Central Perk: 19 ian. 2015

luni, 19 ianuarie 2015

Mish's Global Economic Trend Analysis

For Amusement Only: IMF Growth Forecasts and Rationale
Expect a Blowout Win by Syriza in Greece
Race for Negative 30-Year Yields Underway, Swiss In Front With 0.295%; Futility of Draghi's Upcoming QE
"Endgame for Central Bankers" Says Saxo Bank CIO
Denmark Announces Currency Peg is "Secure"; 12 Denials in 1 Day; Deposit Rate Cut to -0.20%; More Rate Cuts Coming?

For Amusement Only: IMF Growth Forecasts and Rationale

Posted: 19 Jan 2015 10:42 PM PST

IMF global growth forecasts have been totally hopeless, with one downgrade after another.

The latest forecast takes the cake for ridiculousness, not only because of the direction, but also because of the rationale.

Please consider IMF Cuts Global Economic Growth Forecasts.

The International Monetary Fund has cut its growth forecasts for the global economy on the back of a slowdown in China, looming recession in Russia and continuing weakness in the eurozone.

The Washington-based fund warns that the boost from lower oil prices is being outweighed by a host of negative factors and it now expects global growth to edge up only slightly from 3.3% last year to 3.5% this year. That is down from a 3.8% forecast for 2015 in its World Economic Outlook published in October. It forecasts growth picking up only slightly next year and cut its 2016 forecasts from 4% to 3.7%.

Rose Garden Material

That forecast actually seems like rose garden material. But the reasons for the downgrades are even more amusing.

"New factors supporting growth – lower oil prices, but also depreciation of euro and yen – are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries," says Olivier Blanchard, IMF director of research.

Got that?
Depreciation of the Yen and Euro are "New factors supporting growth."

Yet, if the euro and Yen sink, the dollar will rise. So isn't a rising dollar bad for the US? Apparently not. In fact, the IMF raised its US forecast to 3.6% this year, up from 3.1% in October.

The IMF says the "US sees a boost from lower oil prices".

Europe and especially Japan are more dependent on (and benefit from falling oil), but price deflation (primarily caused by falling oil prices) supposedly hurts Europe and Japan.

The IMF report says: "In the euro area, inflation has declined further, and adverse shocks – domestic or external – could lead to persistently lower inflation or price declines, as monetary policy remains slow to respond."

If that doesn't cause you to scratch your head, this will. Amazingly, it took the IMF all year to figure out Russia was in trouble in 2015.

The sharp downgrade in the IMF's outlook to a 3% contraction in 2015 from modest growth of 0.5% forecast back in October, follows official figures showing the Russian economy contracted for the first time in five years in November.

Historical Revisions

Zerohedge has some amusing historical charts.

2013-10-08: Hilarious Charts Of The Day: IMF's "Growth Forecasts" Over Time

The IMF saw 2013 world growth at 4.1% when the S&P500 was at 1,400 and now that it sees 2013 growth at the lowest ever in the series, 2.9%.

Comedy Hour

2014-10-07: IMF Comedy Hour: The Complete History Of The IMF's Growth "Forecasts" Since 2012.

Mentally make an adjustment. The IMF's global growth forecast is down from 3.8% in October to 3.5% now.

Caution!

IMF forecasts should come with this warning: For Amusement Only.

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

Expect a Blowout Win by Syriza in Greece

Posted: 19 Jan 2015 05:52 PM PST

Conventional wisdom on Greece is that Syriza will win but will fall short of winning a sufficient margin to avoid having to form a coalition.

From Bloomberg Racing to Catch Syriza

"It will prove hard for Syriza to secure a majority in the 300-seat parliament, and even if they do, it will still be a fragile, slim majority," said Aristides Hatzis, an associate professor of law and economics at the University of Athens.

A Wall Street Journal report yesterday said "most surveys indicate that Syriza wouldn't be able to secure enough votes—even with the bonus—to get an absolute majority in Parliament, forcing it to seek coalition partners."

The question then would be "coalition with whom?"

However, I am going out on a limb here. I suggest the likelihood of a shocking blowout by Syriza increases by the day. I offer two reasons for my unconventional prediction.

France Open to Negotiations

Yesterday, French finance minister Michel Sapin said France Open to Debt Dialogue with Greece.

French finance minister Michel Sapin has called on eurozone nations to respect the outcome of next Sunday's election in Greece, saying that the EU should be ready to negotiate with the country's new leaders on restructuring its huge public debts or extending the terms of its bailout.

"Whatever the result of the election will be, it is absolutely fair and legitimate that discussions should take place between the EU and the new Greek government," he said. "What we would think is extremely important is the stability of the eurozone.

The remarks from Mr Sapin suggest that France is prepared to take a more conciliatory approach.

New Democracy Loses Credibility

New Democracy leader and current prime minister Antonis Samaras repeatedly stated that bargaining over the bailouts was not possible.

In support of that view, four days ago I reported Finland Opposes Greece Bailout Deal; Contagion Catch 22; No Scope for Solution.

However, France is far more important than Finland, at least psychologically.

In Eurozone rules, every vote theoretically counts the same, but Greek voters are highly likely to believe what they want to believe.

Property Tax Backlash

More importantly, Greek voters are fed up with lies from Samaras and cave-ins to the Troika. That backlash has fueled a surge for Syriza.

The Financial Times reports Property Tax Backlash Underpins Syriza's Poll Prospects

Aspasia Glynou has endured a barrage of pension cuts and tax increases during Greece's six-year recession in which her monthly income has fallen by almost half.

But a property tax pushed through by Greece's coalition government and then made permanent is more than the 68-year-old Athenian widow and conservative voter can bear.

"My late husband would be shocked that I could vote for an ex-communist like Alexis [Tsipras, the Syriza leader] but I think it's time I took a stand," said Ms Glynou in her spacious fourth-floor apartment in the capital's once prosperous Halandri suburb. "Most of my pension now goes to pay [property tax] instalments."

Known as Enfia, the annual levy on private property was introduced under pressure from Greece's creditors — the so-called troika of the European Commission, the European Central Bank and the International Monetary Fund — in 2011 as an emergency revenue-raising measure. It was justified on the grounds that an across-the-board annual property tax would bring Greece into line with other eurozone member states.

The centre-right government of Antonis Samaras, the prime minister, last year made Enfia permanent. It estimates the levy, which replaces a special tax on high-end property, will boost revenues by at least €3.4bn a year, equal to almost 2 per cent of national output.

But policy makers failed to account for the fury it would provoke among Greek taxpayers, who have traditionally invested in property as a hedge against the country's high inflation rates. According to local bankers, about 80 per cent of Greek residents own at least one property, even if they live in rented accommodation.

On the campaign trail last week Mr Tsipras pledged to roll back Enfia if he comes to power and instead restore the levy on high-end real estate. That would reduce budget revenues by an estimated €2bn, but a Syriza-led government would cover the shortfall through a crackdown on tax evasion by wealthy Greeks who have been protected by New Democracy, Mr Tsipras said.

Last Minute Breaks

I have no particular insight on Greek psychology per se. Yet, politically speaking in general, last minute undecided voters in elections (at least in in the US) tend to break strongly in one direction.

I see no reason why Greece should be any different.

Although I am not in Greece, and I cannot even read Greek, the above articles suggest which way the break will happen.

On January 5, in Greek Polls Show Syriza on Cusp of Victory; Greek Political Party Analysis; Intentions Matter Not I commented ...

Syriza's lead has generally been shrinking, but all of the polls have Syriza in the lead. Polls are pretty volatile. Leads swing from 3 to 10 points depending on polling organization. ... But the important factor is all the polls are in agreement. Unless and until that changes, the odds for Syriza are likely better than the polls indicate.

