Central Perk: Mish's Global Economic Trend Analysis

vineri, 10 iunie 2011

Mish's Global Economic Trend Analysis

Another Round of California IOUs On the Way; Democratic Politicians and Unions (Not a Majority of Voters) Support Tax Hikes
Open Revolt Against Trichet: German Politicians Demand "Private Creditor Involvement"; Finland Support for Bailout Vanishes
Baseline Rail Traffic in Contraction: Oil Consumption vs. Production Revisited
Head of Saudi Electric Company Says "Oil Runs Out in 2030 if Current Consumption Maintained"

Another Round of California IOUs On the Way; Democratic Politicians and Unions (Not a Majority of Voters) Support Tax Hikes

Posted: 10 Jun 2011 05:14 PM PDT

California is about to run out of money again.

Here is the backdrop. Republicans who were against sending tax hike measures to the voters now are OK with it. What changed? Attitudes, that's what. Polls show voters are against tax hikes.

That's not the only thing that changed. Because of those polls, Democrats want tax hikes now, and a vote later.

That absurd idea is headed for defeat in the California House and Senate because Democrats are 2 votes shy in each chamber of ramrodding a tax hike through the state assembly that voters do not want.

Why do politicians want a tax hike if the voters don't? Because California public unions want them and politicians want public union campaign contributions.

California Republicans Block Brown's Deficit Plan

Thank heavens for 2 votes because by that measure California Republicans Block Brown's Deficit Plan

California's Senate Republicans blocked Governor Jerry Brown's plan to erase a $10 billion deficit as closed-door talks remain snagged on his demand for higher taxes as a deadline to pass a budget looms.

Republicans oppose the governor's proposal because it would extend tax and fee increases set to end June 30. The so-called bridge tax would preserve the revenue measures pending the outcome of a voter referendum, planned for September or later, to keep them for five years. Republicans said the extensions would harm California's economy. Brown said he doesn't want to raise taxes without voter support.

"The Democrats have moved the goal post," Senator Bob Huff, the Budget Committee's Republican vice chairman, said in a telephone interview. "Now they are saying they need the taxes and then they will let the voters decide. But if the voters say 'no,' they still get stuck with another nine months of taxes."

Democrats are four votes short of the two-thirds margin needed under California law to raise taxes, lacking two votes in the Senate and two in the Assembly.

Controller John Chiang, a Democrat, has repeatedly warned Brown and lawmakers that California may run out of money if there's no budget in place by July 1, forcing the state to issue IOUs, as it did in 2009. That's because the state likely won't be able to go to Wall Street for short-term cash borrowing until it has a spending plan that accounts for how it will be repaid.

The governor's plan relies on retaining a 1 percentage- point boost in the retail-sales levy, to 8.25 percent, and a 0.5 percentage-point increase in vehicle registration fees to 1.15 percent of value. It also seeks to extend a reduction of the annual child tax credit to $99 from $309. All were put in place temporarily in 2009 and are set to expire by July 1.

Republicans, who initially opposed a statewide referendum on the taxes, have indicated they would be willing to allow a vote after polls showed voters would reject the extensions. The Legislature's minority party wants lawmakers to pass a balanced budget now, without prolonging the revenue measures, and give voters the chance to reinstate the tax increases later.

"There's no polling that shows this is going to pass," Huff said. "That's why they want this bridge tax for a year."

I would agree to an extension in tax hikes if I got something major in return. By major I specifically mean:

Pass legislation to make California a right-to-work state
Pass legislation scrapping defined benefit pension plans for public workers
Pass legislation to kill all prevailing wage laws
Pass legislation to end collective bargaining
Privatize state prison system
Pass legislation upping pension contributions of public workers

If I was in the California state assembly those would be my terms. Indeed, I would gladly take those terms. The benefits would be so huge such that no discussion of another tax hike extension would come for a long time.

Brown says he doesn't want to raise taxes without voter support. He also calls for "no gimmicks". He is a liar on both counts. Voters do not want tax hikes, only politicians and unions want them.

