joi, 4 septembrie 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

ECB Now a Hedge Fund; €1T Bazooka; ECB Promotes Euro Carry Trade; Draghi Has it Backwards

Posted: 04 Sep 2014 10:34 PM PDT

Draghi Has it Backwards

A director at a global financial company with offices worldwide pinged me in response to my post ECB's €40bn Stimulus Gamble: ECB Pulls Out Bazooka, Cuts Rates, Buys Assets; Will this Stimulate Lending?.
Hello Mish,

Mario Draghi is an idiot. Banks create money when they lend. The loans create a requirement for reserves which ultimately reverts back as deposits at the ECB. The negative interest rate is therefore a tax on capital and a tax on lending. This not rocket science.

I'd start a charity whereby every newly appointed central bank board member is sent a free copy of Rothbard's Mystery of Banking except I am beginning to doubt their ability to read.

Name Withheld by Request
Bond Bubble Grows

I responded to "NW" with "I  agree 100%. All they have done is give banks the incentive to park money on sovereign bonds with diminishing yield. The bond bubble grows."

It is ridiculous that Spanish and Italian 10-Year bonds trade at a lower yield than 10-year us treasuries, yet that is the current state of affairs.

Is there 0% risk of a Greece- or Cyprus-like disaster in Spain, Italy, or Portugal? That's exactly what those yields suggest.

European banks, already leveraged to the hilt in their own nation's bonds, will now buy more to avoid receiving -0.2% interest on funds parked at the ECB.

Moreover, European banks under pressure to help SMEs (small and medium businesses) will no doubt make poor lending decisions. Bank losses will grow,

€1 Trillion Bazooka

How big is that Bazooka? An Independent headline reads ECB's €40bn stimulus gamble to boost European economy.

It now appears €40bn is orders of magnitude off. Please consider an ECB Press Conference Q&A (not available when I commented yesterday).
Question: Mr Draghi, you said that the new measures and the TLTROs will have a sizeable impact on your balance sheet. Could you give us more insight into how much you expect the impact to be for the new measures? And my second question is, following your speech in Jackson Hole, did you discuss QE today?

Draghi: On the first question - you know, this is quite a complex package of measures. You have the TLTROs which are going to unfold over several operations over two years initially, then two more years. So that's one thing. Then you have the ABS, which is in a sense a very novel programme. Then we have the starting again of a covered bond purchase programme. As you all know, it's not a new thing, but the purposes of this programme are very different from the previous programmes.

So all this makes a precise estimate of the impact that these transactions will have on our balance sheet very complicated, especially at the stage when none of these operations have as yet been undertaken. So we may be more precise especially once the TLTROs, at least the first two TLTROs, have taken place.

The aim here, however, is twofold. The aim is to increase the measures that produce credit easing for the banking industry and banking sector, which as you know represents more than 80% of total intermediation, credit intermediation, in the euro area. The second aim is to steer, significantly steer, the size of our balance sheet towards the dimensions it used to have at the beginning of 2012.
An increase in the ECB's balance sheet to that size would imply something on the order of one trillion euros.

Guarantee?

Draghi confirmed the asset purchases would "include the real estate, the RMBS, real estate ABS. It would also include a fairly wide range of ABS containing loans to the real economy," but only "the senior tranches, and the mezzanine tranches only if there is a guarantee."

Can I ask: Who provides the guarantee, and why should any such guarantee be considered any good?

Short-Term Rates Go Negative in 4 Eurozone Countries

In ECB Opens Liquidity Spout, Reuters reports ...
The euro was deep under water on Friday having suffered its steepest daily fall in three years after the European Central Bank stunned markets by cutting interest rates and embarking on a trillion-euro asset-buying binge.

The aggressive shift sent short-term bond yields into negative territory in Germany, France, the Netherlands and Austria, giving investors an overwhelming incentive to sell euros for higher yielding assets elsewhere.
ECB Promotes Euro Carry Trade

Lovely. By creating an incentive to sell euros, the ECB is effectively promoting a Euro-based carry trade.