Based on voter break that I expect will strongly favor of Syriza, I now predict a "surprise" blowout of sufficient proportion that no coalition is needed.

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

Race for Negative 30-Year Yields Underway, Swiss In Front With 0.295%; Futility of Draghi's Upcoming QE

Posted: 19 Jan 2015 03:47 PM PST

As of the end of Monday January 19, 2015, European 10-year yields are as follows:

Germany 10-Year bond yields 0.441%
France 10-Year bonds yields .641%
Spain 10-Year bonds yields 1.526%
Switzerland 10-Year bonds yield -0.074%

At least the first three are positive.

Congratulations (of sorts) to Switzerland for winning the race to negative yields on 10-year government bonds.

As of today, you can pay Switzerland 0.074% for the privilege of lending to the Swiss government for 10-years.

It was a hard-fought battle, but last week in response to the euro peg removal, Swiss 10-Year Govt Bond Yield Goes Negative for First Time Ever.

Last week was the first time that the benchmark borrowing costs of a developed economy's government has gone negative for a 10-year duration.

Swiss LIBOR Hits Record Low -0.72 Percent

Inquiring minds may be wondering about short-term bank-to-bank lending. If you are in that group, please consider Swiss LIBOR Hits Record Low -0.72 Percent

The three-month benchmark Swiss bank-to-bank Libor lending rate fell to a record low of minus 0.372 percent on Thursday after the Swiss National Bank cut interest rates and abandoned its cap on the franc.

The SNB cut the interest rate by 0.5 percentage points to 0.75 percent on sight deposit account balances -- cash commercial banks and other financial institutions hold with the central bank -- above a certain threshold.

also expanded its three-month Libor target range to -1.25 percent and -0.25 percent from the previous range of -0.75 percent to 0.25 percent.

Blue Ribbons Galore

Switzerland is racking up blue ribbons left and right. It was also the winner in the race to negative yields on the 5-year bond.

But the granddaddy prize of all still awaits: The blue ribbon for negative yields on the 30-year bond.

As preposterous as that may sound, Switzerland is headed that way.

30Yr Swiss Bond

click on chart for sharper image

Yes indeed folks, you can lend money to the Swiss government for 30 years at 0.381%, knowing full well the inflation target is 2.0%.

At one point today, the Swiss 10-year bond fell as low as 0.295%.

Japan is in second place. It's well behind in this dubious race to zero with a 30-year yield of 1.075%.

Germany is in a very close second-third place race with a 30-year yield of 1.120%. In contrast, the US offers an "exceptional value" of 2.446% for 30 years.

Futility of Draghi's Upcoming QE

Such is the absolute madness of central bank policy. Yet, ECB president Mario Draghi (and many others) actually believe the ECB can fix things by driving yields still lower!

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

"Endgame for Central Bankers" Says Saxo Bank CIO

Posted: 19 Jan 2015 12:20 PM PST

Via email, Saxo bank CIO and chief economist Steen Jakobsen declares "Endgame for Central Bankers". He also asks "Why is it that Most People Trust or Bother to Listen to Central Banks?"

Macro Digest: Endgame for Central Bankers
Steen Jakobsen

The SNB suddenly abandoning the CHF ceiling had wide consequences last week as we were all taken by surprise. The fact that it would and should happen eventually was not lost on the market, but the SNB was, as late as last weekend, talking tough and telling the market that the floor was an integral part of Swiss monetary policy. Then suddenly it was not.

I fully understand the rationale for the move (Jakobsen: SNB move is rationality itself) but, like most of the market, I remain extremely disappointed in the SNB's communication and handling of the issue. But isn't the bigger lesson or bigger question: Why is it that most people trust or bother to listen to central banks?

