Mish's Global Economic Trend Analysis

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• Japan Intervenes, Yen Plunges; What's Next?
• Bailout of Italy on Tap; ECB to Become Buyer of "Only" Resort; Expect Failure of Thursday's Italian Bond Auction; Who Will Bail Out the ECB?
• Quantitative Easing Begins in Switzerland to Counteract Soaring Swiss Franc, Central Bank "Aims to Bring 3-Month LIBOR to 0%"; Gold Soars
• ISM says "Business Conditions Flattening Out"; Why Services Number Worse Than It Looks; Unsustainable Conditions
• Durable Goods Orders Sink 2.1%, Non-Defense Orders Sink 4.1%
• Italy Holds 2 Hours of Emergency Meetings with Juncker; EU says "Euro Area's Systemic Capacity in Doubt"; Italy Banks Have Difficulty Securing Funding

Japan Intervenes, Yen Plunges; What's Next? Posted: 03 Aug 2011 09:42 PM PDT No major country or central bank wants a strong currency, not Japan, not the ECB, not Brazil, not Bernanke, not the Fed. The central falsehood is that every country and every central bank seems to think they can export their way out of this malaise if only their currencies would sink. History has proven time and time again that intervention does not work, but that never stops countries from trying. Bloomberg reports Yen Slumps After Japan Intervenes to Curb Rise; Most Asian Stocks Advance The yen dropped the most in about five months against the dollar after Japan intervened in the foreign-exchange market to weaken its currency. Most Asian stocks rose, paced by exporters, and metals rebounded. The yen dropped 2.3 percent to 78.84 per dollar as of 11:52 a.m. in Tokyo, set for the largest intraday decline since March 18, when the Group of Seven nations jointly sold the currency. Finance Minister Yoshihiko Noda said Japan took unilateral action to sell the yen, which earlier this week neared a postwar record. Yen Intraday Chart click on chart for sharper image A Look at Prior Interventions Flashback December 18, 2008: Japan Announces Currency and Stock Market Intervention It is absolutely not clear that Japan needs to do anything here. In fact, it is absolutely clear that Japan should not do a thing. It has been proven time and time again that currency intervention does not work. Flashback March 17, 2011: Coordinated G-7 Yen Intervention in Progress; Currency Interventions Never Work Inquiring minds are once again watching central banks intervene in the forex markets. Japanese Finance Minister Yoshihiko Noda said Japan agreed with central banks of the United States, Britain and Canada as well as the European Central Bank to jointly intervene in the currency market, the first joint action in over a decade. "This entire move can be pinned down to speculative positioning rather than any repatriation flows," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi. "Since it is speculative, intervention in this case should work and clear out some of the long yen positions." Care to change your mind Mr. Hardman? This is what I said ... Currency Interventions Never Work Several people asked me to comment on this. I am not sure what I can add given my stated position that "currency interventions never work". However, to add some color, I will say this is an act of desperation as well as a sign of hubris by central bank clowns to think they are more powerful than the markets. Short of complete self-destruction, no one can defeat the primary trend. They can slow it down, or temporarily buy some time but not reverse it. That said, central banks certainly can enhance the current trend. Indeed, asinine policies by the Greenspan Fed certainly made the housing bubble much larger than would have happened otherwise. Thus, there is always a slight chance that by accident, central banks step in at precisely the right time (as a trend is about to reverse on its own accord), giving the appearance of intervention success. Could this be one of those rare instances central bankers step in at the right time? I suppose so. Nonetheless, as I said just yesterday in Wild Moves in Yen; Best Move for Japan is to Not Intervene; Yen Hits Record High; Carry Trade Blows Up, the best thing for central banks is to leave this alone. Yen Weekly Chart The chart above from today looks ominous. A weekly chart puts things in better perspective. click on chart for sharper image The currency intervention in March gave the appearance of working for 4 weeks or so. However, it is not clear it did anything ever. There is often a correction following a new spike high. At best, the intervention increased the strength of the correction for a few weeks. The same applies to Greece, not with currency intervention, but interest rates. The ECB stepped in on multiple occasions to support Greece by buying Greek government bonds. The first time it worked for a couple months, the second time intervention lasted a month, and the latest effort lasted about a week. Simple Math Mathematically it's impossible for every currency to sink vs. each other. However they can all sink against something. That something is gold and there should be no doubt that gold is reacting to competitive currency devaluation schemes of central banks. 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.

