Mish's Global Economic Trend Analysis |
- "Air of Unreality"; "Do You Feel Lucky, Punk?"; Who Has the Gun?
- IMF Walks Out of Greece Talks; "No More Space for Gambling"; Can Greece Default and Stay in Eurozone? Russia is the Key!
- Retail Sales Bounce as Expected; How Much Longer Can Subprime Auto Sales Lead?
- Mish Interview on Forbes Mexico: Global Day of Reckoning Awaits
| "Air of Unreality"; "Do You Feel Lucky, Punk?"; Who Has the Gun? Posted: 11 Jun 2015 03:20 PM PDT In the wake of the IMF walking out of negotiations with Greece, the Financial Times says the Pullout is Amid an "Air of Unreality". What's Unreal? Sure, everyone expected Greece to buckle. But what if Greece did buckle for the nth time? Greece was eventually going to default anyway. There is not now, nor was there ever, anything "unreal" about the inevitable default. Earlier today German officials said "European taxpayers have been generous" to Greece. What a hoot. Now, that's "unreal". What's also "unreal" is forcing €330 billion worth of debt on a tiny country, pretending that it can be paid back. This alleged "generous" bailout did nothing but bail out banks while forcing a hellacious depression on Greece. Taxpayers have not footed the bill yet, but they will, thanks to bondholder and bank bailouts. Some blame Greece. And to be sure Greece made mistakes. But the real culprits are the ECB's one size fits Germany interest rate policy, the stupidity of the eurozone agreement itself, the lack of a fiscal union, etc. Everyone knew Greece lied to get into the eurozone. They let Greece in anyway. Isn't that "unreal"? "Do You Feel Lucky, Punk?" The Guradian reports the IMF walkout this way: IMF to Alexis Tsipras: 'Do you feel lucky, punk?' "You've got to ask yourself one question. Do I feel lucky? Well, do ya, punk?" The lines spoken by Clint Eastwood in Dirty Harry sprang to mind when the International Monetary Fund (IMF) announced that it had called its Greek negotiating team home from talks in Brussels.Who Has the Gun? The IMF? OK. Pull the trigger. Tsipras wants someone to blame. If he can point the finger at the despised IMF, the IMF will effectively have shot itself. Greece has nothing to lose. The Troika does have something to lose. Let's look at things from the point of the best case scenario. Best Case Scenario
US Naval Base in Greece  The military Base is in Souday Bay, Greece. Note the strategic location. In August of 2013, the US Asked Greece for Military Base Access in Kalamata and Souda for a possible strike on Syria over the alleged use of toxic gas in Ghouta on the eastern outskirts of Damascus. In 2013, Greece said yes. What will they demand to say "yes" the next time? Nothing to Lose From my perspective, Greece has nothing to lose. To be sure, Greece would be far better off defaulting and reforming rather than simply defaulting. But default is the best option for sure. Even staunch euro supporter Wolfgang Münchau agrees. See his April 19 column: Greek Default Necessary but Grexit is Not. For my take on Grexit, please see Can Greece Default and Stay in Eurozone? Russia is the Key! When default is inevitable (and it is), it's best to do it sooner rather than later. When You Ain't Got Nothing I offer a musical tribute to Greece. Click here to play "Like a Rolling Stone" by Bob Dylan. It's an excellent video, but not directly embeddable. Click on link to play. Key Lines Now you don't seem so proud About having to be scrounging for your next meal ... You said you'd never compromise With the mystery tramp, but now you realize He's not selling any alibis As you stare into the vacuum of his eyes And say do you want to make a deal? ... When you ain't got nothing, you got nothing to lose Speece Revisited Some will insists this is all Greece's fault. Most others will insist it's primarily Greece's fault. Actually, it's neither of those. I make the case in From ZIRP to NIRP: Virtues of Germany vs. the Vices of Greece; What About "Speece" and Gold? The big fear out of the eurozone should not be that Greece fails miserably, but rather that Greece succeeds! Success as I have pointed out above is quite possible. If Greece were to immediately initiate the necessary reforms, I would even go so far as to say "success is likely". Unfortunately, I don't believe Greece will reform. Regardless, Greece is better off without a €330 billion albatross around its neck for the next 40 years. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Posted: 11 Jun 2015 10:38 AM PDT In what appears to be a "take it or leave it message to Greece", IMF says Time for Compromise is Over, and walks out of talks. Greece's creditors on Thursday issued their starkest warnings to Athens since the start of a five-month stand-off over the country's soon-to-expire €172bn bailout, with the International Monetary Fund withdrawing its negotiating team and European leaders saying the time for compromise had ended.Can Greece Default and Stay in Eurozone? In April, The Telegraph commented on April 25, that "Greece's Grand Plan" was to Default and Stay in the Euro. The article failed to explain how that would happen. The Financial Times article How Greece Can Default and Stay in the Euro involves the use of scrip as the mechanism. I don't buy that story either, at least as the primary solution, but at least the FT presented a means. Open Europe discusses the question Could Greece default and stay inside the Eurozone? but never answers it. On January 27 the Irish Times reported Greece's Finance Minister Wants to Default and Stay in Euro. The article never discussed how that would happen. On April 19, Wolfgang Münchau wrote Greek Default Necessary but Grexit is Not. Default is not synonymous with exit. There is no EU ruling that says you have to leave the eurozone when you default on your debt. The link between default and exit is indirect; if a country defaults, its defaulting securities are no longer eligible as IOUs for the country's banks to tender at ECB money auctions. The same applies to any other debt guaranteed by Athens. The Greek banks hold quite a bit of the latter category, and might find it hard to obtain liquidity if their government falters.Possible, but Unlikely, Without Russia Of the articles, the only one that comes close is the "brilliant answer" dilemma by Münchau. I believe the correct answer is "Possible, but Unlikely, Without Russia". Not one of the above articles discussed Greece's primary account surplus. Simply put, Greece needs a positive current balance, ignoring debt repayments and interest on debt. Greece had a primary account surplus in 2014, but not now. If Greece can manage to quickly regain a primary account surplus, no one can force them out of the eurozone. Is a primary account surplus "possible"? Sure, why not? All Greece needs to do is cut pensions and step up tax collections. Of course, that is precisely what the Troika demands. However, the Troika wanted Greece to take on all that misery just to pay back creditors. Greece would get nothing in return. This is why default is absolutely necessary. If Greece defaults, then quickly establishes a primary account surplus, the euro it is. Technically, it's possible. Greece may attempt a game with scrip for a while, but if it needs external funding (and it will by definition unless it runs a primary account surplus), then 1. It will have to get that funding from somewhere (and it will not be the Troika) ... OR 2. Return to the drachma (or go to some new named currency) and let the currency float. The currency would of course sink like a rock. There is one other possibility: Greece gets the external funding it needs from Russia for an interim period long enough for Greece to build a primary account surplus. Wouldn't that be a hoot? Combination If there is a default coupled with an initial attempt to stay on the euro, a combination of solutions would be likely:
EU rules are such that every country has to agree. One key card in this mess that is not often discussed is Greece can by itself kill sanctions on Russia. EU rules require unanimous consent on treaty changes, rules, and sanctions. Killing the sanctions would be a great thing for all involved. I encourage Greece to default. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Retail Sales Bounce as Expected; How Much Longer Can Subprime Auto Sales Lead? Posted: 11 Jun 2015 09:07 AM PDT Economists got one right for a change. Retail sales bounced 1.2% led by autos vs. the Bloomberg Consensus Estimate of 1.3%. Auto sales were known to be strong ahead of the report, likely steering economists in the right direction. The consumer showed a lot of life in May, driving up retail sales 1.2 percent with gains sweeping nearly all components. A leading component in the month was motor vehicle sales which jumped 2.0 percent, excluding which retail sales still rose a very strong 1.0 percent. Another component showing special strength was gasoline sales which got a boost from higher prices. Still, excluding both of these components, retail sales ex-auto ex-gas gained a very solid 0.7 percent. These results offset weakness in April, when total sales rose only 0.2 percent (upward revised from no change).Snapback A sales snapback was coming at some point. May was the month following months of disappoints. This will add to GDP. We will see how much in the Atlanta Fed GDPNow forecsast later today. Year-Over-Year Picture Not Strong In spite of the snapback, year-over-year sales except for autos are hardly robust. A picture from the Commerce Department Advance Retail Sales Report for May 2015 tells the story.  click on chart for sharper image Year-Over-Year Numbers