Major centrals banks claim to be independent, but they are all ultimately under the control of politicians. Many developed countries have tried to anchor an independent central bank to offset pressure from politicians and that's well and good in principle until an economy or the effects of a monetary policy decision beginning spinning out of control. At zero bound for growth and for interest rates, politicians and central banks switch to survival mode, where rules are bent or even broken to fit an agenda of buying more time.

Just look at the Eurozone crisis over the past eight years: every single criteria of the EU treaty has been violated, in spirit of not strictly according to the letter of the law, all for the overarching aim of "keeping the show on the road". No, the conclusion has to be that are no independent central banks anywhere! There are some who pretend to be, but none operates in a political vacuum.

That's the reality of the moment. I would not be surprised to find that the Swiss Government overruled the SNB last week and the interesting question for this week of course will be if the German government will overrule the Bundesbank on QE to save face for the Euro Zone? Likely….

The most intense focus for the last few years in central banking policy-making has been on "communication policy", which boiled down to its essentials is merely an appeal to "believe us and act accordingly", often without any real policy action.

Look at the Federal Reserve's forward guidance: They are constantly too optimistic on growth and inflation. Constantly. The joke being to get the proper GDP and inflation forecast you merely take the Fed's own forecasts and deduct 100-150 bps from both growth and inflation targets and Voila! You have the best track record over time.

Studies show that the business cycle was less volatile before the Federal Reserve was born. The presence of the Fed means that the implicit backing of the Fed allows excess leverage (gearing), and this has resulted in bigger and bigger collapses in financial markets as each collapse triggers yet another central bank "put" that then enables the next bubble to inflate. And the trend of major crashes has been increasing in frequency: 1987 stock crash, 1992 ERM crisis, 1994 Mexico "Tequila crisis", 1998 Asian crisis and Russian default, 2000 NASDAQ bubble, 2008 stock market crash, and now 2015 SNB, ECB QE, Russia and China, which will lead to what? I don't know, but clearly the world of finance and the flow of money is increasing in velocity, meaning considerable more volatility. By the way, the only guarantee I issued at the end of 2014 looking into 2015 was:

[Mish note: Look close. That's 4 statements but it's One view on fixed income, one on the economy, one on timing, and one guarantee."

Where does this all bring me? The SNB was really the culmination of bigger and bigger moves at the end of a low volatility paradigm. I have been trading currencies for more than 30 years, Thursday's move was single biggest move I have experienced in one market but let's look at other remarkable moves this year:

Oil has dropped more than 50%
The Russian Ruble has fallen by more than half (USD worth twice as many rubles at one point).
The EUR/NOK [Euro/Norwegian Krone currency pair] had its biggest move in many, many years, 15% in the space of a few days.
the EUR/CHF [Euro Swiss Franc currency pair moved 40% in minutes]
Even the Shanghai composite, the major Chinese equity index, dropped more than 7% overnight, the biggest moves in years on margin calls.

The takeaway here is that these extreme moves may be a symptom of central banks having attempted to suppress the business cycle and engineer low volatility in an attempt to restore confidence. But when you try to suspend economic reality, the risk we may be realizing all over again here is that the price discovery becomes that much more violent once markets build up so much pressure that central banks can't contain them.

We started the year with the Maximum Dislocation of the market in a model of planned economies. We have bond and credit spreads at historic low, currencies at extremes, equity and real estate in bubble-like valuations, and geopolitical risk that keeps rising, as seen this year in Paris, last year in Ukraine and with the rise of ISIS.

The US Dollar is putting pressure not only on the US itself but also the world. A journalist asked me last week: Who benefits from a stronger US Dollar? I still owe him an answer as I can't really figure out who does. In fact, the world has two growth engines at the moment: The US and emerging markets. Both are pretty much US Dollar-based economies. Debt (US Dollar funding) in EM has exploded to an extent that many including the World Bank are now warning of the risk of a "Perfect Storm in EM". Both the US and EM became credit junkies during the QE-to-infinity days in the US from 2009 through much of 2014. And we're now seeing the inevitable law of unintended consequences as the Fed has pulled the world off its USD-based credit addiction.

