Global Economic
Trend Analysis

Recent Posts

Monday, October 31, 2011 8:58 PM

Merkel Sells Soul for Applause from the Devil

Mish Moved to MishTalk.Com Click to Visit.

German Chancellor Angela Merkel Merkel went out of her way to prove she is just like the vast majority of vote-buying hypocrite politicians willing to say or do anything to advance personal agendas and get reelected.

Those looking for proof can find it in Der Spiegel article Another U-Turn For Merkel.

Chancellor Angela Merkel has performed another big U-turn by calling for a minimum wage, which she had opposed until now. She is sharpening her party's social profile in response to the euro crisis -- and, possibly, to secure her power by preparing another 'grand coalition' with the Social Democrats.

Angela Merkel has a reputation for playing the long game. But the German chancellor is no stranger to U-turns either, if it serves her political goals. There are some striking examples of Merkel vacating positions that had long been core to the agenda of her conservative Christian Democratic Union (CDU) party.

Mandatory military service, that bedrock of CDU policy for decades? Merkel ditched it last year. Nuclear power? She arranged for an early exit just months after extending the lifetimes of reactors. The three-tiered system of secondary schools? A thing of the past.

And now it's the turn of social policy. At its party congress in November, the CDU plans to pass a motion that has long been the exclusive domain of the left-wing opposition parties: a minimum wage.

The new approach fits in with Merkel's drive to sharpen the CDU's social profile in response to the euro crisis , which has triggered a wave of public anger at the financial industry and concern that ordinary taxpayers are being made to foot the bill for profligate high-debt euro member states.

Together with Labor Minister Ursula von der Leyen, and much to the annoyance of the center-left Social Democrats, Merkel has been wooing voters with decidedly leftist policies of late. Von der Leyen plans to give pensioners a financial boost to combat old-age poverty, she has taken on discount supermarkets that exploit temporary staff and has criticized German companies for resisting her plans for a minimum quota of women on company boards.

"The question is no longer whether we're going to have a minimum wage but how one negotiates the right level," von der Leyen said in a recent interview with the Süddeutsche Zeitung newspaper published on Monday. It sounded like she had been taking lessons from SPD leader Sigmar Gabriel.

Applause From Trade Unions

The trade unions are predictably elated by Merkel's leftward shift. A general minimum wage had been expressly ruled out in the coalition agreement reached between her conservatives and their junior partner, the pro-business Free Democratic Party (FDP), after the 2009 election.
Reflections on Integrity and Core Principles

So much for agreements, integrity, and core principles. Things change of course, but core principles shouldn't, at least not on a routine basis.

With this latest U-turn, Merkel just made it perfectly clear she has no core principles, that everything is for sale, including her soul and her integrity.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

3:35 PM

Papandreou Calls for Voter Referendum on EU Debt Deal

Mish Moved to MishTalk.Com Click to Visit.

In an extremely risky move, Papandreou calls for referendum on EU debt deal

Prime Minister George Papandreou has stated his intention to hold a referendum on last week's agreement in Brussels for Greece's bondholders to accept a 50 percent haircut and the country to receive some 130 billion euros in loans from its eurozone partners.

Speaking to PASOK MPs, Papandreou also said that he would ask for a vote of confidence in Parliament. This is likely to take place next week. The referendum could happen later this year.

Papandreou said he had faith in Greeks making the right decision. “Let us allow the people to have the last word, let them decide on the country’s fate,” he said. He said handing the vote over to Greeks was «an act of patriotism."

The premier insisted that calling snap polls - ahead of elections scheduled for 2013 - would be “simply dodging the issue.”

The vote of confidence - likely to be held next week - would come just over four months after a similar vote that Papandreou sought, and won, to bolster his government ahead of a Parliamentary vote on austerity measures.

The premier's bombshell came a day after an opinion poll, carried out by To Vima, found that 60 percent of Greeks regard last Thursday's EU debt deal as «negative» or «probably negative."
Things will become unglued in a hurry if Greek voters decide to tell the EU where to go. Moreover, but less importantly, Papandreou just may not survive the next vote of confidence.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

2:50 PM

In 2009, Greek Debt-to-GDP was 127%; Target for 2020 is now 120%; Is this Progress?

Mish Moved to MishTalk.Com Click to Visit.

Depending on your point of view, your holding of Greek debt, and whether or not you live in Greece, here is a humorous (or not so humorous) Google Translation on the Past and Future of Greece.

Based on official data from the Eurostat in 2009, when was the last census that pushed the deficit above 15%, Greece's debt was 127% of GDP. Today, the Government is making earnest efforts to pull Greece out of the crisis according to statements of Chancellor Angela Merkel, mortgaging much to get the debt-to-GDP ratio to 120% by 2020.

And the obvious question that arises for all is, what is so much effort for a decade? To get to where we were in 2009?

The numbers and figures, unfortunately, speak for themselves.

Eurostat census estimates real unemployment will reach 20% by the summer of 2012, Greece will close 183,000 companies, increase cuts in wages and pensions, and over-tax all its citizens just to get 2020 debt to 2009 levels.
All Pain and No Gain

The author, George Kouros perfectly describes the ramifications of stretching out debt for a decade in pretense that a 50% "voluntary" haircut on bonds will solve anything.

Greece surely does need structural reforms, but the average Greek on the street sees all pain and no gain.

A hard default and debt forgiveness of 80% by the EU would show Greek citizens they were at least getting something in return for forced (but badly needed) structural reforms and austerity measures.

Instead, the average Greek understands everything is being done to protect German and French banks, and anything that helps Greece is nothing but a fortuitous accident.

Moreover, by fooling itself, the EU hurts itself. The longer the EU pretends haircuts are voluntary, that Greece can pay back these loans, and that Greece can be competitive with Germany, and there will be no hard default, the worse the crisis will become.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

11:10 AM

Dear Christina: Reflections on Economic Fools and the Policies they Espouse

Mish Moved to MishTalk.Com Click to Visit.

The New York Times headline reads Dear Ben: It’s Time for Your Volcker Moment.

I expected the article to be about inflation. It starts out as such, praising Volcker for his commitment to lower inflation. A third of the way through came an innocuous looking sentence "Mr. Bernanke needs to steal a page from the Volcker playbook."

From there it went straight downhill.

Here are a few snips ...

To forcefully tackle the unemployment problem, he needs to set a new policy framework — in this case, to begin targeting the path of nominal gross domestic product.

More specifically, normal output growth for our economy is about 2 1/2 percent a year, and the Fed believes that 2 percent inflation is appropriate. So a reasonable target for nominal G.D.P. growth is around 4 1/2 percent.

It would work like this: The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.
Who is this Monetarist Fool?

At that point I stopped reading and asked "who is this monetarist fool?" I went to the bottom of the article to find out it was none other than Christina D. Romer, an economics professor at the University of California, and former chairwoman of President Obama’s Council of Economic Advisers.

Dear Christina ...

In case you have not noticed, interest rates are zero percent. The Fed cannot lower them any further. The Fed can of course print, but in case you did not notice again, the Fed already tried that and all it did was increase the price of food, gasoline, gold, and the stock market.

Moreover, and in case you did not notice, here is a chart of excess reserves sitting at the Fed.

You see Christina, there is 1.6 trillion dollars parked at the Fed already. Printing money in and of itself does nothing if it just sits there.

Moreover, and in case you did not notice, Japan over a 20 year period tried both quantitative easing and Keynesian stimulus (fiscal spending), and that did not stop Japan's deflation. All Japan did was dig itself a 200% debt-to-GDP hole that will at some point destroy the country.

Bernanke, a Complete Dunce, "Puzzled by Weak Consumer Spending"

On September 8, 2011 Bernanke said he was "surprised by how cautious consumers remain more than two years since the recession officially ended."

I responded with Bernanke, a Complete Dunce, "Puzzled by Weak Consumer Spending"
It does not take a genius to understand why consumer spending is weak.

  1. Unemployment rate is 9%
  2. Real wages are falling
  3. Income advances go to the wealthy
  4. Middle class is shrinking
  5. Jobs hard to find
  6. Approval ratings of Congress and Obama at record lows
  7. Consumers have high debt ratios
  8. Home prices are still falling
  9. Homeowners are trapped in their homes, unable to refinance
  10. Boomers need to save for retirement

However, those simple facts are far too complicated for a PhD like Fed chairman Ben Bernanke to figure out.

