From David Stockman’s Contra Corner
by David Stockman • June 24, 2016
At long last the tyranny of the global financial elite has been slammed good and hard. You can count on them to attempt another central bank based shock and awe campaign to halt and reverse the current sell-off, but it won’t be credible, sustainable or maybe even possible.
The central bankers and their compatriots at the EU, IMF, White House/Treasury, OECD, G-7 and the rest of the Bubble Finance apparatus have well and truly over-played their hand. They have created a tissue of financial lies; an affront to the very laws of markets, sound money and capitalist prosperity.
After all, what predicate of sober economics could possibly justify $10 trillion of sovereign debt trading at negative yields?
Or a stock market trading at 24X reported earnings in the face of a faltering global economy and a tepid domestic US business cycle expansion which at 84 months is already long in the tooth and showing signs of recession everywhere?
And that’s to say nothing of the endless ranks of insanely over-valued “story” stocks like Valeant was and the megalomaniacal visions of Elon Musk still are.
So there will be payback, clawback and traumatic deflation of the bubbles. Plenty of it, as far as the eye can see.
On the immediate matter of Brexit, the British people have rejected the arrogant rule of the EU superstate and the tyranny of its unelected courts, commissions and bureaucratic overlords.
As Donald Trump was quick to point out, they have taken back their country. He urges that Americans do the same, and he might just persuade them.
But whether Trumpism captures the White House or not, it is virtually certain that Brexit is a contagious political disease. In response to today’s history-shaking event, determined campaigns for Frexit, Spexit, NExit, Grexit, Italxit, Hungexit and more centrifugal political emissions will next follow.
Smaller government—–at least in geography—–is being given another chance. And that’s a very good thing because more localized democracy everywhere and always is inimical to the rule of centralized financial elites.
The combustible material for more referendums and defections from the EU is certainly available in surging populist parties of both the left and the right throughout the continent. In fact, the next hammer blow to the Brussels/German dictatorship will surely happen in Spain’s general election do-over on Sunday (the December elections resulted in paralysis and no government).
When the polls close, the repudiation of the corrupt, hypocritical lapdog government of Prime Minister Rajoy will surely be complete. And properly so; he was just another statist in conservative garb who reformed nothing, left the Spanish economy buried in debt and gave false witness to the notion that the Brussels bureaucrats are the saviors of Europe.
So the common people of Europe may be doubly blessed this week with the exit of both David Cameron and Mariano Rajoy. Good riddance to both.
At the same time, the anti-Brussels parties of both the left (Podemos) and the right (Ciudadanos) are certain to make further gains. But even then, Spanish politics will remain splintered and paralyzed. There will emerge no government strong enough or willing enough to execute Brussels’s inevitable dictates in the event that drastically over-valued Spanish bond market goes into a tailspin and requires another EU intervention.
And that’s the next leg of the Brexit storm. To wit, sovereign bond prices throughout Europe have been lifted artificially skyward by the financial snake-charmers of Brussels and the ECB. The massive rally in Spain’s 10-year bond after Draghi’s “whatever it takes” ukase was not due to Spain becoming more credit worthy or the fact that its unemployment rate has dropped from 26% to a mere 20%.
The whole plunge of yields from 7% to a low of 1% about a year ago was due to a front-runners’ stampede. That is, the fast money crowd was buying on repo what the ECB promised to take off their hands at ever higher prices in due course. They were shooting the proverbial ducks in a barrel.
But as global “risk-off” gathers worldwide momentum, look-out below. There will be no incremental bid from Frankfurt for a flood of carry trade unwinds. That’s because the ECB will soon be embroiled in an existential crisis as the centrifugal forces unleashed by Brexit tear apart the fragile consensus on which Draghi’s lunatic monetary experiments depended.
In particular, the populist political insurgencies throughout Europe are as much anti-German as they are anti-immigrant. It is only a matter of time before German acquiesce in the ECB’s massive bond buying campaign—–which essentially bails out the rest of Europe—–will be abruptly ended by an internal revolt against Merkelite accommodation.
Moreover, Spain is by no means unique. Italy’s Five-Star movement, which just came from winning 9 out of 10 mayoral contests including Rome, will surely now be energized mightily. Its Northern League ally has already called for a referendum on exiting the euro.
Needless to say, Italy’s fiscal circumstance is far more dire than even Spain’s. The likelihood that its 10-year bonds are money good at last week’s 135 basis points of yield are between slim and none. Either the threat of an exit or a 5-Star/populist coalition government would send the front-runners who scarfed up Italy’s bonds running for the hills.
Since Italy owes upward of $2 trillion on it government accounts alone, its bond market is an explosion waiting to happen. And that means its bedraggled banks are, too.
That’s because one feature of the Draghi Ponzi was that national banks in the peripheral nations started buying up their own country’s rapidly appreciating sovereign debt hand-over-fist. Italy’s banks own upwards of $400 billion of Italian government debt.
That’s the one and same Italian government that cannot possibly cope with its existing 135% debt to GDP ratio. And that’s also before the populists take power and are forced to bailout the country’s already insolvent banking system. The latter will suffer from a shock of capital and depositor flight after the current government falls(soon), and Prime Minister Renzi joins Cameron and Rajoy at some establishment rehab center for the deposed.
During the last financial crisis our elite rulers cried financial “contagion”. That scary story generated panic among the politicians and acquiescence in their crooked regime of massive bailouts and relentless money pumping.
The effect of was to bailout the gamblers from the Greenspan/Bernanke housing and credit bubble, and then to shower unspeakable windfalls on the 1% as the central banks reflated an even more monumental bubble during the regime of QE, ZIRP and NIRP.
But now the world’s financial rulers are going to be on the receiving end of an even more virulent and far-reaching political contagion. That is, a tidal wave of voter demands to emulate the British people and take back their countries and their governments from the financial elites and politicians like Cameron who are their bagmen.
This time populist and insurgent politicians are not going to roll-over for the rule of unelected central bankers and the international financial apparatchiks of the IMF and related institutions.
In that context, it can be confidently said that the Eurozone and ECB are finished. That’s because the monstrously inflated euro-bond market that Draghi created will implode if the front-running speculators lose confidence in the scheme.
At length, it will become evident that Draghi’s “whatever it takes” gambit was the single most foolish act in the history of central banking. It assumed that the rule of the financial elite was limitless and endless.
Brexit proves that both assumptions are wrong. Now every nook and cranny of the world’s bloated and radically mispriced financial casinos will face the same shock to confidence.
Central bankers everywhere will be on the run. Just in the nick of time.