportunities.

The market is very small – the article suggests around $3.4bn of loans have been made so far – but the model is just damning.  FIrst you have big government trying to force its policies on a free market.  With the housing issues that triggered the financial crisis this was Government demanding ever greater home ownership among poor people and those that could not afford it.  Second you have the lowering of standard for the setting up of loans.  This is identical to what happened with dubious sales efforts of mortgage brokers during the 1990’s and early 2000s.  Finally you have the build up of risky loans and owners of the loans not knowing where the real risk is.

The popular uprising that has brought Trump to the White House would do well to heed these stories.  After all people will be people and when offered a bad apple that looks and smells sweet, many will take it.  Perhaps we should not fault those that do – or should we expect a stronger moral aptitude?  Either way we need to get big government out of the way.  It should not seek to foist its social or political wants on you and me – we should be free to do what we want, how we want, when we want, as long as it does not harm our fellow citizen.  Innovation and opportunity will drive improvement in the energy sector.  And perhaps tax credits would be a safer way to encourage small changes in behavior that do not create risky loans.  

The other article, a commentary piece in the US print edition of the Financial Times (Thursday Janary 12th) was titled, “The City has nothing to fear from Brexit“.  It was penned by Stanislas Yassukovich who is a former chief executive officer of European Banking Group.  The article is a breath of fresh air since it refutes many of the risks and issues that most other “specialists” report in the press.  For example we have heard a lot about “passporting” – the idea that a financial institution authorized to trade in one country of the EU can freely trade in another country.  It turns out that non-member states can use this capability quite easily – so it’s not even needed as a negotiation.  The article goes further.

Passporting was a means to try to level set the complexities of rules across what was meant to be a single market.  It turns out that even with passporting there remains complex and different rules that still need to accommodated when trading across the member-states.  As such, “core retail financial activities – residential mortgages, deposit and savings products and so on – remain almost entirely national, and highly protected.”   This whole think stinks to me.  

The recent news that PM Thresa May fired her senior most civil servant who worke with the EU was greeted in the press as bad news.  It seems he kept repeating to the PM that it was not going to be possible to complete all negotiations in time before the two year window closed for leaving the EU.  Why is this?  He may have had a practical view on things but he certainly did not have a positive view on what is possible.  I think we need clean out the cupboard and get a fresh new look at everything.  Good for PM May to do so.  If the author of this article is right, there is little we should fear from Brexit.