Mish's Global Economic Trend Analysis

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• Smallest Yield Curve Gap Between US and Japan in 19 Years; What's it Mean?; Curve Comparison US, Japan, Germany, UK; Idiocy of Central Bankers
• Defense Industry Bribes and Legislative Whores
• Global Recession Warning
• BNP Paribas leveraged 27:1; Société Générale Leveraged 50:1; Sorry State of Affairs of U.S. Banks; Global Financial System is Bankrupt

Smallest Yield Curve Gap Between US and Japan in 19 Years; What's it Mean?; Curve Comparison US, Japan, Germany, UK; Idiocy of Central Bankers Posted: 15 Aug 2011 09:53 PM PDT Curve Watchers Anonymous notes amazingly low yields across the entire yield curve for the US, Japan, Germany, and the UK. Here is a chart I put together this evening. Yield Curve Comparison US, Japan, Germany, UK as of 2011-08-15 Data from Bloomberg Government Bonds as of 2011-08-15. Mighty European Recession on the Way Note the inversion in the German yield curve. Typically this means a recession is on the way, but the results may be skewed by all the EU bailout concerns. Regardless, other data points especially falling industrial production also suggest Europe is headed for a recession. The austerity measures in Italy, Greece, Ireland, Spain, and Portugal will turn the recession into a mighty one. Spain and Greece are clearly in recession now, the rest of Europe will soon follow (if it is not in recession already). Elsewhere curves are flat as a pancake everywhere for three years. With both US and Japan flirting with zero for that three-year duration. Smallest Yield Curve Gap Between US and Japan in 19 Years Please consider Smallest Yield Gap in 19 Years Adds to Yen Struggle for Bank of Japan The Bank of Japan, struggling to keep the strengthening yen from derailing efforts to repair the world's third-largest economy, is facing a new challenge -- the shrinking yield gap between two-year sovereigns and Treasuries. The extra yield two-year Treasuries offer over similar- maturity Japanese notes fell today to the least since 1992. BOJ Governor Masaaki Shirakawa said on Aug. 4 there's a "relatively high" correlation between that rate gap and the dollar-yen rate, as falling yield premiums in the U.S. damp dollar-buying demand from Japanese investors. The central bank may need to lengthen the maturity of bonds in its asset purchase program to stop the yen's appreciation, according to Mizuho Securities Co. The BOJ, whose policy rate is already near zero, bolstered stimulus by 10 trillion yen ($130 billion) on Aug. 4, the same day Japan intervened in the currency market for the first time since March. The difference between the U.S. and Japanese two-year yields narrowed to a 19-year low of 3.7 basis points today. US Back in Deflation For Japan and the US, these are deflationary curves. This is 1 of 14 signs the US is once again in deflation. Please see Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over for additional details. That said, this talk of the Bank of Japan going further out on the yield curve to suppress yields at the long end of the curve is sheer madness. Japan has been pursuing such policies for 20 years and has nothing to show for it. Worse yet, its fiscal policies fighting deflation has landed Japan the largest debt-to-GDP ratio in the world (of any major country). Bernanke has not learned a thing from this. Bernanke wants Keynesian fiscal policies in Congress while he follows the Bank of Japan on monetary policy. It's sheer idiocy doing the same thing over and over hoping for a better result. Turning Japanese Barry Ritholtz has this interesting chart of SPX vs MSCI Japan Index (10 Year Lag) The past does not predict the future. However, please remain open to the possibility the US is following the footsteps of Japan in more ways than one. Here is the table of values that make up the lead yield-curve chart. US, Japan, Germany, UK Yield Curve Data Points Duration U.S. Japan Germany UK 3-Month 0.00 0.10 1.12 0.51 6-Month 0.07 0.10 0.81 0.63 12-Month 0.10 0.12 0.68 0.57 2-Year 0.19 0.15 0.71 0.67 3-Year 0.34 0.19 0.84 0.70 5-Year 0.99 0.35 1.39 1.32 7-Year 1.59 0.61 1.86 1.83 10-Year 2.30 1.04 2.33 2.54 30-Year 3.77 2.00 3.18 3.95 These data points are a sign of enormous global weakness. Those banking on a huge second-half recovery are doing more wishing than thinking. 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.

Defense Industry Bribes and Legislative Whores Posted: 15 Aug 2011 01:06 PM PDT In case you ever wondered how it is that Republicans do not want deficits and Democrats do not want deficits, yet we have massive and growing deficits, the following two articles will explain the reasons nicely. Special Interests Gave Millions to Budget Panel The Boston Globe reports Special interests gave millions to budget panel The 12 lawmakers appointed to a new congressional supercommittee charged with tackling the nation's fiscal problems have received millions in contributions from special interests with a direct stake in potential cuts to federal programs, an Associated Press analysis of federal campaign data has found. The newly appointed members -- six Democrats and six Republicans -- have received more than $3 million total during the past five years in donations from political committees with ties to defense contractors, health care providers and labor unions. That money went to their re-election campaigns, according to AP's review. The congressional committee, created as part of the debt limit and deficit reduction agreement enacted last week, is charged with cutting more than $1 trillion from the budget during the coming decade. If the committee doesn't decide on cuts by late November -- or if Congress votes down the committee's recommendations -- spending triggers would automatically cut billions of dollars from politically delicate areas like Medicare and the Pentagon. The committee's co-chairs -- Sen. Patty Murray, D-Wash., and Rep. Jeb Hensarling, R-Texas -- each received support from lobbyists and political committees, including those with ties to defense contractors and health care lobbyists. Hensarling's re-election committee, for instance, received about $11,000 from Lockheed Martin and $8,500 from Northrop Grumman. Companies like Lockheed rely heavily on government contracts: More than 80 percent of Lockheed's net sales during the first six months of 2011 came from the U.S. government, according to Securities and Exchange Commission records. And in SEC filings two weeks ago, Northrop expressed concern of a "material adverse effect" on its finances had the debt ceiling not been raised. 'Doomsday' Defense Cuts Loom Large for Select 12 Yahoo!Finance reports 'Doomsday' defense cuts loom large for select 12 For the dozen lawmakers tasked with producing a deficit-cutting plan, the threatened "doomsday" defense cuts hit close to home. The six Republicans and six Democrats represent states where the biggest military contractors -- Lockheed Martin, General Dynamics Corp., Raytheon Co. and Boeing Co. -- build missiles, aircraft, jet fighters and tanks while employing tens of thousands of workers. The potential for $500 billion more in defense cuts could force the Pentagon to cancel or scale back multibillion-dollar weapons programs. That could translate into significant layoffs in a fragile economy, generate millions less in tax revenues for local governments and upend lucrative company contracts with foreign nations. The cuts could hammer Everett, Wash., where some of the 30,000 Boeing employees are working on giant airborne refueling tankers for the Air Force, or Amarillo, Texas, where 1,100 Bell Helicopter Textron workers assemble the fuselage, wings, engines and transmissions for the V-22 Osprey tilt-rotor aircraft. Billions in defense cuts would be a blow to the hundreds working on upgrades to the Abrams tank for General Dynamics in Lima, Ohio, or the employees of BAE Systems in Pennsylvania. For committee members such as Sens. Patty Murray, D-Wash., Rob Portman, R-Ohio, and Pat Toomey, R-Pa., the threat of Pentagon cuts is an incentive to come up with $1.5 trillion in savings over a decade. Failure would have brutal implications for hundreds of thousands workers back home and raise the potential of political peril for the committee's 12. "I think we all have very good reasons to try to prevent" the automatic cuts, Toomey told reporters last week when pressed about the impact on Pennsylvania's defense industry. "That is not the optimal outcome here, the much better outcome would be a successful product from this committee." The panel has until Thanksgiving to come up with recommendations. If they deadlock or if Congress rejects their proposal, $1.2 trillion in automatic, across-the-board cuts kick in. Up to $500 billion would hit the Pentagon. Those cuts, starting in 2013, would be in addition to the $350 billion, 10-year reduction already dictated by the debt-limit bill approved by Congress and signed into law by President Barack Obama this month. Not surprisingly, Defense Secretary Leon Panetta has described the automatic cuts as the "doomsday mechanism." He's warned that the prospect of nearly $1 trillion in reductions over a decade would seriously undermine the military's ability to protect the United States. For the Pentagon, "we're talking about cuts of such magnitude that everything is reduced to some degree," said Loren Thompson, a defense analyst at the Lexington Institute, a think tank. "At that rate, you're eliminating the next generation of weapons." Next Generation of Weapons Not Needed A defense analyst at the Lexington Institute, a think tank bemoans "At that rate, you're eliminating the next generation of weapons." My reply is "I sure hope so". For the most part, we do not need a next generation of weapons. The US spends $trillions on "next generation" silliness and