Mish's Global Economic Trend Analysis

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ECB Slated to Become "Currency Forger of Europe"; Merkel, the "Teflon Chancellor" Posted: 26 Aug 2012 08:24 PM PDT As time passes, the rifts between the Bundesbank and the ECB grow wider. So do the rifts between what German citizens want and what German chancellor Angela Merkel is willing to do to "save the euro". Merkel increasingly (and as expected) does what she need to do to preserve he legacy, consequences (and Germany) be damned. Please consider Merkel tries to calm storms over Greece, ECB policy Angela Merkel tried to calm a growing storm over euro zone crisis strategy on Sunday after the Bundesbank likened ECB bond-buying plans to a dangerous drug and a conservative ally of the German leader said Greece should leave the currency bloc by next year. The comments, from central bank chief Jens Weidmann and a senior figure in the Bavarian Christian Social Union (CSU), Alexander Dobrindt, point to mounting unease in Germany with the policies being used to combat the three-year old debt crisis. "We are in a very decisive phase in combating the euro debt crisis," Merkel told public broadcaster ARD in an interview. "My plea is that everyone weigh their words very carefully." Dobrindt, whose party is preparing for a regional election in Bavaria and the federal vote next autumn, told top-selling German daily Bild he expected Greece to leave the euro zone in 2013. His comments drew a swift rebuke from Foreign Minister Guido Westerwelle who said "bullying" of euro members must stop. But Weidmann, a former economic adviser to Merkel, said in a front-page interview in influential German magazine Der Spiegel that the bond buys could violate rules against the ECB providing outright financing to governments. "Such a policy is for me close to state financing via the printing press," Weidmann told Spiegel. "In democracies, it is parliaments and not central banks that should decide on such a comprehensive pooling of risks. We should not underestimate the risk that central bank financing can become addictive like a drug," Weidmann said. Dobrindt was more direct, saying Draghi risked passing into the history books as the "currency forger of Europe". Merkel's Disingenuous Pledge of "Help" I really do not know why Merkel is so revered, although feared I can certainly understand. She is a skilled politician, very adept at saying one thing and doing another, yet not getting challenged on it. For example, Merkel Vows to Help Greeks Stay in Euro Zone Read that article (or any other recent article on the subject) and tell me exactly what she is willing to do other than offer moral support. You will not find anything concrete because she is willing to do precisely nothing, right now. She cannot give Greece more time or money because her coalition is likely to splinter if she does. However, her pledge of "help" will absolve her of blame when Greece does leave. More importantly, she is willing to let Draghi do most anything because she recognizes that she must, to have a chance at keeping Spain and Italy in the fold. Decisive Phase When Merkel says "We are in a very decisive phase in combating the euro debt crisis" she is speaking as much about her own precarious position as the precarious position of the euro. Merkel Achieves the Impossible Dream (For Now) Merkel got away with promising Greece citizens help while doing nothing Merkel got away with promising German citizens there will be no fiscal union until there is a political one, while simultaneity offering explicit support for the "Currency Forger of Europe" Merkel is very adept at talking out of both sides of her mouth simultaneously, each saying a different thing, and getting away with it. Reagan may have been the Teflon president, but Merkel is the Teflon chancellor. 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.

GM Seeks Bigger Credit Line To Shrink Pension Obligations; Déjà Vu Pension Woes Posted: 26 Aug 2012 07:55 AM PDT Going into debt to fund pensions seems like a ridiculous thing to do, especially for a company that had a chance to shed more of those pension obligations in bankruptcy. Please consider the Wall Street Journal story GM Wants to Up Credit Line General Motors Co. is in preliminary talks with banks to potentially double its $5 billion line of credit as the auto maker looks to strengthen its balance sheet and shrink pension obligations, according to people with knowledge of the discussions. The world's largest auto maker by sales is in no danger of running short on cash. The Detroit company has very little debt and held about $33 billion in available cash at June 30. Analysts believe it needs roughly $20 billion to operate comfortably. It currently has an available line of credit of $5 billion. But GM could have hefty cash needs ahead. Its European operations are racking up major losses, it is increasing capital spending on new vehicles, and it may want to repurchase shares held by the U.S. Treasury. GM also wants to reduce its U.S. pension obligations. Pensions for hourly, union workers and retirees are underfunded by about $10 billion and have been a major concern for investors. GM is spending around $4 billion to shift responsibility of its $26 billion salaried retiree pension program to Prudential Financial Inc. PRU +1.52% in a deal set to close by year-end. A bigger drag on the company is the $71 billion in pension obligations it has to union-represented hourly workers and retirees. That account is underfunded by $10 billion, according to public filings. GM's Pension Liabilities On June 1, 2012 the Chicago Tribune reported GM to cut about one-fourth of U.S. pension liability General Motors Co will cut nearly a quarter of its U.S. pension obligation by transferring the management of its pension plans for 118,000 white-collar retirees to a third party and offering lump-sum buyouts. The two moves unveiled on Friday will cut $26 billion from the automaker's massive U.S. pension liability of nearly $109 billion. GM's pension overhang is a top concern for investors. It was one of a handful of issues left untouched during GM's U.S.-financed bankruptcy restructuring three years ago. UAW PENSIONS IN FOCUS A growing concern for decades as U.S. automakers lost market share to foreign-based automakers in their home country, pension costs became an albatross for the U.S. industry with the sector's downturn five years ago. GM's Balance Sheet Inquiring minds investigating GM's Balance sheet will notice about $32 billion in cash, $11 billion in securities, and another $11 billion or so in accounts receivable. However, GM has $10 billion in long-term debt and another $43 billion in other liabilities. Current liabilities are roughly $56 billion. Total Liabilities are $110 billion of which at least $31 billion are pension and retirement benefits. Assets include a very questionable $28 billion in goodwill, and a questionable $25 billion in property. The balance sheet above does not seem to match the Tribune's calculation of  $83 billion in pension liabilities (109-26). The $109 billion figure does match total liabilities. Déjà Vu Pension Woes Borrowing $5 billion to shore up its pension plan certainly would have worked well in 2009. However, GM wants to do it now, a foolish undertaking in my opinion. Pension obligations helped sink GM the first time, and it may happen again, especially if GM borrows money to throw at the stock market. If stocks decline and auto sales decline as well, GM will be in serious trouble once again. 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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