Is it any wonder his policies are so counterproductive when he cannot figure out simple things the average person can see clearly?
Change of Heart in Bernanke?

Christina, in case you did not notice, here are a few sentences by Chairman Ben S. Bernanke, Before the Joint Economic Committee, U.S. Congress, Washington, D.C., on October 4, 2011, regarding Economic Outlook and Recent Monetary Policy Actions

Fiscal policymakers face a complex situation. I would submit that, in setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal sustainability. The federal budget is clearly not on a sustainable path at present. ...

As a nation, we need to think carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of our economy in the longer term. Fourth, there is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy. In sum, the nation faces difficult and fundamental fiscal choices, which cannot be safely or responsibly postponed.

Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector. Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies--pertaining to labor markets, housing, trade, taxation, and regulation, for example--also have important roles to play.
Dear Christina, please read those three paragraphs closely.

What is it you fail to understand about all three of them, but especially the last one?

Bernanke, like yourself is a dyed-in-the-wool monetarist, who hopefully (and at long last) may realize that monetary policy is next to useless at this juncture.

Hello Ben Bernanke, Meet "Stephanie"

Dear Christina, I also invite you to read Hello Ben Bernanke, Meet "Stephanie".

The article is about an email from "Stephanie" who wrote about the difficulty of living on fixed income with rising prices and getting 0% on CDs.

I responded that "Bernanke is a Coward Hiding Behind Mathematical Formulas", that he did not know what he was doing in 2006 and he does not know now. Here is one key snip ...
Fed's Policy Is Theft

Stephanie, it's a little known fact that inflation benefits those with first access to money, such as the banks, the wealthy (via rising asset prices), and the government (think rising sales taxes and property taxes when prices go up).

Everyone else gets screwed. You are right in the middle of the pack of those most hurt by the serial bubble blowing policies of the Fed.

Viewed this way, Bernanke's policies are nothing but theft, robbing the poor, for the benefit of banks and the wealthy.

This is why I support Congressman Ron Paul's effort to end the Fed.
Currency Cranks Agree With Themselves

Christina, I read your reference to The Case for a Nominal GDP Level Target by fellow monetarists Jan Hatzius Sven and Jari Stehn, as well as your reference to Nominal Income Targeting by Robert E. Hall and N. Gregory Mankiw, also monetarists.

The opening paragraph of the latter is quite humorous:
There is increasing agreement among economists on two broad principles of monetary policy. The first principle is that monetary policy should aim to stabilize some nominal quantity. Monetarists have sought to make monetary policy stabilize the growth of the nominal money stock. In some periods of history, policy has been committed to pegging the nominal price of gold. Some economists have proposed stabilizing a bundle of commodity prices or even the consumer price index (CPI).

The second principle, which was taken for granted up until the past fifty years, is the desirability of a credible commitment to a fixed rule for monetary policy. It is now apparent that there are substantial gains if the central bank commits in advance to a set policy, rather than leaving itself free to exercise unconstrained discretion.
Ants and Termites in Increasing Agreement

As with currency cranks agreeing with themselves, there is increasing agreement by ants and termites that anteaters should go vegetarian.

In short, put a bunch of monetarist currency cranks in a room, and the one thing they are sure to propose in an economic decline is currency expansion.

Is it Different this Time?

Dear Christina, in light of the facts I presented above in regards to the experiences of Japan, the excess reserves at the Fed, the increase in inflation with no increase in jobs, and the number of people on fixed income destroyed by the rise in price level while getting 0% on their CDs, you have a hell of a lot more explaining why "It's different this Time".

The ultimate irony of your preposterous proposal, is there is a chance (albeit a small one), that Bernanke's realization that there are limits to monetary policy constitutes his Volcker moment.

For the sake of the country, we should all hope so because history shows that additional monetary and fiscal stimulus will not help, no matter how many Monetarist currency cranks and Keynesian clowns think otherwise.

By the way, anyone wondering why the recovery went nowhere and will go nowhere need only look at who was advising president Obama and who has his ear now (Christina Romer and Tim Geithner, respectively).

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

2:05 AM

Europe to Recapitalize Banks Without Raising any Capital; Berlusconi Defiant as Focus Shifts to Italy; Sarkozy Under Fire for Seeking China’s Help

Mish Moved to MishTalk.Com Click to Visit.

Italy's Prime Minister Silvio Berlusconi denies entering an agreement for early elections and arrogantly insists he is the only one who can possibly save Italy from itself.

Berlusconi ruled out early elections and said the current legislature in Rome will last until 2013, according to an interview published yesterday in Corriere della Sera.

“Only I and my government can achieve this reform program for 18 months, which is why there is no way for me to stand aside,” the Italian leader told the newspaper.
Sarkozy Under Fire for Seeking China’s Help

Please consider Sarkozy Criticized for Seeking China’s Help
French President Nicolas Sarkozy came under fire from opposition leaders for seeking China’s help to resolve the euro area’s debt crisis.

“It’s shocking,” Martine Aubry, the general secretary of the Socialist Party, said in the Sunday newspaper, Journal du Dimanche. “The Europeans, by turning to the Chinese, are showing their weakness. How will Europe be able to ask China to stop undervaluing its currency or to accept reciprocal commercial accords?”

Sarkozy reached out last week to his Chinese counterpart Hu Jintao to build support for an enlarged rescue fund designed to solve the region’s sovereign-debt crisis. The leaders talked just hours after a euro-region summit on Oct. 27 ended with an agreement to boost the European Financial Stability Facility to about 1 trillion euros ($1.4 trillion), leveraging existing guarantees by as much as five times.
Financial Suicide

Aubry asks "How will Europe be able to ask China to stop undervaluing its currency?" That's a good question for Sarkozy but a far better one for Klaus Regling, head of the European Financial Stability Facility who says "Bailout Fund Could One Day Issue Bonds in Yuan".

Then again, there is a fundamental question as to whether the Yuan is really undervalued in the first place. However, issuing bonds in Yuan would be financial suicide if per chance the masses are correct or if the timing was wrong.

Moreover, begging for help is a big sign of weakness as well as an admission of fear that no other buyers may step up to the plate.

Europe to Recapitalize Banks Without Raising any Capital

Bloomberg reports Europe Tries to Recapitalize Its Banks Without Injecting Capital
European Union leaders ordered banks last week to increase the ratio of “highest quality” capital they hold by the end of June, creating a shortfall of 106 billion euros ($150 billion). Of Europe’s 28 largest lenders, only eight will need to raise a total of 11 billion euros from investors, Huw Van Steenis, a Morgan Stanley analyst, wrote in an Oct. 28 report.

Rather than tapping investors or governments, firms are trying to hit the 9 percent core capital target by adjusting risk-weightings, limiting dividends, retaining earnings, reducing loans and selling assets. Banks had threatened to curb lending, risking a recession, to meet the goal rather than take government aid that would bring limits on bonuses and dividends. EU leaders already are pressing banks to restrain payments to employees and shareholders until they meet the capital target.

“Surely, no one thinks that by allowing banks to avoid raising capital in all these various ways it’s going to give investors more confidence,” said Peter Hahn, a professor of finance at London’s Cass Business School and a former managing director at New York-based Citigroup Inc. “Part of the issue for a long time has been the lack of credibility of bank balance sheets and their risk models. This isn’t going to help.”
Capital Math

Let's go over the math one more time as noted previously in Capital Shortfall Estimates of European Banks Range from 8 to 413 Billion Euros; EU to Offer Additional Extend-and-Pretend Time

Analyst Estimates

  • Citigroup estimates there is a capital shortfall of between €64 billion and €216 billion for banks to achieve a minimum core Tier 1 ratio of 7% to 9%, respectively.

  • Credit Suisse came up with a similar figure of €220 billion for the potential 9% scenario.

  • Analysts at Espirito Santo said write-downs at current market prices on Greek, Portuguese, Irish, Italian and Spanish bonds, along with a higher minimum capital ratio of around 9%, could require as much as €413 billion in new capital across the sector.

  • Merrill Lynch analysts in turn came up with estimates of between €7.6 billion and €143 billion in required capital for the region's major banks, depending on various scenarios.

The IMF came up with 200 billion Euros, a figure I think is exceptionally low because it ignores writedowns on Portuguese, Spanish, and Irish debt (and of course Italian debt as well). It also presumes Greek losses will be pegged at 50% when losses are likely to be in the 70-90% range.

