Mish's Global Economic Trend Analysis

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• Growing Isolation in Germany as Merkel's Allies Abandon Her; Polls Show 75% of Germans Oppose More Bailouts; Clock Ran Out of Time
• Government and the Power to Issue Fiat Currency Out of Thin Air
• Harrisburg Heads for Receivership in New Pennsylvania Bill; Crisis Will Linger Because State Legislature is Clueless
• Merkel Prepares Market for Bigger Haircuts; Split opens Over Greek Bail-Out Terms; Needs vs. Fantasies
• Brazil Seeks to Tax Derivatives; No BRIC Decoupling
• Chris Christie Mulls Presidential Run; Independents Key to Election, and Christie can Rally Independents

Growing Isolation in Germany as Merkel's Allies Abandon Her; Polls Show 75% of Germans Oppose More Bailouts; Clock Ran Out of Time Posted: 28 Sep 2011 09:53 PM PDT German Chancellor Angela Merkel will likely survive a key vote on Thursday to expand the EFSF bailout fund, but passage now depends on support from the opposition. Even more telling is the increasing isolation sentiment in Germany. Polls show shows three-quarters of Germans are against the expanded European rescue fund that's subject to Thursday's vote. So, who is it that politicians represent? The Wall Street Journal reports Germans Reconsider Ties to Europe When German lawmakers vote Thursday on whether to put more money into Europe's bailout fund—a step many investors see as essential to prevent a market panic—several conservative deputies, including Wolfgang Bosbach, a prominent champion of European integration, are expected to vote "no." Mr. Bosbach, a high-ranking conservative in Ms. Merkel's Christian Democratic Union, has recently become an outspoken critic of the bailout strategy. "The first medicine didn't work, and now we are simply doubling the dose," said the lanky Mr. Bosbach of the Greek debt crisis. "My fear is that when the big bang happens, it won't just be us who will have to pay but generations hereafter." The lawmaker rebellion underscores a broader shift among Germans about their nation's role in Europe since the crisis erupted nearly two years ago. While the Thursday vote is expected to pass, and a vast majority of Germans continue to feel a strong, historical commitment to Europe, with a common currency as its anchor, many have grown doubtful of whether it's worth the ever-growing cost of saving the euro. A poll for national German broadcaster ZDF earlier this month shows three-quarters of Germans are against the expanded European rescue fund that's subject to Thursday's vote. The measures before German parliament today would nearly double the main euro-zone's bailout fund's lending capacity to €440 billion ($595 billion) and allow the fund to buy sovereign bonds in the open market. Germany's contribution to the new, expanded rescue loan package is €211 billion, still less than half the €500 billion it pledged to bail out its banks in 2008. But many see the European Central Bank's moves to buy billions of euros in low-grade government bonds of southern European countries as another sign that European institutions are slipping away from them. Even more unpalatable is the prospect of making the euro zone collectively liable for its members' debts, as a growing chorus of European officials have recently urged. Many argue so-called euro bonds, which Ms. Merkel has steadfastly opposed, are the bulwark to relieve financial pressure on debt-ridden members and underpin the euro zone's full fiscal union. But to Germans, it would mean relinquishing their hard-won low borrowing rates to pay for the largess of more free-wheeling members. "Ultimately the euro-bond issue will come to a head, and Ms. Merkel will have an impossible dilemma," says one senior German coalition lawmaker. "If she goes back to the German people with [euro bonds], she is out. If she doesn't, she will be a very lonely person in Europe." Merkel's Clock Ran Out of Time The vote in Germany is a foregone conclusion, but it is the end of the line for Merkel, whether or not she needs opposition votes for passage. She is taking a stance 75% of the nation does not agree with, and that stance is guaranteed not to work. The German court nixed Eurobonds, permanent bailout funds, and leveraged use of the EFSF. Greece is going to need more and there is no more to give. Time will not improve this situation but it's a moot point. The clock ran out. 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.

Government and the Power to Issue Fiat Currency Out of Thin Air Posted: 28 Sep 2011 01:42 PM PDT Here is an excellent video on fiat currencies by my friend Dominic Frisby at Frisby's Bulls and Bears. Bear in mind we are in credit based economy, and credit markets can override the Fed's ability to create inflation, assuming of course a definition of inflation that encompasses credit. Please see Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over for a discussion. 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.

