joi, 5 februarie 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Head-Banging Revisited; Obama’s 'Have-It-All' Budget; Mish Proposal

Posted: 05 Feb 2015 06:14 PM PST

Dead on Arrival

On Sunday, in More Obama Dead-on-Arrival Tax Proposals, a post regarding Obama's proposed corporate tax hikes, I asked a simple question ...

Is there a point to beating your head against a concrete wall? The answer would seem to be "no", yet President Obama continues to do just that with dead-on-arrival proposals. .... If he's attempting to pound some sense into his head, it's clearly not working.

Republican Head Banging

Now it's the Republican's turn at head-banging.


From the Washington Examiner: "The debate sounded like it usually does — with Democrats hammering Republicans trying to strip away the law's insurance subsidies and other benefits, and Republicans contending that the law remains unpopular among the public and has raised insurance costs for some people or cost them hours of employment."

What's the Point?

Obama will veto the legislation, assuming the Senate does not kill it first. That begs the question: Is there a point?

In Praise of Head-Banging

I see the error in my ways. There is a point to it, although it certainly will not pound sense into anyone's head.

In contrast to typical Washington compromise non-solutions, head-banging seldom does much harm. In fact, head-banging provides entertainment value.

In comparison, history suggests legislation nearly always makes matters worse. And it has for decades.

Obama's 'Have-It-All' Budget

What worries me now is this: $4 Trillion Budget Replaces 'Mindless Austerity'.

Politico explains further in Barack Obama's 'Have-It-All' Budget.
President Barack Obama released a $4 trillion budget Monday designed to convince Americans that they can have it all: more tax breaks for the middle class, more spending on government programs, and just enough cuts and tax hikes to keep the nation's deficits under control.

To pay for it, Obama proposed raising a number of taxes on wealthy taxpayers or businesses — some of them already dismissed as nonstarters by the Republican Congress. They include fees on big banks and taxes on companies that do business overseas — plus spending cuts on health programs and other savings — to cover the costs of all the new initiatives.

The budget calls for $1.091 trillion in discretionary spending for fiscal year 2016, $74 billion above the "sequestration" spending caps that Obama wants to eliminate. The additional spending — $38 billion for defense, $37 billion for domestic programs — would produce a $474 billion deficit for next year.
Obama Threatens to Veto Any Bill That Does Not Increase the Budged

A Washington Post article is even more scary: Obama may have new leverage with his $4 trillion budget.
Obama warned that he will veto spending bills that do not do away with the sharp automatic budget cuts, known as "sequestration," also adopted as part of that deal.

"I am not going to accept a budget that locks in sequestration going forward," Obama said in an appearance at the Department of Homeland Security's National Operations Center.
"More Spending" Compromise

Obama will not accept budget cuts and Republicans will not accept tax hikes.

The compromise solution is the same as it's always been: Republicans will get more defense spending and the Democrats will get more social spending.

Neither side is willing to address the real problem: Both social spending and military spending is out of control.

The fake deficit-hawk Republicans will cave in, as they always do. A head-banging result where nothing at all happened would be a better result.

Mish Proposal

I would readily make concessions if I got something significant in return. Here's my bargaining list.

  1. End collective bargaining of public unions
  2. Pass national right-to-work legislation
  3. Scrap prevailing wage laws
  4. Allow states and municipalities to go bankrupt
  5. End all tariffs and subsidies

My proposals would start a genuine recovery enabling cities and states to shed debt obligations in bankruptcy while lowering costs for much needed infrastructure improvements.

President Obama says he is willing to make some "tough choices". Republicans never present him with any. Instead, both parties just spend more and more without fixing any fundamental problems. 

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.

Ukraine Floats the Hryvnia: It Sinks, As Expected, Down 45% Today; Carpetbaggers Take Over

Posted: 05 Feb 2015 01:25 PM PST

On February 3, I posted a chart of the "official" exchange rate at 16.24 hryvnias to one US dollar. In reality, the true exchange rate on the black market was on the order of 21.5 hryvnias to the dollar.

See Black Market in Ukrainian Currency Masks True Extent of Decline; Banks Impose 30% Foreign Exchange Fee; Freely Floating Hryvnia Announced.

Rumor had it that Ukraine would float the currency today. That rumor was correct as was my call as to what would happen. This is what I said on February 3:
How Low Will It Go?

From 8 [a valuation just over a year ago] to 21.5 represents a 62.7% decline. And I suspect it won't stop there. Why should it?