Nonetheless, the agreement worked out by Merkel reduced that 200 billion euro figure down to 106 billion. Now we see that of that 106 billion euros, banks claim they need only raise 11 billion euros.

Is that before or after Merkel agreed to kick in an extra 21 billion euros of taxpayer money to the banking sector in the recent EFSF agreement?

Regardless, the answer to the question "How Does Europe Recapitalize Banks Without Raising any Capital?" should now be perfectly clear ...

Oh Ho Ho Its Magic!

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Sunday, October 30, 2011 10:54 PM

Massive Intervention in Yen; Japan Finance Minister Promises to "Intervene Until I'm Satisfied"; Race to Debase Back On; Will It Work?

Mish Moved to MishTalk.Com Click to Visit.

The headlines on the Yen tonight are rather amusing.

Two hours ago Bloomberg reported Yen Climbs to Postwar Record Versus Dollar as Traders See No Intervention

About 40 minutes ago Bloomberg reported Yen Drops on Intervention; Aussie Weakens

About 10 minutes ago Bloomberg reported Yen Tumbles as Japan Sells Currency Third Time in 2011

The yen dropped as Japan stepped into foreign-exchange markets to weaken the currency for the third time this year after its gains to a postwar record threatened an export-led economic recovery.

“I’ve repeatedly said that we’ll take bold action against speculative moves in the market,” Japanese Finance Minister Jun Azumi said to reporters today in Tokyo after the government intervened unilaterally. “I’ll continue to intervene until I am satisfied.”

The yen sank as much as 4 percent to 78.98 per dollar and traded at 78.19 as of 11:10 a.m. in Tokyo from 75.82 in New York Oct. 28.
I like to watch these headlines for a bit to see where they are going. Here is a chart of the action.

Yen 15 Minute Chart

Intervention Never Works

Japan has struck out twice this year on intervention efforts and numerous times before. Why should this time be any different?

Currency intervention never works. However, it may appear to work if by some lucky chance intervention came at the time the Yen was ready to reverse on its own accord.

The race to debase is back on.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

5:29 PM

Financial Suicide: Head of EFSF says Bailout Fund Could One Day Issue Bonds in Yuan

Mish Moved to MishTalk.Com Click to Visit.

Klaus Regling, head of the European Financial Stability Facility has proposed European Bailout Fund Could ‘One Day’ Issue Bonds in Yuan

The euro area’s bailout fund could at some point issue bonds denominated in the Chinese currency, Chief Executive Officer Klaus Regling said in Beijing today.

“We are authorized to use any currency we want if it seems efficient so we may one day issue in U.S. dollars or renminbi,” said Regling, head of the European Financial Stability Facility, using another name for the yuan. “It depends whether the Chinese authorities would approve of that. I could imagine that over the years that might happen, maybe not immediately but maybe one day,” he said.

European leaders are seeking financial support from China, holder of the world’s largest foreign-exchange reserves, for an enlarged rescue fund aimed at containing the region’s sovereign- debt crisis. Vice Finance Minister Zhu Guangyao said yesterday his government wants more details about the “technicalities” before making any decision on investment.

Regling said yesterday that China, which has been a “good” and “loyal” purchaser of EFSF bonds so far, hasn’t set any conditions for buying more of the securities.
Financial Suicide

Issuing bonds in another currency risks financial suicide. Currency movements add to the already massive potential risk of huge fluctuations because of leverage.

Argentina blew up when it could no longer hold a peg in US dollars. While not a peg, imagine the losses on long-term bonds on a leveraged fund were the Yuan to rise by 33% vs. the Euro.

Many homeowners in Eastern European countries have housing loans in Euros or Swiss Francs and have paid a severe price as the value of their currency has dropped vs the Euro and even more so vs the Swiss Franc.

Perhaps the yuan would sink vs. the Euro, but anyone entertaining the risk is severely lacking in financial competence.

Moreover, that Regling would even suggest such a foolish thing says the EU not only expects this crisis will linger for a long time, and it does not believe it has buyers for the debt it issues.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

3:02 AM

Czech PM Considers Referendum to Halt Joining EU

Mish Moved to MishTalk.Com Click to Visit.

The Czech Republic is having second thoughts about joining the EU, and rightfully so. The EU Observer reports Czech PM mulls euro referendum

The ruling euro-sceptic ODS party in the Czech Republic wants to push for a referendum on the country's future eurozone accession, claiming that the rules have changed since 2003 when Czechs said yes to the EU and the euro.

We signed up to a monetary union, not a transfer union or a bond union in our accession treaty. This is the major reason why the Czech Prime minister wishes to call the referendum on this matter," said Czech MEP Jan Zahradil, leader of the European Conservatives and Reformists.

Last weekend, at an ODS party congress, Prime Minister Petr Necas demanded a referendum on whether the country should join the eurozone.

"The conditions under which the Czech citizens decided in a referendum in 2003 on the country's accession to the EU and on its commitment to adopt the single currency, euro, have changed. That is why the ODS will demand that a possible accession to the single currency and the entry into the European stabilisation mechanism be decided on by Czech citizens," the ODS resolution says.

Prime Minister Necas also floated the idea in case Germany gets it way on another treaty change bringing about more economic integration and tougher sanctions for deficit sinners.

"In the event that there is a change to fundamental rights that would result in powers being transferred from national organs to European organs, this government is bound to ratify this step with a referendum,” Necas told reporters in Brussels on Sunday evening.
Conditions Have Changed

It is crystal clear the rules and conditions have changed. Thus, the Czech prime minister is right to call a voter referendum.

The ESM alone is reason enough to tell the EU bureaucrats where to shove it the Euro. For details, please see Treaty of Debt - An Eye Opening Video on the ESM Bailout Mechanism

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Saturday, October 29, 2011 5:14 PM

Treaty of Debt - An Eye Opening Video on the ESM Bailout Mechanism

Mish Moved to MishTalk.Com Click to Visit.

Inquiring minds are interested in the terms of the European Stability Mechanism (ESM) accord scheduled to replace the EFSF. The following video highlights the key sections of the proposed treaty.

Link if video does not play: Treaty of debt (ESM) - stop it now!

There are comments on The Telegraph article A German view of the bailout deal which is where I found the video.

Key Details of ESM Accord

  • Article 8 says "Authorized Capital stock 700 billion Euros"
  • Article 9 says "ESM members irrevocably and unconditionally undertake to pay capital calls on them within 7 days"
  • Article 10 allows the ESM board of governors to "change the authorized capital and amend article 8 accordingly"
  • Article 27 says ESM shall enjoy "immunity from every form of judicial process". Thus the ESM can sue member countries but no one can challenge it. No governments, parliament or any other body or laws apply to the ESM or its organization.
  • Article 30 says "Governors, alternate governors, directors, alternate directors, the managing director and staff shall be immune from legal process with respect to acts performed by them (...) and shall enjoy inviolability in respect of their official papers and documents"

There are no independent reviewers and no existing laws apply. Thus Europe's national budgets will be in the hands of one single, unelected body that is accountable to no one and immune from all legal actions.

Is this the future of the EU or will the German supreme court and other governments put an end to it?

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

4:21 PM

Chanos Interview: China Slowdown Just Beginning

Mish Moved to MishTalk.Com Click to Visit.

Jim Chanos Says China Slowdown has just begun.

There is not much new in the video actually. I just happen to think he is correct.

The link came in an email I played while stuck in an airport on a plane delay back to Chicago.

URL if video does not play: http://www.macrobusiness.com.au/2011/10/chanos-china-slowdown-just-beginning/

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

10:55 AM

Absurd Comment of the Week; Peter Principle in Action

Mish Moved to MishTalk.Com Click to Visit.

The absurd comment of the week goes to Larry Summer for his statements on the irony of the financial crisis.

The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending. Most policy failures in the United States stem from a failure to appreciate this truism...
Anyone who thinks the cure is the same as the disease (as Larry Summers clearly does) is incompetent (at best).

I found the reference when Zerohedge posted the Summers link with no comment. I suspect the Summers comment was so asinine that ZH did not even see a need to state it. Because he did not comment, I will.

Peter Principle in Action

Larry Summers may be one of the best examples of the Peter Principle that you can ever find.

However, I suspect a case can be made that Summers did not rise to his level of incompetence, that he was never competent in any position, ever, and that he got where he is out of sheer luck, birthright, bribery, or some combination thereof.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

2:32 AM

Spain's Unemployment "Unexpectedly" Rises to 21.52%; Expect Market Focus to Shift from Greece to Portugal, Spain, Italy

Mish Moved to MishTalk.Com Click to Visit.