If Brown does not want gimmicks, then why does he ask for them? If he wants to do something for the state instead of for the unions he can adopt my six-point proposal above.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Open Revolt Against Trichet: German Politicians Demand "Private Creditor Involvement"; Finland Support for Bailout Vanishes

Posted: 10 Jun 2011 12:52 PM PDT

The feud between ECB president Jean-Claude Trichet and German finance Minister Wolfgang Schaeuble escalated in a major way today with members of German Parliament siding with Schaeuble and against the wishes of the ECB.

German Politicians Demand Private Creditors Participate

Please consider Germany MPs discuss resolution on Greece aid

German members of parliament are discussing on Thursday a joint motion for a resolution demanding the fair participation of private creditors in future aid to Greece, a draft of the paper obtained by Reuters said.

The deputies from all three parties in Chancellor Angela Merkel's center-right coalition are demanding to have a say in agreements for new aid packages, the resolution said.

"The German parliament urges the government to only agree to new financial aid for Greece if an appropriate participation of private creditors has been introduced," the document said.

"That way Greece's ability to carry its debt and so that a fair distribution between public and private sides can be reached."

The document is not binding for the German government, but can be seen as a guideline for its leaders when they enter negotiations with other EU leaders.

Merkel in No-Win Position

Chancellor Angela Merkel better get behind her party before what's left of it splinters to smithereens.

She made a huge mistake and I called her on it at the time, by giving into Trichet. She may not have a choice now and may be in a "heads she loses, tails she loses situation".

Trichet Throws Another Hissy-Fit

As expected from the above details, Trichet went into another hissy-fit, insisting that he, not the markets, not voters, not the German parliament knows what's best for the EU.

Please consider Trichet Escalates Greece Clash as ECB Puts Onus on Governments for Rescue

Germany stepped up demands that investors share the cost of a second Greek rescue after Jean- Claude Trichet rejected direct involvement by the European Central Bank.

"We have to insist on the participation of the private sector," German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin today, ignoring warnings from credit-rating firms that his proposal to extend Greek debt maturities by seven years would be deemed a default. A working group set up this week is charged with indentifying "a good solution for the involvement of the private sector that can and has to be supported by the European Central Bank," he said.

Greek, Irish and Spanish benchmark bonds slumped after Schaeuble's speech. Portugal's 10-year bond yield rose to a record 10.45 percent before settling up 13 basis points at 10.42 percent as of 12:17 p.m. in London. Greece's 10-year yield rose 12 basis points to 16.78 percent.

The cost of insuring against default on government debt sold by Greece surged to a record yesterday, according to traders of credit-default swaps. Contracts on Greece soared 30 basis points to 1,522, according to CMA.

Sustained ECB resistance could leave politicians facing the prospect of asking their taxpayers to finance a Greek budget shortfall that may amount to 90 billion euros ($130 billion) through 2014. Trichet also warned against Schaeuble's approach, saying any solution forcing private-sector involvement amounts to a "credit event" and would be an "enormous mistake."

"Trichet is really digging his heels in now," said Tobias Blattner, an economist at Daiwa Capital Markets Europe in London who worked at the ECB until April.

Schaeuble, in a June 6 letter to Trichet and fellow euro finance ministers, called for Greek bondholders to extend the maturities of their debt by seven years to give Greece more time to cut its debt and budget deficit.

"I have proposed a fair distribution of risks between taxpayers and private creditors for the phase of gaining time," Schaeuble said today. "We're taking skeptical voices and warnings from the European Central Bank on the involvement of the private sector seriously."

Credit Markets – A Gathering Storm"

Trichet says haircuts are OK as long as private participation is "voluntary". Does the construct "voluntary" participation even exist?

Pater Tenebrarum on the Acting Man blog tackles that question and much more in his post Credit Markets – A Gathering Storm

Note the French demand that any participation of private creditors has to be 'voluntary'. How is such 'voluntary participation' going to be negotiated before the looming deadline on June 20? It is simply impossible. As we have noted before, Moody's and Fitch both have already let it be known that they will not consider such an agreement to be 'voluntary' – and that creates a considerable stumbling block, as the ECB likewise insists that any haircut to private creditors arrived at by compulsion will be deemed unacceptable.

It should be perfectly clear that any private creditor participation – as desirable and necessary as it surely is – can not be considered 'voluntary' if it is based on 'resolutions' issued by national parliaments or governments. This is a catch-22 situation that seems intractable.

