China Plows Into Absurd Bet on Long-Term Japanese Debt

Bloomberg reports China’s Net Purchases of Japan’s Long-Term Debt Rises to Record in April

China’s net purchases of Japan’s long-term debt reached a record as the larger nation seeks to diversify the world’s biggest currency reserves.

China bought a net 1.33 trillion yen ($16.6 billion) in Japanese long-term bonds in April, the biggest amount since records began in January 2005, according to data released today in Tokyo by Japan’s Ministry of Finance. The nation sold a net 1.47 trillion yen of short-term debt, the data shows.

“As China tries to diversify its assets with its huge foreign-exchange reserves, it probably wants to have yen- denominated assets to some extent” in the longer term, said Tetsuya Inoue, chief researcher for financial markets for Tokyo- based Nomura Research Institute Ltd. “China has a strong trading relationship with Japan.”

Japanese government debt due in 10 years and longer has handed investors a 2.2 percent gain since the start of April, versus a 1 percent advance for the broad market, based on Bank of America Merrill Lynch data. The Nikkei 225 Stock Average has fallen 2.9 percent over the same period.

$16.6 billion is peanuts to China, but the trade itself is ridiculous. 10-Year Japanese debt is yielding 1.2%. 30-year Japanese debt yields 2.2%.

Pray tell what is the upside? Is 10-year debt falling to zero%?

Bear in mind that nations do not enter trades on a profit-loss basis so losses are of no concern. However, why take risks for almost no chance of gain when there are huge risks of losses, especially when there is a more viable play.

Buying long-term Japanese bonds is a heads you break even, tails you lose your ass bet. One can lose twice if yields rise and the Yen sinks. It is a sure loser if yields rise substantially, even if the Yen appreciates.

Holding Yen straight-up at least has a chance. I do care for that play, but perhaps I am wrong.

So what is China thinking? The answer is they aren't thinking.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bernanke's Self-Serving Bold-Faced Lies

Inquiring minds are reading Bernanke's blatantly self-serving speech including some bold lies regarding the U.S. Economic Outlook.

I can condense Bernanke's speech down to a single paragraph. An interesting set of word cloud images follows this summation.

Blah, blah, blah brief update. Economic growth slower than expected. Blah, Blah, uneven across sectors and frustratingly slow, millions of unemployed and underemployed workers. Blah, Blah, ability and willingness of households to spend will be an important determinant of the pace at which the economy expands in coming quarters. Blah, blah, signs of gradual improvement. I expect hiring to pick up. Business sector presents a more upbeat picture. Blah, blah, blah Fiscally constrained state and local governments continue to cut spending and employment. The solution to this dilemma, I believe, lies in recognizing that our nation's fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. Blah, blah. Establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence. Blah, Blah, the Outlook for Inflation Blah, Blah, the prices for many commodities have risen sharply, resulting in significantly higher consumer prices for gasoline. Price index for personal consumption expenditures has risen at an annual rate of about 3-1/2 percent, compared with an average of less than 1 percent over the preceding two years. Blah, blah, blah, not much evidence that inflation is becoming broad-based or ingrained in our economy Blah, Blah, subdued unit labor costs should remain a restraining influence on inflation. Blah blah, longer-term inflation expectations reasonably stable. Blah, blah, commitment of the central bank to low and stable inflation remains credible. Blah, blah world oil consumption rose by 14 percent from 2000 to 2010. Blah, blah, U.S. oil consumption was about 2-1/2 percent lower in 2010 than in 2000. Blah, blah improving diets in the emerging market economies. Blah blah, Production shortfalls have plagued many other commodities as well. Not all commodity prices have increased, blah, lumber and natural gas near levels of early 2000s. Blah, blah, dollar's decline can explain, at most, only a small part of the rise in oil and other commodity prices. Blah, blah, blah dual mandate of maximum employment and price stability, and we will certainly do that. Blah, blah, economic recovery in the United States appears to be proceeding at a moderate pace, longer-term inflation expectations remain stable. Blah blah, (FOMC) has maintained a highly accommodative monetary policy, keeping its target for the federal funds rate close to zero. Blah blah, economic conditions are likely to warrant exceptionally low levels for the federal funds rate for an extended period. Blah, blah, blah [blatant lie coming] Federal Reserve's actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer. Blah blah blah Federal Reserve be vigilant in preserving its hard-won credibility for maintaining price stability.