most of it does not work or is unneeded. How much did we waste of SDI (Star Defense Initiative) only to be thwarted by a group of knife-wielding terrorists? How many more submarines does the US need? Tanks? Missiles? Anything? Bribes and Whores Defense contractors bribe member of the Senate and House to pass their legislation. Any representative not supportive of defensive industry bribes is labeled "weak on defense". Those supportive of aggressive US militarism receive hundreds of millions of campaign contributions. That is the way the game is played. Moreover, Republican hypocrites who warn about spending do not have the courage to pass tax hikes to support this idiocy. The legislative whores from both parties play the game because it means jobs for their district. No one gives a flying **** about whether any of this spending makes any sense for the nation. Instead they bemoan "brutal implications for hundreds of thousands workers back home", workers who should never have been hired in the first place, to build weapons that are not needed, to fight an enemy that is imaginary. The War in Vietnam and the most recent war in Iraq is proof enough of the madness. Neither was justified. Idiots like Secretary of Defense Robert McNamara formulated the "Domino Theory" to justify the war. Neither Vietnam nor Iraq was a threat to the US in any way shape or form. We have had absurdly stupid wars and continuation of stupid war policy under presidents Johnson, Nixon, Bush, and Obama. Clearly this is not a Republican vs. Democrat issue. This is a "Defense Industry Bribes and Legislative Whores" issues. Campaign Finance Reform Badly Needed Worse yet, the policy does not pertain just to defense. In tit-for-tat trading, Republicans and Democrats trade favors for pet projects, bloating up the budget for all kinds of reasons. The situation is so out of line that I have sarcastically proposed on several occasions "Instead of electing Congressional representatives, we should eliminate Congress and let lobbyists write our bills. They do no anyway, so lets cut out the middleman". Lobbyists are the only group who knew what was in the health-care bill rammed through by Democrats. Recall House Speaker Nancy Pelosi's statement: "We have to pass the health care bill so that you can find out what is in it". It is pointless to expect change as long as lobbyists write legislation that our legislators never bother to read. Clearly, something needs to be done about campaign finance reform. Speaking of which, have you ever noticed how challengers bemoan lack of campaign finance reform as a campaign issue, yet as soon as they are elected, nothing happens? The reason is simple: Payouts and campaign contributions eventually makes whores out of the most of them. Is it any wonder public approval of Congress is at an all-time low? Many representatives will point out they genuinely believe in the policies they vote for. For some it is likely true. It is how they got elected in the first place (with help of donations of course). Others fail to understand the role bribery and payoffs have on their beliefs over time. Addendum: My friend BC writes .... Consider this. As a share of the private GDP (total GDP less government spending, including personal transfers, such as Social Security, Medicare, Medicaid, unemployment insurance, food stamps, etc.), government spending, oil consumption, and household interest payments account for an equivalent of 75-80% of private GDP!!! Of the equivalent 56% of private GDP attributable to government spending, 10% of private GDP is for never-ending imperial wars!!! In simple terms, it costs us 75-80% of the output of the non-government sector to pay for imperial government and war so we can import and consume oil for car and truck transport, which in turn allows us to borrow more money than we can ever afford to pay back to buy import oil and goods. And we have been conditioned to believe for 30-40 years that this is a reasonable arrangement and sustainable indefinitely. We are insane. 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.

Global Recession Warning Posted: 15 Aug 2011 11:59 AM PDT Daiwa Capital Markets economist Kevin Lai says Hong Kong Recession Risk Is Global Warning Of nine economists in a Bloomberg News survey, Lai came closest to predicting a 0.5 percent contraction in the city's economy in the second quarter. Only two of the analysts expected gross domestic product to decline from the previous three months. The government released the data Aug. 12. "Global demand is really weak and we expect the U.S. and Europe will see a sharp slowdown, or near-zero growth, next year," Lai said in a phone interview in the city today. "A recession is a reality for Hong Kong." An 11 percent decline in Hong Kong's merchandise exports in the second quarter from the previous three months highlights the weakness, Lai said. In a note, he described the economy as the world's "most externally-driven" and said that a slump has "grave implications." The world economy is "entering a new danger zone" and international policy makers need to take steps to restore confidence, World Bank President Robert Zoellick said yesterday in Sydney. A U.S. debt-rating downgrade and a widening European debt crisis triggered a global rout of equities. Some economists define a global recession as a slowdown in combined global growth under 2%. That is a near-given. 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.