With news of a "voluntary" haircut on Greek bonds of 50%, it's time to look ahead to the next big trouble spots. By measure of 10-Year government bond yields, Portugal at 11.8%, Italy at 6.02%, and Spain at 5.51% (as compared to Germany at 2.18%), Portugal, Italy, and Spain clearly have critical issues.

Moreover, the economic data from Spain is continuously awful. For example Spain's Unemployment "Unexpectedly" Rises to 21.52%

The number of unemployed persons increased by 144,700 in the third quarter, bringing the total number of unemployed amounted to 4,978,300 people, according to Labour Force Survey (EPA) released today by the National Statistics Institute (INE). Spain has not seen such a high unemployment rate since the fourth quarter of 1996.
Austerity measures and economic reforms in the "Club-Med" Euro states are much needed. However, the short and intermediate-term effect will not be good for sovereign debt yields, budget targets, or GDP.

Spain and Portugal are accidents waiting to happen (sooner rather than later), and judging from bond yields alone, it is safe to add Italy to that mix.

The euphoria of a "settlement" (that fixes nothing) in regards to the crisis in Greece will soon give way to the massive number of even larger problems elsewhere in the Eurozone.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Friday, October 28, 2011 11:34 AM

Fitch says 50% Haircuts would Constitute Default; No Official Ruling from ISDA Yet; Wrong Decision Could Kill CDS Market; How Will Setup be Resolved?

Mish Moved to MishTalk.Com Click to Visit.

The yield on 10-year Italian bonds is back over 6% following a weaker than expected bond auction. Who wants to load up on Spanish, Portuguese, or Italian bonds if they cannot hedge with credit default swaps?

No ISDA Ruling Yet

Everyone is acting as if the International Swaps and Derivatives Association (ISDA) has issued a ruling on on whether 50% haircuts forced at gunpoint are "voluntary", but there is no official ruling yet, only hints.

Please consider Voluntary or forced? The important word games of debt default

When is a default not a default?

Investors struggled with that question Thursday after European officials outlined plans that would see owners of Greek bonds take a 50 per cent loss on the face value of their holdings.

The International Swaps and Derivatives Association, an industry group that oversees the CDS market, says the Greek deal probably won’t trigger default clauses in CDS contracts because the 50 per cent “haircut” is voluntary.

That view is starting to roil the $25-trillion market for credit default swaps because it calls into question the fundamental reason for purchasing insurance against losses on bonds. If investors can no longer count on being able to hedge against the possibility of a loss, they may start demanding higher yields as compensation for increased risk.

“I would think [such a ruling by the ISDA] would be quite a negative for the market,” said Lawrence Chin, director of research at the Cundill division of Mackenzie Financial. “You could get hit on the debt, but you don’t get the insurance [payout].”

“Based on what we know it appears from preliminary news reports that the bond restructuring is voluntary and not binding on all bondholders,” the ISDA said on its website Thursday. “As such, it does not appear to be likely that the restructuring will trigger payments under existing CDS contracts.”

But things can be confusing, even at the ISDA. In a version of the Q&A dated July 8, the ISDA asks, “Does it matter whether the event is ‘voluntary’ or ‘mandatory’ ”? Answer: “The CDS Definitions do not refer to a distinction between voluntary and mandatory events, though it does come up indirectly.”

Then there’s the matter of just how voluntary the latest agreement really is. Banks may have agreed to take a 50 per cent loss on their Greek debt holdings to avoid an even worse deal.

David Geen, general counsel for the ISDA, acknowledged in an interview on Bloomberg Television that there was likely some “coercion” of banks by European officials. “There’s been a lot of arm twisting,” he said, but asserted that while the deal may have been “borderline.” it still fell short of being a default.

The Determinations Committee of the ISDA will make a final decision on whether the Greek deal triggers CDS payouts “when the proposal is formally signed, and if a market participant requests a ruling from the DC,” the association said in its Q&A.

“If you can’t hedge your position, you shrink your position,” said Steven Tananbaum, managing partner and chief investment officer at GoldenTree Asset Management.
Fitch says 50% Haircuts would Constitute Default

Just to muddy the waters further, Fitch says acceptance of 50% haircuts on Greek debt would constitute default. Bloomberg reports ...
If it’s accepted, “the 50 percent nominal haircut on the proposed bond exchange would be viewed by the agency as a default event under its Distressed Debt Exchange criteria,” Fitch said in a statement today. The accord is “ a necessary step to put the Greek sovereign’s public finances on a more sustainable footing.”

This week’s rise in the euro “shows expectations were very low for what would come out of the meeting,” said Geoff Kendrick, head of European currency strategy at Nomura Holdings Inc. in London. “I am relatively skeptical about how long this will last because I think it was just another plan for a plan.” Kendrick expects the euro to weaken to $1.30 by year-end.

Italian Prime Minister Silvio Berlusconi conducted the first test of investor enthusiasm for Europe’s debt since the summit’s plan was announced, selling bonds today at euro-era record borrowing costs.
Italian Sale

The Treasury in Rome sold 7.93 billion euros, less than the maximum 8.5 billion-euro target, of four different bonds today. The yield on Italy’s benchmark 10-year bond rose 11 basis points, or 0.11 percentage point, to 5.98 percent.
Fitch vs. ISDA

We come to the very real possibility that Fitch rules one way and the ISDA another.

Voluntary "No Default" Decision Could Kill CDS Market

The Wall Street Journal reports Default Insurance Market Takes Hit
Under the broad deal reached this week to stem the euro-zone's financial crisis, holders of credit-default swaps on Greek government bonds aren't expected to receive any payout, even though a preliminary agreement between financial institutions and European policy makers would recognize just half the face value of some Greek debt.

The decision not to trigger the swaps raises questions about the value of the insurance-like contracts and exposes the limitations of the hedging strategies that banks and investors have come to rely on. The swaps are widely used by bondholders and major banks to defuse a wide range of risks, and by traders to bet on market trends. If the swaps don't pay out when bonds default, banks and funds that bought the insurance may face losses they thought they had hedged.

"You need the real money guys, the banks, to view [credit-default swaps] as a viable contract for CDS to be a real market," said Adam Fisher, chief investment officer at hedge fund Commonwealth Opportunity Master Fund Ltd., and a trader of sovereign credit-default swaps. The deal reached Thursday, he said, could "kill off the market."

"If you owned a sovereign bond and you got scared because you bought CDS thinking it would pay out, you'll realize you would have been better off just selling your bond—and you'll just get rid of everything," said Ashish Shah, co-head of credit at AllianceBernstein.

The biggest U.S. lenders don't stand to lose much on the Greek "haircut." A bigger issue is exposure to economies such as Portugal and Ireland, and much bigger countries such as Spain, Italy and even triple-A-rated France.
I Predict a Surprise Default Ruling by ISDA

The WSJ implies a "decision not to trigger the swaps" has been made. Piecing together various reports, I don't think it has.

Here is the setup. There is only $3.7 billion in CDS contracts on Greek bonds vs. €350 billion ($496 billion) government debt.

Will the ISDA be willing to risk the CDS market on sovereign debt for a lousy $3.7 billion? I believe it won't if the "Derivatives King" (JP Morgan) and a few of the other big boys decide it is in their best interest to take a small hit now to prevent killing a lucrative market.

Thus I am going to go out on a limb and predict the ruling will be a default, possibly triggering massive buying of CDS contracts on Portuguese, Spanish, and Italian debt to the huge benefit of the "Derivatives King" and other big players.

Just don't expect the same result next time if the big boys go on an insurance selling spree.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

2:51 AM

Shanghai Homeowners Smash Showroom in Protest of Falling Prices; Developer Warns on Price Drops; "Twilight Zone" of Phony Accounting and Shadow Money

Mish Moved to MishTalk.Com Click to Visit.

The property bubble in China has finally burst. Denial has turned to anger as Shanghai Homeowners Smash Showroom in Protest Over Falling Prices

A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.

The local media reports said an unspecified number of people were injured.

Chinese media separately reported that another group of Shanghai homeowners gathered on Saturday to speak with Longfor Properties Co., after it dropped asking prices to 14,000 yuan per square meter from 18,000 yuan per square meter at a residential development in the city’s Jiading district.

