When the World Booms

When the World Booms

It’s time for the Daily Reckoning Australia to order an espresso and sit down with a copy of Il Globo.

Yes, we’re heading to Italy.

We’ve long opined in these pages that Italy was on the mend, at least in a financial sense. There’s nothing we can say about their football team, or their politicians.

We’ve now got more evidence that the Italian banking system — creaking, weak and bloated — is being repaired.

This development makes me even hungrier for what’s to come in the next 18 months.

The stage is still set for a ‘melt-up’ in asset prices worldwide.

Here’s an opportunity worthy of investor attention:

The Financial Times reports that the total transaction volume for non-performing loans across the Eurozone banking system was up 42% in 2017 on the previous year.

This refers to European banks dealing with loans that ‘impair’ their balance sheet.

A loan is an asset for a bank. But many borrowers stop paying, and so these loans become a liability, or ‘non-performing’.

Private equity firms are buying up these loans. Non-performing loans across Europe have declined from 7.5% of total loans to under 5%.

That’s still high, but the trend is down.

I have been writing about this for ages now. You might think it’s all somewhat obscure or unimportant.

But you could have made money from this.

For example, Italian stocks hit their highest level last month since 2009.

Part of the reason for that is an improving outlook for the Italian financial sector.

However, Italian stocks and bonds lately have come under pressure because of politics.

There’s no clear majority to form a government. The country is still divided over the euro, among other things.

In a sense, it doesn’t matter if a communist, fascist, or Hillary Clinton gets the top job. They need to fix these banks up or there’ll be less national wealth for the power junkies to hand around to their friends.

But it’s true that the foreign investment funds buying these bad loans might recoil should the wrong person take power.

We can only keep watching.

18 months on and still going strong

For those watching from overseas, Italian politics offers more amusement value than anything else.

Certainly, it’s been a long time since any major innovation came out of Rome, except perhaps on the catwalk.

I’ll be able to give you a more focused look at Europe shortly. I’m heading to Spain in July. There’s a similar dynamic at play in Spain with non-performing loans, though less acute.

In any case, European banks have another problem: the low interest rate regime that the European Central Bank is imposing.

Remember, rising interest rates are good for banks.

In fact, the ingredients are there for the world to go into a full-blown credit boom.

That’s exactly what I expect. And I also expect it to heat up the global economy.

There are two conclusions to draw from this:

One is that inflation is likely going to rise. As might commodity prices.

This will stem from strong global demand, especially across Asia and the United States.

The second is that investment funds is likely to seek shelter in ‘hard assets’ as bond markets start looking vulnerable.

However, there’ll be the usual dips and worries along the way.

Oil, for example, fell back on Friday on news that OPEC might loosen supply somewhat. Apparently Russian President Vladimir Putin is also still ‘happy’ if oil is at US$60 a barrel.

Don’t get sucked into this kind of analysis. The real boss — the oil market — doesn’t give two hoots what Putin wants or thinks. The same is true of Donald Trump and the Saudi oil minister.

If there’s too much oil, the price goes down. If there’s too little, it will go up.

My analysis suggests prices are likelier to be higher in 2019 than 2018.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia