Central Perk: 7 aug. 2011

duminică, 7 august 2011

Mish's Global Economic Trend Analysis

Do These Idiots Realize How Stupid They Sound?
ECB Seeks to Avert What Has Already Happened; Raspberries and Gold
S&P Futures Open Down 30 Points, -2.6%; ECB to "Actively Implement" Bond Purchases
France AAA Rating on the Line; S&P Says 1 in 3 Chance of Further US Downgrades; Contagion in Downgrades? Currency Crisis Escalates; Euro Endgame
Israel, Dubai, Saudi Arabia Shares Plunge in Wake of S&P Downgrade; Israel Drops 7%, Dubai 3.7%, Saudi 5.5%; Is S&P Downgrade to Blame?
Decade of Stimulus Yields Nothing But Mountain of Debt; What to Do About It?

Do These Idiots Realize How Stupid They Sound?

Posted: 07 Aug 2011 08:36 PM PDT

Just how idiotic is it to seek to prevent what has already occurred? I suggest that is blatantly idiotic. Here is a case in point.

Earlier this evening, I noted ECB Seeks to Avert What Has Already Happened

I cannot help but laugh out loud at some of the headlines this evening. By any rational measure, confidence has collapsed, yet G-7 Seeks to Avert Collapse in Confidence

That the ECB needs to take these actions is a 100% sure-fire sign that investors have lost confidence.

That is ridiculous enough, but the height of absurdity is found in the G-7 Statement on Renewed Strains

We reaffirmed our shared interest in a strong and stable international financial system, and our support for market-determined exchange rates.

Today the G-7 advocated both currency and and bond-market interventions "whatever it takes" yet sings the praises of "market-determined exchange rates".

I really do have to ask "Do These Idiots Realize How Stupid They Sound?"

Definition of Idiot

The above question is more complicated than it seems at first glance. In typical usage, "idiots" by definition do not realize what they are saying.

However, let's throw out a definition as follows: Idiot - Someone devoid of common sense who lives in the shelter of academia or politics, with no real-world experience. Also included in this definition is someone with real-world experiences yet ignores the real world in favor of academics, politics, or desires.

Bernanke with a PhD, and Krugman with a Noble Prize both qualify as potential idiots under the above definition. Bear in mind that sometimes (when it suits their goals) both may say things that make perfect sense. I agree with Krugman about 20% of the time. Such is the problem with this definition of idiocy.

Common Sense vs. Purposeful Idiocy

On grounds of common sense, anyone simultaneously praising free markets and intervention on the exact same issue is an idiot.

But Wait! What if the statement was a lie on purpose, hoping that idiots in mainstream media would not catch the lie?

Recall that Jean-Claude Juncker, Luxembourg PM and Head Euro-Zone Finance Minister says "When it becomes serious, you have to lie"

Is the support for free markets just another purposeful lie?

One cannot easily determine the truth in these instances. However, in accordance with Occam's Razor, the simplest explanation is likely the best.

One case suggests that potential idiots are telling lies on purpose. The simple case suggests that idiots can be expected to behave like idiots.

Thus, I come to the conclusion that "These Idiots Do Not Realize How Stupid They Sound".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ECB Seeks to Avert What Has Already Happened; Raspberries and Gold

Posted: 07 Aug 2011 06:13 PM PDT

I cannot help but laugh out loud at some of the headlines this evening. By any rational measure, confidence has collapsed, yet G-7 Seeks to Avert Collapse in Confidence

Group of Seven nations sought to head off a collapse in global investor confidence after the U.S. sovereign-rating downgrade and a sell-off in Italian and Spanish debt intensified threats to the world economic recovery.

The G-7 will take "all necessary measures to support financial stability and growth," the nation's finance ministers and central bankers said in a statement today. Members agreed to inject liquidity and act against disorderly currency moves if necessary.

The European Central Bank indicated separately that it will buy Italian and Spanish bonds and Japan signaled further dollar purchases in a sign of concern that prices are becoming unhooked from fundamentals. Stocks extended last week's decline, the biggest since 2008, adding to risks for a global rebound already burdened by European fiscal cuts and elevated U.S. unemployment.

That the ECB needs to take these actions is a 100% sure-fire sign that investors have lost confidence.

Raspberries and Gold

"The G-7 just gave a raspberry to S&P and basically said its analysis is irrelevant," said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago.

I can top that. The futures so far have given the raspberry to the ECB and the G-7. Moreover, gold has given the raspberry to nearly everything else. Grain, energy, and equity futures are all trading lower. However Gold is up $34 to $1684 and silver is up $1.18 to $39.39.

Addendum:

The feed on Zero Hedge has been messed up all evening. It has been both duplicated and not working. I am not sure if this is universal or not. However, links are now working (at least for me) but some of them may still be duplicated.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

S&P Futures Open Down 30 Points, -2.6%; ECB to "Actively Implement" Bond Purchases

Posted: 07 Aug 2011 03:02 PM PDT

What started out as an extremely poor idea has now turned into a bet the bank bond-buying strategy as ECB Signals Purchases of Italian, Spanish Bonds.

The European Central Bank said it will "actively implement" its bond-purchase program, signaling it is ready to start buying Italian and Spanish securities to counter the sovereign debt crisis.

In a statement issued in the name of President Jean-Claude Trichet after an emergency teleconference meeting of policy makers, the Frankfurt-based ECB welcomed Italy and Spain's efforts to reduce their budget deficits. It also called on all euro-area governments to follow through on the measures agreed at a July 21 summit, including allowing the European Financial Stability Facility to purchase bonds on the secondary market.

"It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Program," the central bank said. "This program has been designed to help restoring a better transmission of our monetary policy decisions -- taking account of dysfunctional market segments -- and therefore to ensure price stability in the euro area."

Buying Italian and Spanish debt may open the ECB to accusations it is bailing out profligate nations, breaching a key principle in the euro zone's founding treaty and eroding its credibility. Germany's Bundesbank opposes the move.

"The ECB is once again intervening as the last line of defense," said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London. "The intervention will put a halt to the bond market crash that some member states faced. However, the ECB is now in for the long haul and will potentially have to buy up to half of the Italian and Spanish traded debt, the biggest risk-pulling effort ever engineered in Europe."

The initial reaction from the market was swift and severe. S&P futures opened up 30 points in the red, Nasdaq futures 47 points in the red.

The night is still young and the intervention in Italian bonds begins tomorrow.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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France AAA Rating on the Line; S&P Says 1 in 3 Chance of Further US Downgrades; Contagion in Downgrades? Currency Crisis Escalates; Euro Endgame

Posted: 07 Aug 2011 11:58 AM PDT

With the US AAA rating gone, how long can France hold its AAA rating? I suspect not long. So where will that leave the ECB attempting to put a circle around Italy? Will Germany have to backstop all of Europe?

Those are the new key questions and notice how the key question list keeps growing larger in size and significance.

France Vulnerable to Rating Cuts

Bloomberg reports AAA France May Be Vulnerable After U.S. Cut

The decision by Standard & Poor's to downgrade the U.S. credit rating leaves France as the AAA country most likely to lose its top grade, some investors and economists say.

France is more expensive to insure against default than lower-rated governments including Malaysia, Thailand, Japan, Mexico, Czech Republic, the State of Texas and the U.S.

"France is not, in my view, a AAA country," said Paul Donovan, London-based deputy head of global economics at UBS AG. "France can't print its own money, a critical distinction from the U.S. It is not treated as AAA by the markets."

"If Italy and Spain have difficulties, are we sure that, for instance, France can still be considered a 'core' country?" said Marco Valli, chief euro-area economist at UniCredit Global 'Core' is becoming a narrower group of countries."

While France's debt of 84.7 percent of gross domestic product is less than Italy's 120.3 percent, as a percentage of economic output it has risen twice as fast as Italy's since 2007. French government debt totaled 1.59 trillion euros ($2.3 trillion) at the end of 2010, according to the European Union; Italy's was about 1.8 trillion euros. France has had a larger budget deficit than Italy every year since 2006. S&P rates Italy A+, four levels below France.

"If French authorities do not follow through with their reform of the pension system, make additional changes to the social-security system and consolidate the current budgetary position in the face of rising spending pressure on health care and pensions, Standard & Poor's will unlikely maintain its AAA rating," S&P said in a June 10 report.

The S&P warned the US, now it has warned France. Notice how the rating agencies want austerity. I asked some tough questions above, here is a cream-puff question: Short-term, what will all these austerity measures do to global growth?

Japan Threatens More Yen Intervention

Adding to the global tension, Japan Official Warns of More Yen Selling

A Japanese Finance Ministry official said the government is ready to sell yen again following last week's move if it sees speculative trades driving the currency higher.

Further intervention would "maintain the effect and warn those who make unusual moves" in the currency market, Vice Finance Minister Fumihiko Igarashi said on a television program of public broadcaster NHK yesterday.

Japan acted alone in selling the yen last week, in contrast with a previous intervention in March that was coordinated among the G-7. The Bank of Japan added 10 trillion yen of monetary stimulus on Aug. 4, hours after the Finance Ministry's move.