The Shanghai property-owner demonstration found little support on China’s Internet, where most still expressed worries that housing prices are too high.
22% Drop Overnight

The drop from 18,000 to 14,000 yuan is a 22% overnight drop and that is just a down payment on the carnage that is coming.

Housing Math in China

  • 18,000 Yuan per square meter is about $2,835 per square meter
  • One square meter = 10.7639104 square feet
  • Cost per square foot = ($2,835 ÷ 10.7639104) = $263.38

In downtown Shanghai, the price is 48,000 yuan per square meter or roughly $696.77 per square foot.

I am told these are for roughly finished units (no carpeting, appliances, etc), just stark bare units.

For more on absurd Downtown Shanghai property prices, please see Property Developers Hurting in China; New Homes Sales Down 50% in Shanghai; Preposterous Prices Won't Last; Commodities to be Hit in Building Slump

Protests Hit China as Property Prices Fall

Yahoo! Finance has additional protest details in Protests hit China as property prices fall
Hundreds of angry home buyers launched a series of protests in China's commercial hub of Shanghai this week, as owners decried falling prices for their properties, state media said Thursday.

In the latest incident, some 200 home owners on Wednesday besieged the sales office for a project of leading developer Greenland Group, demanding refunds.

"We require a refund because the loss we are suffering now is too great for us to afford," the Shanghai Daily quoted a protestor as saying.

He paid 17,000 yuan ($2,678) per square metre last year and claimed the developer had cut the price by around 30 percent to boost sales.

In a another incident, 30 home owners stormed the sales office of a project of Hong Kong-listed China Overseas Land & Investment Ltd. on Wednesday, the Global Times said, repeating a similar protest from over the weekend.

Demand for apartments has been falling after authorities, fearing a property bubble, banned the purchase of second homes, increased minimum downpayments and trialled property taxes in some cities -- including Shanghai.

At the same time, property developers have been hit by a lack of funds, as the government hiked interest rates and restricted bank lending to rein in surging inflation and bring real estate prices into line.

Ratings agency Standard & Poor's expects China's property prices to fall by 10 percent nationwide over the next year as the measures take effect.
S&P 10% Decline Prediction is Hugely Understated

Prices in many places are already down 20 to 30 percent and things will get to the 50 t0 70 percent decline mark before this is over.

"Twilight Zone" of Phony Accounting and Shadow Money

MarketWatch says Watch out for China’s ‘freak’ economy
Ten years ago, homes in Shanghai sold for about six times an average family’s income. Today that’s 13 times. Shenzhen has gone from five times to 14 times. These are off-the-charts absurd ratios. This is a bona fide mania.

And it works fine until the music stops. Where are we now?

Prices have started falling. Now, fewer than 46 of 70 major cities saw prices stall or decline in September, reports the National Statistical Bureau. As recently as January the number was just 10.

In the past two and a half years, China has witnessed a staggering credit bubble. Total lending has come to about $7.8 trillion.

To put this in context, that is twice the entire net government debts of the European so-called “PIIGS” — the troubled countries of Portugal, Ireland, Italy, Greece and Spain — put together.

An alarming report from Schroders said Chinese banking operates in a “twilight zone” of phony accounting and shadow money and it’s all coming apart. “Almost half of all credit creation in China is off balance sheet,” wrote the team at Schroders.

They think this situation could unravel “over the next three to six months,” producing a huge crisis with international implications. Most Chinese banks, they predict, will end up as “zombie banks.”
Hard Landing Coming

The Financial Times reports China property developer warns on price falls
China's largest real estate developer believes the country's property market, a key driver for the economy, has turned and expects conditions to worsen in the coming months as sales prices volumes decline further.

China Vanke, the country's biggest developer by market share, said government efforts over the past year to rein in soaring prices were having a severe impact on the market and developers were being squeezed after sales volume in 14 of the country's largest cities halved in September from a year earlier.

A 30 per cent drop in property prices would precipitate a collapse in fixed investment in China and the country's investment-driven economy would experience a so-called hard landing after years of annual growth above 9 per cent, according to UBS economist Wang Tao.

Property investment accounts for more than 20 per cent of total fixed investment in China and UBS estimates almost 30 per cent of final products in the economy are absorbed by the property sector.

"A property-led hard landing scenario is quite likely in the next few years, even though we do not think the property market is about to collapse now," Ms Wang said.

Debt-laden provincial governments in China rely heavily on land sales for revenue and have poured investment into commercial housing projects in recent years.

These local authorities also account for up to 30 per cent of all outstanding bank loans, many of which are collateralised by land and housing developments, so a collapse in the property market could have a devastating knock-on effect on the financial system.
The property bust is underway in China and will spread from city to city just as it did in the US. No city will be immune and commodity prices will be smashed in the downturn.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Thursday, October 27, 2011 12:36 PM

Credit Default Swaps Useless as Hedge Against Default; CDS on Greece a Purposeful Sham; Derivatives King Always Wins

Mish Moved to MishTalk.Com Click to Visit.

As a result of labeling 50% haircuts "voluntary", Credit Default Swap contracts have proven to be useless when it comes to protecting against sovereign default. The serious implication is investors will need to find another way to hedge.

Bloomberg reports Greece Default Swaps Failure to Trigger Casts Doubt on Contracts as Hedge

The European Union’s ability to write down 50 percent of banks’ Greek bond holdings without triggering $3.7 billion in debt-insurance contracts threatens to undermine confidence in credit-default swaps as a hedge and force up borrowing costs.

As part of today’s accord aimed at resolving the euro region’s sovereign debt crisis, politicians and central bankers said they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new securities. If the International Swaps & Derivatives Association agrees the exchange isn’t compulsory, credit-default swaps tied to the nation’s debt shouldn’t pay out.

“It will raise some very serious question marks over the value of CDS contracts,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “For euro sovereigns in particular, the CDS market is likely to remain wary.”

This approach may undermine confidence in credit-default swaps as a hedge and force banks to look at other ways of laying off risk, according to Pilar Gomez-Bravo, the senior adviser at Negentropy Capital in London, which oversees about 200 million euros ($277 million).

“If they find a way to avoid a trigger event in the CDS, then people will doubt the value of credit-default swaps in general, leading to more dislocations in the market,” she said.

“It is symptomatic of the regulatory and legal goalposts being constantly shifted either randomly or to suit political interests,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “For genuine long-term investors, either financial or non-financial, it’s a major liability.”
CDS on Greece a Purposeful Sham

Janet Tavakoli writes “Standard” Credit Default Swaps on Greece Are a Sham and It’s Not a Surprise
“Customers” that accepted ISDA documentation when buying credit default protection on Greece are now discovering that ISDA defends the position that a 50% discount on Greek debt is “voluntary” and therefore not a credit event for credit default swap payment purposes according to its documents.

First Step in a CDS: Protect Yourself from the ISDA Cartel

As previous sovereign problems have illustrated, the only way to buy protection is to rewrite the flawed ISDA “standard” document and agree to new more sensible terms, before concluding the initial trade. One has to first protect oneself from the ISDA cartel “standard” documentation before one can buy sovereign default protection, or any other protection for that matter.

This isn’t the first time investors have been burned in the sovereign credit default swap market. Hedge funds Eternity Global Master Fund Ltd. and HBK Master Fund LP thought they purchased protection against an Argentina default and sued when J.P. Morgan refused to pay off on Argentina credit protection contracts they had purchased.

At issue was the definition of restructuring. Did Argentina's "voluntary debt exchange" in November of 2001 meet the definition of a restructuring? The Republic of Argentina gave bondholders the option to turn in their bonds in exchange for secured loans backed by certain Argentine federal tax revenues. J.P. Morgan claimed this didn't meet the definition of restructuring, at least for the protection it sold to Eternity.

J.P. Morgan's story was different when it wanted to collect on the protection it bought from Daehon, a South Korean Bank. J.P. Morgan claimed its slightly different contract language met the definition of restructuring under the credit default protection contract it had with the South Korean Bank.

In other words, J.P. Morgan made sure its contract language would allow it to get paid when it bought protection and would make it harder for its counterparty to get paid when it sold protection.

Language Arbitrage: You’re Not a Sucker, You’re a Customer

Banks that play this game call it “language arbitrage.” Anyone that bought sovereign credit protection on Greece after accepting ISDA “standard” documentation without modifying the language now finds that they are on the wrong side of an “arbitrage.” An arbitrage is a riskless money pump. In this case, it means that money has been pumped out of credit default protection buyers with no risk to their counterparties, the financial institutions that ostensibly sold them credit default protection on Greece.
Derivatives King Always Wins

Note how the "Derivatives King" JP Morgan wins on its contracts, even on both sides of essentially the same bet.