Moreover, another potential stumbling block to the EU's bailout policies is slowly but surely taking shape in Germany – the German Constitutional Court in Karlsruhe is beginning to hear arguments in the constitutional challenges to the aid package raised by several prominent economists and politicians. Although the court has proved pliable in the past and has tended to side with the German government's line in EU related questions, we would submit that there is no guarantee this will continue.

Clearly, if the judges were to resort to a strict interpretation of Germany's constitution and how it relates to the Lisbon treaty's obligations and rights which were already once modified due to an earlier court ruling (this was the first bone the court threw to euro-skeptics, see articles Mr. Gauweiler's Challenge and Gauweiler's challenge – an update), the court would not be able to dismiss the challenges entirely. More likely it would have to issue a directive asking the government to once again renegotiate the requisite passages of the Lisbon treaty. If this were coupled with a temporary injunction against further disbursements to the EFSF, the entire bailout scheme would immediately collapse.

Another Court Challenge Coming Up

With thanks to Acting Man please consider this translation of Karlsruhe verhandelt über Klage gegen EU-Rettungsschirm

"The federal constitutional court will hear oral arguments in the challenges against the euro 'rescue umbrella' as well as the aid to Greece on July 5. This was announced by the court on Thursday. The federal government will have to explain to the court how the measures to stabilize the euro currency accord with the constitution and European law. Originally the second senate considered a trial in camera [a non-public trial, ed.]. However, this view appears to have changed in the course of recent deliberations. One must expect a fundamental decision, for instance regarding the budgetary rights of parliament. Plaintiff is a group around the euro-skeptic Joachim Starbatty. In Starbatty's view, the aid program is not compatible with the EU treaties [he's right, ed.]. The plaintiffs fear that the EU is going to develop into a fiscal and transfer union in the long term [right again, ed.]. In the framework of the rescue package, Germany can issue credit guarantees for euro area member nations in the amount of up to € 148 billion. Overall, the size of the rescue package amounts to € 750 billion. It is designed to dissuade financial markets for further speculation on national bankruptcies within the euro area [hasn't worked so far, ed.]."

Finland Support for Bailout in Jeopardy

Also via Acting Man, please consider Katainen Turns to Euro-Skeptics Amid Impasse

Finland's inability to form a government almost two months after elections is forcing the head of coalition talks to return to bailout-skeptic parties as he approaches a June 10 deadline for reaching an agreement.

"I will try to find a new basis for the government by Friday," Jyrki Katainen, who as leader of the biggest party since April 17 elections is heading government talks, said in an interview in Helsinki yesterday. "I'll talk with everybody and I'll try to find a majority government. It's impossible to say right now what will be the outcome."

The stalemate comes after Katainen last month ensured parliament approved a bailout for Portugal before starting coalition talks, a move he pushed through to prevent the euro- skeptic True Finns from blocking a rescue. His failure since to secure majority backing in coalition talks means it's now an "open question" whether Finland can support additional aid to Greece, Katainen said.

The deadlock was "inevitable," True Finns leader Timo Soini said in an interview yesterday. "The negotiations have failed two times." Katainen "has one more chance," he said.

If Katainen fails to find a majority, Social Democrat leader Jutta Urpilainen will head a new round of talks, after her party came second in the April elections. The Social Democrats, while backing Portugal's rescue package, have said they want bondholders to share losses and are calling for asset sales and other conditions for any future aid.

Greek Prime Minister May Face Revolt

The Irish Times reports Greek prime minister may face revolt

Greek prime minister George Papandreou will tomorrow strive to stem an outbreak of unrest in his party over the social cost of a new bailout after data laid bare the depth of the country's economic crisis.

Discontent in the ruling Socialist party (Pasok) could yet spill over into a full-scale parliamentary rebellion and tens of thousands are protesting regularly in central Athens against waves of austerity demanded by the European Union and IMF, as well as corruption and state mismanagement.

Labour minister Louka Katseli said Pasok deputies wanted to know whether the sacrifices Greeks have made under the original 110 billion euro bailout, agreed with the EU and IMF a year ago, were bearing any fruit. "The deputies are demanding that the burden should be shifted to those who can withstand it better," she told Mega TV.