Baba and Lee at Goldman Sachs said that Japan has been buying U.S. Treasuries when it sells yen, leaving it with more than 30 trillion yen in unrealized losses that will test the government's "true determination" to combat the currency's rise.

Japan maintains its trust in the ability of the U.S. to pay its debts and expects Treasuries to remain an attractive investment, a government official from the Asian nation said yesterday on condition of anonymity. Japan is the second-largest international investor in Treasuries, behind China.

Countries do not care much about losses on treasury holdings. They care about exports. Notice how even amidst the S&P downgrade of US debt Japan's reaction is to buy more.

I covered this topic at length on Friday in Reserve Currency Curse: Idea China to Stop Buying Treasuries After S&P Downgrade is Fallacious; US Would Welcome China Not Buying US Treasuries!.

Global Currency Wars

In spite of its stated "strong dollar" policy, clearly the US wants a lower dollar. It is equally clear (and stated) that Japan wants a lower Yen, Brazil wants a lower Real, Switzerland wants a lower Swiss Franc, and China does not want the Yuan to rise.

Yet every month, someone talks about China or Japan or some other country dumping treasuries or dumping the dollar.

In case you missed it, please consider Global Currency Wars Enter New Stage; Brazil Calls Off Truce, South Korea Reviews "All Possibilities", Philippines Threatens "Prudential Limits".

When does this madness blow sky high in a global currency crisis? I will tell you it is going to happen, I just cannot tell you when.

Europe's Structural Problems

Structurally the only way to resolve the European mess is

Adoption of a European nanny state complete with common bonds and common fiscal policies
Partial breakup of the Eurozone

Euro Endgame

Would Germany go along with the former? How difficult is the latter?

I cannot answer the former but the latter is easier said than done. Greece for example would immediately blow up in hyperinflation if it was forced to immediately go back on the Drachma. No one would want that. Capital and human capital would both flee Greece. The same might apply to Portugal and Spain.

Germany could leave. Otherwise, slowly but surely the European Nanny State solution will be forced down the throats of screaming German taxpayers.

The endgame is not clear, and both option 1 and 2 involve huge unresolved issues with global consequences. What is clear is the current path is unsustainable. There has never been a successful currency union in history that did not also involve a fiscal union as well. This time will not be different.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Israel, Dubai, Saudi Arabia Shares Plunge in Wake of S&P Downgrade; Israel Drops 7%, Dubai 3.7%, Saudi 5.5%; Is S&P Downgrade to Blame?

Posted: 07 Aug 2011 10:25 AM PDT

The Mideast markets typically run Sunday to Thursday. However, the Saudi Arabia market is open on Saturday. The global selloff hit Saudi on Saturday and spread to Israel and Dubai on Sunday.

Israel Drops 7 Percent, 19.9% Since April 21

Israeli Stock Index Tumbles Most Since 2008

Israel's benchmark stock index plunged the most in almost 11 years after Standard & Poor's lowered the U.S. credit rating and amid concern the widening sovereign debt crisis in Europe will stall global growth.

Israel Discount Bank Ltd. (DSCT), the country's third-largest lender, skidded 10 percent. Nice Systems Ltd. (NICE) slumped the most since November 2008. All 25 shares in the TA-25 Index tumbled, pushing the gauge down 7 percent, the biggest decline since October 2000, to 1,074.27 at the 4:30 p.m. close in Tel Aviv. The index is near the so-called bear-market territory after retreating 19.9 percent from a record high of 1,341.89 on April 21.

Dubai Shares Drop 3.7 Percent

Dubai Shares Drop Most Since February

Emaar Properties PJSC (EMAAR), developer of the world's tallest tower, slumped 5.3 percent. Arabtec Holding Co. (ARTC) dropped the most since March after it said second-quarter profit fell 74 percent. The DFM General Index (DFMGI) lost 3.7 percent, the most since Feb. 28, to 1,484.31 at the 2 p.m. close in Dubai. The measure has plunged 12 percent from this year's high in April, entering a so-called correction.

Saudi Shares Plunge 5.5%

Saudi Shares Plunge as U.S. Downgrade Fuels Concern Over Global Economy

Saudi Arabian shares tumbled for a third day, sending the benchmark index to its largest intraday drop since March, amid rising concerns about the global economy after Standard & Poor's cut the U.S.'s credit rating for the first time.

Saudi Basic Industries Corp. (SABIC), or Sabic, the world's biggest petrochemicals maker, fell the most in five months. Al Rajhi Bank (RJHI), the kingdom's largest publicly traded lender by market value, reached its lowest price since March.

The 147-company Tadawul All Share Index (SASEIDX) slumped 5.5 percent to 6,073.44, the steepest decline since March 1, at the 3:30 p.m. close in Riyadh. All 15 industry groups fell. The gauge has fallen 10.5 percent from the year-high of 6,788.42 on Jan. 16.

"The Saudi market is reacting to the steep declines in global markets over the weekend," said Asim Bukhtiar, an equity analyst at Riyad Capital. "Growing concerns of the U.S. relapsing into recession are driving sentiment."

S&P Downgrade Did Not Cause This

Analysts worded all these reports as if the S&P downgrade was to blame or partially to blame. The facts of the matter are these.

The global economy is slowing
European debt crisis has escalated
A global currency war is underway
The US is headed for recession if not in recession now
Europe is already in a recession in my estimation

The downgrade itself is not the problem. Rather the S&P downgrade (long overdue) is one of many symptom of a much larger global financial crisis. Nonetheless, expect many demagogues to make S&P the scapegoat if the decline escalates this week.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Decade of Stimulus Yields Nothing But Mountain of Debt; What to Do About It?

Posted: 07 Aug 2011 12:13 AM PDT

Is there any kind of stimulus the US did not try in the last 10 years?

We had 1% interest rates from Greenspan fueling housing.
We had wars from Bush and Obama fueling defense industry employment.
We had two rounds of Quantitative easing from the Fed.
We had cash-for-clunkers.
We had two housing tax credit packages.
We had an $800 billion stimulus package from Congress for "shovel-ready" projects.
We had stimulus kickbacks to states.
We had HAMP (Home Affordable Mortgage Program).
We had bank bailouts out the wazoo to stimulate lending.
We had Small Business lending programs.
We had central bank liquidity swaps.
We had Maiden Lane, Maiden Lane II, and Maiden Lane III
We had Single Tranche Repurchase agreements
We had the Citi Asset Guarantee
We had TALF, TARP, TAF, CPFF, TSLF, MMIFF, TLGP, AMLF, PPIP, and PDCF
We had so many programs the Fed must have run out of letters because they were not given an acronym.

That is a partial list. Other than bailing out bondholders what exactly do we have to show for any of it? The one-word answer is "debt".

Decade of Stimulus Yields Nothing But Debt

Caroline Baum wrote an excellent article on this theme. It was so good I asked if I could reproduce it in entirety.

With permission please consider Decade of Stimulus Yields Nothing but Debt: Caroline Baum

When George W. Bush took up residence in the White House in January 2001, total U.S. debt stood at $5.95 trillion. Last week it was $14.3 trillion, with $2.4 trillion freshly authorized by Congress Tuesday.

Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011.

It doesn't sound like a very good trade-off. And now Keynesians are whining about discretionary spending cuts of $21 billion next year? That's one-half of one percent. And it qualifies as a "cut" only in the fanciful world of government accounting.

The Budget Control Act of 2011 will save $917 billion over 10 years relative to the Congressional Budget Office's baseline. It leaves the tough work to a bipartisan congressional committee of 12, to be appointed by the leadership in each house. If this supercommittee fails to agree on a minimum of $1.2 trillion of additional savings over 10 years, automatic spending cuts -- evenly divided between defense and nondefense -- will kick in.

Is there any reason to think the same folks who couldn't agree on a grand bargain this past month will join hands and find commonality in the next three, with one month off for vacation?

Rosy Scenario

Even if the committee agrees on the prescribed savings by Nov. 23 and Congress enacts them by Dec. 23, as required, laws passed today aren't binding on future congresses.

Throw in the fact that revenue and budget forecasts tend to be overly optimistic, and there's even less reason to think Congress has put the U.S. on a sound fiscal path.

In a July 2011 working paper for the National Bureau of Economic Research, Harvard economist Jeffrey Frankel identified a pattern of over-optimism in official forecasts, a bias that gets bigger in outer years. (Who can forget the CBO's 2001 estimate of a 10-year, $5.7 trillion budget surplus?) A fixed budget rule, such as the euro area's Stability and Growth Pact with its mandated deficit-to-GDP ratios, only exacerbates the tendency.

"Political leaders meet their target by adjusting their forecasts rather than by adjusting their policies," Frankel writes.

First Installment

The deal hashed out in Washington at the eleventh hour this week does nothing to curb the unsustainable growth of entitlement spending -- on programs such as Medicare, Medicaid and Social Security. Medicare outlays have risen 9 percent a year for the last 30 years in a period of stable demographics, according to Steven Wieting, U.S. economist at Citigroup Inc. The automatic spending cuts outlined in the budget act would limit reductions in Medicare expenditures to no more than 2 percent a year.

By the end of 2012 or start of 2013, the federal government will be back at the trough with a request for additional borrowing authority. The debt will keep rising, and the ratio of publicly held debt to GDP will increase from 62 percent last year to as much as 90 percent in 2021, according to some private estimates, depending on what Congress does about the expiring tax cuts, the Medicare "doc fix" and the alternative minimum tax.

The CBO's estimate of $2.1 trillion in savings over 10 years is well short of the $4 trillion Standard & Poor's says is necessary to stabilize the debt and avoid a rating downgrade.

'Architectural Change'

No matter. Some prominent Keynesians are advocating more spending now for an economy that is sputtering. Alas, there is little appetite in this country, and less in Congress, for more spending in light of the questionable results. A lost decade doesn't seem like a good return on an $8.35 trillion investment. (For purists, only $6 trillion of the increase was in marketable debt, the kind of good old deficit spending Keynesians love.)

Maybe it's time to try something new and different. In 2002 I wrote a column titled, "How About Some Tax Reform Along With Tax Relief?"

How about it? Get rid of the loopholes. Better yet, scrap the entire tax code, which would decimate the lobbying industry. Implement a flat tax or a national sales tax. The time has come for what former Treasury Secretary Paul O'Neill calls "architectural change."

Can the Code

The current tax code is burdensome, inefficient and costly to administer. O'Neill says it costs the Treasury an estimated $800 billion annually, divided equally between administrative costs and uncollected revenue.

Eliminate the corporate and individual income tax, he says, and replace them with a value-added or consumption tax, with tax refundability for lower-income households.

"We should focus the tax system on raising revenue for the things we as a society need," O'Neill says.

Of course, what society needs is a matter of opinion. Without strong economic growth, the options are more limited, the choices more difficult. Fiscal stimulus can have only a short-term impact. The government taxes or borrows from Peter to pay Paul, reflecting a temporary transfer of resources, nothing more.

What does the nation have to show for chronic short-term thinking and policies like these? Long-term problems and a mountain of debt.

Keynesians Always Want More Stimulus

Baum wrote "Some prominent Keynesians are advocating more spending now for an economy that is sputtering."

She is too polite, but to follow suit I will not name-drop either.

Keynesians always want more stimulus. They claim they don't, but there is never a time any of them ever wanted to run surpluses or even a balanced budget out of fear of ending a nascent recovery or starting a "recession of choice" as one Keynesian clown put it.

More to the point, the idea that government or the Fed can micro-manage the economy stepping in as needed is absurd. Heck the Fed could not even see a housing bubble or a recession and it is supposed to manage the economy?

Look at the supporters of Fannie Mae in Congress. Look at Democrats whining about cutbacks in social programs 100% of the time. They are supposed to run a surplus?

Lesson of Japan

For over 20 years Japan tried Monetarist (various QE and interest rate) stimulus as well as Keynesian (fiscal) stimulus and all it has to show for it is the highest debt-to-GDP ratio of any major country in the word. Rest assured that is going to matter sometime within the next 5 years.

Right now we are following their path and it clearly is not working.

How About We Try Something Different?

I am with Caroline here, how about trying something different like scrapping the tax code?

I will add my standard three ideas 100% guaranteed to help cities and states.

Scrap Davis and all prevailing wage laws
Eliminate collective bargaining of public unions
Institute national right-to-work laws

If you want to try something really radical (yet perfectly sensible), here is an idea that is also guaranteed to help: get rid of the Fed and its perpetual bubble-blowing, moral-hazard, bail-out-the-bondholder policies.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Seth's Blog : Bypassing the leap

Bypassing the leap

Every now and then, a creative act comes out of nowhere, a giant leap, a new way of thinking apparently woven out of a brand new material.

Most of the the time, though, creativity is the act of reassembling many elements that are already known. That's why domain knowledge is so critical.

The screenwriter who understands how to take the build that went into the classic Greg Morris episode of the Dick Van Dyke show and integrate it with the Maurce Chevalier riff from the Marx Bros... Or the way Moby took his encyclopedic knowledge of music and turned into a record that sold millions... if you don't have awareness and an analytical understanding of what worked before, you can't build on it.

That's one of the reasons that the recent incarnation of the Palm failed. The fact that the president of the company had never used an iPhone left them only one out: to make a magical leap.

It's not enough to be aware of the domain you're working in, you need to understand it. Noticing things and being curious about how they work is the single most common trait I see in creative people. Once you can break the components down, you can put them back together into something brand new.