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April 30, 2013

It is Bunga Bunga all over again!

With the election confirmed today by the Senate of the new Italian government Berlusconi has managed to place himself in power once again. 
No wonder that Berlusconi is having a very good time these days; with two trials pending and a new government controlled by him, he has managed again to shield himself from going to jail. 
The old fox has outwitted his antagonists once again.

Beyond the politics of the moment Italy though is besieged by a very serious crisis.

As the various central banks dump money into the system, the yields on Italian sovereign debt have gone down but this does not change the economic difficulties.

The official debt to GDP ratio is 136% but the actual number is somewhere around 280% which is unsustainable by any measure.

Italy's Real GDP is back to 1990s levels practically erasing any growth accumulated in the last 10 years.

The Italian banking system is also in dire straits.
Italian banks are seeing a sharp deterioration in the quality of their assets. The rate of acceleration in newly impaired loans is staggering as it appears the current recession, driven by falling internal demand, is more insidious than the export-led crisis in 2009.

And no matter how the Italian banks try to differentiate their bad loan composition, it is an ugly picture.

The Italian House Price Index (IPAB) decreased 4.6% YOY as a result of tightening credit conditions, new property taxes and a difficult macro environment.

Italy's industrial base has one important peculiarity: 95% of companies have under nine employees. In fact the average is four. They are micro companies and as such, their balance sheet is modest and so is their ability to withstand prolonged contraction in demand (external or domestic depending on the line of business).

Italy has a second important peculiarity. It has significant household financial wealth and an aging population, including a high average age of entrepreneurs.
This implies that on the margin more entrepreneurs are likely to decide to scale back operations as expected profitability has diminished due to weak turnover, high red tape and growing fiscal burden.

On the margin, opting for early retirement looks like an increasingly appealing option.
Be it because of severe balance sheet pressures or because of less attractive future returns, the economy is losing productive capacity at a disturbingly high pace.

But despite private wealth and assets the public sector is quite close to going over the cliff.

Italy’s difficult position was enumerated in a Bank of Italy report to parliament last week which said the economy was going through its most acute crisis since World War II. Economic output last year was nearly 7% below that of 2007, while disposable incomes had fallen 9.5%. Industrial production had collapsed by 25% over five years, while the building sector shrank 22%. Unemployment had nearly doubled to 11.7% the Italian central bank said.

In the meanwhile Berlusconi's ratings are at an all time high, his PDL party in the latest polls is showing an increased popularity eroding support at PD and MS5.

Simply wondering if the Italian people are completely deluded or simply insane, I propend for the second option!

“Insanity is doing the same thing, over and over again, but expecting different results.”


April 20, 2013

Italy political chaos reach new highs with president re-election!

Italy, which has devolved into total political chaos since the February 25th inconclusive elections has managed to re-elect the current president Giorgio Napolitano for a second consecutive 7 year term. 
So if not a prime minister, the country at least has a president.
There is one problem: Napolitano is 87 years old.
Perhaps the prospect of a 95 year old president in 7 years is precisely the the kind of stamina and  impetus the country needs to shift its economy into overdrive!

Yet while the presidential election was largely a farce, it is the problems in Italy's Democratic Party (PD) that are now center stage, following what appears to be a complete implosion in the party.

From Reuters:
Center-left leader Pier Luigi Bersani announced his resignation on Friday after party rebels sabotaged two separate candidates he had backed for state president, deepening Italy's political chaos.

Bersani told a meeting of parliamentarians he would quit as Democratic Party (PD) leader as soon as the election of the next head of state was completed, following two dramatic days of parliamentary voting in which successive center-left candidates were scuppered in secret ballots.

"He accepted his responsibility after the disgrace of what happened," Paolo Gentiloni, a senior Democratic Party parliamentary deputy said after Bersani's announcement.

Then disarray in the center-left, which has the most seats in parliament, could make a snap election in the summer more likely to end the political deadlock, but there is no clarity about the next moves after weeks of chaos.

It is unclear who will take over leadership of the badly split party but Bersani's departure could clear the way for arch-rival Matteo Renzi, the dynamic 38-year-old mayor of Florence, to take over.

Bersani's announcement came shortly after former Prime Minister Romano Prodi announced he was pulling out of the race for president after more than 100 center-left electors disobeyed Bersani's instructions to vote for him in parliament.

It was the last of a series of humiliating setbacks for Bersani and blunders that have shredded his ability to hold the center-left bloc together.