Word Cloud of Bernanke's Speech

Zero Hedge provides this word cloud image of Bernanke's Speech.



Inspired by Zero Hedge, I ran my summation through a word cloud program.



I believe I've captured the essence of Bernanke's speech perfectly except for the lies.

Self-Serving Lies

Bernanke did everything possible to mitigate his role and the Fed's role in this crisis. His unmitigated gall comes through loud and clear with this bald-faced lie:

"The Federal Reserve's actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer."

For starters, were it not for the complete ineptitude of the Greenspan and Bernanke Fed the US would not be in this mess in the first place. Second, there most assuredly is a cost to the Fed's policies.

Prices are higher, wages are not. Banks were bailed out at taxpayer expense. The Fed pays interest on reserves. That interest comes from taxpayers. The Fed's balance sheet is loaded to the gills with garbage from Fannie Mae and Freddie Mac. The Fed is not at risk on that garbage because Congress approved unlimited backing for GSE debt. That unlimited backing is over $300 billion and counting. Those losses are not all on the Fed's balance sheet of course. However let's not ignore the Fed's role in getting Congress to pass that blatantly stupid bill.

Let's also not forget the Fed cheerleading fiscal stupidity in Congress, not wanting Congress to do anything about monstrous deficits now. Keynesian and Monetarist clowns never want to do anything now. They always want to do it at the "appropriate" time, which in practice means never.

Most importantly I would like to point out the very real cost of those on fixed income, attempting to get by with higher food prices, higher gasoline prices, etc. I dare Ben Bernanke to face senior citizens and tell them there is no cost associated with interest rates at 0%.

In case you missed it please read Hello Ben Bernanke, Meet "Stephanie". That post is about the plight of those on fixed incomes struggling to get by with rising costs and CD rates at 1%.

Finally, there is an unseen cost to the stupidity of Bernanke's policies. That unseen cost is the cost associated with fostering still more speculation in the financial markets. There is another bubble in the stock market, another bubble in junk bonds, and another bubble in commodities.

We have yet to feel the ramifications when those bubble pop, and they will. Bernanke cannot see those bubbles for the same reason he could not see the bubble in housing, the bubble in credit, the rapidly rising unemployment rate, and countless other things he missed.

Bernanke is a complete fool, trapped in academic wonderland, completely oblivious as to how the real world works. To top it off, Bernanke has the gall to knowingly lie about the real world effects of his blatant stupidity.

Ben Bernanke, you are disgusting.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Prudently Managed Banks Victimized by Taxpayer-Subsidized Too-Big-To-Fail Banks; Seen and Unseen in Dodd-Frank Regulation

Dallas Fed president Richard Fisher blasted too-big-to-fail banks, CEO compensation, bank risk-taking, inadequacies in Dodd–Frank regulation, and unintended consequences of poor legislation in a speech in New York on Monday.

Please consider excerpts from Containing (or Restraining) Systemic Risk: The Need to Not Fail on 'Too Big to Fail'

I confess that in matters of monetary policy and regulation, I am often in the minority. This does not make me the least bit uncomfortable. The majority opinion is not always right; indeed, my experience as an investor has biased me to conclude that more often than not, the consensus view is the wrong view, even among the most erudite.

For example, some of you may recall the public letter written by 364 eminent economists predicting disastrous consequences that would result from Thatcher’s policy initiatives. That letter was published in the Times of London on March 30, 1981. The British economy began a recovery almost immediately afterward.

Most regulatory reform initiatives applied since the Banking Act of 1864 have missed the mark. They looked good on paper and appeared to solve the problems of the day but later proved not up to the task. This is especially true with efforts to solve the “too big to fail” problem, in which an unwillingness to follow through on prior policy commitments to actually close down large failures and impose losses on their uninsured creditors has led to what economists call “time inconsistency” in policy.

While there is much to criticize about Dodd–Frank, I cotton to those blunt statements on ending too big to fail. For, if after the myriad rules and regulations are written and implemented we have not eradicated too big to fail from our financial infrastructure, reform will have failed yet again.

In looking at regulatory reform and implementing Dodd–Frank, I think a key point worth repeating is that the distinction between “commercial banks” and “the shadow banking system” is a false one. The two became intertwined beginning with the bypassing of Glass–Steagall strictures by Sandy Weill and Citicorp and the deregulatory initiative of Gramm–Leach–Bliley. The fact is that the largest commercial banks played a major role in many of the more problematic phenomena of the recent credit boom and ensuing crisis, including the spread of what I have previously referred to as financial STDs, or securitization transmitted diseases.

