| Absurd Threat by Greek Prime Minister: "Hand Over Your Wallet or I Will Give You a Million Dollars" Posted: 17 Jan 2012 11:25 PM PST Hedge funds holding credit default swaps on Greek bonds are probably laughing out loud over statements made today by Greek Prime Minister Lucas Papademos. The New York Times reports Greek Premier Says Creditors May Be Forced to Take Losses Taking direct aim at hedge funds and other private holders of Greece's debt, Prime Minister Lucas Papademos says he will consider legislation forcing the creditors to take losses on their holdings if no agreement can be reached in critical negotiations scheduled to resume Wednesday.
Mr. Papademos said that if Greece did not receive 100 percent participation in a program in which bondholders would voluntarily write down $130 billion from Greece's unwieldy $450 billion debt, the country would consider passing a law to require holdouts to take losses.
"It is something that has to be considered in the light of expectations about the degree of the participation to be achieved," Mr. Papademos said. "It cannot be excluded. It is contingent on the percentage." Laughable Bluff I will post some another snip below, but that is all you need to read to be laughing your head off. If you "force" creditors to take losses, the writedowns can hardly be considered "voluntary" can they? In short, the moment Greece does what Papademos illogically threatens to do, there would be a "credit event" on Greek bonds, exactly what Papademos does not want, and exactly what hedge funds with CDS on Greek bonds do want. Ideally a bluff should carry some measure of risk. Instead, hedge funds are praying Papademos does what he threatens to do. Thus, the Papademos threat is like a robber pointing a gun at you saying "hand over your wallet or I will give you a million dollars". Absurd Statement of the Day Papademos asked Greeks to put their sacrifices in perspective. If all goes well, he said, they could expect "an end to austerity" next year. The only way austerity in Greece will end next year is if Greece defaults. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Cherry Picking Timeframes on Alleged Leading Indicators; Big Change In LEI on January 26 Posted: 17 Jan 2012 02:18 PM PST Bob Bronson makes the claim on the Big Picture Blog that Initial Unemployment Claims Confirm Unfinished Market Rally
click on any chart in this post for a sharper image Stock Market vs. Weekly Claims  In addition to other bullish coincident economic data reported yesterday, initial unemployment claims, which are a leading economic indicator, are especially noteworthy. They are a good precursor to the popularly-followed payroll, or jobs, report, a coincident economic indicator. Really? No, Not Really! This is a classic case of picking one tiny timeframe and extrapolating a coincident at best indicator (and possibly even a lagging indicator) into a leading one. Here is proof: Weekly Claims vs. Recessions  Looking at longer-term trends, I count 4 instances in red where weekly-claims was more of a lagging indicator than anything else. A recession started 4 times with weekly claims at or very near the lows. I count 3 recessions in green where a weak case can be made that claims are a leading indicator. However, I can also count six instances in which weekly claims turned up relatively sharply and there was no recession. Unfortunately, Bronson cherry picked not only a timeframe for weekly claims but used it to make the claim that weekly claims are a leading indicator for the stock market which is also a leading indicator for the economy. Stock Market Not a Leading Economic Indicator The stock market is not a leading indicator of the economy. Rather, the stock market is a coincident indicator of sentiment towards equities. S&P 500 vs. Recessions  Far from being a leading indicator, on an absolute basis the S&P has a perfect track record of peaking right before or just as a recession starts. This is just as one might expect from a gauge of equity sentiment which tends to peak right before a downturn in the economy (with everyone extrapolating good times forever into the future). Annualized Percent Change in S&P 500 vs. Recessions  On a percentage change basis, the S&P 500 is not leading, not lagging, and not coincident. Instead it is completely useless mush. Leading Indicators and the Risk of a Blindside Recession John Hussman penned a must-read article on January 9th called Leading Indicators and the Risk of a Blindside Recession Over the past few weeks, investors used to setting their economic expectations based on a "stream of anecdotes" approach have seen their economic views evolve roughly as follows:
"After a brief 'scare' during the third quarter, economic reports have come in better than expectations for weeks - a sign that the economy is on a gradual but predictable growth path; Purchasing managers reports out of China and Europe have firmed, and the U.S. Purchasing Managers Indices have advanced, albeit in the low 50's, but confirming a favorable positive trend, and indicating that the U.S. is strong enough to pull the global economy back to a growth path, or at least sidestep any downturn; New unemployment claims have trended gradually lower, and combined with a surprisingly robust December payroll gain of 200,000 jobs, provides a convincing signal that job growth is on track to improve further."