Since a yen-based carry trade did nothing to stimulate lending in Japan, why is a carry trade supposed to stimulate lending in the Eurozone?

Moreover, it's one thing when global interest rates are high enough to cover a significant portion of currency fluctuations, but what does one do when 12-month US treasuries yield less than 0.1% and 2-year treasuries yield only 0.54%?

The answer of course is to plow in to risky emerging markets at a time of already heightened risk.

I confidently predict some hedge funds will blow up attempting such a maneuver with leverage.

ECB Now a Hedge Fund

The comment of the month award goes to Guru Huky at Guru's Blog for his accurate assessment of Thursday's surprise announcement by the ECB.

Guru says Draghi Turns the ECB Into Hedge Fund While Lowering Rates to Record Low of 0.05%

To those who think this stunning ECB maneuver will end well, I offer this simple advice "It won't".

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.

Only 26% in Favor of Obama's Amnesty Plan for Illegal Immigrants, 62% Oppose, Rest Uncertain

Posted: 04 Sep 2014 03:54 PM PDT

On August 28-29, in a national survey of likely voters, Rasmussen asked Five Questions on Immigration Amnesty.

  1. How closely have you followed recent news reports about President Obama and illegal immigration?
  2. According to news reports, President Obama is considering granting amnesty to several million illegal immigrants without the approval of Congress. Do you favor or oppose the president granting such an amnesty?
  3. Does the president have the legal authority to grant amnesty to several million illegal immigrants without the approval of Congress?
  4. If the president does grant amnesty to these illegal immigrants, should Congress challenge that action in court?
  5. Which should come first – securing the border to prevent future illegal immigration or amnesty for some illegal immigrants now in this country?

Results

Results show Voters Strongly Oppose Obama's Amnesty Plan for Illegal Immigrants.

Obama's Plan Approval

  • 62% of likely U.S. voters oppose the president granting amnesty to millions of illegal immigrants without the approval of Congress
  • 26% are in favor of Obama's plan
  • 12% are undecided

Legal Authority to Act Without Congress

  • 24% think the president has the legal authority to grant amnesty to these illegal immigrants without Congress' approval
  • 57% believe the president does not have the legal right to do so
  • 18% are undecided

If Obama Acts Without Congressional Approval

  • 55% of voters think Congress should challenge that action in court
  • 30% disagree
  • 14% are undecided

Which Should Come First

  • 67% think securing the border to prevent future illegal immigration should come before amnesty is granted for some illegal immigrants already in this country
  • 26% believe amnesty should come first

Voters disagree with Obama on every aspect of immigration, even to the point of asking for a Congressional challenge in court should the president act alone.

Will this stop Obama?

Nothing has yet. Will it be different this time?

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.

ECB's €40bn Stimulus Gamble: ECB Pulls Out Bazooka, Cuts Rates, Buys Assets; Will this Stimulate Lending?

Posted: 04 Sep 2014 11:51 AM PDT

ECB president Mario Draghi pulled out a bazooka today announcing asset purchases. The ECB also cut interest rates to 0.05% (from 0.15%) while offering negative 0.2% on funds parked with the ECB.

Here are some details from the ECB Announcement.