Next Subprime Crisis, Auto Loans, Won't End Well Stories about subprime auto sales have been circulating for months. Forbes had a nice report at the end of January: The Next Subprime Crisis, Auto Loans, Won't End Well. Less than 10 years removed from the worst credit crisis in history, you would think ads like this would be hard to come across:Subprime auto sales still led the way in consumer spending. How much longer is anyone's guess. This is yet another bubble fostered by the Fed's loose monetary policies. It's hard to say when, but auto sales will collapse out of the blue at some point, taking retail sales down with them. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Mish Interview on Forbes Mexico: Global Day of Reckoning Awaits Posted: 10 Jun 2015 11:18 PM PDT Last week I received an interview request from Guillermo Barba, a Mexican economist and financial blogger writing for Forbes Mexico. Barba is a follower of the Austrian school of economics. He has also interviewed Jim Rogers, Hugo Salinas Price, Simon Black, Steve Forbes, Jim Rickards, and others. The interview is below. It is also on Forbes Mexico , in Spanish at Un día del juicio global nos espera: Mish Shedlock. GB: Mish, you are one of the top financial bloggers in the World, you offer always a different point of view from the mainstream media. Please, tell us about the US economy. Is it good shape or on the verge of a new recession? Mish: US GDP contracted at a 0.7% annualized in the first quarter. For discussion, please see First Quarter GDP -0.7%; GDPNow Second Quarter Forecast +0.8%; Economists Get Zero Accolades; Smoothed Recession Odds. I was one of very few who outlined that possibility early, back in January in fact. See Diving Into the GDP Report - Some Ominous Trends. The Atlanta Fed GDPNow Model now suggests 1.1% annualized growth. Should consumer spending falter, and I believe spending will falter, the GDPNow forecast will be on the high side. Even if the GDPNow model is accurate, we are talking first half GDP of 0.3% or so, well below the stall speed. On June 4th we learned Nonfarm Productivity Collapsed Greater Than Expected 3.1%, Unit Labor Costs Rose 6.7%. That is not good for hiring prospects. On June 2, the US Census Report showed Factory Orders Down 8th Time in 9 Months; Durable Goods Inventories Highest Since 1992. Economists say this is transitory, but they have been saying that for nine months! GB: China, the Euro Zone, Japan and now the US seem to be in financial and economic trouble. What can we expect for the global economy? What will be the consequences for emerging markets like Mexico? Mish: The global economy is clearly slowing led by Asia and the US. Europe has seen some improvement recently, but it's based on the beggar-thy-neighbor tactics of QE. For a while, nearly a third of European government bonds traded with negative yields. This is outright lunacy in any market, and even more so if one buys into the recovery thesis. No structural problems have been fixed in Europe or elsewhere. A global day of reckoning awaits; I just cannot say when. Emerging markets in general have been hammered. Brazil is in a huge recession now, no one believes GDP stats from China, and commodity producers like Australia and Russia are in the dumps. Of those, I expect Russia to do best, because sanctions have forced Putin to make many necessary reforms. One positive aspect for Mexico is the in-sourcing and near-sourcing trend in US manufacturing, from China. However, even if manufacturing returns to the North American continent, the jobs will not come with it thanks to robotics. GB: There is speculation that the Fed will raise interest rates sometime this year. What will happen if that occurs? What if not? Mish: The Fed seems hell bent on raising rates. The Fed actually should because the Fed (central banks in general) has created enormous bubbles in equities and corporate bonds, especially junk bonds. Things are now so distorted, it may not matter what the Fed does. Bubbles are 100% guaranteed to pop, by definition. And it is 100% obvious there are bubbles. The Fed cannot see them though, just as it failed to see the housing bubble in 2006 and the dotcom bubble in 2000. The moral of the story is central banks create huge bubbles in a foolish attempt to defeat ordinary consumer price deflation that is not even damaging. The result is asset bubbles that are damaging when they pop. Even the Bank of International Settlement (BIS) recognizes routine deflation is not harmful, yet central banks fight it, creating massive asset bubble problems for their efforts. For discussion of the nonsensical perils of CPI deflation, please see Historical Perspective on CPI Deflations: How Damaging are They? GB: Tell us your thoughts on Keynesians and monetarists. Are their ideas and theories responsible for the current economic mess? Why? Mish: Keynesians believe governments need to step in with fiscal policy if growth is insufficient. Monetarists believe increasing the money supply if growth is insufficient. Neither group has any clue as to what "insufficient growth" means. Both groups tend to believe routine deflation need to be fought. I addressed the foolishness of that belief above. Perhaps a simple example will help: If the Fed