I can understand this view in the sense that the data points are correct - economic data has come in above expectations for several weeks, the Chinese, European and U.S. PMI's have all ticked higher in the latest reports, new unemployment claims have declined, and December payrolls grew by 200,000.
Unfortunately, in all of these cases, the inference being drawn from these data points is not supported by the data set of economic evidence that is presently available, which is instead historically associated with a much more difficult outcome. Specifically, the data set continues to imply a nearly immediate global economic downturn. Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) has noted if the U.S. gets through the second quarter of this year without falling into recession, "then, we're wrong." Frankly, I'll be surprised if the U.S. gets through the first quarter without a downturn.
Let's examine the seemingly most "compelling" data point first - the fact that December payrolls grew by 200,000. Surely that sort of jobs number is inconsistent with an oncoming recession. Isn't it? Well, examining the past 10 U.S. recessions, it turns out that payroll employment growth was positive in 8 of those 10 recessions in the very month that the recession began.
Likewise, in 5 of the past 10 recessions, the ISM Purchasing Managers Index was greater than 50 just weeks before the recession began, and the new orders component of that index was greater than 50 in most cases, immediately prior to the recession.
New claims for unemployment have very slight short-leading usefulness, but new claims, the unemployment rate, and the slope of the yield curve (flattening) actually have much better lagging characteristics, so these should be used primarily to confirm an ongoing recession (particularly if the NBER hasn't made an official determination yet), rather than to anticipate a downturn. The yield curve generally flattens significantly coming into a recession, but the change in the yield curve (not plotted) is also most useful as a lagging indicator. Consumer confidence has mixed characteristics, with weak leading characteristics and somewhat greater usefulness as a lagging indicator, but in any case is too much of a "weak learner" to be used in isolation.
At present, our own recession ensembles, as well as ECRI's official views, remain firmly entrenched in the recession camp. This feels more than a little bit disconcerting, as the entire investment world appears to have the opposite view. My problem is that the data don't support that rosy "U.S. leads the world off the recession track" scenario. Leading data leads. Lagging data lags. Weak data is weak data. To anticipate a sustained economic upturn here would require us to place greater weight on weak, lagging data than we presently place on strong leading data. It's really that simple. If the evidence turns, we will shift our view - and frankly with some amount of relief. At present, though, we continue to expect a concerted economic downturn.
Our own recession ensembles remained unfavorable last week, and the ECRI Weekly Leading Index deteriorated to -8.2, from -7.6 the previous week. The 3 month growth rate of non-farm payroll employment - despite last month's employment gain - is among the lowest 13% of all historical observations. The 6-month change in the S&P 500 is among the lowest 20% of historical observations. The current value of ECRI's Weekly Leading Index is among the lowest 9% of all historical observations. We don't disregard the marginal improvement in various economic measures in recent weeks. It's just that those marginal improvements are either too small or too statistically uninformative to be helpful in shifting the evidence.