A plunge from 8 to 30 would be a 73% decline in just over a year. And that's my initial guess barring some quick monetary rescue by the IMF.

If and when the Ukrainian National Bank does float the currency, other sites will note the "shocking overnight" plunge.

In reality, the plunge has already taken place, over time. The charts just don't show that yet.

Hryvnia One Day Price Action



Chart courtesy of Bloomberg. Click on chart for sharper image.

The decline shown today is 45.13%, but as stated above, that decline really occurred over time, as measured by the black market.

What are those intraday gyrations are all about? I strongly suspect intervention to prevent an even bigger plunge. If so, another collapse is coming up.

In the last year the Hryvnia sunk from 8.29 to the dollar to 24.35 to the dollar. That's a decline of 66%, not far off my 73% projection.

It will get there, and probably more unless the IMF steps in very soon.

Ukraine Floats Currency, It Sinks

Bloomberg reports Ukraine Floats Currency, It Sinks.
In recent months, Ukraine was probably pursuing the most clueless exchange rate policy in Europe. In the run-up to the October parliamentary election, President Petro Poroshenko used his good relationship with National Bank governor Valeria Gontareva to persuade her to keep the exchange rate below 13 hryvnias to the U.S. dollar. In late September, banks were ordered not to sell more than 3,000 hryvnias' worth of foreign currency per day to their customers. At the same time, the National Bank started holding special auctions in which it sold $3 million per day to banks to set a so-called "indicative rate" that they were supposed to follow in transactions with clients.

After the election, even that artificial rate dropped quickly, moving to 16 hryvnias per dollar in a matter of days. The banks, however, only displayed that rate at exchange offices, where citizens could barely buy any foreign currency anyway. Among themselves, they traded at rates that were about 20 percent higher than the official one. For ordinary Ukrainians, there was also a lively black market, where rates were closer to the interbank ones than to the official benchmark.

Today, Gontareva announced the end of indicative auctions, allowing the banks to move to a single, market-determined rate. The result was a collapse of the hryvnia's value.

At a press conference today, Gontareva vehemently denied that she had agreed to an exchange rate of 25 hryvnias to the dollar with the IMF. "It's not even being considered," she said. But at the time of this writing the hryvnia was trading at 24.85 to the dollar.

The National Bank's decision to float the hryvnia will hardly change anything for citizens or businesses -- they just won't have a useless official exchange rate to laugh at. Ukraine saw 25 percent inflation last year; this year, prices will keep rising at a fast clip.

Today, the National Bank said its international reserves had shrunk to $6.4 billion at end of January.

The Ukrainian financial authorities' blundering has worsened the country's already desperate economic situation. The IMF is effectively setting Ukraine's policy now, because it is the country's only reliable source of foreign currency. It needs to focus on preventing Ukrainian politicians from making stupid self-serving decisions like the ones that caused the hryvnia debacle and spawned the black market. The Russian-instigated war in the east is not Ukraine's only problem: When it inevitably ends, bureaucratic incompetence, plaguing the country's transition to a modern economy, will remain behind.
Carpetbaggers Take Over

The last paragraph above says it all. The only thing I disagree with is the reference to the "Russian-instigated" war.

Make no mistake, this was a "US-instigated" war. Russia merely stepped into it, in support of separatists.

The IMF Carpetbaggers have arrived. Total destruction of the country is at hand.

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.

Playground Bully Theory vs. Eurozone Gang Rules; The Only (and Ironic) Solution

Posted: 05 Feb 2015 10:50 AM PST

Playground bullies pick on the weak and the feeble. Extortion (lunch money, allowances,  etc.) are common means of avoidance.

But feeding the bully never does any good. It's only when the bullied party takes action (a punch in the nose qualifies but so might complaining to the principal),  does resolution of the problem occur.

It's much harder on a bully facing a gang. Punching a gang leader in the nose could get you killed.

A frequent and unfortunate happening in inner city schools is for the bullied person to seek relief by joining the gang.

I am not talking about Chicago, Detroit, or LA inner-city schools. I am talking about Germany, the ECB, and the gang of 17 vs. Greece.

Who's the Bully?

In the following discussion, some might object to my posing Germany as the bully. They will claim Greece did this on its own.

The reality is both sides are guilty.  Germany knew (or should have known) that Greece was a bad risk.

There is a price to be paid for making bad loans. That price is inevitable default.  When you insist you do not have to pay a reasonable price for mistakes you made or insist that debt be paid back when it can't, you become a bully.

