The first quarter was hot across the Eurozone. The euro has gotten
purposefully crushed by the ECB’s currency war. QE, first promised then
implemented, became all the rage. And stocks surged: the Stoxx Europe
600 was up 16%; Italy’s FTSE MIB index up 22%; and Germany’s DAX also up
22%, the sharpest quarterly gain since Q2 2003. Since January 2012, in a
little over three years, the DAX has nearly doubled. Only Greece
couldn’t get it together.
And bonds have soared to ludicrous levels, with yields turning negative on €2.2 trillion in Eurozone government debt,
according
to Societe Generale. German government debt is now sporting negative
yields up to a 7.5-year maturity, while 10-year yield – at 0.14% as I’m
writing this – is on its way to negative as well.
So on March 31, Hans-Jörg Vetter, CEO of Landesbank Baden-Württemberg
in Germany, spoke at the bank’s annual press conference – and fired a
warning shot across the bow of investors.
Publicly owned LBBW, a full-service and commercial bank, serves as
the central bank for the savings banks in the states of
Baden-Württemberg, Rhineland-Palatinate, und Saxony. With €266 billion
in assets and over 11,000 employees, it is the largest such
Landesbank in Germany. And it too was dutifully bailed out by taxpayers during the financial crisis.
And so the press conference had the usual feel-good fare.
“Over the past few years LBBW has gained a very good position to
operate successfully on a sustained basis amid a difficult environment,”
Vetter said in the bank’s
press release.
“On this basis we are aiming for targeted and risk-conscious growth in
our core business areas,” he said. There was a slight improvement in
pre-tax profit to €477 million in 2014, from €473 million a year
earlier. And for this year, he expected a “moderate” increase in pre-tax
profit. He talked about how solid the bank was, and he talked about
opening new offices…. It was that sort of press conference.
But then, maybe he got off script. That’s when the mundane bank press
conference, designed for the taxpayers who own the bank but don’t care
and certainly wouldn’t pay attention to it, turned into something that
the major German paper
FAZ decided to report.
Banks, insurance companies and all kinds of funds were taking on huge
risks to get through the zero- and negative-yield environment, Vetter
said. Alas….
“Risk is no longer priced in,” he said. And these investors aren’t
paid for the risks they’re taking. This applies to all asset classes, he
said. The stock and the bond markets, he said, are now both seeing “the
mother of all bubbles.”
This can’t go on forever. Or for very long. But he couldn’t see the
future either and pin down a date, which is what everyone wants to know
so that they can all get out in time. “I cannot tell you when it will
rumble,” he said, “but eventually it will rumble again.”
By “again” he meant the sort of thing that had taken the bank down
last time, the Financial Crisis. It had been triggered by horrendous
risk-taking, where risks hadn’t been priced into all kinds of
securities. When those securities – mortgage-backed securities, for
example, that were hiding the inherent risks under a triple-A rating –
blew up, banks toppled.
Yet the bailed-out bank would not again engage in such risky
transactions and would rather endure lower returns, said Vetter, who was
brought in as part of the bailout in 2009 to clean up the mess and put
LBBW back on its feet.
He warned that it’s hard for banks to make money by lending due to
the combination of low interest rates and the effects of competition.
There are too many banks in Germany and Europe, he said. They’re all
going after medium-sized businesses, and prices for financings have
become “critically low,” he said.
At the same time, a whole new generation was growing up without the
idea of earning interest on savings in the this zero-interest-rate or
negative-interest-rate environment. Without that incentive of interest,
they aren’t learning to save. And banks won’t be able to play their
traditional role as an intermediary to plow those savings back into the
economy as loans. So he warned, “I am afraid that we will become only
gradually aware of the medium- and long-term consequences of this
European debt financing.”
We’ve been saying this – “the mother of all bubbles” – for a while,
though we may not have used this exact technical term. And we’ve long
lambasted this zero-interest-rate and negative-interest-rate
environment. But he isn’t just some wayward blogger. He runs a big
state-owned bank with responsibilities to taxpayers, a bank that had
already taken too many risks that hadn’t been priced in, and when those
risks began to exact their pound of flesh during the Financial Crisis,
the bank cratered.
Central banks have re-created that environment, and similar risks are
building up. With terrible consequences that we will know only
afterwards.
But no top banker, and certainly not a top banker at a state-owned
bank, has been allowed to say it publicly. It would be heresy against
current central-bank dogma.
This “mother of all bubbles” is front and center in the startup
scene, where “valuations” have reached a state of delirium. Read…
It’s Just a Question of Whose Capital Will Be Destroyed
http://www.zerohedge.com/news/2015-04-01/%E2%80%9C-mother-all-bubbles%E2%80%9D-stocks-and-bonds-bank-ceo