Harrisburg Heads for Receivership in New Pennsylvania Bill; Crisis Will Linger Because State Legislature is Clueless Posted: 28 Sep 2011 12:01 PM PDT The state of Pennsylvania continues to take half-ass measures in resolving the budget crisis in Harrisburg. New legislation fails to address two badly needed action items. Please consider Harrisburg Might Get a Receiver Thanks to Pennsylvania Bill Harrisburg may become Pennsylvania's first municipality to fall under receivership. The City Council in July and August rejected fiscal rescue blueprints from consultants hired by the state and Mayor Linda Thompson. Today, The state House of Representatives voted 185-9 for a bill that would let Republican Governor Tom Corbett name a receiver. The Senate still must consider the plan. The capital city of 49,500 faces a debt burden five times its general-fund budget because of an overhaul and expansion of a trash-to-energy incinerator, which doesn't generate enough revenue to cover the obligations. It avoided defaulting on general-obligation bonds in September and last year by getting advances on state aid. The vote "sends a strong message" to elected officials in Harrisburg and elsewhere not to dawdle with recovery plans, Representative Glenn Grell said on the House floor. Grell, of Hampden Township in Cumberland County, and Senator Jeffrey E. Piccola of Susquehanna Township in Dauphin County, both Republicans, are pushing the legislation. The bill would allow Corbett to declare a fiscal emergency in Harrisburg and name a receiver who would develop a recovery plan. The manager, technically appointed by the Commonwealth Court and paid by the state, would have the power to implement the steps, such as selling assets, hiring advisers and suspending the authority of elected officials who interfere. Unlike in Michigan, the receiver wouldn't be able to change union contracts. There is no point in reading further. The facts as presented show why the crisis will linger on and on, at taxpayer expense. Harrisburg is bankrupt. It's time to recognize that simple fact, announce bankruptcy, and force the bondholders to take a loss. Without power to force changes in union contracts and pensions, any new receiver will have not one but two hands tied behind his back in putting Harrisburg back on a path towards fiscal sanity. Strong Message Legislature is Clueless Representative Glenn Grell said "the vote sends a strong message to elected officials in Harrisburg". Actually it sends a strong message the Pennsylvania legislature is clueless about what needs to be done. Harrisburg has numerous problems, and untenable union wages and benefits are a huge part of that problem. Once again, it's time to stop Fantasyland dreams and Take The Loss. Bondholders and unions alike have losses to take. Until they do, the crisis in Harrisburg will linger on. For needed loss-taking in Europe, please see Merkel Prepares Market for Bigger Haircuts; Split opens Over Greek Bail-Out Terms; Needs vs. Fantasies. 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.