The collapse of efforts to secure the presidency for Prodi, a respected international figure, underlined the deep fractures running through politics in a country still seeking a government nearly two months after February's inconclusive general election.

"The politicians should be ashamed of what they're doing to the country. Today we're seeing a level of irresponsibility that goes beyond all limits," said Diego Della Valle, head of shoe group Tod's, one of Italy's most successful clothing companies.
The biggest winner as a result of all of the above? Silvio Berlusconi of course!
Since Berlusconi's star seems on the rise again I thought to follow the BBC track and highlight some of his most enlightened words such as these:
"I am without doubt the person who's been the most persecuted in the entire history of the world and the history of man."

"In my opinion, and not only mine, I am the best prime minister we can find today."

Previously, on the same theme: "I am the Jesus Christ of politics. I am a patient victim, I put up with everyone, I sacrifice myself for everyone."

"The best political leader in Europe and in the world."

"There is no-one on the world stage who can compete with me."

"Out of love for Italy, I felt I had to save it from the left."

"The right man in the right job."

"I don't need to go into office for the power. I have houses all over the world, stupendous boats... beautiful airplanes, a beautiful wife, a beautiful family... I am making a sacrifice."

"In Italy I am almost seen as German for my workaholism. Also I am from Milan, the city where people work the hardest. Work, work, work - I am almost German."
And to put current Italian events into context it is worth quoting Benito Mussolini:
Democracy is talking itself to death. The people do not know what they want; they do not know what is the best for them. There is too much foolishness, too much lost motion. I have stopped the talk and the nonsense. I am a man of action. Democracy is beautiful in theory; in practice it is a fallacy.

April 13, 2013

Household Wealth in Europe

The ECB has finally published the all-country report which gives us an indication of where household wealth is located and where in the future bailouts private wealth will be confiscated. The data is from 2009-2010 so especially in the PIIGS countries it could be overinflated after 3 years of austerity still is a powerful indicator of major unbalances in the Eurozone.
Italian median household wealth was indeed over three times larger than Germany’s. But that wasn’t the problem. The problem was Cyprus.
Cypriot households (CY), as measured by both their median and average wealth, were the second richest in the Eurozone. Median household wealth of €266,900 was over five times Germany’s median of €51,400. 
Average household wealth reached a phenomenal €670,900, 3.4 times Germany’s €195,200, and just shy of Luxembourg’s €710,100. Rarefied levels of wealth achievable only by small countries with huge and murky banking centres, or lots of oil. Few countries in the world are in that elite club.
And Germans based on median household wealth, were the poorest in the Eurozone.

It wasn’t that Cypriot households earned a lot of money—they earned the same as German households! They just knew how to hang on to it. At least until their bubble blew up.

By now, wealthier German households, those who own property and stocks, are significantly better off than they were in 2010, and they have since pulled up the average. Median household wealth, however—almost none of them own property or stocks—has certainly been left behind, again.
In the meanwhile in Cyprus real estate values, after a mind-boggling bubble, have been plunging for over two years; and billions in bank deposits have evaporated. 
Spanish household wealth has also been caught in a downward spiral of devastating unemployment and an exploding housing bubble—Spanish households lead the survey with a homeownership rate of 83%. In 2010, homeowners valued their homes at bubble prices. By now, much of the home equity Spaniards were clinging to has dissipated—with dramatic impact on household wealth.
Central bank sources told the FAZ that the Bundesbank and the ECB, to avoid stirring up a storm at an inconvenient time, kept this explosive wealth data secret until after the Cyprus bailout had been decided. But the data also explains the political motivation for the haircuts of account holders in Cypriot banks.

April 10, 2013

Mark Shaw: One very dry demo

Mark Shaw demos Ultra-Ever Dry, a liquid-repellent coating that acts as an astonishingly powerful shield against water and water-based materials. At the nano level, the spray covers a surface with an umbrella of air so that water bounces right off. Amazing!

How to move offshore your cash in six steps

No one know for sure how much of the planet's private wealth is parked in tax havens. One estimate is that there's $32 trillion deposited offshore; a more conservative calculation puts it a minimum of $8 trillion.
It is easy to understand why 2.5 million files covering 120,000 offshore entities was 'accidentally' leaked to the media.
Governments realize that they are running out of options fast and putting pressure on off-shore accounts is the second front of a coordinated effort to start converting private wealth to a public one.

