marți, 17 decembrie 2013

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Rand Paul Ponders NSA Class-Action Lawsuit Options; Senator Recruits 'Hundreds of Thousands' of Plaintiffs; Rand Paul 2016

Posted: 17 Dec 2013 04:31 PM PST

In the wake of a welcome court ruling that NSA mass collection of phone conversations is unconstitutional (see District Court Judge Rules NSA Phone Taps Likely Unconstitutional; 68 Page Ruling Cites "Orwellian Technology" and Unreasonable Searches), come more welcome news that senator Rand Paul is going to turn up the heat further.

Rand Paul Ponders NSA Class-Action Lawsuit Options

Please consider Rand Paul Plots NSA Class-Action Lawsuit Options
After months of consideration, Sen. Rand Paul, R-Ky., is moving closer to filing a lawsuit in federal court against National Security Agency surveillance programs.

A senior Paul staffer says U.S. District Court Judge Richard Leon's Monday decision that NSA opponents have standing to sue over the bulk collection of phone records makes Paul "much more likely" to file his own lawsuit.

The senior staffer, who spoke with U.S. News on background, says hundreds of thousands of people volunteered online as possible plaintiffs after Paul first floated the idea of a class-action lawsuit in June.

The senator has not firmly decided to file suit and it's still possible Paul will choose to instead assist with three already-filed lawsuits against the NSA.

If Paul does file a lawsuit it would be the fourth major legal attack against the NSA's bulk collection and five-year storage of American phone records.

Lawsuits against the phone-record collection are already filed in federal court by the American Civil Liberties Union in New York, by conservative legal activist Larry Klayman of Freedom Watch in Washington, D.C., and by the Electronic Frontier Foundation in San Francisco.

Klayman won a major victory against the NSA on Monday, with Leon ruling the phone record program is likely a violation of the Fourth Amendment. Leon granted a preliminary injunction barring the collection, but stayed implementation pending appeal.

Unlike the possible Paul lawsuit, Klayman only sought a handful of original plaintiffs. He is seeking for the "class" he represents to be defined by Leon to include all Americans affected by the program, which purportedly helps scuttle terrorist plots - an accomplishment Leon disputed.

The senior Paul staffer stressed that Paul is currently evaluating strategy options. If a lawsuit is filed, it would likely be in either D.C. or Kentucky. It's unclear which Paul-affiliated entity would file the challenge.
Rand Paul 2016

I salute Rand Paul for his efforts. And as noted on numerous occasions, I also salute U.S. hero Edward Snowden who revealed the unconstitutional data collection efforts.

Finally, I wish Rand Paul well, hoping he wins the Republican nomination, then replaces president Obama as the next president of the United States.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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.

Laughable Eurozone Banking "Non-Union"; Expect Disorderly Breakup

Posted: 17 Dec 2013 11:07 AM PST

On December 12 the Financial Times reported EU reaches landmark deal on failed banks with a "common rule book for handling failed banks".

Gunnar Hökmark, the lead negotiator for the parliamentary side, said: "We now have a strong bail-in system which sends a clear message that bank shareholders and creditors will be the ones to bear the losses on rainy days, not taxpayers. At the same time we also established clear rules to deal with the most exceptional cases in which overall financial stability is in danger."

The next day, a friend commented the banking union agreement proved me wrong. I replied "wait for the details".

Laughable Details Now Pouring In

Let's start with a look at Eurozone Red Tape in the Financial Times just three short days later.
Fears are growing that the eurozone's proposed new banking regime will be too bureaucratic for the task of handling a sudden collapse of a cross-border institution.

The latest proposals could see up to 126 people being consulted on how to wind up a bank, even though agreement might need to be reached over the course of a weekend while financial markets are closed. Some senior officials are warning the proposals are too cumbersome.

A Financial Times analysis of the full banking union resolution process for a lender operating in three countries reveals the labyrinthine procedure that would still be required to wind up a bank. In a worst case scenario, where key officials disagree, this could involve nine panels and up to 143 votes being cast, from its supervisor raising a warning flag to the final wind-up decision.
Germany Backtracks on Banking Union

MarketWatch reports Germany appears to backtrack on EU banking deal
EU finance ministers have promised to agree on a so-called single-resolution mechanism--consisting of more centralized decision-making and financing for the shuttering or downsizing of failing banks--before the end of the year. But a letter sent by Wolfgang Schäuble to some of his counterparts sets clear limits on how far Europe's biggest economy is willing to go.

Mr. Schäuble's letter, dated Dec. 12 and seen by The Wall Street Journal, was described by German officials as reiterating Berlin's concerns expressed in recent talks.

At the heart of the disagreement is what to do when so-called bank resolution funds, financed by the banking sector, run out of money.