Until now dissent has been muted among the ruling Socialists. But Greeks have staged nightly protests for a fortnight in the capital's Syntagma Square to hurl abuse at the parliament building, with numbers hitting over 80,000 on Sunday.

Many Pasok backbench members of parliament appear to be taking fright.

Open Revolt Against Trichet

The actions in Germany by finance minister Schaeuble and the German parliament, and in Finland by the Social Democrats and the True Finns constitute an open revolt against Trichet.

Note too that Greek Prime Minister George Papandreou is another one who insists there will be no haircuts on Greek Bonds. The reason is Greek pension plans are stuffed to the gills with them.

Tough luck says Finland, the German finance minister, and now the German Parliament. How will that fly with Greek unions and Papandreou.

German courts will be icing on the cake, assuming this whole deal does not come flying apart before the German courts rule on it. Next week may be a disaster unless there is a major "mind meld" over the weekend. Don't count on it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Baseline Rail Traffic in Contraction: Oil Consumption vs. Production Revisited

Posted: 10 Jun 2011 09:43 AM PDT

Inquiring minds are looking at the Railfax Charts for data through June 4, 2011.

Rail Traffic 13 Week Moving Averages - Percent Change From Year Ago

Note that baseline traffic is now in contraction with intermodal and cyclical traffic soon to follow if the current trend holds.

The above charts go back 1.5 years. It helps to steps back and look at the bigger picture. The recovery appears pronounced on the above charts but it isn't.

Rail Carload Traffic Since 2006

Intermodal traffic, containers and piggyback service, actually has stronger cyclical tendencies than so-called cyclical traffic. Compared to the same month a year ago, intermodal is right where it was in 2006, 2007, and 2008.

Baseline traffic is below and cyclical traffic is well below levels in the same month in 2006, 2007, and 2008. Thus total traffic is below levels in the same month in 2006, 2007, and 2008.

The recovery looks good only in comparison to the 2009 trough.

What is Railshare?

Railshare is a comprehensive database of North American rail traffic. The data are provided each Thursday by the Association of American Railroads. Each week's report covers the seven day period ending the preceding Saturday. Rail traffic is disaggregated between carload (traffic moving in traditional freight cars such as box cars, tank cars and hoppers) and intermodal traffic (containers and piggyback service).

Railshare provides commodity breakdowns for carload traffic; commodity detail for intermodal traffic is unavailable. Railshare graphs show four major breakdowns of rail traffic. Total traffic includes all carload and intermodal traffic; carload traffic is further divided between economically sensitive commodities (cyclical) and those that are less affected by the business cycle (baseline).

The above Railshare explanation from Railfax.

Note that commodity detail for intermodal traffic is unavailable. The charts show a highly cyclical nature.

Oil Consumption vs. Production Revisited

In Head of Saudi Electric Company Says "Oil Runs Out in 2030 if Current Consumption Maintained" I displayed a chart from BP that shows oil consumption exceeds production.

The Economist made an ominous sounding post out of it.

This morning, I was informed that the production numbers in the BP chart do not include biofuels or coal liquefaction, but consumption does.

Here is the chart:

Oil Consumption vs. Production

Possible Explanations (from my article)

Cheating (under-reporting production) by OPEC
Poor consumption numbers from China or elsewhere
Another source of production not shown
Some combination of the above

The biofuel explanation falls under point number 3 above "another source of production not shown".

Thus, the ominous shortfall as suggested by The Economist is not really a shortfall at all, nor does it represent a huge drawdown in oil stocks. Instead biofuel production increased to make up the difference in demand.

As I said, it simply is not possible for oil consumption to grow faster than production for years on end. Logically, any increase in biofuel production will appear as a reduction in normal oil drilling production because of the mathematical truism consumption = production.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Head of Saudi Electric Company Says "Oil Runs Out in 2030 if Current Consumption Maintained"

Posted: 10 Jun 2011 03:27 AM PDT

In light of Saudi Arabia wanting to step up production only to be rebuffed by the rest of OPEC, this story from elEconomista.es is rather interesting.