In the aftermath of the Panic, these viruses linger. Last week, the New York Times printed an interesting article by Joe Nocera, who drew upon the observations of a highly regarded regional banker from Buffalo, Robert Wilmers of M&T Bank. Wilmers claimed that of the $75 billion made by the six largest bank-holding companies last year, $56 billion derived from trading revenues.

Nocera noted that "in 2007, the chief executives of the Too Big to Fail Banks made, on average, $26 million … more than double the compensation of the top nonbank Fortune 500 executives."

These recent numbers buttress Nocera’s reasonable conclusion that bank CEOs “were being compensated in no small part on their trading profits—which gave them every incentive to keep taking those excessive risks.”

I am sympathetic to these concerns. There is no logic to having the public underwrite through deposit insurance or subsidize through protective regulation the risk-taking ventures of large financial institutions and their executives. There is a substantial case to be made for separating the “public utility”―or traditional core function of banking―from the risk-taking function.

To be sure, financial problems are not limited to large institutions and their complex, opaque and conflicted operations. Regional and community institutions that have, for the most part, stuck to the public utility function have faced their own difficulties, especially in the context of construction lending. But while over 300 banks failed during the crisis, another 7,000 did not. Community and regional banks that are not too big to fail appear to have succumbed less to the herdlike mentality and promiscuous financial behavior that affected their megabank peers.

Moreover, when smaller banks got into deep trouble, regulators generally took them over and resolved them. In the treatment of big banks, regulators, for the most part, tiptoed around them. Failing big banks were allowed to lumber on, with government support, despite the extensive damage they wrought. Big banks that gambled and generated unsustainable losses received a huge public benefit: too-big-to-fail support.

Post-crisis, the large institutions are even larger: The top 10 now account for 64 percent of assets, up from 58 percent before the crisis and substantially higher than the 25 percent they accounted for in 1990. In effect, more prudent and better-managed banks have been denied the market share that would have been theirs if mismanaged big banks had been allowed to go out of business. This strikes me as counter to the very essence of competition that is the hallmark of American capitalism: Prudently managed banks are being victimized by publicly subsidized competition from less-prudent institutions.

In solving the crisis at hand during the Panic, it appears that the most imprudent of lenders and investors were protected from the consequences of their decisions; the sinners were rescued and the virtuous penalized. In crafting regulations in response to Dodd–Frank, we need to restore market discipline in banking and let the market mete out its own brand of justice for excessive risk-taking rather than prolong the injustice of too big to fail.

It is not difficult to see where this dynamic, if uncorrected, will lead—to more pronounced financial cycles and recurring crises. I would argue that the failure to reform the banking system in Japan was one of the principal reasons for that country’s “Lost Decade(s).” We must not let that pathology take hold here.

Making Matters Worse

Here, I think it wise to draw upon the insight of the classical liberal Frédéric Bastiat in his take on unintended consequences.

To the extent that a large scale becomes necessary to absorb the regulatory cost associated with reform, Dodd–Frank could intensify the tendency toward bank consolidation, resulting in a more concentrated industry, with the largest institutions predominating even more than in the past. Such an outcome would appear to me contrary to the stated spirit and goal of the act. A more consolidated industry would only magnify the challenge of dealing with systemically important institutions and offsetting their historically elevated too-big-to-fail status.

My concerns over regulation-induced economies of scale and the implications for industry consolidation apply to all the size classes of banks, given the extensive list of new or enhanced requirements created by Dodd–Frank and their associated compliance costs.

The act indicates that all banking organizations with more than $50 billion in assets should be subject to enhanced supervision. Yet, few really believe a $50 billion bank poses a systemic threat to our $17 trillion banking system. Nor is a $50 billion bank qualitatively similar along risk dimensions to the very largest ones that exceed $2 trillion in size. The top 10 banking organizations have a cutoff point of $300 billion. I posit that this group should constitute the primary target for enhanced supervision. Interestingly, despite its large share of industry assets, this group holds only about 20 percent of the small-business loans on bank books. Clearly, these institutions are engaged in substantial activities outside the traditional banking role. It is within these very largest banks, and perhaps a few slightly smaller yet highly complex or interconnected ones, that systemic risk is concentrated.