Bailout of Italy on Tap; ECB to Become Buyer of "Only" Resort; Expect Failure of Thursday's Italian Bond Auction; Who Will Bail Out the ECB? Posted: 03 Aug 2011 12:32 PM PDT A critical Italian government bond auction is coming up Thursday, August 4. That bond auction is highly likely to fail. However, if it does fail, don't expect results to be reported that way. The chief economist at Citigroup says ECB to Revive Bond-Buying to Protect Italian Auction This Week Former Bank of England policy maker Willem Buiter said the European Central Bank will revive its bond-buying program to safeguard this week's auction of Italian bonds. "The ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday," Buiter, now chief economist at Citigroup Inc., told reporters in London today. "If the ECB doesn't come in, the Italian bond auction is likely to fail." Nonsense from Citigroup Buiter's statements are of course complete nonsense. If the ECB steps in it will be because the auction failed. The act of intervention will not turn a failed auction into a successful one. What the hell is the matter with chief economists who do not understand simple economic principles? Protection? Really? Here is another ridiculous headline on the same subject from The Telegraph: ECB to protect Europe by buying bonds The European Central Bank is expected to signal it is stepping into the eurozone debt crisis on Thursday by reopening its purchases of government debt, amid fears the turmoil will claim the economy of a nation that is "too big to bail". Officials on Wednesday night said the ECB's monthly meeting was expected to see a reversal on the buying of sovereign bonds after 18 weeks of staying out of the markets, because of an EU institutional vacuum that threatens to drag down Italy and Spain, the region's third and fourth-largest economies. With EU officials scrabbling to fine-tune changes to allow the eurozone's €440bn (£384bn) bail-out fund to intervene in the markets, central bankers are expected to reluctantly accept the precedent of allowing ECB bond buy-backs in May 2010. Measures allowing the European Financial Stability Facility (EFSF), the bail-out fund created last summer, new powers to buy the bonds of struggling countries were agreed at an emergency euro summit on July 21 in an attempt to protect Italy (whose public debt and bank exposure is shown in the interactive graphic above) and Spain. However, legally changing the basis of the EFSF and ratifying the changes in 17 eurozone countries, where the expanded fund's role is controversial in German, Dutch and Finnish parliaments, could take weeks or even months, leaving a dangerous vacuum. "We're watching the ECB which, unlike the eurozone, can intervene now and build a bridge until the EFSF can take up its new role in the autumn," said an official. Buyer of Only Resort The idea the ECB can "protect" Italy by buying Italian bonds is as silly as the idea the ECB could protect Greece by buying Greek bonds. We all know how the Greek purchase turned out. Market forces will overrule anything the ECB can do. Worse yet, the ECB is exacerbating the problems. If the ECB misprices bonds and does so repetitively, other participants will eventually step to the sidelines and the ECB will become the buyer of only resort, with a balance sheet full of garbage and obvious implications. Who Will Bail Out the ECB? Who pray tell will bail out the ECB? The correct answer is no one, and this is one of the driving forces of gold. For more on nonsensical central bank actions driving the price of gold, please see Quantitative Easing Begins in Switzerland to Counteract Soaring Swiss Franc, Central Bank "Aims to Bring 3-Month LIBOR to 0%"; Gold Soars 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.

Quantitative Easing Begins in Switzerland to Counteract Soaring Swiss Franc, Central Bank "Aims to Bring 3-Month LIBOR to 0%"; Gold Soars Posted: 03 Aug 2011 10:23 AM PDT It's official. Quantitative easing has begun, just not where you might have expected. QE is underway in Switzerland, by the Swiss National Bank, not the US by the Fed. Swiss National Bank Targets LIBOR "Close to Zero as Possible" The Swiss National Bank Press release says Swiss National Bank takes measures against strong Swiss franc The Swiss National Bank (SNB) considers the Swiss franc to be massively overvalued at present. This current strength of the Swiss franc is threatening the development of the economy and increasing the downside risks to price stability in Switzerland. The SNB will not tolerate a continual tightening of monetary conditions and is therefore taking measures against the strong Swiss franc. Effective immediately, the SNB is aiming for a three-month Libor as close to zero as possible, narrowing the target range for the three-month Libor from 0.00-0.75% to 0.00- 0.25%. At the same time, it will very significantly increase the supply of liquidity to the Swiss franc money market over the next few days. It intends to expand banks' sight deposits at the SNB from currently around CHF 30 billion to CHF 80 billion. Consequently, with immediate effect, the SNB will no longer renew repos and SNB Bills that fall due and will repurchase outstanding SNB Bills, until the desired level of sight deposits has been reached. Since the SNB's last quarterly monetary policy assessment, the global economic outlook has worsened. At the same time the appreciation of the Swiss franc has accelerated sharply during the last few weeks. Consequently, the outlook for the Swiss economy has deteriorated substantially. The SNB is keeping a close watch on developments on the foreign exchange market and will take further measures against the strength of the Swiss franc if necessary. Emergency Central Bank Cut Outside Scheduled Quarterly Meetings Via email (no direct link) Barclay's Capital reports "SNB moves to QE to counteract appreciating CHF, and cuts official rates" This morning the Swiss National Bank (SNB) announced that it will, over the coming days, increase the Swiss monetary base (that is, banks' sight deposits held with the SNB) from currently around CHF30bn to CHF80bn - a measure that we argue can rightly be described as "quantitative easing" (QE). In effect, the bank will repurchase outstanding SNB Bills. The measure aims to bring the 3-mth Swiss Libor target rate to "as close to zero as possible", and the bank will also narrow the target range for the 3-mth Libor from 0.00-0.75% to 0.00-0.25% - so the bank has therefore also cut official rates today (thus outside of a regular quarterly meeting). The increase in the monetary base is not necessarily going to increase the SNB's balance sheet; rather, we believe it is more likely to result in a restructuring of its liabilities: banks' sight deposits held with the SNB increase, while liabilities in the form of, say, SNB Bills decline. We believe the action taken by the SNB is clearly driven by the negative consequences for the Swiss economy and the financial sector of an environment of sagging worldwide growth, accompanied by the CHF exchange rate having climbed to record highs (in nominal and real terms) vis-à-vis major currencies: "Since the SNB's last quarterly monetary policy assessment, the global economic outlook has worsened. At the same time the appreciation of the Swiss franc has accelerated sharply during the last few weeks. Consequently, the outlook for the Swiss economy has deteriorated substantially." Is it any wonder gold is soaring? 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.