Courtesy of Google Translate please consider Saudi Arabia fears that the oil runs out in 2030 if current consumption is maintained

Note: I am rewording some awkward translations so they read better.

The electricity company of Saudi Arabia warns that oil in this country could be depleted by 2030 if left unchecked domestic consumption. According to a report of Saudi Electric, domestic consumption is estimated to be between 2.5 and 3.4 million barrels a day.

The report, published in the magazine Al Mashka says that the increase in domestic consumption of oil is one of the main challenges facing the country, mainly because oil accounts for 80% of national income.

Abdel Salam al-Yamani, head of the Saudi Electricity Company also warned of the consequences for citizens to ignore the calls to save electricity and water, and has advised that they depend more on solar energy.

Oil Running Dry

The Economist says Oil production fails to keep up with demand

CRUDE-OIL prices shot up on June 8th—Brent crude to a one-month high of $118.59 per barrel—after OPEC representatives meeting in Vienna were unable to reach an agreement on production quotas. Many had expected an increase in quotas as members with spare production capacity, led by Saudi Arabia, pushed to avoid a price spike that may dampen long-term demand. As figures released in BP's "Statistical Review of World Energy" show, global oil production has struggled to keep up with increased demand recently, particularly from Asia. In China alone consumption has risen by over 4m barrels per day in the past decade, accounting for two-fifths of the global rise. In 2010 consumption exceeded production by over 5m barrels per day for the first year ever, as world oil stocks were run down.

Oil Consumption vs. Production

click on chart for sharper image

The above chart, referenced above by The Economist is from BP Statistical Review of World Energy June 2011

After falling for two consecutive years, global oil consumption grew by 2.7 million barrels per day (b/d), or 3.1%, to reach a record level of 87.4 million b/d. This was the largest percentage increase since 2004 but still the weakest global growth rate among fossil fuels.

OECD consumption grew by 0.9% (480,000 b/d), the first increase since 2005. Outside the OECD, consumption growth was a record 2.2 million b/d, or 5.5%. Growth remained robust in China and Middle Eastern countries, with Chinese consumption growing by 860,000 b/d or 10.4%. Driven by the economic recovery, middle distillates (+4.4%) were the fastest-growing refined product category globally.

Global oil production increased by 1.8 million b/d, or 2.2%, but did not match the rapid growth in consumption. The gains in production were shared between OPEC and non-OPEC producers. OPEC production cuts implemented late in 2008 were maintained throughout 2010, although relaxed production discipline and rising output not subject to production allocations resulted in an increase of 960,000 b/d, or 2.5%. The largest increases were in Nigeria (+340,000 b/d) and Qatar (+220,000 b/d).

Oil production outside OPEC grew by 860,000 b/d, or 1.8%, the largest increase since 2002. Growth was led by China – which recorded its largest production increase ever – the US, and Russia. Continued declines in Norway – which saw the world's largest decline – and the UK partly offset growth elsewhere. Non-OPEC countries accounted for 58.2% of global oil production in 2010, roughly the same share as in 2000.

Consumption = Production

Long-term consumption cannot exceed production. Even in shorter time frames, consumption can only exceed production if there is sufficient production in storage.

To cover 5 million barrels per day of excess consumption for a year, global oil stocks would have had to drop by 1.825 billion barrels. If that did not happen, we need another explanation.

Possible Explanations

Cheating (under-reporting production) by OPEC
Poor consumption numbers from China or elsewhere
Another source of production not shown
Some combination of the above

Regardless, it simply is not possible for oil consumption to grow faster than production for years on end.

Addendum:

I have been informed that the production numbers in the BP chart do not include biofuels or coal liquefaction, but consumption does.

The biofuel explanation falls under point number 3 above "another source of production not shown".

Thus, the ominous shortfall as suggested by The Economist is not really a shortfall at all, nor does it represent a huge drawdown in oil stocks. Instead biofuel production increased to make up the difference in demand.

As I said, it simply is not possible for oil consumption to grow faster than production for years on end. Logically, any increase in biofuel production will appear as a reduction in normal oil drilling production because of the mathematical truism consumption = production.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

vineri, 10 iunie 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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vineri, 10 iunie 2011

Mish's Global Economic Trend Analysis

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