By the way, I have a couple of questions:

  1. What the hell are banks doing in all these derivatives markets in the first place?

  2. Isn't it time banks act like banks instead of arbitrage hedge funds?


Reader Scott writes ...
One look at the ISDA membership should disabuse anyone of the notion that this is some kind of neutral judge. The big banks that write most of the derivative contract also compose the group that defines a credit event. This is not much different than have a baseball pitcher call the balls and strikes. How this is legal is beyond me.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

11:40 AM

Massachusetts Supreme Court Foreclosure "Bombshell" Ruling Nothing But Hot Air

Mish Moved to MishTalk.Com Click to Visit.

Many people sent links regarding a bombshell ruling in Massachusetts by the Daily Bail that allegedly "made foreclosure sales in the commonwealth over the last five years wholly void."

On Oct. 18th, 2011 the Massachusetts Supreme Judicial Court handed down their decision in the FRANCIS J. BEVILACQUA, THIRD vs. PABLO RODRIGUEZ – and in a moment, essentially made foreclosure sales in the commonwealth over the last five years wholly void. However, some of the more polite headlines, undoubtedly in the interest of not causing wide spread panic simply put it "SJC puts foreclosure sales in doubt" or "Buyer Can't Sue After Bad Foreclosure Sale."

In essence, the ruling upheld that those who had purchased foreclosure properties that had been illegally foreclosed upon (which is virtually all foreclosure sales in the last five years), did not in fact have title to those properties. Given the fact that more than two-thirds of all real estate transactions in the last five years have also been foreclosed properties, this creates a small problem.

The Massachusetts SJC is one of the most respected high courts in the country, other supreme courts look to these decisions for guidance, and would find it difficult to rule any other way in their own states. It is a precedent. It's an important precedent.
Clueless Hype

Let's first dispose of the nonsense that the "Massachusetts SJC is one of the most respected high courts in the country, other supreme courts look to these decisions for guidance, and would find it difficult to rule any other way in their own states."

The more important issue is the way sites trump up these cases with preposterous statements such as "In essence, the ruling upheld that those who had purchased foreclosure properties that had been illegally foreclosed upon (which is virtually all foreclosure sales in the last five years) ..."

The essence of the matter is the Daily Bail preaching clueless hype.

I asked Patrick Pulatie at LFI Analytics to chime in on the significance of the case. Pulatie writes ...
US Bank foreclosed upon the property, but no assignment to US Bank occurred until after the foreclosure. B then bought the property.

The court ruled that the foreclosure was unlawful, like in Ibanez. Therefore, B could not own the property. That said, the court ruled that if the Chain of Title could be corrected, then the foreclosure can be redone.

The author completely misrepresents the ruling like so many do. They claim that gold exists, where there is only lead. Unfortunately, this will only give homeowners more false hope.

What tells you how little the authors know is their claim the MA court is so well respected that other states will use the ruling as guidance.

That is laughable hogwash.
Third Opinion

We have heard from the Daily Bail and from Pulatie. Let's find a neutral party for a third opinion. I just happen to have one.

The Massachusetts Real Estate Law Blog asks What Now? Bevilacqua v. Rodriguez Leaves Toxic Foreclosure Titles Unclear
The Massachusetts Supreme Judicial Court issued its opinion today in the much anticipated Bevilacqua v. Rodriguez case considering property owners’ rights when they are saddled with defective titles ...

Contrary to some sensationalist headlines [linking to the Daily Bail], the sky is not falling down as the majority of foreclosures performed in the last several years were legal and conveyed good title. Bevilacqua affects those small percentage of foreclosures where mortgage assignments were not recorded in a timely fashion and were otherwise conducted unlawfully. Bevilacqua does not address the robo-signing controversy.

The Bad News

First the bad news. The Court held that owners cannot bring a court action to clear their titles under the “try title” procedure in the Massachusetts Land Court. This is the headline that the major news outlets have been running with, but it was not a surprise to anyone who has been following the case. Sorry Daily Kos, but the court did not take away a property from a foreclosure sale buyer. The buyer never owned it in the first place. If you don’t own a piece of property (say the Brooklyn Bridge), you cannot come into court and ask a judge to proclaim you the owner of that property, even if the true owner doesn’t show up to defend himself. It’s Property Law 101.

The Good News

Next the good news. The court left open whether owners could attempt to put their chains of title back together (like Humpty-Dumpty) and conduct new foreclosure sales to clear their titles. Unfortunately, the SJC did not provide the real estate community with any further guidance as to how best to resolve these complicated title defects.
It should be pretty clear now as to what is hype and what is not.

As far as precedent setting cases from respected courts, please consider 9th Circuit Court Ruling Legitimizes MERS.

As a followup post including an analysis of Assignment of the Deed of Trust in the California case Calvo v HSBC, please consider More on the Coming Wave of Foreclosures.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

1:22 AM

Good News for Bears: Torture by Rumor Ends

Mish Moved to MishTalk.Com Click to Visit.

A deal has been reached. While many decisions are yet to be made the agreed upon deal looks something like this:

  • A "voluntary" haircut of 50% on Greek debt
  • Bank recapitalization set at 106 billion euros
  • EFSF will use leverage to get to at least 1 trillion Euros
  • Leverage will be via a combination SIV plus Insurance plan
  • Banks get an additional 21 billion Euros in "official aid"
  • The ECB is going to continue to buy Italian bonds come hell or high water

A group of 70 European banks will need to raise 106 billion euros in the next eight months.

Recapitalization Breakdown

  • Greek banks need 30 billion euros
  • Spanish banks need 26.2 billion euros
  • French banks need 8.8 billion euros
  • Italian banks need 14.8 billion euros
  • Remaining countries 26.6

Banks that fail to raise enough capital on the markets will first tap national governments, falling back on the EFSF rescue fund only as a last resort.

The above details pieced together from EU Sets 50% Greek Writedown, $1.4T in Fund and Impasse on Greek Debt Relief Threatens EU Crisis Summit Deal

The fuzziest point in the deal is in regards to what banks get the additional 21 billion Euros in "official aid", with what strings, and where the money comes from.

Good News for Bears

Although many details are yet to be resolved, the bulls got everything they wanted except endless printing by the ECB. However, the sad fundamental situation remains unchanged

  1. No structural problems have been solved
  2. Banks most assuredly need more than 106 billion in recapitalization efforts. The idea that French banks only need to raise 8.8 billion is preposterous.
  3. No investors in their right mind will fund Greek and Spanish banks to the tune of 56.2 billion euros
  4. The haircuts were not voluntary

Instead of the rumor mill of potential actions working to lift the market 24 hours a day for three straight weeks, it will be up to the EU to make the plan work. However, the plan won't work because of point number one above: not a single structural problem has been solved.

Although this rally may run for a while longer on fumes of past rumors and blind hope, it will eventually wear itself out.

Bear market rallies tend to end on good news. What more good news is coming?

The bulls got nearly everything they wanted, putting an end to torture by rumor. What could possibly be better news for the bears?

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Wednesday, October 26, 2011 8:17 PM

License to Lie: The "Most Transparent Administration Ever" Seeks Law to Respond to Freedom of Information Requests with "Information Does Not Exist"

Mish Moved to MishTalk.Com Click to Visit.

The Justice Department of the Obama Administration, the self-proclaimed "most transparent administration ever Proposes Letting Government to Respond to Freedom of Information Requests Denying Existence of the Documents.

A longtime internal policy that allowed Justice Department officials to deny the existence of sensitive information could become the law of the land -- in effect a license to lie -- if a newly proposed rule becomes federal regulation in the coming weeks.

The proposed rule directs federal law enforcement agencies, after personnel have determined that documents are too delicate to be released, to respond to Freedom of Information Act requests "as if the excluded records did not exist."

Jay Sekulow, Chief Counsel of the American Center for Law and Justice, says the move appears to be in direct conflict with the administration's promise to be more open.

"Despite all the talk of transparency, I can't think of what's less transparent than saying a document does not exist, when in fact, it does," Sekulow told Fox News.

Earlier this year, in a case involving the Islamic Council of Southern California brought against the FBI after the plaintiffs learned about the existence of documents denied by the FBI, a federal judge in California expressed great concern about the agency using the internal policy not only in response to the FOIA but to mislead the court.

