A definition, breaking records, stars lining up and approaching Queenstown

There was a fantastic quote circulating the net last week regarding inflation. You can’t switch on the tv last months or you have a central banker or a politician proudly saying that inflation is low. Of course we all know the calculation is rigged (last change in Belgium was to include the Summer and Winter sales in the inflation basket). The bread price on the other hand was taken out years ago already. So inflation is not representative at all about the real cost of living, as anyone who does his weekly grocery shopping himself knows very well. So I give you this wonderful definition of inflation and central banking from Dylan Grice:

“Trying to control a variable you can’t measure (inflation) with a tool you don’t fully understand (money) in a complex system with hidden, unobservable and non-linear interrelationships (the economy) is a guaranteed way to ensure that most things which happen weren’t supposed to happen.”

I came across a graph (courtesy of Bloomberg and Zerohedge) that really spooked me.


It’s the New York Stock Index divided by the US FED balance sheet. Ok so 2008 is Lehman we know that. The thing is since Lehman, the US FED has pumped 4 trillion $ in the economy as reported last week. This has not done anything to the stock exchange if you divide it by the FED balance sheet. So the optimists will look at this graph and say: “Wow! The NYSE can go up another 500% just to reach the 2008 levels. Let’s rock-and-roll!” The realist in me however is scared sh#tless (excusez-le-mot) because 4 trillion $ has done nothing, null, zero, rien. Never mind that stock exchanges are breaking new records. Taking the FED balance sheet as basis, shares haven’t moved an inch. Basically we fell off a cliff in 2008 and since then flat line... The economy and financial system is dead and they don’t know it. Bucket loads of money are acting as defibrillator but no matter how often they push the defibrillator button (printing press) the patient is brain dead and the heart beat is not coming back.


Contrary to the new NYSE records which are in the news almost daily, this piece of very interesting news, hardly got any media attention: Germany argued against the use of European funds to help banks.
From Euroactiv:
“Ahead of the meeting, French Finance Minister Pierre Moscovici told reporters: "France continues to believe that we ... must not exclude direct recapitalisation by the European Stability Mechanism as a last resort."
Speaking just yards away, however, Wolfgang Schäuble, Germany's finance minister, poured cold water on the idea.
"The German legal position rules it out now," said Schäuble. "That's well known. I don't know if everyone has registered that."
Inside the meeting room, people close to the talks said the two clashed again, when Germany asked for the removal of any reference to ESM bank aid from the ministers' statement”.

Just politics you say? Well yes of course but there is more behind it. I see some stars lining up here and it doesn't bode well for us working class who try to save some money.

The ECB is going to do a big bank stress test next year. Contrary to earlier bank tests (which were a joke) this time it seems the ECB intends to do a proper job that risks exposing many banks short of capital (because they still have too much bad loans). Latest estimates talk about 95 billion € of losses.

The question then is: who will pay for the losses? A new European wide system was meant to do this, but this is what Germany now opposes to. And what if some banks are not worth salvaging?

The answer is disturbing: “Any state help will come at a heavy cost by imposing losses on shareholders and junior bondholders. In time, possibly as soon as 2015, senior bondholders and even depositors with more than 100,000 euros will be forced to take losses.”

So yet another confirmation that the ‘never-to-be-repeated-once-in-history’ saving of the Cyprus banks slowly but surely becomes institutionalised.


During a meeting in Auckland we were shown below movie of the approach in Queenstown. Very challenging but oh so beautiful. Watch this tribute to airmanship and enjoy the scenery!