were to announce tomorrow that it would set the price of orange juice, everyone would be shocked. People would liken it to Soviet-style central planning stupidity, and they would be correct. Yet, the Fed tries to do something much harder: set the supply of money and interest rates in a vain belief they can steer the economy. The results speak for themselves. After decades of deflation-fighting via both Keynesian and Monetarist policies, all Japan has to show for it is a debt-to-GDP ratio of about 250%, the highest in the industrial world. All the rest of the world has seen from Keynesian and Monetarist foolishness is asset bubble after asset bubble with increasing amplitude over time coupled with central bank sponsored income inequality. The economy is not something that one can drive like a tractor. It does not need steering. Left alone, the economy would do quite fine. Central banks are the problem, not the solution. GB: Central banks try to fight deflation by "printing" money and lowering interest rates. Some economists have warned that eventually this will create hyperinflation. Nevertheless, you have stated that you expect another round of credit and asset deflation. Why is that? What's your definition of deflation? Mish: I define deflation as a decrease in money supply and credit, with credit marked to market. Others define it in terms of consumer prices, and still others believe it's simply an increase in money supply. Those focusing on consumer prices, like the Fed, miss asset inflation. And as I stated earlier, it is asset deflation that wrecks the economy and banks, not routine CPI deflation. Asset deflation hurts because banks inevitably make loans based on inflated assets, and when the bubbles pop, banks are capital impaired and cannot lend, while borrowers immediately become overleveraged. This is why those who ignore credit miss the picture as well. Since it's clear that bubbles pop, and since it's equally clear there are numerous asset bubbles, it follows there is yet another round of credit and asset deflation. GB: What can investors do to protect themselves from asset deflation? Mish:
GB: Do you think that free markets with the minimum number of regulations and laws to preserve property rights are the way to follow? Mish: Yes, as stated in many ways above. GB: How do you respond to those who blame "free markets" for our problems? Do we have free markets in the world? Mish: It's rather curious that people blame the free markets when we don't have them. Every major problem blamed on the free market is caused precisely because we do not have them. Take the housing bubble: The Fed helped create the dotcom bubble with loose money supply in a foolish scare over Y2K (year 2000 date issues). When the dotcom bubble burst, the Fed kept interest rates too low, too long, sponsoring the housing bubble. US Congress passed legislation after legislation to make housing "more affordable". President Bush added to the madness with the Ownership Society thesis. Fannie Mae, created out of foolish legislation added to the problem, and of course credit rating agencies rated pure garbage as AAA. Mainstream media used every one of those policy errors to clamor for more regulation. In actuality, there should not have been Fannie Mae, there should not have been an ownership society, there should not have been a Fed able to hold interest rates too low for too long, there should not be an FHA, there should not be a myriad of affordable housing programs, and the SEC never should have sponsored the rating agencies that in turn rated junk as AAA. That latter point is particularly important. To understand how the SEC helped sponsor the housing bubble, please see my May 18, article, Rate Shopping Whores and Chicago's Bond Rating, something I first wrote about in 2007, before the crisis even hit. We do not have a problem because of a failure to regulate; we have "failure by regulation". GB: In your opinion, should the monetary system come back to the gold standard? Mish: Yes, the world needs a gold standard enforcement mechanism. Debt has spiraled out of control ever since Nixon closed the gold window. Once that happened, central banks and legislative bodies were free to inflate at will. Once again, the results speak for themselves. I discussed why, in detail, in my 2011 article Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited. Mexico's Hugo Salinas Price is well out in front on this issue. He wants to bring "honest money" back to Mexico. In December of 2014, Hugo penned A Silver Coin that is Money To Calm the National Tantrum in Mexico. It's an idea well worth considering. GB: Anything else you wish to add. Mish: Money, interest rates, and the pitfalls of regulation are not easy subjects to discuss. I try to do so in a manner that most can follow. I hope I succeeded. Many thanks for the opportunity to try. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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