  • Governing Council decided today to lower the interest rate on the main refinancing operations of the Eurosystem by 10 basis points to 0.05% and the rate on the marginal lending facility by 10 basis points to 0.30%.
  • The rate on the deposit facility was lowered by 10 basis points to -0.20%.
  • The Governing Council decided to start purchasing non-financial private sector assets. The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities (ABSs) with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase programme (ABSPP). This reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter, as decided by the Governing Council in June.
  • In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by MFIs domiciled in the euro area under a new covered bond purchase programme (CBPP3). Interventions under these programmes will start in October 2014. The detailed modalities of these programmes will be announced after the Governing Council meeting of 2 October 2014. The newly decided measures, together with the targeted longer-term refinancing operations which will be conducted in two weeks, will have a sizeable impact on our balance sheet.
  • The Governing Council sees the risks surrounding the economic outlook for the euro area on the downside. In particular, the loss in economic momentum may dampen private investment, and heightened geopolitical risks could have a further negative impact on business and consumer confidence. Another downside risk relates to insufficient structural reforms in euro area countries.
  • According to Eurostat's flash estimate, euro area annual HICP inflation was 0.3% in August 2014, after 0.4% in July. This decline reflects primarily lower energy price inflation, while the other main components remained broadly unchanged in aggregate. Inflation rates have now remained low for a considerable period of time. As said, today's decisions, together with the other measures in place, have been taken to underpin the firm anchoring of medium to long-term inflation expectations, in line with our aim of maintaining inflation rates below, but close to, 2%. On the basis of current information, annual HICP inflation is expected to remain at low levels over the coming months, before increasing gradually during 2015 and 2016.
  • The September 2014 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation at 0.6% in 2014, 1.1% in 2015 and 1.4% in 2016. In comparison with the June 2014 Eurosystem staff macroeconomic projections, the projection for inflation for 2014 has been revised downwards. The projections for 2015 and 2016 have remained unchanged.

Euro Response



The Euro has been declining for weeks in expectation of an announcement. Judging from today's reaction, the market may not have expected this big of an announcement.

ECB's €40bn Stimulus Gamble

Details will not be announced until October, but the Independent seems to have some in advance. Please consider ECB's €40bn Stimulus Gamble to Boost European Economy.
ECB boss Mario Draghi is expected to outline plans to inject as much as €40bn into the flagging economy.

According to US investment bank JP Morgan Chase, he plans to buy bundles of bank loans which would be paid for by effectively creating money.

This extra money would be paid to the banks that had owned the bonds, so that they in turn can provide much-needed loans to businesses.

The aim is to stimulate economic activity by increasing lending, creating jobs and eventually allowing more people to spend money in the eurozone.

Justin Doyle, a treasury analyst with Dublin-based specialist bank Investec, predicted the ECB would buy up the loans of big private companies.

Will this Stimulate Lending?

Everyone wonders if this will work. Let me ask a different set of questions:

  1. Why should it?
  2. Does the announcement fix any structural problems with the euro?
  3. Does the announcement fix any fiscal issues in any European country?
  4. Does the announcement fix any competitive disadvantages of France vs. Germany?
  5. Does this provide any impetus for structural reforms in France or Italy?
  6. If -0.1% rates for funds parked with the ECB did not stimulate lending, why should -0.2% rates?

Yield Down

  • The yield on the Spanish 10-Year bond is now 2.16%, down from 4.51% a year ago.
  • The yield on the Italian 10-year bond is now 2.35%, down from 4.42% a year ago.
  • The Yield on the Portuguese 10-year bond is now 3.15%, down from 6.77% a year ago.

Meanwhile, yield of the US 10-Year treasury is 2.45%. Apparently there is 0% risk of a restructuring of Spanish, Italian, or Portuguese bonds.

Greece was a one-time event, until Cyprus came along. Then it became a two-time event. But don't worry, it will never happen again.

Anyone really believe that?

Draghi Creates Bond Bubble

All Drahghi really accomplished with LTRO is to make Europe the biggest bond bubble in the world.

Well bubbles can always get bigger, until they pop.

Meanwhile none of these can-kicking efforts have fixed a single structural problem. Instead, they made it easy for governments to delay needed reforms.

Forcing Banks to Lend a Huge Mistake

These attempts to force banks to lend is a huge mistake. Banks lend if and only if ...

  1. Banks are not capital impaired
  2. Banks believe they have credit-worthy borrowers
  3. Credit-worthy borrowers want credit

If banks lend in other circumstances, they will incur losses. They also incur losses if they believe they have credit-worthy customers but they don't.

The problem should be obvious. European banks lack credit-worthy borrowers who want loans, or the banks are capital impaired.

I suggest both.

And if this move by Draghi does spur more lending to small uncreditworthy businesses, the ECB will have done nothing but compound Eurozone problems greatly.

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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