ISM says "Business Conditions Flattening Out"; Why Services Number Worse Than It Looks; Unsustainable Conditions Posted: 03 Aug 2011 09:38 AM PDT In the July 2011 Non-Manufacturing ISM Report On Business®, the ISM offered this interesting thought: Respondents' comments remain mixed; however, for the most part they indicate that business conditions are flattening out." Why Services Number Worse Than It Looks Here is a table from the report, with annotations in red, green and blue by me, that suggests things are weaker than they look. click on table for sharper image The NMI/PMI is an equal weighted index of four components. Business Production New Orders Employment Supplier Deliveries Unsustainable Conditions Production is +2.7 while new orders, employment, and deliveries are down. Also note that backlog of orders has plunged over the past two months. Meanwhile new export orders is not only in a free-fall, but also in contraction for the first month as the global economy cools. Supplier deliveries are on the verge of contraction, and inventories were +3 points to 56.5. In short, one of these numbers does not make sense in relation to the others, in relation to the manufacturing ISM, in relation to the financial industry, and in relation to the global economy. That 56.1 production reading at +2.7 simply does not fit in, and is not sustainable if the other conditions remain in current "slowing" condition. The possibility of a much bigger decline next month seems very real. In fact, that is my call in advance. Slowing Global Economy Links Factory Production August 3: Durable Goods Orders Sink 2.1%, Non-Defense Orders Sink 4.1% Consumer Spending - August 2: US Consumer Spending Unexpectedly Declines, First Drop in 20 Months; Personal Savings Rate Highest Since August 2010 Anecdotes From Bill Gross - August 2: Bill Gross says "Fed Approaching Dead End Unsolvable Dilemma"; Feldstein sees 50% Chance of Recession; Three Cardinal Rules of Stimulus Shipping - August 2: Freighter Rates See Significant Plunge In Normally Busiest Time of Year Petroleum Usage - August 2: Petroleum Distillates Demand Shows "Definite Economic Downturn Starting April/May 2011" Manufacturing ISM - August 1: Gap-and-Crap it Was; ISM Plunges to 50.9, Lowest Level in 2 Years, New Orders Contract; Key Thoughts; Reaction in Gold Canada GDP - July 30: Canada GDP Declines .3%, Largest Drop in Two Years - Don't Worry It's "Temporary"; Canadian Apologists Be Warned Soft Patch? Those are just a few of the economic stories from the last 3 days. Is this a "soft patch" or is it "soft thinking" by those who believe the former? 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.