Merkel Prepares Market for Bigger Haircuts; Split opens Over Greek Bail-Out Terms; Needs vs. Fantasies Posted: 28 Sep 2011 09:37 AM PDT French and German banks know a good deal when they have one. They have one in the 21% haircuts they "voluntarily" accepted. The problem is even 50% haircuts are likely insufficient. The bondholders are upset at this reality. Tough. Yahoo! Finance reports Merkel says Greek bailout terms may be changed German Chancellor Angela Merkel hinted that the second Greek bailout package might have to be renegotiated amid increasing market speculation Wednesday that European leaders want to force private holders of Greek bonds to take bigger losses. Merkel didn't rule out altering the terms to the euro109 billion ($148 billion) package, saying the decision must be based on how Greece's debt inspectors, the so-called troika, judge Athens' recent austerity efforts. "So we must now wait for what the troika finds out and what it tells us: do we have to renegotiate or do we not have to renegotiate?" she said in an interview with Greece's ERT television Tuesday night. Merkel added that she "cannot anticipate the result of the troika." Greece "will not get back on its feet without a serious reduction in debt," said Ottmar Issing, a former chief economist of the European Central Bank, who has served as an adviser to Merkel in the past. Athens needs to see its debt cut "at least 50 percent, probably more," Issing was quoted by Germany's Stern magazine. Germany's banking association insisted there was no need to renegotiate the terms of the second bailout package. Banks in Germany and France are among the biggest holders of Greek bonds. A default by Greece or another country would send shock waves through the global economy, particularly in Europe, authorities fear. Banks would suffer such large losses on government bonds they hold that they would cut off credit to the wider economy and cause a new, sharper recession. Needs vs. Fantasies The banking industry says there is no "need" to change the terms. Of course there is a need to change the terms. Banks are not going to be paid back what they are owed. Let's not confuse "needs" with pie-in-the-sky fantasies. Split Opens over Greek Bail-Out Terms The Financial Times reports Split opens over Greek bail-out terms A split has opened in the eurozone over the terms of Greece's second €109bn bail-out with as many as seven of the bloc's 17 members arguing for private creditors to swallow a bigger writedown on their Greek bond holdings, according to senior European officials. The divisions have emerged amid mounting concerns that Athens' funding needs are much bigger than estimated just two months ago. They threaten to unpick a painfully negotiated deal reached with private sector bond holders in July. While hardliners in Germany and the Netherlands are leading the calls for more losses to be imposed on the private sector, France and the European Central Bank are fiercely resisting any such move. They fear re-opening the bond deal could spark renewed selling of shares in European banks, which have significant holdings of Greek and other peripheral eurozone debt. Senior European said there was significant division over the move to re-open the bondholders' deal, which could trigger a bigger and earlier restructuring of Greek debt. Even within Germany, officials are split over whether to press for a bigger "haircut" for private sector creditors. Under the terms of the July bail-out, bondholders agreed to trade about €135bn in bonds that come due through 2020 for new, European Union-backed bonds that would not be repaid for decades. This deal implied a haircut of 21 per cent for bondholders, but many German officials say they were forced to agree a deal that was too beneficial for the banks. Take the Loss One look at the DAX, or European bank stocks suggests major shock waves have already been felt. More are coming. However, the shock waves would have been far less had banks, the ECB, and the EU accepted realistic losses two years ago and simply let Greece default. Losses will now be four to 10 times as large, depending on how much more money everyone is willing to throw at the problem. Thus, upping the ante to shelter bondholders from losses was exactly the wrong thing to do then, and it is still the wrong thing to do today. Barry Ritholtz had an excellent article on this theme just today: Take The Loss. The fear should have been in hiding losses not taking them. Unfortunately, I expect some wishy-washy compromise will up the losses one reportedly "final time" to 30-35% not the needed 60% or so. It won't work. Hiding losses by not reporting them only makes matters worse. 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.

Brazil Seeks to Tax Derivatives; No BRIC Decoupling Posted: 28 Sep 2011 08:38 AM PDT In response to Europe Plans to Tax Stock and Bond Transactions .1%, Derivatives .01% Despite US Objections; Expect More Crashes Should it Pass I received a response from a reader in Brazil about BRIC decoupling (more specifically, the lack thereof). LTBR writes ... Hi Mish, Brazil is also trying to push a tax on derivatives. However, the opposition is faking outrage. They will pass, for sure, because those crook politicians never met a tax they didn't like. I think that Brazil is freaking out, because they know that China's economy is about to crash. I've noticed that lately Brazil is trying to collect money with taxing about anything, fearing that China's bubble and the commodities party is ending. For instance, Brazil just proposed a 30% tax (IPI) on any car mfr. with less than 80% of its parts made in Brazil. China's auto mfr. PAC has given up on opening a factory in Brazil, after this special tax nonsense was announced. Other companies are trying the judicial system to cancel this tax. Keep in mind that import cars in Brazil cost already 3 times more than at its country of origin. And the place is full of imports, since it's a land of wannabes who love to live beyond their means. Another problem with taxing derivatives, which you have mentioned, is that exporters use it to hedge their exports. Since Brazil is a large net exporter, that tax will eat a big chunk of exporter's profits. All to fund welfare for buying votes from the poor or to transfer taxes to their political parties, unions, and corporate cronies. Here's the link to the article about taxing derivatives in Brazil, if you want to read on Google Translate: Opposition wants to hear before voting Mantega IOF derivatives Regards, Long time Brazilian reader with degree from American B-School. 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.

