Mish's Global Economic Trend Analysis

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• Moody's Puts US AAA Credit Rating on Review, Places 7,000 Municipal Ratings on Review as a Result; Bernanke Slapped Already?
• Bernanke Pledges More Monetary Stimulus, Dollar Tanks, Gold Soars to Record High
• Only 22% of US Wants to Raise Debt Ceiling, 44% Don't; Senate Minority Leader Proposes Granting Obama Unilateral Power to Raise Ceiling; Gold Reacts
• Moody's Cuts Ireland to Junk, Retains Negative Outlook; Ireland Should Be Thankful

Moody's Puts US AAA Credit Rating on Review, Places 7,000 Municipal Ratings on Review as a Result; Bernanke Slapped Already? Posted: 13 Jul 2011 07:10 PM PDT At long last the bond vigilantes have a spotlight on US debt. Please consider Japan Stock Futures Fall as Yen Rises as Moody's Reviews U.S Credit Rating Moody's Investors Service put the U.S., rated Aaa since 1917, under review for a credit-rating downgrade for the first time since 1995 on concern the government's $14.3 trillion debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low. The rating would likely be reduced to the Aa range and there is no assurance that Moody's would return its top rating even if a default is quickly cured. Federal Reserve Chairman Ben S. Bernanke told Congress the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling. The Fed last month completed a program to buy $600 billion of Treasury bonds that aimed to stimulate the economy by reducing borrowing costs, boosting stock prices and spurring consumer spending. Moody's Places 7,000 Municipal Ratings on Downgrade Review Bloomberg reports Moody's Places 7,000 Municipal Ratings Tied to U.S. on Downgrade Review Moody's Investors Service placed 7,000 municipal ratings on review for possible downgrade after it warned the U.S. may lose its Aaa investment grade. Gold Soars as Bernanke Pledges More Stimulus At 12:30 I reported Bernanke Pledges More Monetary Stimulus, Dollar Tanks, Gold Soars to Record High The ping-pong match between the ECB and Fed to see who can make the worst policy decisions the fastest, switched back in favor of the Fed today with Bernanke's pledge to pour on the monetary stimulus if needed. Most think it's a given that the stock market will soar when Bernanke starts QE3. I don't. Just because it did last time does not mean it will every time. One of these times Bernanke is going to react in a way that spooks the bond market in a major way, and the market will slap him silly just as happened to Jean-Claude Trichet and the ECB over Trichet's "no default" insistence. Bernanke Slapped Already? The market was relatively giddy when I made those comments. I was on the road having lunch when I made those comments. I have internet access now at 8:46 PM, for the first time since. This is the way things looked after the close. S&P 500 Intraday Chart As I type, I note that the S&P futures are down 4 points to 1308. I also note that gold held nearly all of its gains today as did the $HUI, unhedged miner index. $HUI Intraday Chart I caution that it is too early to say what the market is reacting to, if indeed it is reacting to anything at all. However, this could be the start of the bond and equity markets either having had more than they can take from the monetarist policies of Bernanke and/or the fiscal policies of Congress. I repeat my caution that one of these times, the market is going to spit directly in the face of Bernanke when he pulls one of his monetarist stunts. I do not know if this is the time, but the sooner it happens the better off the US and the rest of the world will be. University of California Economist Brad DeLong (who is calling for more monetary easing), should put this in his pipe and smoke it. DeLong is blind, but I assume he can still breathe. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Bernanke Pledges More Monetary Stimulus, Dollar Tanks, Gold Soars to Record High Posted: 13 Jul 2011 10:32 AM PDT The ping-pong match between the ECB and Fed to see who can make the worst policy decisions the fastest, switched back in favor of the Fed today with Bernanke's pledge to pour on the monetary stimulus if needed. Please consider Fed Ready With Stimulus If Needed Federal Reserve Chairman Ben S. Bernanke told Congress the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling. "The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support," Bernanke said in prepared testimony before the House Financial Services Committee in Washington today. "The Federal Reserve remains prepared to respond should economic developments indicate that an adjustment of monetary policy would be appropriate." Bernanke acknowledged there are "uncertainties" in both directions -- about the strength of the economic recovery and the prospects for inflation -- over the medium term. The Fed chief repeated his belief that inflation won't be a problem for the economy because gasoline and food prices, which had surged earlier this year, are now moderating. Dollar Tanks on Bernanke's Comments Bloomberg reports Dollar Weakens as Bernanke Says the Fed Will Respond If Stimulus Is Needed The greenback fell the