Get used to a lot of zero's, tipping banks, floating books and off to space

Let me ask you something: how much is a quadrillion dollars. Don’t say a lot of money, that’s too easy. How many zero’s does it have? 9? That’s a billion. 12? That’s a trillion. 15 then? Yep. 1 quadrillion looks like this:

1000000000000000

Why do I ask this question? Well let me answer that by asking you another question. How much is the Gross World Product (GWP)? (GWP = total gross world product = the value of everything we all together produce over a year). The IMF (and they should know) puts it at 72 trillion US$ at market exchange rates (see p 149 of the April 2013 IMF World Economic Outlook). That’s a lot. You also remember what brought the banks down back in 2008 (this weekend was the 5th anniversary of Lehman’s fall): the wonderful world of derivatives (like Credit Default Swaps) and too much exposure. The current estimates of the total global derivatives markets range from 700 trillion (estimate by The Economist in 2011) to 1,2 quadrillion US$. These are estimates because no-one really knows. Scary hu? Why does no one really know? Because derivatives are fictitious. It doesn’t really exist. It is not adding any value to the economy or the real world. I give you the Wikipedia definition which is clear enough: “A derivative is a financial instrument which derives its value from the value of underlying entities such as an asset, index, or interest rate—it has no intrinsic value in itself.”
Some claim however that these numbers are a gross exaggeration. In fact these derivatives “only” have a market value of 21 trillion US$.
A couple of remarks. Even if true, 21 trillion still is an enormous amount of non-existent value. But it isn't true. Last week the US Office of the Comptroller of the Currency published its quarterly report showing that just US banks hold 231 trillion $ in derivatives! JP Morgan is champion with 70 trillion$! The horror literature can be found here: http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq113.pdf
Secondly if the global derivatives market is 700 trillion and the “real” market value is 21 trillion, someone has used a rather big leverage... In fact the real value is only 3% of the total market (at the conservative estimate of 700 trillion). So what might you conclude? Well, when the derivatives market shrinks with a mere 3%, the complete underlying real value is wiped out and the whole system comes crumbling down on us. When this happens can we afford it? Well... no. The derivatives market is 10 times the value of everything humans produce during 1 year!

I was reminded of this by an interview I saw last weekend and a presentation. Throughout history numbers with 15 zero’s have not been uncommon to the man in the street. In November 1923, the American dollar was worth 4210500000000 German Mark (that’s 4,2105 trillion German Mark). So you needed 4210 of these notes to exchange them to 1 US$ (picture courtesy of Wikipedia):

Now, the presentation I saw gave some numbers of the very top rich, the 0,1%. These are quite fascinating and are for the US but the same happened all across the world:

1970      1% were worth      10% of national income

Today    1% are worth         20% of national income

Today    0,1% are worth      8% of national income

In 1992, the total Forbes 400 list (400 wealthiest people in US) represented a wealth of 300 billion US$.

Today this is 1,7 trillion US$.

What does this teach us? Get used to a lot of zeros. The richer are getting a lot richer, fast. Inequality is rising (fast). For the Taleb aficionados (like me) this is Extremistan to the extreme (and you know what happens next).



In other news, Dijsselbloem (head of the Eurogroup) spoke before his turn (again), when addressing the European Parliament week before last, stating Greece is in need of another rescue plan. The warning was taken over by the IMF and Moody’s last week. In the mean time almost unnoticed, Slovenia liquidated two banks (Pro Banka and Factor Banka). The Government seized the institutions to prevent what they fear could otherwise have been a deposit run. And the oldest bank in the world, Italian Monte Pascchi, is in critical need to raise 2,5 billion €. Commenting on Reuters one investment banker described the chances of success like this: "There is no chance on the planet that they can raise [this] in 12 months... they are heading towards nationalization”. The capital raise equals the current entire market value of the bank. So the Italian state is likely to have to come to the rescue which means a repeat of the Cyprus experience (remember that template-which-wasn’t-one “exceptional-case-that-will-never-be-repeated-again”). This also means that bondholders AND depositors would be drawn into a bail-in (for deposit holders above 100000,- €)! Also last week Dijsselbloem added that Europe should ensure bail-ins are done in the right way by states (to be understood as 'by confiscating depositors' savings'). See here for the EU’s law that will be adopted by year-end legitimising the bail-in principle based on the one-off-special-never-to-be-seen-again-case of Cyprus: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/137627.pdf



Over to some fun! Embrear posted this video about a floating book it sent to selected potential customers for its Lineage 1000. I would love to get a copy as well (no I am not in the market for a Lineage 1000).