If the enhanced-supervision requirements are not highly graduated and imposed primarily on the very largest banks, it is not difficult to imagine how the costs associated with such supervision could lead mid-tier banks that exceed the $50 billion threshold—yet fall well short of megabank status—to seek merger partners in order to achieve sufficient scale by which to help cover the cost of regulation. This would compound the problem rather than alleviate it.

However, when it comes to the top 10 or so, I would apply Dodd–Frank extensively and vigorously. I would apply all the elements of heightened supervision—from enhanced standards for capital and liquidity requirements, leverage limits and risk management to the additional measures of living wills and credit-exposure reports, concentration limits, extra public disclosures and short-term debt limits—with full force.

I quoted Bastiat’s criterion for a good economist as one who accounts for “effects that must be foreseen.” Economists did not do a good job of foreseeing the financial crisis. Neither did regulators. Moreover, previous measures directed at containing too big to fail proved ineffective, with no one too surprised that when crisis came, many large-bank counterparties were protected under implicit guarantees.

Let’s hope that going forward, regulators can do better, avoiding both unintended consequences and time inconsistencies. For if they don’t, and they are unable to solve the too-big-to-fail issue in a timely manner, we will ultimately have to take more draconian measures and simply break up the largest banking organizations to eliminate the threat they pose to financial stability and economic growth.

That is my contrarian view, and I’m sticking with it.

Thank you.

Fisher Hits the Bulls-Eye.

It is exceptionally rare for me to endorse a lengthy speech by a Fed governor. However, Fisher hits the bulls-eye on many points.

• Fisher blasted Sandy Weill and Citicorp
• Fisher blasted too-big-to-fail
• Fisher blasted Dodd-Frank
• Fisher blasted CEO pay
• Fisher blasted the "herdlike mentality and promiscuous financial behavior" of large banks
• Fisher blasted the removal of Glass–Steagall
• Fisher cited trading profits and promotion of risk taking
• Fisher cited Frédéric Bastiat on unintended consequences and the seen vs. unseen

What's not to like?

I suspect this is one of the few lengthy speeches by anyone on bank regulation that would have Barry Ritholtz, Calculated Risk, Yves Smith, and myself in major agreement. It would be interesting to see them chime in.

Alas, I suspect Fisher wasted his breath. Bernanke is not behind those ideas, and getting Congress to completely revamp Dodd-Frank would be difficult at best, even with a major push by Bernanke.

Reflections on Another Lost Decade

Fisher said "I would argue that the failure to reform the banking system in Japan was one of the principal reasons for that country’s Lost Decade(s). We must not let that pathology take hold here."

Unfortunately that very pathology has already taken hold.

Greenspan and Bernanke both criticized Japan for not forcing banks to take losses and write down assets. When given the same opportunity, the Fed and ECB opted to kick the can at taxpayer expense while embarking on a misguided QE policy, just as Japan did.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Excluding Default Risk, 33 European Banks Need Additional $347 Billion of Capital; Banks Trade Below Book Value; Only 22% Expect Credible Stress Test

European banks have $188 Billion at risk from Greece, Ireland, Portugal, and Spain. Excluding default risk, those banks are still woefully short of capital according to a study coming out tomorrow.

Please consider European Banks’ Capital Shortfall Means Greece Debt Default Not an Option

The “fragilities” of Europe’s banking industry mean a Greek default isn’t an option, European Union Economic and Monetary Affairs Commissioner Olli Rehn said in New York last week. By delaying a decision some investors consider inevitable, policy makers risk increasing the cost to European taxpayers and prolonging Greece’s economic pain.

“European officials are trying to buy time for the troubled economies to get their house in order and the banks to be strengthened,” said Guy de Blonay, who helps manage about $41 billion at Jupiter Asset Management Ltd. in London.

While estimates of the capital shortfall vary, the vulnerability of European banks to a sovereign shock isn’t disputed. Independent Credit View, a Swiss rating company that predicted Ireland’s banks would need another bailout last year, found in a study to be published tomorrow that 33 of Europe’s biggest banks would need $347 billion of additional capital by the end of 2012 to boost their tangible common equity to 10 percent, even before any sovereign default.