most in six months versus the euro as Bernanke said central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling. The Australian and New Zealand dollars led earlier gains against the currency after China's economic growth exceeded analysts' estimates. The euro advanced as Italian and Spanish bonds rose for a second day. Gold Hits Record High In the wake of Bernanke's statements Gold Advances to Record High Gold futures surged to a record $1,588.90 an ounce as the dollar's slump and the European debt crisis spurred demand for precious metals as alternative assets. Silver surged the most since March 2009. The greenback fell as much as much as 1 percent against a six-currency basket after Federal Reserve Chairman Ben S. Bernanke told Congress that the central bank is prepared to provide additional stimulus to bolster the economy. Yesterday, Ireland became the third nation in the European Union to have its credit rating cut below investment grade. Gold futures for August delivery climbed $24, or 1.5 percent, to $1,586.30 at 12:32 p.m. on the Comex in New York, heading for the seventh straight gain. The previous intraday record of $1,577.40 was on May 2. The spot price of the metal priced in euros and pounds also rose to all-time highs today. Since Dec. 1, 2008, gold has doubled as the Fed kept interest rates at a record low and governments spent trillions of dollars to spur global growth. The Fed's second round of so- called quantitative easing, known as QE2 among investors, ended in June. Yesterday, tonnage holdings in exchange-traded products backed by gold jumped 1 percent, the most in a year. Most think it's a given that the stock market will soar when Bernanke starts QE3. I don't. Just because it did last time does not mean it will every time. One of these times Bernanke is going to react in a way that spooks the bond market in a major way, and the market will slap him silly just as happened to Jean-Claude Trichet and the ECB over Trichet's "no default" insistence. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Only 22% of US Wants to Raise Debt Ceiling, 44% Don't; Senate Minority Leader Proposes Granting Obama Unilateral Power to Raise Ceiling; Gold Reacts Posted: 13 Jul 2011 01:55 AM PDT In disgusting turn of events, Senate Minority leader Mitch McConnell appears to have lost his mind regarding raising the debt ceiling. Please consider McConnell Offers 'Last Choice' Debt Option Senate Republican leader Mitch McConnell proposed granting President Barrack Obama unilateral power to raise the national debt ceiling as a "last-choice option" to avoid a default, a move intended to put the burden on the White House to identify future spending cuts. McConnell's proposal to let the president increase the debt limit in three stages, while requiring him to propose offsetting spending cuts, offered a potential path out of the impasse over addressing the nation's long-term debt that has brought the government within weeks of a default. It also signaled the issue may continue to loom during next year's election campaign if Congress is forced to take further votes on the debt ceiling. Backlash Against McConnell Still, McConnell's plan drew a backlash from conservatives -- former House Speaker Newt Gingrich called it "an irresponsible surrender" -- and it wasn't clear whether it could pass the U.S. House. The president said on "CBS Evening News with Scott Pelley" that, unless the debt ceiling is raised in time, the federal government might not be able to pay Social Security and veterans' benefits. "I cannot guarantee that those checks go out on Aug. 3 if we haven't resolved this issue," Obama said. "Because there may simply not be the money in the coffers to do it." Thoroughly Disgusted with "Point-Scoring" Exercise of Both Parties The idea that social security checks would not go out on August 3rd is likely sappy hype. Other things would be cut first, unless of course Obama thought he could score political points in doing so. The whole debate now is nothing but a political-point scoring episode. Think back a couple months ago. Obama wanted the ceiling raised and did not offer any cuts. Republicans insisted on $4 trillion in cuts. Now, Obama wants to cut $4 trillion and the Republicans don't want it. Obama allegedly offered cuts in Medicare, Social Security, and other items if Republicans would only hike taxes $1 trillion. Is Obama really offering $3 trillion in cuts? Who the hell knows? I sure don't. No one has mentioned any details. Doesn't the public have a right to know? Sadly, we have not seen any specifics from either party. The negotiations have been "hush hush" every step of the way. Regardless, Republicans blew a big chance to insist on $3 trillion in real cuts and possibly something the US desperately needs such as the end to collective bargaining of public unions and the scrapping of Davis-Bacon prevailing wage laws. McConnell's Backbone Limp as Overcooked Spaghetti In return for a mere $1 trillion in hikes ($100 billion a year), Republicans could have asked for whatever they wanted. Either the president would have backed down or Republicans would have gotten some major