As for the aviation part there is no contest with Virgin Galactic’s successful test flight demonstrating all technical mission phases in one single flight for the first time:

A barometer takes the temperature (?), and distant memories to chilean halcones

I stumbled over a small article on Reuters that wasn't picked up in mainstream media. It's important nevertheless: the Cypriot bail-in has apparently been raised to 47,5% (up from 37,3% - see http://uk.reuters.com/article/2013/07/28/uk-cyprus-bank-idUKBRE96R03Y20130728). Let me translate that for you: everyone in Cyprus who had > € 100000,- on an account, will be robbed of 47,5% of everything above that € 100000,- mark. Yes 'robbed'. How else do you call it when politicians and European institutions decide that you loose a big part of your money. And don't give me anything of that: "the rich can afford it" nonsense. This is not about the rich. It is confiscation of savings, something people have worked for all their lives. Just imagine you just sold your house to go and live in a retirement home! Or you were saving to guy a house! Thank you very much says the bank and the government. And Cypriots should still count their blessings because if it hadn't been for some brave parliamentarians who blocked the first proposal of going through, the confiscation would have applied to all deposit holders, without a minimum.
In the mean time in Greece the situation is so bad it is heart braking. Our national radio 1 sent a reporter to Greece and he gave a description from the war zone: people have no money for medication, those who are diagnosed with cancer actually get a dead sentence as they don't have the money for the therapy, infants are brought in underfed, a three month baby had not gained any weight since his birth,  people who still have some money for food and medicine try to share as much as they can with others who don't, voluntary organisations are set up  for the distribution of food and medicine. Does this read like a refugee camp on the border between Syria and Turkey? Well this is what is happening in Greece right now. To add insult to injury, the Troika published this week its third review on Greece's second economic adjustment program saying "Greece continues to make overall, albeit often slow, progress under the Second Economic Adjustment Programme..." (http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp159_summary_en.pdf)
But Europe is fine,all is well, the politicians are enjoying their holidays taking a break from the eurocrisis that seems only like a bad nightmare to them. And then surprise on their (the politicians) faces when they see the results of the latest eurobarometer. You can read the full Eurobarometer report here: http://ec.europa.eu/public_opinion/archives/eb/eb79/eb79_first_en.pdf
Dear Mr Van Rompuy and Mr Barroso, your little project doesn't look well:

As I write this, aviation's walhalla is located at N43°59.06’ W88°33.42’. Google it and you will see a map of Wittman Regional Airport the home of the EAA Airventure in Oshkosh. Nope, I am not going to put up some pictures of this year's event. It's too painful to look at these whilst being stuck in an office in Brussels. But by all means have a look on their website: http://www.airventure.org/

It did make me think about those very first airshows I went to. Of course nothing comparable to Oshkosh but still. One vivid memory is of the Leopoldsburg Sanicole airshow. These were the days when public was still allowed close up to the action (I'm showing my age here...). In fact in this case, the barriers were right on the edge of the grass strip. Which resulted in these pictures. You have to excuse me for the poor quality, in those days I had a cheap camera with no zoom and no possibility to tweak the exposure or shutter speed. A basic push-the-button-swing-the-handle-5-times-to-get-to-the-next-frame camera. Yes I know I am that old already. In case you are wondering what the blurs are on the pictures: a Pitss Special S-2A of the Chilean Halcones (isn't that exotic to see in Belgium!), a Let L-410 (just after rotation) and the venerable Avro Shackleton (do you remember that airplane!? - bet they don't have one of these in Oshkosh :-) ). Those were the days!