Durable Goods Orders Sink 2.1%, Non-Defense Orders Sink 4.1% Posted: 03 Aug 2011 08:33 AM PDT Manufacturing continues its slide as one might expect in the wake of the latest ISM reports. Please consider details from the Advance Report on Durable Goods Manufacturers' Shipments, Inventories and Orders for June 2011. New Orders New orders for manufactured durable goods in June decreased $4.0 billion or 2.1 percent to $192.0 billion, the U.S. Census Bureau announced today. This decrease, down two of the last three months, followed a 1.9 percent May increase. Excluding transportation, new orders increased 0.1 percent. Excluding defense, new orders decreased 1.8 percent. Transportation equipment, also down two of the last three months, had the largest decrease, $4.2 billion or 8.5 percent to $45.4 billion. This was due to nondefense aircraft and parts which decreased $2.8 billion. Inventories Inventories of manufactured durable goods in June, up eighteen consecutive months, increased $1.6 billion or 0.4 percent to $357.2 billion. This was at the highest level since the series was first published on a NAICS basis and followed a 1.2 percent May increase. Transportation equipment, also up eighteen consecutive months, had the largest increase, $1.2 billion or 1.1 percent to $109.1 billion. This was also at the highest level since the series was first published on a NAICS basis and followed a 1.7 percent May increase. Capital Goods Nondefense new orders for capital goods in June decreased $3.0 billion or 4.1 percent to $69.8 billion. Shipments increased $0.7 billion or 1.1 percent to $67.7 billion. Unfilled orders increased $2.1 billion or 0.4 percent to $504.7 billion. Inventories increased $2.1 billion or 1.3 percent to $162.7 billion. Defense new orders for capital goods in June decreased $0.3 billion or 3.9 percent to $8.6 billion. Shipments decreased $0.1 billion or 1.6 percent to $7.8 billion. Unfilled orders increased $0.9 billion or 0.6 percent to $150.3 billion. Inventories decreased $0.5 billion or 2.3 percent to $20.3 billion. Shipments Shipments of manufactured durable goods in June, up six of the last seven months, increased $1.0 billion or 0.5 percent to $196.0 billion. This followed a 0.5 percent May increase. Machinery, up four of the last five months, had the largest increase, $0.7 billion or 2.6 percent to $29.1 billion. Unfilled Orders Unfilled orders for manufactured durable goods in June, up fourteen of the last fifteen months, increased $2.1 billion or 0.2 percent to $862.7 billion. This followed a 0.9 percent May increase. Machinery, up seventeen consecutive months, had the largest increase, $2.1 billion or 2.0 percent to $111.2 billion. This was at the highest level since the series was first published on a NAICS basis in 1992 and followed a 3.4 percent May increase. In general, orders were down and shipments were up. Nondefense was hammered. Unfilled orders are on the verge of contraction. This set of data does not bode well for employment. 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.

Italy Holds 2 Hours of Emergency Meetings with Juncker; EU says "Euro Area's Systemic Capacity in Doubt"; Italy Banks Have Difficulty Securing Funding Posted: 03 Aug 2011 08:02 AM PDT Congratulations (of sorts) to Jean-Claude Juncker for not lying about what was said in emergency meetings with Italian Economy Minister. Juncker did not lie for the simple reason he did say anything of substance about the meeting. Credit Crunch European Style Inquiring minds are noting various details in a Reuters report EU says Euro area's systemic capacity in doubt European Commission President Jose Manuel Barroso said a surge in Italian and Spanish bond yields to 14-year highs was cause for deep concern and did not reflect the true state of the third and fourth largest economies in the currency area. "In fact, the tensions in bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis," Barroso said in a statement. He urged member states to speed up parliamentary approval of crisis-fighting measures agreed at a July 21 summit meant to stop contagion from Greece, Ireland and Portugal, which have received EU/IMF bailouts, to larger European economies. Italian Economy Minister Giulio Tremonti held two hours of emergency talks with the chairman of euro zone finance ministers, Jean-Claude Juncker, in Luxembourg but neither disclosed anything of substance after the meeting. The euro zone's rescue fund cannot use new powers granted at last month's summit to buy bonds in the secondary market or give states precautionary credit lines until they are approved by national parliaments in late September at the earliest. The European Central Bank could reactivate its bond-buying program, which temporarily steadied markets last year but has been dormant for more than four months. Weekly data released on Monday show it has so far refrained from doing so despite market rumors to the contrary last week. Italy and Spain could offer new austerity measures to try to placate the markets, but Rome has just adopted a 48 billion euro savings package and Madrid's lame duck government has just called an early general election for November 20. Shares in banks exposed to euro zone sovereigns, particularly in Italy, have taken a hammering and are having growing difficulty in securing commercial funding. "Bank funding remains stressed for southern Europe and remains a key source of risk for bank earnings, ability to lend and a drag on economic recovery," Huw van Steenis, analyst at Morgan Stanley in London, said in a note. "The risk of a credit crunch in southern Europe is growing." Spanish and Italian bonds yields shot up to new record highs but are now a few basis points above yesterday's close. Both remain above 6% with Italy 10-year bonds currently at 6.09% and Spain at 6.25%. The highs were 6.26 and 6.42 respectively. Gold hit another new high and currently sits up $29 at $1672 and silver surged a whopping $1.76 to $41.85. No Reason for Alarm?! In a clear use of the Jean-Claude Juncker theory to "lie when it gets serious", a "German government spokesman said Berlin saw no reason for alarm over the selloff of Italian stocks and bonds and was focused on implement the latest euro zone summit decisions." Does anyone believe that? 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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