Another unintended consequence was that energy was the trigger for the crisis in 2008 as the rising energy prices took 5 trillion US Dollar out of the economy – which became the catalyst for the Eurozone crisis and US bank bail-out. Now eight years later, the drop in energy has broad spillover effects as the wealth is transferred from Sovereign Wealth funds in resource countries to consumers. That's good for Main Street and bad for Wall Street as the "bid" in the assets disappear as these former sovereign buyers will now become sellers of assets to fund fiscal shortfalls domestically. And that goes for the SNB, as well, as the SNB will now stop adding the NASDAQ stocks it was famously buying previously as its reserves have now stopped growing for the duration.

Meanwhile, the fact that volatility is rising, the fact that we see early signs of the business cycle being activated, is good for the real economy. It's a sign of money flowing from the 20% QE induced overvalued listed companies to the 80% SME (the real economy) as increases in volatility will lower the expected returns on "paper money" and make it more attractive to invest in tangible assets and real businesses.

The world should be concerned when volatility is too low, as it's a sign the market is allocating money poorly. The one lesson everyone needs to learn is that for a market based economy to function, you need to allocate capital to activities that provide the highest marginal real return on capital. Not to the most political connected.

When history is written on 2015, I have no doubt that the Paris terror act and SNB removal of the floor will stand out – both happened less than two weeks into 2015, although that is random, what is not random is that the market volatility has been rising directly and non-directly through a misallocation of capital directed by the central bank system.

Many central will envy SNB for its move last week, as they at least try to regain some control of their destiny, but the conclusion remains: as a group, central banks have lost credibility and when the ECB starts QE this week, the beginning of the end for central banks will be well under way. They are running out of time – that's the real real bottom line: SNB ran out of time, ECB runs out of time this week, and Fed/BOJ and BOE ran out of time in 2014.

What comes now is a new reality – the SNB move was a true paradigm shift – we can no longer look at central banks, the markets and policies of extend-and-pretend in the same light as we did last Wednesday (the day before the SNB move).

Safe travels,

Steen Jakobsen

Guest Post Courtesy of Steen and Saxo Bank

The above is quite similar what I said in a series of recent posts:

Faith Ending: Is Faith in Central Bankers Ending? Disinflation or Deflation? Yen-Gold, Euro-Gold Trend Breaks
Final Epitaph: Grand Experiment Failure; Bankers Prefer Bubbles; Europe is not USA; Final Epitaph
Wild Moves: Rabbit Hole Intervention Fails: Wild Moves in Swiss Franc as Switzerland Abandons Euro Peg; Morals of the Story
Sure Things: Reflections on the "Sure Trade" of 2014; Yield Curve Inversion Possible? Five "Sure Things" for 2015?

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

Denmark Announces Currency Peg is "Secure"; 12 Denials in 1 Day; Deposit Rate Cut to -0.20%; More Rate Cuts Coming?

Posted: 19 Jan 2015 10:37 AM PST

Here's the quote of the day: Denmark's Finance Minister, Morten Oestergaard, says the Danish currency peg of the krone to the euro "is secure."

