Banks in troubles

It is generally known that you can see a bottle of wine, that somebody drank a half of, as a bottle that is half empty or half full. It is only about the angle you look at it. The volume of the liquid is still the same. Financial markets are similar.

A news came that could be perceived both as a tragedy of the Italian economy or we can see it optimistically as a rescue of not only Italian but also European economy. The markets decided for that optimistic viewpoint. And that is why the stocks have been growing today. The Frankfurt stock exchange has been adding 0.6 %, the Paris one 1.0 % and the Milan one right away 1.3 %.

Markets have simply been thrilled about the news that the Italian government is going to pay 5.2 billion euros to the Intesa bank and provide a guarantee of another up to 12 billion euros for taking over the Popolare di Vicenza bank and Veneto Banca which bankrupted. The market sees it positively because the bank is going to take over only the good assets only for one euro. In the eyes of the investors, it is like it choses only the cherries from the sundae.

From the point of view of the entire banking sector, it is a good news. Italy has a giant amount of bad loans and now their big part is going to get outside of the banking sector. But everything has its price. The Italian government has been saving another bank not long ago and it poured in it 6.6 bn. euros. So it is cumulated 17.2 bn. That means almost 24 bn. euros in several weeks. By the end of the year – before this rescue – the Italian debt to GDP was 133 %.

So Italy is going to get indebted even more. I think that Italy is going to be a big problem for the Eurozone. Much bigger than Greece because it is a big country. Indebtedness of the South of Europe is not and won’t be solved just like that and the Northern part of Europe is going to pay it one day.

The world votes for the bitcoin

There is a problem in Europe: The ECB should have a bond portfolio in the amount of 2.3 trillion euros by the end of the year. But it is more complicated. The ECB has been saving indebted south-European economies by those bonds-buyouts. It is the biggest creditor of European governments. So the ECB is going to be under a giant political pressure not to raise the interest rates.

Moreover, the south of Europe needs low interest rates for another reason too. Italian banks are having problems with bad loans. While the bad loans had a share only of 3 % in the year 2009 today it is even 13 % (!). Raising of the interest rates might endanger the banks.

On the other hand, keeping the interest rates on the current levels is also wrong. Even though Europe doesn’t have a traditional consumer inflation, the growth of prices has manifested elsewhere. It looks like there is a mortgage bubble in many countries, stocks are incredibly high and digital currencies are growing to all-time highs as well.

While the bitcoin was at 1000 dollars at the beginning of April, it is at 2725 dollars today and it has been almost on 3000 dollars at the beginning of the week. That’s why the chief of Bundesbank warned of the dangers from digital currencies. It is understandable. Everything is heading towards the digital currencies replacing the current currencies one day because the central bankers are failing. So the fish doesn’t want to drain the pond.

Reactions on the bitcoin are coming from the investment banks as well. Morgan Stanley is asking for the bitcoin regulation. I think that the fewer people trust the central banks the higher the bitcoin would go. It is a reaction to the scepticism in society. Gold is doing similarly. It is important that it is growing in the long run. Today it is at 1270 dollars per ounce and it was at 670 dollars ten years ago. The more complicated the world is the more interesting gold is.

The growth of the global economy is false

We can say a good news. OECD has adjusted its expectations concerning the global growth. While in November, it has been expecting that the planet is going to grow by 3.3 % in the year 2017, today it is expecting that it is going to grow by 3.5 % and in the year 2018 even by 3.6 %. If the prognosis gets fulfilled it is going to be the most significant growth since the year 2011. It would be great if OECD was right - but I am cautious.

The world has changed a lot. Patterns which have been working for years are not working anymore. It is extremely difficult to make prognosis today. The yield curve has been working as an effective tool of prediction for years. You could tell a lot about the entire economy from the difference of 2-year and 10-year yield. The bigger was the difference the more were the investors speculating on the recovery of the economy and on the growth of the interest rates of central banks. But today?

For example at the American bonds, this difference has been getting smaller for a couple of months which should hypothetically mean a speculation on a crisis. But that is definitely not expected according to OECD. We all can relativize this and take it down by saying that let’s say the interest rates are significantly influenced by the decisions of central banks and those are behaving unusually so the difference of interest doesn’t have such good predictive ability as it had twenty years ago. But we do have new tools.

For example, bitcoin is right under the all-time high today and moving around 2860 dollars. It was still around 1200 dollars three months ago. Why? Because the investors are preferring alternative investments. Simply said, they think something is stinky in the standard economy. The same goes for gold. That has reached to its seven-month high. When has the gold always been growing in the history? When a crisis was coming up or when the investors were fearing something. So how is OECD going to deal with this?

No matter what side we look at this, investors are suddenly doubting that it is possible to be raising the interest rates quickly. Economic recovery should be automatically connected to the growth of the interest rates… Many are assured of this also because of the development on Spanish banking market. The biggest bank in the country announced that it is going to buy the struggling Banco Popular for symbolic one euro and increase its capital by 7 bn. euros. That is showing nothing more than a weakness of the sector which is still dusty from the last crisis.

All things considered, I still think that the growth of the global economy is false from a big part and it is pulled by artificial demand from the central banks.  Many central banks are already owning a giant share in the industry. For example, the central bank of Japan has ownership of more than 20 % share at many key companies. It is simply rather a growth on the paper then a real one.