investing on the waves: The euro crisis and the growing capital problems for the Bundesbank and DNB

Friday, 3 February 2012

The euro crisis and the growing capital problems for the Bundesbank and DNB

Each day we read that big progress has been made in how Private Sector Involvement will soften the problems for Greece. Banks hope the loss will be limited to 70%, while they start to think that even 75% would be a good result. The IMF is no longer the biggest friend of the ECB now they ask for the ECB to suffer along with the private sector.
Germany is saying that is not allowed, especially when Greece summons to get new money from Germany. When the current trends continue with losses for the ECB the capital of the Bundesbank and DNB will soon no longer be adequate.

Lagarde tries to collect € 500 billion for the IMF to get Money to burn for help for the PIIGS. She first visited the great sandpit Saudi Arabia. Brazil wants to show solidarity wit hits former coloniser and gain extra influence in the IMF and China is even more happy to get rid of its too big currency reserves in exchange for more influence in the IMF.
Wen Jiabao has leaked again China is thinking about how to help ESM/EFSF.
So there is good progress to get € 1500 billion for a common fund of ESM+ EFSF + IMF to finance the garlic belt.

That good news was neutralised by anger from Germany that the Bundesbank could not endless go on with collecting collateral of dubious quality (they have already € 496 billion, of which € 12 billion of Greek sovereigns), see Ambrose Evans- Pritchard (always a good read for people that want to indulge themselves into Armageddon thinking about the euro crisis): Bundesbank sinks deeper into debt saving Europe
http://www.telegraph.co.uk/finance/financialcrisis/9055142/Bundesbank-sinks-deeper-into-debt-saving-Europe.html.
In the Target2 system of the ECB the strong central banks, now the Bundesbank and DNB, get inundated with with credits from the other central banks in the Eurozone. Their governments are bankrupt but their central banks are treated as 100% credit worthy. This situation aggravates when the balance sheet of the ECB continues to grow further so rapidly. Especially when the 3 years deposits (LTRO) grow into the trillions you get really big collateral problems for then no longer strong central banks (and Germany/Netherlands could no longer be seen as AAA). When the Eurozone explodes you can easily think at situations where the central banks will lose lots of money (the DNB dividend will be passed this year, so warned DNB). So when you continue to give endless liquidity to the banks it could very well be possible that the European central banks need a lot of new capital.
So it is not that strange that the Bundesbank wants better collateral.
FTalphaville had a good post about how Target2 is bankrupting the Bundesbank and DNB: http://ftalphaville.ft.com/blog/2011/12/06/782821/how-germany-is-paying-for-the-eurozone-crisis-anyway/
(see for example the table about Target2)

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Cycles

This blog will discuss from time to time the most important cycles, as we (ter Veer and Vermeulen) decribed in our book.

We illustrate the long wave, the Kondratiev wave, with the chart above the blog. So we see inaverage good times for investors until 2018 (maybe longer).

The four year cycle have we illustrated stylistic above the way ter Veer (and I) always did it. Other people describe the four year cycle difeerently.

From time to time I will try to indicate where we are on the four year cycle. You can't know for sure, so the indication will always be subjective and can be wrong.

At the moment I think we probably are in the phase FG (and we have seen the first correction in this phase).

Summary investing on the waves (beleggen op de golven)

This blog started because of the Dutch book Investing on the Waves (Beleggen op de golven in Dutch).

The summary of the book:

For being a good investor you must have views. You have to explain things well to judge what the future will bring.

We (Ter Veer and Vermeulen) think the next eight to ten years will bring prosperity as the world (dominated by the 85% of the world population that lives in Emerging Markets) has never seen.

We base that view on the study of several shorter and longer cycles in the economy. We use our investment chart (heading this blog) already for several decades: you can see the Kondratiev wave with its regular sequence of the scenarios recovery, creative transformation, prosperity, recession, chaotic downturn and depression.

To determine in which scenario we are you study the important powers in the society: business, employees, government and individuals. The shift of these powers goes in a regular cycle and causes the long wave (Kondratiev) in the economy with its long periods that things go well on average and its long periods that things don't go well.

In the current phase of the cycle business and indivuals are strong (and government plus employees weak). The strong powers cause a high growth of productivity and implementation of many innovations.

High productivity growth is much more important for economic growth than debts deleveraging.

That is why we -especially Emerging Markets- will get strong growth in the world. That will especially be the case when governments invest a lot in infrastructure (including what is necessary for the Green Revolution).

The growth in the world in the past years had three pillars: the ICT-Revolution, the Emerging Markets and the Financial Revolution with its Asset Economy.

All three pillars had its severe setbacks (The ICT-Revolution in 2000-2003, the Emerging Markets in the Asia crisis of 1997-1998 and the Financial Revolution in 2008-2009 because of the Credit crisis). The first two pillars saw very strong recoveries and we expect the same for the third pillar, especially when the Green Revolution will take off..

Gerhard ter Veer was CIO of PVF asset management that later merged with Achmea Asset Management and F&C. After his retirement he wanted together with Peter Vermeulen, then his head of strategy and now strategist at F&C extensively our theories about investing and our views that we had told to the boards of pension funds during decades.

To make things not too heavy and complicated we explain a lot with dreamings, the simple stories that aboriginals use to teach. On this blog you will see more new dreamings.

Explanation for the existence of a long wave (Kondratiev wave)

* Debt mechanism: over and under investment creates long cycles (Marxist explanation)

*Innovation mechanism: inventions, implementations follow long cycles (capitalist explanation). It explains productivity growth and so employment growth.

*Sociological mechanism: you have long periods where the society gets softer and harder.

All three mechanisms explain for a part the phenomenon of long waves. When you take them together, you can get a better picture.

The power shift between Business, Employees, Government and Individuals ( a social mechanism) is according to us the best explanation for long waves.. It explains why in some periods the incentives are right to have succesful innovations,inflation and high investment growth versus other periods in which inflation goes up,unemployment goes up and profit margins go down.

The current debt crisis is definitely a reason why growth is so low in high debt countries.

The possibilities for high growth are underestimated because productivity growth is high, many innovations have to be implemented and important new (emerging) markets grow fast.

In Emerging Markets and some developed markets like Germany you have the old classic situation of the powers for a prosperity scenario: strong Business (strong profit growth, high margins), strong position of employees (unemplyment rate is low or falling to low levels) and a weak position of government (has to downsize). Individualism is not yet strong.
In many dveloped markets like the US and the UK the situation of the important powers is differenT: employees are in a weak position and individuals (like knowledge workers with (international) networks) are in a strong position.

Because of the weak position of employees this is not the classic prosperity scenario, but you still can get high economic growth when the income of business and individuals grows strongly: a Goldilocks economy with a strong asset Economy. When this growth is strong enough this will lead to a more normal prosperity scenario with fast declining unemployment rates.

This situation will occur much sooner than most people realise: productivity growth is high, the housing market in the US will grow strongly from rock bottom levels, investment growth will be very high because of high profit margins and low real interest rates.

Because 85% of the world population lives in Emerging Markets and only 15% in Developed Markets and economic growth in the world is more than 4% (even while it is now only 2% in Developed Markets) for the world in total you can speak of a prosperity scenario.

investing on the waves

Investment Chart Kondratiev Wave

Friday, 3 February 2012

The euro crisis and the growing capital problems for the Bundesbank and DNB

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