Under the provisional agreement reached last week, euro-zone countries would start building up national resolution funds by imposing levies on their banks. Those national funds would be gradually merged over 10 years into a single European fund containing around €55 billion.

Throughout the talks, Germany and other rich euro-zone countries such as Finland made clear that they didn't want their taxpayers to pay for problems that had developed in other countries' banks in the past. If the resolution funds prove too small to deal with a big bank's failure, taxpayers in the lender's home country should pick up the bill, they argued.

France and some Southern European countries, meanwhile, have been pushing to use the euro-zone government bailout fund, the European Stability Mechanism, as the common backstop.

Berlin believes the single resolution fund will be sufficient to deal with even large bank failures, the officials said.

"We think 55 billion [euros] would be an impressive sum," said one. In the unlikely event that it turns out not to be enough, the official said, the bank's home country could always ask for a loan from the ESM, just like Spain did last year.

That is the line Mr. Schäuble also took in his letter. "The SRF having reached its target level...will be the backstop to safeguard stability and protect taxpayers," he wrote. Mr. Schäuble hinted that Germany might agree to some deeper integration later, by calling for a "revision clause, based on implementation experience, on when and how to further improve and develop the future mechanism and backstop."
EU Ministers Set to Define Banking Union

Today, the Financial Times reports EU Ministers Set to Define Banking Union
Europe's banking union is at a crucial juncture. Three late-night meetings of finance ministers this week, culminating on Wednesday, is likely to define the eurozone's system for policing how its banks live and die, including a common fund to cover rescues. It marks the biggest surrender of sovereignty since the creation of the euro.

How will the costs of a bank failure be covered?

The first line of defence is imposing losses on the bank's shareholders and creditors. If that is insufficient then a bank-paid resolution fund will kick in. The fund aims to hit a €55bn target over 10 years; until then it is split into national funds that are gradually merged. In 2020, for instance, about €12.5bn of joint funds would be available, which amounts to perhaps a €3bn German contribution. A big bank collapse would dwarf the available resources; some €473bn of capital has been pumped into EU banks since 2008.

Will the banking union cover all eurozone banks?

It is a single system under law. But in practice national authorities will be the master of small banks (Germany would accept nothing less). The ECB will directly supervise around 130 of the bloc's 6,200 lenders, which covers 85 per cent of the bloc's bank assets. The resolution system will directly cover a couple of hundred more, as all cross-border institutions will be covered.

How does this relate to the ECB-led bank health check?

Banking union won't be ready for the results of the ECB health check in November 2014. Its resolution system will only be up and running from 2016. In any event Germany is determined that "legacy" costs are not shared. So the fallout from the review of banks will be mainly handled at national level, under existing rules.

What are the main weaknesses?

These are sweeping reforms agreed – in EU terms – at lightning speed. But scores of people are potentially voting on a resolution decision. The common resolution funds are not automatically available. There is no joint backstop if the resolution fund is overwhelmed. Deposit guarantees are as good as the ability of the national government to back them. Wolfgang Schäuble, Germany's finance minister, once called for a "timber-framed" system as a first step to full banking union. This might be it.
Serious Questions

Sweeping reforms? Lightening Speed? When only €12.5bn of joint funds would be available by 2020? When the first line of defence is imposing losses on the bank's shareholders and creditors?

Please be serious.

Banking Union Not Worth Supporting

Staunch eurozone supporter Wolfgang Munchau concluded on December 15, Banking Union Not Worth Supporting

Many advocates of banking union, including me, underestimated the economic costs of the banking union. ... Against the costs, one must obviously also consider the potential benefits. ... If done right, this could have been a hugely important project.

But, unless we see some important shifts in the balance of the argument, the political agreement reached last week simply did not cut it. I am not holding my breath here, since the political deal is done. But unless there are important additions to what we have been told about the deal, I would not think this banking union is worth supporting.

Banking Union Math

Munchau's reasons are important. He notes that the ECB will end up as "supervisor" of 128 banks with an aggregate balance sheet "somewhere between €26 trillion and €27 trillion."

How big is the proposed bailout fund? €55 billion, not available immediately, but built up over 10 years. It will take 10 years to build up a fund equivalent to a mere 0.2 per cent of the asset base.

Munchau asks "Would you call it insurance if the payout depended on whether the German parliament voted in favour?" That's a good question, but what about the other nine panels and up to 143 votes it would take for approval?

Munchau concludes "It is not a banking union, and should be rejected."

Indeed. There is no banking union, nor will there be one even if the various finance ministers agree to double or triple the alleged "impressive sum" of €55 billion built up over 10 years.

Expect Disorderly Breakup
 
Lost is the debate about "impressive sums", is the simple fact there should not be a banking union in the first place. In practical terms, there still isn't, but no one wants to admit that.