In sum, the balance of leading evidence continues to indicate a very high likelihood of an oncoming recession. We respect the various marginal improvements in the data in recent months, which do take the probability to less than 100%, but that is a far cry from suggesting that recession risk is anywhere close to being "off the table." Recession is not a certainty, but it remains the most probable outcome at present. Warning About Using One Indicator in Isolation Note the key difference between the approach of Hussman vs Bronson. Brosnon extrapolated a coincident (at best) indicator into a leading indicator for the stock market, alleged to be a leading indicator of the economy (which I clearly proved isn't). In contrast, Hussman looks at a broad array of indicators, and the combined analysis in aggregate suggests we will soon be in recession territory. Leading Indicator Battle Here are a pair of charts courtesy of Doug Short and Advisor Perspectives regarding The Great Leading Indicator Smackdown Conference Board LEI  ECRI WLI  ECRI and Hussman vs. LEI I may be wrong, but I side with Hussman and the ECRI, not the LEI. The LEI is way too dependent on the yield curve rather than the direction of the yield curve. The yield curve itself is useless because the lower end is zero-bound. Hussman points out ... Close to half of the weight in the LEI index goes to the two monetary components - the yield curve, and real M2. I suspect that this is a legacy of inflationary business cycles where monetary tightening in response to inflation was the typical event preceding recessions, but it adds noise in the present environment, where the primary economic risks are related to leverage and credit strains.
Remember that at present, monetary policy is way out on the "liquidity preference" curve, to an extent that is historically unprecedented (see Monetary Policy in 3D ). Normally, there is a general, if weak, linear relationship between monetary variables, interest rates and economic activity. But given the current scope of monetary policy, M2 velocity has collapsed (and moves as a perfect inverse of M2 itself), and interest rates are at the zero bound, so these variables are essentially detached from economic activity. So you've got two highly weighted variables in the index that have gone almost perfectly horizontal with respect to their effect on the economy. The crisis in Europe has triggered a flight of time deposits from European banks to U.S. banks, which shows up as a further boost to M2, which has driven much of the advance in the LEI. Expect Big Change In LEI on January 26 Please consider Makeup of Leading Economic Indicators Index in U.S. to Change For the first time since 1996, the components of the U.S. leading economic indicator index will change, according to the New York-based Conference Board.
Gone will be the inflation-adjusted money supply, the Institute for Supply Management's supplier deliveries gauge, the Thomson Reuters/University of Michigan's measure of consumer expectations and the Commerce Department's orders for non- defense capital goods, the private research group said in a statement.
Replacing the money supply will be the Conference Board's own Leading Credit Index, which aggregates measures of the yield curve, interest-rate swaps and the Federal Reserve's senior loan officer survey. The ISM's supplier deliveries gauge will give way to the group's index of new orders.
Instead of using one measure of consumer confidence, the Conference Board will include an equally weighted average of the Michigan sentiment expectations reading and its own measure. Finally, the capital goods component will be replaced by the one that excludes commercial aircraft.
The new index will start with the December number coming out on Jan. 26, the group said, and readings will be revised retroactively to 1990. At least a portion of the enormous discrepancy between the LEI and the ECRI weekly leading index (WLI) will be resolved to the downside of the LEI on January 26. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Prepare for a Meeting of "Monetary Cardinals" as Euro End-Game Nears; Sarkozy Falling Apart; "Hope Trade" in Extreme Overvaluation Posted: 17 Jan 2012 10:36 AM PST Steen Jakobsen, chief economist for Saxo Bank in Denmark, has some very interesting thoughts to share on the sovereign debt crisis in Europe. His six major points are: - More austerity cannot possibly work.
- Voters have lost the faith and willingness needed to repair the current EU and Eurozone construct
- Credit and debt cycle is busted. Irving Fisher's Debt-Deflation Model is in progress.
- The end-game is near for Europe. Prepare for a meeting of the cardinals
- Nicolas Sarkozy is falling apart and likely to lose to Marine Le Pen in the first round of French elections
- The "Hope Trade" in equities is in Extreme Overvaluation. Be nimble and cash-rich now to be able to take advantage of deep discounts coming up later.