BNP Paribas leveraged 27:1; Société Générale Leveraged 50:1; Sorry State of Affairs of U.S. Banks; Global Financial System is Bankrupt Posted: 15 Aug 2011 09:44 AM PDT BNP Paribas leveraged 27:1 Jean-Pierre Chevallier reports on his Business économiste monétariste béhavioriste blog, that BNP Paribas leveraged: 27!. The real leverage of BNP Paribas is … 27.2! Indeed, the French bank counts in its equity item 2: Undated Super Subordinated Notes eligible as Tier 1 capital which are actually a form of liabilities related interests subject to some conditions. Chevallier posts a series of graphs taken from consolidated financial statements to support his claim. Société Générale Leveraged 50:1 Yesterday Chevallier reported Société Générale leveraged: 50! The real leverage of Société Générale is… 50! Indeed, the French bank counts in its equity item 2: Equity instruments and associated reserves which are actually different forms of liabilities related interests subject to some conditions. Equity published in item 1: Sub-total equity, Group share should be reduced by Equity instruments and associated reserves (item 2) to determine the true equity at fair value (item 3) i.e. 22,535 billion of euros. Total liabilities are equal to total assets (item 4) less the true equity at fair value (item 3): 1,135.473 billion of euros. So, the leverage is the ratio of total liabilities on equity: 50.4 i.e. a Tier ratio at 2.0%. Société Générale did not respect the rules of prudential borrowing as they were defined by Alan Greenspan. As above, Chevallier posts a series of graphs taken from consolidated financial statements to support his claim. Blaming the Shorts What did officials do in the wake of share price collapse? You should know the answer, blame the shorts: France Selectively Bans Short-Selling of 11 Banks; Spain Bans Shorting and Derivatives Based Shorting;Why the Bans Will Fail Shorts did not play games with tier-1 capital, banks did. Shorts did not leverage 50-1, banks did. Officials blame the shorts. Moreover, Société Générale had the gall to "deny all rumors" as noted in European Banks Hammered; Societe Generale "Denies All Rumors"; French Bank Option Prices Soar; Credit Default Swaps on France Under Attack Are they denying this excess leverage? Apparently. Without stating what the rumors were, they denied all of them. This prompted me to say "Societe Generale did not even say what they were denying. The bank simply denied everything. Whatever the rumors are, I assure you at least some of them are true. This denial sounds just like Lehman's denial to me." More than anything else, excessive leverage sunk Lehman. Excuses for various things got so silly, I asked Do These Idiots Realize How Stupid They Sound? Things matter When They Matter Things don't matter until they do. In the past few weeks the market decided these things finally mattered. Everyone should realize that nearly every bank is playing games with tier1 capital, still hiding assets off the books in SIVs, and not marking commercial and residential real estate loans to market. Sorry State of Affairs of US Banks For a look at the sorry state of affairs of US banks, please consider July 18, 2011: Bank of America Clobbered on $50 Billion Capital Shortfall Related to Mortgage Losses August 10, 2011: Bank of America CEO Discusses Letting Countrywide Financial Go Bankrupt as Separate Legal Entity; Conference Call Shows Signs of Delusion The Fed, SEC, and FDIC all turn a blind eye to leverage that is still excessive, to assets still not marked-to-market, and to assets still hidden off the books in SIVs and by other means. They do this to support share prices. Share prices of US and French banks, shows the market has had enough of this practice. Time is up, more capital needs to be raised. Banks should have done so when share prices were up and they could have easily., Now they will do so when prices are down. Global Financial System is Bankrupt The entire global financial system is bankrupt. There is no way for these loans to be paid back, and the Fed and Central bankers in general are at the end of the line as to what monetary policy can do. Please don't tell me that central banks will "print their way out of it". No they won't, but they will likely try. Simple Facts of the Matter Central banks can print money but not capital. Central banks can initiate "swaps" but swaps are temporary. Of the money central banks do print, they cannot give away, they can only lend it. Right now, there are no takers of printed money as evidenced by excess reserves deposited at the Fed. Those excess reserves will not eventually flood the system with cash, spawning off a 10-1 multiplier as many think. Reserves have little to do with lending. In practice, the major constraints to lending are insufficient capital and willingness of credit worthy borrowers to seek loans. For further discussion and numerous details and rebuttals of widely believed fallacies, please consider Fictional Reserve Lending And The Myth Of Excess Reserves 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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