marți, 27 septembrie 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Europe Plans to Tax Stock and Bond Transactions .1%, Derivatives .01% Despite US Objections; Expect More Crashes Should it Pass

Posted: 27 Sep 2011 01:41 PM PDT

Europe plans to raise as much as 50 billion Euros annually with a financial transaction tax. If they are looking to increase volatility, remove liquidity, and increase the odds of a crash, then such a tax may "help".

Please consider Brussels to release financial tax plan despite US objections
The European Commission approved in principle the tax proposal on Tuesday, and the head of the EU executive Jose Manuel Barroso may outline the plan on Wednesday in a "state of the union" address to the European parliament in Strasbourg.

On the commission's drawing-board for more than a year, the idea was given fresh impetus last month when given the nod by Europe's power couple, French President Nicolas Sarkozy and German Chancellor Angela Merkel.

"The idea is to force a contribution from the financial sector, which enjoys fiscal privileges thanks to a sales tax exemption, meaning it saves 18 billion euros a year in Europe," an EU source told AFP on condition of anonymity.

If adopted -- not before 2014 -- the tax could ring in between 30 billion and 50 billion euros a year -- possibly half for the European Union budget, the remainder for national governments.

The rate suggested would be minimal with member states free to hike the tax.

The financial transactions tax is slated to target a wide field, with the latest known proposals aiming to slap 0.1 percent on shares and bonds and 0.01 percent on derivatives.

While Merkel and Sarkozy offered no details on the tax in August, their support helped send shares into an immediate tailspin with financial sector players warning the measure would push business away from Europe.

Britain, at the heart of the financial industry, reiterated demands for any such tax to be applied globally. "Otherwise the transaction covered would simply relocate," a Treasury spokesperson said.

But a source close to experts drafting the proposals said the research on the issue was "reassuring", with negative impact deemed "negligeable" when compared with Europe's overall attraction to financial transactions.

The tax, the source added, would include a principle of territorial location to avoid relocation.

"A non-European bank registered in Europe for certain transactions could be considered to be established in Europe. The tax would not be based on where transactions take place but on the parties involved."
Reduced Liquidity Increases Chance of Crashes

Short term traders add liquidity. Would .1% drive them away? Yes, it might. Think of it this way, 10 quick flips is 1%. 100 trades is 10%. In the short-term trading world 100 trades is not a big number.

What about computerized trading? I fail to see how that is any different.

Reduced liquidity increases the chances of crashes. Thus, the financial transaction tax will not help anyone, and that includes long-term hold types.

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.

European Stocks Climb Most in 16 Months; Pimco's El-Erian Says "Europe Finally Gets It"; El-Erian is Wrong in Multiple Ways

Posted: 27 Sep 2011 09:53 AM PDT

For three days European stocks have soared 7% with the beaten up banking sector up even more. This is the biggest rally since May 10, 2010. That rally did not hold, and while anything is possible, this rally is unlikely to hold either. In the meantime, enjoy the rally.

European Stocks Climb Most in 16 Months

Bloomberg reports European Stocks Climb Most in 16 Months Amid Effort to Contain Debt Crisis
European stocks climbed the most in 16 months amid speculation policy makers will increase efforts to contain the region's sovereign-debt crisis.

Rio Tinto Group led a rally in raw-material shares, surging 7 percent, as metal prices rose. BNP Paribas (BNP) SA and Societe Generale (GLE) SA, France's biggest banks, soared more than 12 percent. MAN SE (MAN) rose 6.9 percent as European Union regulators cleared Volkswagen AG (VOW)'s takeover of the truckmaker.

The benchmark Stoxx Europe 600 Index climbed 4.4 percent to 229.88 at 4:36 p.m. in London. That's the biggest gain since May 10, 2010, when it jumped 7.2 percent after the EU unveiled a 750 billion-euro ($1 trillion) loan package aimed at controlling the debt crisis. The gauge has surged 6.8 percent over the past three trading days after falling to a two-year low on Sept. 22.

The Stoxx 600 fell 26 percent from this year's peak in February through Sept. 22 as European and U.S. economic reports trailed forecasts, adding to concern that the global recovery is at risk. The decline left the measure trading at 9 times estimated earnings, the cheapest since March 2009, data compiled by Bloomberg show.

U.S. Treasury Secretary Timothy F. Geithner predicted that European governments will step up their response to their region's debt crisis after a chiding from counterparts around the world.

"They heard from everybody around the world" in Washington meetings last week, Geithner said on ABC's "World News With Diane Sawyer" program. Europe's crisis is "starting to hurt growth everywhere, in countries as far away as China, Brazil and India, Korea. And they heard the same message from us they heard from everybody else, which is it's time to move."
Stocks Not Cheap

For starters, stocks are not particularly cheap. Earnings in general will be worse than expected because consumers have increasingly thrown in the towel and much of the global economy is back in recession. Banks are still hiding losses, and European banks are way over-exposed to sovereign debt not remotely marked-to-market.

While the 3-day euphoria spreads, I point out many times in the past six months where there have been 1- to 3-day rallies that all died.

This time the market is giddy over EFSF leverage that the German parliament may not even approve, and the German supreme court says "not without a referendum".

Please see Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers for details.