European banks had $188 billion at risk from the government debt of Greece, Ireland, Portugal and Spain at the end of 2010, according to a report this week from the Bank for International Settlements. European lenders held $52.3 billion in Greek sovereign debt, with German banks owning the biggest share, the BIS data showed.

European banks are trading at 0.83 times book value, according to the banks index, almost the widest discount since the end of 2008 to their U.S. counterparts, which trade at 0.94 times book, based on the 24-member KBW Bank Index. (BKX) The five-year average price-to-book ratio of the 51 European lenders is 1.34, data compiled by Bloomberg show.

That banks in both regions are trading below book value indicates investors don’t believe their assets are worth as much as the companies say.

Low market valuations make any potential capital-raising more dilutive for shareholders, said Simon Maughan, head of sales and distribution at MF Global Ltd. in London. Questions about regulatory requirements are adding pressure on bank stocks, making a quick recovery unlikely, he said.

“The big issue behind why price-to-book ratios are well below averages is that the market is saying banks can’t make a proper return and certainly not a return anything like they’ve been used to getting,” said Maughan.

EU regulators are seeking to assuage investors’ concerns about capital with a second round of stress tests on 90 lenders. The European Banking Authority is promising tougher tests this year after failing seven of 91 banks last year and finding a capital shortfall totaling 3.5 billion euros, or about a 10th of the smallest estimate from analysts. Ireland’s biggest banks needed a rescue four months after passing the test.

Tests carried out in the U.S. in 2009 found 10 lenders including Bank of America Corp. (BAC) and Citigroup Inc. needed to raise $74.6 billion of capital. The banks were required to raise the funds from private investors or accept government aid.

Mark-to-Fantasy Asset Valuations

Bank stocks have been in the gutter because of mark-to-fantasy accounting. No one believes asset valuations, and no one believes results of existing stress tests.

Few will believe the results of the next one.

Only 22% of Respondents Expect Next Stress Test will be Credible

The Wall Street Journal reports Spanish, German, Greek Banks Seen Failing Stress Tests -Survey

Banks from Spain, Germany and Greece are expected to have to raise the most new capital following the next round of European stress tests, according to a survey of investors by Goldman Sachs published Monday.

But the survey of 113 fund managers, mostly from hedge funds and long-only investors, also found that only 22% of respondents expect the test to be a "credible reflection of bank resilience," highlighting the lack of credibility of the stress test.

Last year's test rubber-stamped the balance sheets on several banks that later fell on hard times, including Irish banks that a few months after the tests were published had to be bailed out.

According to the Goldman survey, investors expect the stress tests to show that banks will need another EUR29 billion in fresh capital. It expects 90% of the banks included in the test to pass. Investors on average expected nine out of the 91 banks that will take the test to fail, down from 10 institutions that failed last year's stress tests.

The stress test should include default because default is the epitome of stress. Default is also highly likely.

The expected result of the stress test is a mere EUR29 billion in fresh capital ($42.5 billion US) for 91 banks. Compare that to Credit View's analysis that shows 33 banks, need $347 billion in capital, not counting a risk of default.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fisher Calls for "Slow Slog" Recovery Yet Says Fed has "Done Enough if Not Too Much" to Stimulate Economy

Bernanke is calling the shots but that has not stopped a few Fed Governors from speaking their minds. Please consider Fisher Says Central Bank Has ‘Done Enough if Not Too Much’ to Help Economy.

Federal Reserve Bank of Dallas President Richard Fisher said the central bank has “done enough if not too much” to stimulate the economy and “one has to question the efficacy” of doing more.

While “it’s going to be a very slow slog” for the economy, the U.S. should grow at more than a 3 percent annual rate in the second half of this year, Fisher, 62, said today in response to audience questions after a speech in New York.

The Fed is set to complete its second round of large-scale bond purchases this month, and Fisher has said he will be among the first policy makers to push for a reversal of policy as needed. The Dallas chief, who votes on the Federal Open Market Committee this year, dissented five times in favor of tighter policy the last time he was a voting member in 2008.

In his speech, Fisher reiterated his view that the nation’s largest banks may eventually need to be broken up to prevent them from posing threats to stability and economic growth. He echoed concerns among Fed district bank presidents, including Thomas Hoenig of Kansas City and James Bullard of St. Louis, that the financial-overhaul law enacted last year may not be strong enough to solve the too-big-to-fail problem and to prevent a meltdown by one or more big banks from damaging the economy.