"The government, cannot, under any circumstance, affirmatively mislead the court. … The court simply cannot perform its constitutional function if the government does not tell the truth," the judge wrote in a stinging rebuke.

A final version of the proposal could be issued by the end of 2011. If approved, the new rule would officially become a federal regulation with the force of law.
Pure Insanity

This proposed law is pure insanity. Wrong accused persons might go to prison or guilty persons purposely protected based on this law.

All that is required is for some government official (possibly protecting himself or his department) to think information is "too sensitive".

The U.S. should be ashamed to even consider such a law.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

7:41 PM

No Agreement on "Any" Element of a Deal

Mish Moved to MishTalk.Com Click to Visit.

Bloomberg reports Impasse on Greek Debt Threatens EU Deal

European Union talks with banks on bondholder losses as part of a second Greek bailout ran aground, dimming the chances for a comprehensive strategy at a summit to stamp out the debt crisis.

A statement issued close to midnight in Brussels by the Institute of International Finance, the bank lobby, said there was no agreement “on any element of a deal.”

The outlines of a deal to safeguard banks emerged, centering on a June 30, 2012 deadline for lenders to reach core capital reserves of 9 percent after writing down their sovereign debt holdings, according to a statement after all 27 EU leaders met.

A group of 70 European banks will need to raise 106 billion euros in the next eight months to meet the goal, the European Banking Authority, the banking regulator, said. Greek banks need 30 billion euros; those in Spain need 26.2 billion euros. In France, the need totals 8.8 billion euros and in Italy, it’s 14.8 billion euros.

While policy makers and bondholders were converging on a 50 percent writedown of Greek debt, clashes over collateral to underpin the transaction will limit the summit to issuing a mandate for further talks, an EU official said in Brussels on condition of anonymity.

While markets clamor for a signal that the euro area will devote 1 trillion euros or more to combating the crisis, the EU won’t be able to produce a number until late November, the EU official said.
Mandate for Further Talks

The only agreement on anything is a mandate for further talks. This is the second summit in four days, and 14th summit in 21 months.

We can hope they talk themselves to death, but at this point that hope seems futile.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

1:42 PM

Grateful for Idiocy, a Pack of Lies, Financial Engineering, Legerdemain, and Trickery; Opposition Leader Rebukes Merkel's Lies and Arrogance of Power

Mish Moved to MishTalk.Com Click to Visit.

A few weeks ago everyone knew German Chancellor Angela Merkel lied about leverage to the German Parliament. Nonetheless, and disgustingly, this morning the Bundestag was all too willing to Approve a "Blank Check" for Unlimited EFSF Leverage.

For this, Ambrose Evans-Pritchard says Thank you Germany

Alone among EU leaders, Chancellor Angela Merkel goes to tonight’s summit in Brussels with an iron-clad mandate. It is a remarkable moment. Never before – to my knowledge – has a national parliament demanded and held a prior vote on an EU summit accord.

Had this principle been established a long time ago, we might have avoided much of the relentless Treaty creep and EU aggrandizement advanced by secret deals at the Bâtiment Justus Lipsius. Thank you Germany.

Thank you too, judges of the Verfassungsgericht, for giving the Bundestag a veto on EU encroachments on fiscal sovereignty. The court is seemingly the only tribunal willing and able to defend the liberties of European citizens against EU over-reach, and is therefore my supreme court too even as a British citizen.
Opposition Leader Rebukes Merkel's Lies and Arrogance of Power

Pritchard continues ....
Dr Merkel has won her vote. She secured an "own majority" for proposals to leverage the €440bn bail-out fund (EFSF) into the stratosphere, with the support of some very sheepish looking law-makers from posturing Free Democrats and Bavaria’s Social Christians.

But what a price she paid. The credibility of her team is shattered. Europe has all but destroyed her, even if she manages to limp on to the next crisis.

As she glowered darkly, speaker after speaker from the Social Democrats (SPD), the Greens, and Die Linke, asked how she could possibly reconcile her plan to leverage the EFSF to €1 trillion or €1.5 trillion (we still don’t know how much) with solemn pledges to the Bundestag just three weeks ago that there would be no such leverage.

"Shameless abuse of the truth," was the verdict of SPD leader Frank-Walter Steinmeier. The government had acted "tactically" at every turn, "misled the people", "held back information", "crossed every red line", brought Europe "to its knees" with botched policies, and lied blatantly about EFSF leverage.

"You came here to say there would be no leverage, not three years ago, not three months ago, but three weeks ago. You denied everything."

Die Linke (Left) leader Gregor Gysi was electrifying. "It is the arrogance of power," he began, and never let go.

"Every week you come up with a different story about this crisis."

"We were told there would be no leverage and you have reversed everything in a matter of weeks. Now we learn that the 20pc loss will fall entirely on taxpayers. They alone will pay. That is the decision you are taking."
"Why don’t you tell German taxpayers the truth? They are being asked to pay the losses for French banks."

Green leader Jürgen Trittin rebuked Dr Merkel for hiding the true implications of EFSF leverage, particularly the plan to insure the first 20pc of losses on Club Med bonds.

"Why are you shying away from telling the people the truth? You must tell people what this leverage means. You must explain to them what the risk is, and why it is necessary. But you wriggled out of it."

"You came here three weeks ago and said there would be no leverage. This is the sort of thing that unnerves people."

And so it went on, raw red-blooded democracy.

The unpleasant truth is that the EFSF leverage proposals are idiotic, the worst sort of financial engineering, legerdemain, and trickery.
Grateful for Idiocy, a Pack of Lies, Financial Engineering, Legerdemain, and Trickery

Other than the ruling by the German Supreme Court there is nothing to be grateful for. The "unpleasant truth" is Merkel lied to parliament about leverage, which is why the EFSF was approved in the first place. Having secured passage of the EFSF via bald-faced lies, the Bundestag ignored the lies and approved a blank check on the amount of leverage and the method of leverage.

Pritchard notes the EFSF leverage proposals are idiotic, the worst sort of financial engineering, legerdemain, and trickery" and for that he says "Thank you Germany".

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

12:07 PM

Talks Suspended in Deadlock; German Parliament Approves "Blank Check" on EFSF Leverage; Belgian PM Seeks Firepower Exceeding One Trillion Euros

Mish Moved to MishTalk.Com Click to Visit.

Today the German Parliament approved the use of leverage without specifying an amount, thereby giving Chancellor Merkel an effective "blank check" on the amount.

In a nonbinding (on the ECB) resolution, the parliament seeks to halt ECB sovereign bond purchases. Unfortunately, the issue will be up to the ECB to decide, not Germany.

Given Italy has the ECB deck stacked, I would expect the purchases to continue in clear violation of the Maastricht Treaty.

Otherwise, the main news is talks are deadlocked with open issues regarding the size of the haircuts, whether or not the haircuts are voluntary, the amount of EFSF leverage, the size and timing of bank recapitalization efforts, and how much of the new Greek bonds will be insured.

That's a lot of open issues.

Talks Suspended Following Deadlock

Bloomberg reports EU Talks With Banks on Greece Said Deadlocked

European Union talks with banks on bondholder losses as part of a second Greek rescue package are deadlocked and have been suspended, an EU official said.

The EU is seeking voluntary participation by banks, though a forced solution can’t be ruled out, the official said in Brussels today on condition of anonymity because the talks are private.

While policy makers and bankers are converging on a 50 percent writedown for Greece’s lenders, the disagreement centered on the specifics of the transaction. The dispute focused on how much of the risk of newly issued Greek bonds should be insured, the official said.

The Institute of International Finance, which lobbies on behalf of 450 financial firms, yesterday proposed investors make a larger writedown than the 40 percent the group offered last week, said two people with knowledge of the talks. The European Union is calling on investors to forfeit as much as 60 percent, a person familiar with the talks said last week.

To safeguard banks’ finances, EU leaders will set a deadline of June 30, 2012, for banks to have core capital reserves of 9 percent after writing down their holdings of sovereign debt, according to a draft statement prepared for the summit.

The reserves must be of the “highest quality,” according to the document obtained by Bloomberg News. Lenders are expected first to tap private sources to make up any capital shortfall and “should be subject to constraints regarding the distribution of dividends and bonus payments until the target has been attained.” The document doesn’t give an estimate of total capital EU banks must raise to comply with the rule.
Germany’s Parliament Approves EFSF Leverage

ForexLive reports Germany’s Lower House Of Parl Approves EFSF Leverage Models
Germany’s lower house of parliament, the Bundestag, on Wednesday approved with a large majority the broad outlines agreed to at the EMU leaders’ summit last weekend to enlarge the capacity of the European Financial Stability Facility (EFSF) without extending the guarantees underpinning the E440 billion fund.