Europe Finally Gets It

El-Erian Says "Europe Finally Gets It"
"What I learned in Washington is that Europeans finally get it," El-Erian, chief executive and co-chief investment officer at the world's biggest manager of bond funds, said in a radio interview today on "Bloomberg Surveillance" with Tom Keene and Ken Prewitt. "They recognize they have deep problems and they recognize they need to do something about it. And now they are going back and will try to do something about it. This was a very important wake-up call for Europe."




Talk is Cheap

El-Erian says that European leaders are now "all saying the right things". What right things? There is bickering over bank capitalization ratios, bickering over how banks will be recapitalized, and bickering over whether or not Greece will default and if so what the haircuts will be.

None of the talk regarding the currently hatched plan addresses haircuts that are coming.

European leaders have their heads in the sand, or perhaps up Treasury Secretary Tim Geithners' ass as it was Geithner who actually hatched the ballyhooed leveraged bailout scheme.

Yes, they have hatched a plan to use leverage, but that plan has enormous risks. Moreover, it is questionable at best the German supreme court will allow that plan to stand.

Even if the plan does stand, throwing trillions of Euros around just to prevent Greece from defaulting hardly seems like a sensible policy. The sensible policy would have been to let Greece default two years ago.

Throwing Trillions of Euros is Not "Getting It"

Europe does not "Get It", nor does El-Erian. In the end, El-Erian is just another monetarist who thinks the answer to problems is sloshing around money, at taxpayer expense, to bail out banks and bondholders who should instead have to take losses for poor lending decisions.

This is Not "Getting It". Rather it is "Going All In" instead of taking writeoffs that are going to happen anyway. Thus, El-Erian is wrong in more ways than one.

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.

Cash Crunch in China Picks Up Momentum; Chinese Economy "Teetering On the Edge"

Posted: 27 Sep 2011 01:42 AM PDT

Todd Martin, an Asia equity strategist at Societe General SA, talks about the outlook for China's economy and credit market. Martin also discusses global stocks and commodities. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia."



The interview starts off with a very weak idea "fundamentals have been thrown out the window". However the analysis gets much better as the video progresses. Here are a few key ideas from Todd Martin.

  • RMB offshore vs. onshore rate is at a historic low. This shows Hong Kong or China mainlanders are hoarding cash, possibly to repay debts.
  • The liquidation phase is concerning. Markets are looking into a deflationary abyss.
  • Recent capital inflows into China are misleading. It was not investment but rather mainland money repatriated to repay debt.
  • Cash crunch in China picks up momentum. We are going into a new down phase and true credit cycle in China. That can take on a life of its own.
Select Quotes

Rishaad Salamat: "Are you saying at the moment that the Chinese economy is teetering on the edge as a consequence of all this?"

Todd Martin: "It's beginning to look like that. There are signals that there is a cash crunch and it is picking up momentum. The offshore RMB market for one. The repatriation of capital for two. This could cascade into a property correction. Once that gets going, you could probably get a lot of sellers jumping into the market."

Rishaad Salamat: Is commodities the worst asset class to be in, at the moment?

Todd Martin: "Commodities is probability the worst asset class to get hit. If you are in a business seeing input prices fall and you have some pricing power downstream, then you could come out OK. Steel prices are still falling faster than iron ore, so that is still not one to be in yet. It's pretty bloody. We are withing 15% of the bottom but the credit cycle concerns me."

Fundamentals

I disagree with Martin about the fundamentals. I think fundamentals on China are horrible. I have been bearish on commodities because China is overheating at a time global demand from Europe and the US will collapse.

For further discussion, please see Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12 Global Predictions written August 22.

Hopping into commodities or commodity-related currencies with a strengthening US dollar, falling global demand, a potential breakup of the Eurozone, a default by Greece, etc, was a poor investment idea.

Please see the link for a very nice discussion of 12 detailed ideas for the global economy.

This is what I said on August 22, in response to the ideas of Pettis.

Six Key Ideas

  1. China Will Slow Much More than China Bulls and Commodity Bulls Think
  2. Non-food Commodities Take Big Hit
  3. Eurozone Experiment Ends in Breakup
  4. US Protectionism Takes Hold
  5. Deficit Countries Control Demand, Thus Have the Best Cards
  6. Disaster Hits BRICs

Contrarian Thinking

Except perhaps for points three and four (and perhaps for all six points) investors and analysts have taken the opposite view. Most are looking to buy the dip, invest in commodities, invest in commodity producing currencies, and invest in the BRICs.

We did not have commodity producer decoupling in 2008 and there is no reason to expect it as debt-deflation plays out and China abandons its reckless investments in infrastructure.

I suspect China slows sooner than Pettis thinks, but no sooner than the next regime change in China. Markets, however, may react well in advance.

Global Deflationary Outlook

Pettis does not use the word "deflation" in his writeup, but he describes a very deflationary global outlook complete with protectionism, beggar-thy-neighbor policies, currency wars, and falling non-food commodity prices.

Pettis did not discuss energy, but the forces are clear: peak oil. vs. global slowdown. Given peak oil and the possibility of war over it, energy is a wildcard.
China did not decouple in 2008 (except perhaps in reverse), and it will not be immune from this global slowdown either.

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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