Keeping the Gang In Line

A few days ago I saw this report Eurogroup leaves door open for Syriza to partially renegotiate.

On February 2, the EU Observer reported France, US Support Greece in Debt Battle.

That bit of hope did not last long. Yesterday, French President Francois Hollande warned Greek Prime Minister Alexis Tsipras that "respecting the rules is necessary for all, for France too, and it's not always easy."

Also yesterday, The Financial Times reported Spain Keeps Hawkish Eye on Greece as Southern Solidarity Crumbles.

Gang Solidarity Reached

What happened to the token gestures towards Greece?

Gang leader Germany squashed every overture towards Greece, no matter how slight. Then, having reached solidarity against the outcast, the Mob Enforcer (affectionately known as the ECB) threw down the gauntlet.

For a description of the enforcement process, please see ECB Revokes Greek Bonds as Collateral; ECB vs. Novices; Brass Knuckles.

When it comes to playground bullies there are five possible resolutions.

Five Outcomes

  1. The bullies have a sudden change of heart and voluntarily stop their bullying.
  2. The bullied party perpetually pays the bully's demands. 
  3. The bullied party joins the gang on the gang's terms.
  4. The bullies and the bullied agree to a truce on terms favorable to the bully.
  5. The bullied party finally decides it has had enough.

Those are no other choices.

In practice, number one does not happen until everything else has failed a number of times.

On the playground, choices number 2 or 3 most often win. Choice number 4 goes something like this: "Give me another candy bar and I will be your friend." If the bullied party pays up, The bully soon demands an extra candy bar a week.

Admission of Obvious Truth

The first step in solving a problem is to admit you have one.

In a interview yesterday on Zeit Online, Greek finance minister Yanis Varoufakis admitted the obvious truth: "I'm the Finance Minister of a Bankrupt Country".

It took an amazing amount of time to admit the obvious truth, but the important point is the truth is finally on the table.

Effectively, Greece finally admitted that it has no more funds to pay the bully. That's an important step, and it precludes option number 2, perpetual payment to the bully. It also precludes option number 3 because properly joining the gang requires payment owed to the gang, and Greece does not have those funds. It is bankrupt.

Option 4 is the can-kicking exercise everyone hopes for.

However, Greek Prime Minister Alexis Tsipras and his finance minister Yanis Varoufakis have ruled that out. They do not want a can-kicking truce that does not properly take into consideration one simple fact: Greece is bankrupt.

If Greece is truly serious, there's nothing left but option 5: The bullied party finally decides it has had enough.

Does Option 5 Mean Grexit?

I have been thinking about option 5 quite a bit. What if Greece defaults, but claims it will stay on the euro? Who is going to kick them out of the eurozone gang?

Eurozone Gang Rules

Rules of the eurozone gang are such that once in the gang, no one can kick you out. No one can stop you from leaving, but there is no means to kick someone out.

The ECB can shut off all funding, but as long as Greece maintains a primary account surplus (current account surplus excluding debt service), what is the ECB to do?

Greece does have a primary account surplus (tax receipts are sufficient to pay the bills excluding  debt payments), but if Syriza honors its election promises, that surplus would instantly melt.

Only Solution

A default with the intention of keeping the euro is the only solution, assuming Syriza is truly serious about wanting to stay on the euro.

It will not be easy, but it appears feasible.

Greece would need to institute all kinds of reforms immediately. Syriza would also have to abandon many left-wing proposals and Greece would likely have to agree to pay back the ECB and the IMF in full.

In regards to the bulk of the debt owed, Greece could then ask for and eventually get the debt restructuring conference it wants. The payoff for my proposal would be spectacular.

Spectacular Payoff

  1. Extend-and-pretend solutions for many countries would die on the spot, a much needed event.
  2. Syriza would have to abandon numerous and unrealistic socialist goals.
  3. Unburdened by debt payments, Greece GDP would rise.
  4. Greece could stay on the euro as long as it maintained a primary account surplus.
  5. Hyperinflation would not rear its ugly head as it might if Greece returned to the drachma.
  6. Greek productivity would soar.
  7. Costs would fall and the world would see price-deflation as a good thing, not bad.
  8. Central banks would learn a huge (and badly needed) lesson about sponsoring a proliferation of debt, hoping to meet counterproductive inflation targets.

Ironically, Greece would become more like Germany! Isn't that what everyone claims to want?

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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