Of the 596 parliamentarians present, 503 voted for the motion, 89 against it and four abstained.

In the motion, the Bundestag states that after the EFSF’s capacity has been enlarged “there is no necessity for the ECB to continue the secondary market program (SMP)” of bond purchases.

On Tuesday, Chancellor Angela Merkel said that Germany does not agree with a paragraph in the draft communique for today’s European summit that says the ECB is to continue its non-standard measures.

“Germany does not accept this sentence,” Merkel told reporters. “We are negotiating at the moment to get a statement from the European Central Bank on what it plans to do and then we will take a position on that.”

The Chancellor stressed that Germany “wants to see in the wording [of the communique] much more clearly what the European Central Bank wants to do…in order to prevent the misunderstanding that politics are expecting something of the ECB.”
Leverage Approved, Amount Open

Note the open issues in just those few paragraphs. There is no agreement on the amount of leverage, the method of leverage (the SIV model vs. the Insurance Model), or what the role of the ECB will be going forward.

It was the "blank check" provision that had the market giddy at the open, even though the greater the leverage, the quicker this mess is going to blow sky high.

Belgian PM Seeks Firepower Exceeding 1 Trillion Euros

Yahoo! Finance reports Belgian premier: bailout fund needs more than euro1bn
The prime minister of Belgium says the eurozone's bailout fund should have a firepower of more than euro1 trillion ($1.4 trillion) to prevent the currency union's debt crisis from spreading.

Yves Leterme said Tuesday "I think that effectively, it has to be able to intervene a good deal beyond euro1 trillion."

He was heading into a crucial emergency summit of European leaders in Brussels.

At the summit, the leaders will seek to set up a complicated scheme to give the euro440 billion bailout fund more leverage, reduce Greece's massive debt and strengthen banks across the continent.
Throwing Money with Leverage Never Solves Problems

Throwing money around with leverage has never in history permanently solved any problems but that does not stop Monetarist and Keynesian clown fools from trying.

Regardless, talks are so contentious now over resolution of all these issues they have been suspended. Bear in mind, these are easy issues compared to treaty changes that would allow ECB printing, eurobonds, fiscal unity, etc.

Whatever agreement is worked out (or forced upon Germany) is sure to cause serious resentment starting immediately. Moreover, the next set of meetings down the road on treaty changes (or still more leverage after this is quickly used up), will make this suspended meeting look like a birthday party in comparison.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

12:03 AM

Holiday Price Wars Begin Because "Price Matters"

Mish Moved to MishTalk.Com Click to Visit.

In yet another indication of a weak holiday shopping season, stores aim to outdo each other as shoppers focus on getting the best deals.

This shopping season is shaping up into two key words "Price Matters"

A week before Halloween and two full months before Christmas, stores are desperately trying to outdo each other in hopes of drawing in customers worn down by the economy.

Wal-Mart, the biggest store in the nation, joined the price wars Monday by announcing that it would give gift cards to shoppers if they buy something there and find it somewhere else cheaper.

Staples and Bed Bath & Beyond have already said they will match the lowest prices of Amazon.com and other big Internet retailers. Sears is going a step further, offering to beat a competitor's best price by 10 percent.

In a recent poll of 1,000 shoppers by America's Research Group, 78 percent said they were more driven by sales than they were a year ago. During the financial meltdown in 2008, that figure was only 68 percent.

Duncan MacNaughton, chief merchandising officer for Wal-Mart's U.S. stores, told reporters Monday that he has noticed "much more promotional intensity and gimmicks" among competitors.

The holiday price wars mark an acceleration of a trend that has already swept the retail industry. Lowe's, the nation's No. 2 home improvement store, said in August it was starting to focus on everyday low prices for items that customers can easily comparison-shop at rivals like Home Depot and Sears.

64 percent of shoppers polled said that it would take discounts between 30 percent to 50 percent to get them to spend, up from 54 percent last year, according to a recent Citi Investment Research & Analysis survey of a little more than 1,000 customers. Customers looking for 60 percent off as a big motivator to spend increased to 10 percent from 8 percent last year, the survey showed.

"The reality is consumers are targeted. They're well informed, and they've searched the Internet for price information," said Bill Martin, co-founder of ShopperTrak, which expects foot traffic to drop 2.2 percent during the holiday season compared with a year ago.
It is extremely rare to see shopping estimates lower than last year. That does not mean lower traffic and lower sales are written in stone, but that is the way consumer sentiment numbers and shipping stats are shaping up.

For details, please see ...

Even if spending does not drop, expect profits to drop on reduced markups and increased discounts.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Tuesday, October 25, 2011 2:51 PM

Greece Pension Plans Insolvent; No Conceivable Way to Make Promises; Can Spain and Portugal be Far Behind?

Mish Moved to MishTalk.Com Click to Visit.

I am attempting to figure out just how deep in the hole Greek pension plans are. I have not had any luck finding plans or asset holdings but there are a few things we know and some assumptions we can make.

One of the things we do know is that Greek pension plans are one of the largest holders of Greek bonds.

For the sake of argument, let's assume a 60% haircut on the value of those bonds although I believe that haircut will increase over time. The critical question is what percentage the pension plans hold Greek bonds, other sovereign bonds, Greek equities, and other equities.

Here is a look at the stock markets of Greece, Germany, and France from the site Trading Economics. Click on any chart for sharper image.

Greece Stock Market

German Stock Market

French Stock Market

Here are a few scenarios assuming the Greek pension plans are primarily weighted in Greek bonds. These scenarios may or may not be realistic.

60% Greek Bonds and 40% Greek Equities

Down 60% on 60% and down 85% on 40%.
Current value is 40% of 60% + 15% of 40%
Current value is 24% + 6% = 30%
Plan value is down 70% since 2008

60% Greek Bonds and 40% European Equities (weighted 50% Greece, 25% Germany, 25% France)
Down 60% on 60%, Down 85% on 20%, Down 41% on 10%, Down 25% on 10%
Current value is 40% of 60% + 15% of 25% + 59% of 10% + 75% of 10%
Current value is 24% + 3.75% + 5.9% + 7.5% = 41.15%
Plan value is down 58.85% since 2008

There are more than one Greek pension plan programs, but no matter what they are invested in, all of them have horrendous losses in the last few years. Moreover, the more the plans are invested in the Greek equities markets and Greek bonds vs. other European bonds and other European equities, the worse off those pension plans are.

If the plans are primarily in German and French bonds as opposed to Greek bonds, the plans are in much better shape than presented in the above examples. If the plans are primarily in Greek equities they are far worse.

To know just how badly underfunded the plans are, we need to look at individual plans, as well as pension plan assumptions. Greek citizens need to be told the truth regarding those pension plans, no matter how bad the situation is.

Because of the holdings of Greek bonds, one thing I am sure of is the already crippled finances of Greek citizens are about to take another hit. I do not believe there is any conceivable way the promises will be kept even with agreed upon pension cutbacks.

The answer to headline question "Can Spain and Portugal be Far Behind?" is no. It will become apparent as soon as there are haircuts on Spanish and Portuguese bonds (assuming it is not apparent already).


Please consider Funds, banks exposed to any Greek restructuring

Greek banks are estimated to hold close to 20 percent of the country's estimated 327 billion euro sovereign debt, or nearly 60 billion euros. National Bank has the biggest share at 12.8 billion euros; the second biggest bank, EFG Eurobank, has about 7.4 billion euros, according to sources at the banks.

Greek social security funds hold slightly over 8 billion euros, according to the Finance Ministry. But their relative exposure is huge, as their liquid assets total 11.68 billion euros. IKA, the biggest fund, has almost two thirds of its liquid assets in Greek bonds and Treasury bills.

If they are unable to pay health and pension benefits, the state will be forced to help, which would further hurt its fiscal position as the government defies public opposition to impose waves of tough austerity measures.

Some analysts therefore think the Greek politicians who are urging debt rescheduling may not fully understand what it would entail.
Two-thirds in Greek bonds and US Treasuries, OK - Split how?

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Last 10 Posts

Copyright 2009 Mike Shedlock. All Rights Reserved.
View My Stats