Faith in Eurozone Dissipating Fast Please consider More apathy, less austerity - faith in Eurozone dissipating fast written below as a complete guest post in entirety. From Steen ... In my travels to Madrid I made the following observations:
Sarkozy was in Madrid last night and when questioned on French downgrade he said three times to three different journalist: 'I don't understand the question, you need to clarify it'. The journalists here are amazed at how arrogant he was/is but more importantly it seems Sarkozy is 'falling apart'. He knows he is likely to lose to Marine Le Pen - and he needs to do something desperate and he will. I am in Paris later today and will report more.
On Spain - there is the same apathy I observed in Milan this time last year - people appear to have already given up on 2012 - but...
- More austerity is not possible - a worker is lucky to make 1000 eur a month! How do you cut 20 percent of that?
- Taxes have just gone up - more than 1 million people live for less than EUR 400 a month!!!!
- Plus I continue to hear of people being laid-off from major banks. Apparently one such major bank initiated big cuts on Friday (yet to be reported?) firing high salary employees like private bankers.
The end game is just one of two:
- The debt trap leads to collapsing growth, rising fiscal imbalances and stock market tanks 25/30 percent leading to a call for a 'meeting of the cardinals' - which ends up addressing the real issue: who pays the bill and how do we create an internal devaluation of the poor Eurozone countries combined with a move to true solidarity and fiscal transfer. (Germany pays!)
- More of the same - the German fiscal compact makes the rich in the north more rich and the poor in the south even more poor. The current account trends continue and the world comes to an 'Atlas Shrugged' moment where there is only the public sector left. Social riots become the norm, Greece leaves the EU, Portugal follows, and things get out of control leading to the EU breaking up.
Voters have lost the faith and willingness needed to repair the current EU and Eurozone construct. The only thing left is to possibly take the loss, either by democratising the loss - a part nationalisation of banks like the Swedish bank model - or through a Schumpeter model of destruction of capital.
The world simply will not see enough growth in 2012 to service the massive debt despite a 1 percent effective financing rate. This economic gravity will prevail despite the big hopes for the European Central Bank's Long-term Refinancing Operation and QE3 in the US (via US dollar unlimited swaps lines).
Yes we have LTRO and yes we will see more LTRO ahead but the private sector is contracting more than banks and governments are able to sustain. This is becoming a classic Irving Fischer theory; excessive debt leads to deflation and ultimately new beginnings.
I have never been more confident than now that this game is just months or a few quarters away from breaking down. Prepare for that meeting of Cardinals!
The credit and debt cycle is busted. Keep watching the 'new capital of 2012' being deployed into 'hope trades' but also note that my favourite cyclical model is now in extreme overvaluation territory!
Finally, the dislocation of capital and credit creates huge opportunities in the credit space and in stocks. Be nimble, be cash rich not because you have to be afraid of the future but because the resetting of prices will create deep discounts which could create double digit returns for a decade when this forecasted fire ends sometime in 2012.