chips in return. Instead, McConnell proposes to piss away this opportunity for nothing. McConnell's backbone is as limp as overcooked spaghetti. Grand Compromise of Muppetry Both sides agree there will be a deal, but the most likely deal now is to do next-to-nothing. ZeroHedge sums up the likely debt compromise nicely. "The final outcome on the debt ceiling will be a grand compromise of muppetry in which nothing is achieved on either spending cuts, or tax hikes." Only 22% of Americans Want to Raise Debt Ceiling, 44% are Against While the Muppet theater debates what to do in secret, please bear in mind the U.S. Debt Ceiling Increase Remains Unpopular With Americans Despite agreement among leaders of both sides of the political aisle in Washington that raising the U.S. debt ceiling is necessary, more Americans want their member of Congress to vote against such a bill than for it, 42% vs. 22%, while one-third are unsure. This 20-percentage-point edge in opposition to raising the debt ceiling in Gallup's July 7-10 poll is slightly less than the 28-point lead (47% vs. 19%) seen in May. Gallup Question: From what you know or gave read about the discussion of raising the debt ceiling would you want your member of Congress to ... vote in favor of raising the debt ceiling vote against raising the debt ceiling or you don't know enough to say By Political Party Public's Fear of Runaway Spending Evident President Barack Obama has emphasized that not raising the debt ceiling would force the U.S. to default on its debt payment obligations, leading to economic catastrophe, while Republicans have made their support for raising it contingent on a budget agreement that sharply limits future spending. A follow-up question finds Americans more sympathetic to the Republicans' argument than Obama's. Specifically, when asked to say which is their greater concern, 51% say raising the debt ceiling without plans for major future spending cuts concerns them more, while 32% are more concerned with the risk of a major economic crisis if Congress does not take action. Reaction in Gold In a reaction to inaction in the US to do anything about the budget and/or to the inaction or futility of political leaders in Europe to address the Eurozone crisis, gold is responding as it should. Gold is a fraction of a percent from making a new all-time high. Bloomberg reports Gold May Extend Rally, Nearing Record, as European Debt Crisis Escalates. That reaction in gold is not just over Europe. It is about budget stress in the US, credit stress in Europe, rampant inflation in China, and central banker actions in general, globally. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Moody's Cuts Ireland to Junk, Retains Negative Outlook; Ireland Should Be Thankful Posted: 13 Jul 2011 12:07 AM PDT Moody's just effectively spit in the face of EU commissioner Michel Barnier who wants to prohibit rating debt of countries in rescue programs. Please consider Ireland Cut to Junk Rating by Moody's Ireland joined Portugal and Greece as the third euro-area nation to have its credit rating reduced to below investment grade as European Union finance ministers struggle to contain the region's sovereign debt crisis. Moody's Investors Service cut Ireland to Ba1 from Baa3, citing the probability that Ireland will need additional official financing and for investors to share in losses before it can return to the private market to borrow. The outlook remains "negative," Moody's said in a statement yesterday. In Spain, Finance Minister Elena Salgado said the nation might need to endure even deeper spending cuts in 2012 than those currently planned. Ireland, which had a top Aaa rating just over two years ago, has suffered after a real-estate boom collapsed, fueling bank bailouts and a surge in the country's debt. "The downgrade underlines the need for something more radical in terms of a European solution," said Austin Hughes, chief economist at KBC Ireland Plc in Dublin, which publishes a monthly index of consumer sentiment. "You really need Europe to come up with a solution rather than pushing it into the future. A solution needs to be found sooner than later." Ireland's government criticized the Moody's downgrade, Dublin-based broadcaster RTE reported, citing a finance ministry spokesman. Ireland has met the targets so far under its bailout program and the downgrade is a "disappointing development," the spokesman was cited as saying. Massive Irony The irony in this mess is that Ireland benefits from that downgrade. If yields keep rising, and they are likely to do just that, the EU will cut Ireland's interest rate, Ireland will default, or (most likely) both, and cost to taxpayers will drop. The best thing for Ireland is to default. Any action that takes Ireland towards that outcome benefits Ireland and Irish taxpayers to the detriment of stupid banks that made stupid loans to Ireland in the midst of a huge property bubble. The sooner Ireland defaults, the better off it will be. Thus, Ireland should be thankful for this downgrade. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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