Too Much

One look at speculation in commodities, the stock market and junk bonds is all you need to see to understand the Fed has done too much already, yet it did not help the real economy one bit.

As for 3% second half growth, I will take the under. Moreover, barring a drop in the participation rate, I expect the unemployment rate to rise.

Mike "Mish" Shedlock
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Housing ATM Theory and Finland's Property Bubble

Ukri who lives in Finland writes ....

We have very frothy housing prices here, especially in the capital area, and a world record of sorts in tying the loans into adjustable rate mortgages. Fixed rates are a peculiarity in Finland. Over 90% of all mortgages here are adjustable rates.

These clowns are actually trying to sell reverse mortgages for mostly elderly customers. And they are promoting them with the classic ATM-in-da-house bubble-pictures! The captions are something like "Going traveling again?!" and "Yeah since I have this home-made cash."

Above the pic it says something with a meaning of: "When you save equity by paying a mortgage, you can later utilize the equity once you retire".

Add Finland to the list of countries that will blow sky high once we get some sanity into euribor rates in terms of pricing risks accordingly instead of socializing the risk factor.

Get Your Housing ATM Reverse-Mortgage Today



Interestingly, the cartoon is supposed to depict a serious proposal from the quarterly housing market analysis of HYPO.

The captions were in Finnish but I changed them courtesy of Ukri's translations.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Beyond the Point of No Return; Operation Twist to Infinity

Inquiring minds are reading a post from Steen Jakobsen, Chief Economist at Saxo Bank in Denmark. Please consider Steen's Chronicle: Consensus, buying time aren't acceptable

There are three major themes this morning: the election in Portugal, Greece bail-out Part II, and confirmation of slowing US growth.

Portugal

On the surface, the Portuguese election looks like a victory for change as the Social Democrats (PSD) secured 30 per cent of the vote and appear to have a solid majority of 126 seats in the 230-seat Parliament with the support of the Conservative Popular Party. The new prime minister, Passos Coelh, has promised austerity beyond the needed cuts of 3.5 per cent of GDP per annum layed out in the IMF plan.

But real change - what change?

Portugal has become the poster child of an Entitlement Society – the public sector has extended everywhere and private capital has been crowded out by the need to keep the public sector employment in place. The only solution to Portugal’s catch-22 is to create real private sector growth and to cut the public sector down in size. Portugal has one of the lowest GDP growth rates in Europe with a four-year average of -0.7%, and an outlook for -2.1% in 2011 and -1.5% for 2012, according to the ever too optimistic OECD. Even more importantly than GDP growth rates, unemployment will rise to 11.7% and then 12.7% over the next two years from present 10.8%! That’s a recipe for a social upheaval.

This is the huge national dilemma – Portugal has gone beyond the point of no return – the problems facing the country are not merely those of “challenges”, but massive, structural intractable problems. Even if Portugal did the “right thing” – curtailed the public sector, refinanced the banks, and created a pro-business, pro-growth agenda, it would take years, not months before Portugal again starts moving forward. My issue, as always, is not with the people or the individuals of Portugal, but with the system. The Portuguese entitlement society began collapsing years ago, and the only reason the situation has been allowed to limp along until this year was due to the artificially low rates generated by the ability to ride German credit rating for years.

Greece Bail-Out Part II

The Greek drama continues – basically no one has a clue how to solve the issue of giving Greece more money when the funding runs out next spring. The “re-profiling” of debt (extending duration and the like through a “soft restructuring”), the Vienna solution and the new path of creating ratings default but not a CDS default event are all too complicated for me. My mentor always told me: if it takes more than one minute to understand your arguments, you have no arguments. Clearly, using Greece as the benchmark for how the EU will face down the sovereign debt issue, the EU institution is critically challenged, and Greece is even more so.

For starters, we have to shake our heads at the fact that, the EUR 327 billion in outstanding Greek debt, more than 90 per cent is under Greek law (source: Citigroup), whereby Greek bonds have no collective action clause (CAC). This would mean that a voluntary debt restructuring requires 100 per cent of investors to accept the terms to avoid triggering a default.

Furthermore, the ECB continues to object to any sort of debt restructuring as it would blow a hole in their own portfolio and create a moral hazard. Good luck to EU trying to resolve this before the June 23-24 summit.