Safe travels,
Steen Major Agreement I am in essential agreement with all of Steen's points having said the same things on many occasions. I only have a couple small differences. The chart of the S&P does not say much to me. Indeed one can look at various points where indiactors were at extremes and the market kept rising anyway. However, his main point " be nimble and cash-rich now to be able to take advantage of deep discounts coming up later" is 100% spot-on. In regards to Marine Le Pen, I do not know if she is "likely" to defeat Sarkozy in the first round, but certainly EuroSkeptics are on the rise and it is a very reasonable possibility. Regardless, polls show Hollande would beat either Le Pen or Sarkozy, so Sarkozy's days are indeed "likely" numbered. For an analysis of Le Pen, please see - September 16 2011: Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied)
- December 12 2011: Will Sarkozy Survive the First Round in French Elections? Regardless, Sarkozy's Replacement Will Be Worse; Socialist challenger François Hollande Would Renegotiate EU Deal; Bickering Before Ink is Dry
- January 15 2012: "Let the Euro Die" Candidate Trails Sarkozy by Slight 2 Percentage Points; Will Sarkozy Survive the First Round Vote? Eurozone About to Become Unglued
March Polls Le Pen 24% Strauss-Kahn 23% Sarkozy's 20% Strauss-Kahn was forced out over sexual allegations in late Spring. December Polls Round 1 François Hollande 31.5% Nicolas Sarkozy 26% Marine Le Pen 13.5% Francois Bayrou 13% Round 2 François Hollande 57% Nicolas Sarkozy 43% January Polls François Hollande 27% Nicolas Sarkozy 23.5% Marine Le Pen 21.5% Round 2 François Hollande 57% Nicolas Sarkozy 43% Certainly Le Pen has gained much on Sarkozy in just the last month. As Steen commented, the " arrogant Sarkozy is falling apart" and will not win round 2 even if he survives round 1 one on April 22, 2012. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Graphical Representations of Bernanke's Effort to Stimulate Bank Lending Posted: 16 Jan 2012 11:57 PM PST Bernanke is trying every way he can to get banks to lend (printing coupled with a multitude of lending facilities and Fed programs). It's easy enough to prove the printing: Base money supply is up about $1.8 trillion since the start of the recession. Base Money Supply  Money Multiplier Theory The Money Multiplier Theory (an incorrect theory) suggests this money would be lent out 10 times over causing rampant price-inflation and GDP growth. Alternate (Correct) Bank Lending Theory - Banks do not lend simply because they have the money
- Banks lend as long as they have credit-worthy customers provided the banks are not capital impaired
- Reserves are not an issue. Lending comes first, reserves follow if needed.
With some charts below created by my friend "BC" let's take a look at Bernanke's efforts to stimulate lending. Bank Loans Divided by Base Money Supply  Annualized Percent Change in Bank Loans Divided by Base Money Supply  Loans to GDP  Loans to GDP Annualized Percent Change  Loans to Private GDP  Loans to Private GDP Annualized Percent Change  M2 Multiplier: M2 Money Supply Divided by Base Money  M2 Velocity: GDP Divided by M2  The above charts show that it is taking more and more money just to keep the economy afloat. US deficit spending is $1.4 trillion dollars, Bernanke is flooding banks with cash, interest rates are at record lows, mortgage rates are at record lows, and velocity of money is falling like a rock. Excess Reserves  Of the $1.8 trillion Bernanke has added to base money supply since the start of the recession, nearly all of it is sitting parked at the Fed as excess reserves. Interest Paid on Excess Reserves  As you can see, banks have parked close to $1.6 trillion with the Fed earning .25 percent annually. This is free money to the banks to the tune of $4,000,000,000 per year for doing nothing. In short, banks would rather have $4 billion in free money at a measly .25 percent than make much more money by lending it out. This indicates two things: - Money Multiplier Theory is nonsense
- Banks are still capital impaired and/or banks have no credit-worthy borrowers who wish to borrow money
If and when banks do start lending, it will not be because all those excess reserves have tempted them. Rather it will be because banks feel they have credit-worthy borrowers. In the meantime, debt deflation rolls on, distorted of course by global central bank stimulus everywhere one looks, notably (the Fed, ECB, China, Bank of England) and coming up shortly, the Bank of Japan. As I have stated before, competitive global currency debasement is a good environment for gold. Let's wrap this up with one final chart. Total Credit Market  As you can see the total credit market is well over $50 trillion. Yet a large number of misguided souls believe printing $1.8 trillion of which $1.6 trillion is parked as excess reserves will cause hyperinflation. It won't. Hyperinflation is a political event, not a monetary one. Besides, the US has more gold than any other nation. For further discussion, please see Hyperinflation Nonsense in Multiple Places. Yes, the US is going to have a "debt moment", just as Europe is having one now and Japan will have soon enough. However, that moment may be quite a long ways away (or not), but hyperinflation will not be the result when it happens. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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