And given that there isn't a genuine union (which is the only way to realistically hold this mess together a bit longer), the eurozone ministers ought to focus on a meaningful task: how best to break up the eurozone with minimal disruption.

Unfortunately, they won't. Thus, the resultant eurozone breakup will prove to be very disruptive. The only other possibilities (and I have mentioned them before) are 1. slow growth and extremely high unemployment in the peripheral countries for another decade 2. Germany and the Northern countries pony up hundreds of billions of euros in more support (debt forgiveness, not loans).

Pick your poison, but a breakup is the most likely result.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 
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.

Fed Study Shows Drop in Participation Rate Explained by Retirement; Let's Explore that Idea, in Depth and in Pictures

Posted: 17 Dec 2013 02:54 AM PST

A November Fed study on the Causes of Declines in the Labor Force Participation Rate by Shigeru Fujita at the Federal Reserve Bank of Philadelphia concludes "The decline in the participation rate in the last one-and-a-half years (when the unemployment rate declined faster than expected) is entirely due to retirement."

Fujita based that statement on BLS surveys that look at the underlying reasons people give for nonparticipation. 

The CPS divides nonparticipants into three broad categories: disabled, retired, and others. The last category includes nonparticipation due to "discouragement."

Based on respondents' reasons for nonparticipation, weighted by age group, Fujita produced this chart (trendlines in red by me).

Nonparticipation Rates by Reason



I do not doubt for one second the chart represents responses given to the BLS. But is there any evidence the answers given to the BLS are correct?

Let's explore the question in a series of step-by-step charts.

First a chart by Doug Short at Advisor Perspectives that shows participation rates of various age groups.

Age 50 and Older Participation Rates



Interestingly, the biggest decline in labor force in percentage terms is in the 50-54 group. However, that is not conclusive. Because older workers' participation rates are lower, the increase in the share of old workers by itself pushes down the aggregate participation rate.

To determine what is really happening, we need to look at age-group weighted effects on the participation rate. I asked reader Tim Wallace to explore that idea in a set of charts.

Note: Both Doug Short and Tim Wallace have better charting skills than I have. I frequently ask them for charts of this nature to explore ideas that I have. 

Here's the specific question I asked: What age groups account for the decline in labor force?

For this question, we need to look at all groups, not just 50 and older. As customary, Wallace uses not-seasonally adjusted data.

For all of the following charts, Wallace compares November of 2013 to November in prior years.



As with the earlier chart, the decline in age group 50-54 relative to 55-64 is suspicious but inconclusive. We need stats on the population itself to draw valid conclusions.

Percentage Makeup of Civilian Non-Institutional Population by Age Group



Note the recent rise in the 65+ population demographic, the rise in 55-64 demographic, the decline in the 25-49 group, and the flattening of the 50-54 age group.

All of these are as expected. Now let's hone in on what has transpired since 2010.

Participation Rates by Age Group 2010-2013



By multiplying the age group population % by the age group participation rate, we can calculate contributions to the overall participation rate. The next chart does that.



Focus on Percentages is Wrong

The impact on the overall participation rate of the 55-64 age group only increased from 9.8% to 10.2%. Similarly, the impact on the overall participation rate of the 65+ age group only increased from 2.9% to 3.3%.

Does that prove or disprove the Fed thesis?

The answer is neither. Looking at participation rates (percentages) in isolation cannot address the question.

Because of demographic shifts, we need to look at the hard numbers, specifically the growth (or decline) in labor force relative to the growth (or decline) in population.

I asked Wallace to do just that. Here are the results.

Overall Labor Force and Civilian Population by Age Group



The above chart does answer the question as to whether or not the Fed thesis is reasonable. However, it's not easy to see. A chart of relative growth will be easier to understand.

Change in Labor Force and Population From Previous Year



In the above chart, the change in labor force and the change in population in hard numbers (not percentage terms) are side-by-side.

Consider the numbers for 2012 for age group 65+: The population rose by 2,349,000 but the labor force only rose by 621,000.

What happened to the rest? Retirement?

To make it even easier to see, please consider this final chart, with subtractions made.

Delta of Change in Labor Force to Change in Population



The decline in labor force relative to the growth in population is heavily concentrated in the 65 and older demographic.

This is proof that the analysis by the Fed is indeed reasonable.

A rally in the stock market is one possible reason. Also, there may be a lot of teachers, police officers, and firefighters who just put in their required number of years to be eligible to collect their pensions.

Implications

Regardless of why, the number of retirees collecting pensions or social security is increasing at a rapid pace while the number of those contributing to social security is declining.

Moreover, those retiring are in general making more money than new workers coming into the system.

The already stressed pension and social security programs will be coming under increased stress. We all knew this would happen sometime, and it started in a big way about 1.5 to 2 years ago.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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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