ICIJ issued the following simple six-step process guide to off-shore stashing; from 'Choosing a haven' to creating a 'secret identity' and from opening the 'right' bank account to how to 'move' the money; this picturesque guide may be indispensable to many Europeans now that the EU is adamant on who will pay the next banking crisis.

For a full interactive tour visit: 

April 9, 2013

Europe Stagflation risks

Hard times ahead for Cyprus and the PIGS.
Bloomberg has ranked countries based on their risk of stagflation.
Stagflation, a combination of stagnation and inflation, is a term used in economics to describe a situation where inflation is high while the economic growth rate slows down, and unemployment remains steadily high.
It raises a dilemma for economic policy since actions designed to lower inflation may exacerbate unemployment, and vice versa.
The lower the score, the greater the risk of stagflation.
Cyprus was found to be most at risk of stagflation with a Stagflation Score of -4.733, followed by Portugal (-2.671), Italy (-2.133), Spain(-1.745) and Greece (-1.366). Switzerland was ranked least at risk with a score of (7.560), followed by China (2.612) and Japan (2.446).

Source: Bloomberg Brief

April 6, 2013

Eu Wide Bank Confiscation Approaching

What happened in Cyprus is unfortunately going to be replicated all over Europe, the reason is simple at the end there is not enough money to bailout Spain and Italy, the system used so far in Portugal, Greece and Ireland is not sustainable, let us even suppose for one moment that Germany is willing to help Italy and Spain, it will not work, there is not enough money to sustain those rapidly decomposing economies and even if Germany would mortgage its future it would only kick the can down the road for few more years.
The crisis is systemic and the jump-ship set of mind is already in place all over Europe.
Italy and Spain are doomed, France is on the brink.
Cyprus has been correctly addressed as a guinea pig for future bail (out-in) but at the end all minds go to Italy with its large savings base and Spain with his colossal bank crisis.
This week Italy's largest bank CEO contemplated such a move and alarm bells should start ringing all over Europe:

From Bloomberg: Unicredit says global rule needed

Cutting large deposits in failing banks, along with other liabilities such as bonds, to offset losses is acceptable as long as small savers’ funds remain protected, Ghizzoni told reporters in Vienna late yesterday. The European Union has to introduce identical rules in all of its member states and ideally those rules would be coordinated globally, he said.

Unicredit knows the Cyprus effect is coming to Italy and Spain and it is asking a global coordination to ring fence the EU from massive capital flows.
What is scaring is that we have moved from a world where property and savings were guaranteed to a world where property is no longer safe and where starting from bankers to politicians a framework is being created to justify or legalize such confiscations as necessary.

From Reuters: EU to push for losses on big savers at failed banks.

The European Parliament will demand that big savers take losses if their banks run into trouble, a senior lawmaker told Reuters, adding momentum to a policy unveiled as part of a Cypriot bailout.

Now the likelihood is rising that tough treatment of big depositors will be written into a new EU law, making losses for large savers a permanent feature of future banking crises.

"You need to be able to do the bail-in as well with deposits," said Gunnar Hokmark, an influential member of the European Parliament, who is leading negotiations with EU countries to finalize a law for winding up problem banks.

"Deposits below 100,000 euros are protected ... deposits above 100,000 euros are not protected and shall be treated as part of the capital that can be bailed in," Hokmark told Reuters, adding that he was confident a majority of his peers in the parliament backed this line.

The law, which will also introduce means to impose losses on bondholders, is due to take effect at the start of 2015. Germany wants provisions for bailing in bondholders and others in the same year, though that may be delayed.

Hokmark urged savers to check their banks' health before taking the risk of depositing money.

"If you put your money in Royal Bank of Scotland ... or Deutsche Bank, depending on how that bank is working you are taking a risk," he said. "You need to be aware that you are taking a risk.
Looking ahead, the implication is that no one should place more than €100,000 in any bank (but then since every rule can be twisted according to the moment's necessity who know if 100.000 will still be the threshold in 1 year time).
So no one will invest in Europe especially in questionable Southern European banks.
Instead, expect capital flights to resume in different, more creative forms.
Pressure is going to rise on offshore banks as well to undermine their attractiveness and willingness to accept deposits from EU citizens, proof enough is this week leaks on offshore accounts.
A major campaign has started to coral money inside the EU in anticipation of the Great Confiscation and Great Depression approaching.
My only tip if you have money inside the EU is time to move out before the trap is in place.