Chris Christie Mulls Presidential Run; Independents Key to Election, and Christie can Rally Independents Posted: 28 Sep 2011 12:29 AM PDT Over the past week or so I have seen several stories about the possibility of Chris Christie running for president. Here is one such story from today from CBS News Political Hotsheet: Chris Christie confidante says N.J. gov. mulling WH run New Jersey Gov. Chris Christie has repeatedly said he is not running for president. But one of his predecessors who has known Christie for decades says he is now at least thinking about it. Former governor Tom Kean told the National Review Online that the chatter around Christie's change of heart in recent days is "real." Republicans are clamoring for a candidate who will be able to energize the base and beat President Obama in a general election. Erstwhile front-runner Mitt Romney is widely seen as one of the strongest Republican candidates in a general election, but the most conservative parts of the party are less than thrilled with a candidate who was once governor of left-leaning Massachusetts. Christie, as governor of Democratic New Jersey, may run into the same problem with Republican primary voters, who tend to be have the most conservative views of the party. In New Jersey, however, Christie's approval rating has risen sharply since he signed into a law a dramatic revamp of pension and health benefits for state workers in June. About 54 percent of voters in his state now approve of his performance as governor, while 36 percent disapprove, according to a poll released Tuesday by Fairleigh Dickinson University PublicMind. That's a 10 point increase from the 44 percent approval in May, when about 44 percent also disapproved, and the highest approval rating for Christie since taking office after ousting former Democratic Gov. Jon Corzine in 2009. Kean Confirms Christie Boomlet: 'It's Real' The National Review Online reports Kean Confirms Christie Boomlet: 'It's Real' Former New Jersey governor Tom Kean, who has known Chris Christie since he was a teenager and remains an informal adviser, tells National Review Online that the governor is "very seriously" considering a presidential bid. "It's real," Kean says. "He's giving it a lot of thought. I think the odds are a lot better now than they were a couple weeks ago." Christie remains undecided, Kean says, but is listening closely to pleas from party leaders. The chance for a "Jersey guy" to rise, Kean says, is not something Christie has sought. But now, with the field up for grabs, he is actively mulling a late entry. "More and more people are talking to him," Kean says. "He's getting appeals from major figures around the country." Kean, for his part, is also encouraging the first-term Republican to jump in. "He is the best speaker I may have ever heard in politics," he tells me. "In an era when most people suspect that politicians read polls and then tell you what they think, people don't believe he's that kind of a fellow," Kean says. "He tells you what he thinks, period. We like that around here." "A lot of people are not satisfied with the field," Kean says. "I know he's getting advice from all sides." In coming days, "he's not going to tease anybody." If circumstances do change — and Kean makes no predictions — "he's not going to hide it." Unsatisfactory Field I'm not satisfied with the field. I think it's safe to say independents in general are not satisfied with the field. I back Ron Paul but do not think Paul can win. Furthermore, I may write in Ron Paul even if he does not win the nomination. That is how much I dislike the rest of the Republican field. My position was the same in 2008. I could not stomach a McCain/Palin ticket. I wrote in Ron Paul. However, if Christie is the nominee, I will do whatever I can to help the Governor. In spite of long-odds Christie has helped turn the state of New Jersey around. Moreover, he has above a 50% rating in spite of the fact that he has stepped on many unions toes. I see no indication that Christie is beholden to banks, and he certainly is not beholden to unions. Independents Need Someone to Rally Around It is highly likely independents will swing the next election. They voted overwhelmingly for Obama in 2008 and abandoned Democrats in the mid-term elections. Can independents rally around Mitt Romney? I can only speak for myself, not independents in general. I can't support Romney. Nor can I support Perry who has made an enormous number of gaffes recently, anyone of which can sink him in the general election were he to win the nomination. On the other hand, Chris Christie is honest, does not mince words, is not beholden to anyone and has a tremendous fiscal track record in New Jersey. If he can stay away from the political hotbed issues of abortion by taking a modest, middle-of-the-road stance, that too would help him with independents. Light My Fire The Republican nominee will capture the far-Right vote. They are not going to vote for Obama, nor will they stay away from the election. Thus, it would be a serious mistake for Republicans to rally around a far-Right platform when it may cost them dearly with independents. A fiscal conservative like Christie can light a fire with independents in a way the other Republicans can't. Battle for the Middle Not much is known about Christie on other than Fiscal issues. He can easily put together a platform that would appeal to everyone but unions, the far-Left, and the far-Right. The far-Right will vote for Christie 8-days a week. The far-Left and unions will vote for Obama 8-days a week. The middle, not the Left or Right is where the battle will be won or lost. All we need now is a decision from Christie to throw his hat in the ring with a strong, fiscally conservative message, and middle-of-the-road ideas elsewhere. If Christie does that, he will not only ignite enthusiasm, he will win the nomination and the general election as well. 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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