Banks Battle Speculation Denmark's Euro Peg at Risk

Bloomberg reports Banks Battle Speculation Denmark's Euro Peg at Risk

Quotes of the Day Synopsis

The Danish currency peg "is secure," Economy Minister Morten Oestergaard said.
Carl Hammer, chief currency strategist at SEB in Stockholm, says he's been trying to make clear to callers that it's "highly unlikely" Denmark will alter its exchange-rate regime.
"Obviously, we think it's completely unrealistic" that Denmark will abandon its peg, Jan Stoerup Nielsen, an economist at Nordea Markets in Copenhagen, said by phone. "But that doesn't seem to be stopping the speculation."
Central-bank GovernorLars Rohde said last month "there's still some way to go" before Denmark tests the limit of its monetary tool box.
"There's no point in speculating that the currency peg will fall," Arne Lohmann Rasmussen, head of fixed-income research at Danske in Copenhagen, said by phone.
"There are always rumors in the market that have nothing to do with reality," Klaus Rasmussen, chief economist at the Confederation of Danish Industry, said by phone.
Dropping the euro peg would be "totally silly," said Klaus.
David Woo, of Bank of America Merrill Lynch, suggested that the DNB would now seek to defend the peg more strongly than before, "as markets potentially question the central bank's commitment to maintaining it".

That's eight denials (or strong defense of the peg). Quote number eight is from a Telegraph article linked to below. (Four more coming from Danish Central bank below).

I have no way of measuring but I speculate this is some kind of record, at least as pertains to currencies.

Denmark Next?

The Telegraph asks Will Denmark be the next country to cause currency chaos?

Denmark is the last major economy to peg its currency - the krone - to the euro, and has conducted a fixed exchange rate policy since the 1930s.

Given that Thomas Jordan, the SNB's chief, declared "you can only end a policy like this by surprise. It is not something you can debate for weeks", traders are likely to be more wary of the DNB.

Traders were caught off guard by the SNB. The franc was viewed as incredibly stable until the moment of the announcement.

David Woo, of Bank of America Merrill Lynch, suggested that the DNB would now seek to defend the peg more strongly than before, "as markets potentially question the central bank's commitment to maintaining it".

"The Danish currency framework is much longer standing than the Swiss and the DNB has not had the reserve accumulation that the SNB had," said Tina Mortensen, an analyst at Citi.

If the DNB does abandon the peg, it is unlikely to hit the markets as hard as the Swiss move. In 2013, the last year in which the Bank of International Settlements (BIS) published its last triennial central bank survey, krone trades represented just 0.4pc of global currency market turnover.

In the same year, the franc was involved in 2.6pc of trades. There is a risk that the Danish krone becomes as popular as Switzerland's franc

Denmark Cuts Deposit Rate to -0.20%

Because of increase strength in the Krone and speculation Denmark would abandon its peg, Danish central Bank Slashes Rates to -20bps.

The central bank in Copenhagen lowered its deposit rate to minus 0.2 percent from minus 0.05 percent, according to a statement today. The lending rate was cut to 0.05 percent from 0.2 percent.

The move comes amid speculation that Denmark could be forced to follow Switzerland, which had spent the last three years struggling to buy enough euros to support its exchange-rate regime. Denmark has maintained its currency peg for three decades. Its foreign reserves rose to 446.8 billion kroner ($69.9 billion) last month, compared with a high of 514.4 billion kroner in 2012.

And one final reminder: Danish households debt 321% of disposable income – OECD.

More Denials

Here's four more denials, albeit three from the same person, Danish Central bank spokesman Karsten Biltoft, via Bloomberg.

We have the necessary tools to defend the peg,"Karsten Biltoft, head of communications at the Copenhagen-based central bank, said by phone.
Asked whether Denmark could ever consider abandoning its currency peg, he said, "Of course not."
"The comparison that is made between Denmark and Switzerland I think is somewhat off," Biltoft said. "I don't think you can make a comparison between the two cases."
"It doesn't make any sense to compare the short-term, one-sided Swiss currency peg with the long-term Danish fixed-rate regime, which has been in place since 1982 and is a bilateral agreement between Denmark and the euro area," Economy Minister Morten Oestergaard said in a phone interview.

More Rate Cuts Coming?

One final quote. Today's cuts "underline the fact that the inflow has been pretty massive since they decided to move on a Monday," said Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank. "We should price in a probability of a new cut on Thursday, especially if the FX intervention continues."

In the race to debase currencies, which country will be the first to break the -1.0% interest rate barrier? At this juncture, Denmark is clearly in the lead.

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