Slowing US Growth

How low can we go on US growth? The status quo is maintained and extended in the USA – as the fortunes for Main Street and Wall Street continue to head in opposite directions. The Bernanke cocktail of lower rates for longer has only made Wall Street richer and Main Street poorer.

Where from here? We have our most likely scenario as one called 'QE to Infinity' but it may need to be changed to QE and Operation Twist to Infinity.

Bernanke thinks it’s only a matter of size and objective to do what could not be achieved in the 1960s. As it happens, Operation Twist not only failed but became the Great Inflation of 1965-81. Fed rates were 3.0%, and were supposed to go back to 2.5% but ended at 6.0% before the Fed of the 1960s gave up.

We remain bearish the market as per my earlier note: "No more Silver Bullets" and I have increased the Crisis 2.0 odds from less than 10% to 25% as the amount of troublesome issues continue to rise day-by-day.

Operation Twist to Infinity

Steen cites a reference to "Operation Twist" in footnote 11 to Bernanke "famous" deflation speech from 2002: "Deflation: Making sure 'It' does not happen here" - the very same speech which was academic reasoning for QE and QE2.

An episode apparently less favorable to the view that the Fed can manipulate Treasury yields was the so-called Operation Twist of the 1960s, during which an attempt was made to raise short-term yields and lower long-term yields simultaneously by selling at the short end and buying at the long end. Academic opinion on the effectiveness of Operation Twist is divided. In any case, this episode was rather small in scale, did not involve explicit announcement of target rates, and occurred when interest rates were not close to zero.

Let's Twist Again Unlikely For Now

QE2 did not stimulate employment or housing. However, it did stimulate risk taking in financial markets, and bubbles in commodities and junk bonds. In other words, QE2 was a total failure.

Will that stop Bernanke?

Of course not. However, "Let's Twist Again" is unlikely for now given that Bernanke will not want the short end of the curve to rise just yet.

Nonetheless, I am in complete agreement with Steen on the critical point: "Bernanke thinks it’s only a matter of size and objective to do what could not be achieved in the 1960s."

Bazooka Theory Revisited

Recall that Treasury Secretary Paulson's failed "Bazooka" policy was based on the construct that size matters. The EU's silly attempt of talking down problems in Greece was based on the same principle.

"If you have a bazooka in your pocket and people know it, you probably won't have to use it." Paulson said at a July 15 Senate Banking Committee hearing in regards to Fannie Mae and Freddie Mac.

Bazoooka Theory vs. Actual Results

I discussed the ECB's attempt at Bazooka policy on February 12, 2010 in EU Tries Paulson's Bazooka Ploy; Bazooka Theory vs. Historical Results.

Did the EU's ploy of talking down problems and threatening action work? No, it failed.

Did that stop Trichet? No, it didn't. Indeed the ECB, IMF, and EU tried a basket of ideas that all failed. Then Trichet went on to buy a boatload of Greek debt believing it would cap yields on Greek bonds. That did not work either.

Now Trichet has upped the ante once again as noted in his Call for Creation of European "Nanny-State" and Fiscal "Nanny-Zone"

Cure Cannot be Same as the Disease

Keynesian and Monetarist clowns always think it's just a matter of size. When proven wrong they simply grab more power and try again.

I discussed that idea just this morning in Fed Uncertainty Principle as Applied to ECB: Trichet's Power Grab

The disgusting state of affairs is that bureaucratic fools in the EU, US and everywhere else, all believe the cure is the same as the disease if only done in big enough size.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fed Uncertainty Principle as Applied to ECB: Trichet's Power Grab

My personal favorite post is the Fed Uncertainty Principle written April 03, 2008. I called for a huge power grab by the Fed well before it happened and well before the Lehman crisis and bank bailouts.

Interestingly, the Fed Uncertainty Principle, especially corollary number 2, clearly applies to the ECB as well.

Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

What brought the Uncertainty Principle to mind is a Google translation on FAZ.NET.

"The progressive shift of power to Brussels"

Please consider "The progressive shift of power to Brussels"

In a "five-point memorandum of [Christian Democratic Union party] CSU General Secretary Alexander Dobrindt, responds to the recent proposals of the President of the European Central Bank (ECB), Jean-Claude Trichet.

"The power of the EU has become larger after each crisis, not less. We must, therefore, the automatism that leads to a progressive shift in power towards Brussels, to the test. "It would have to determine criteria, is the point at which the European integration process to end. Then no other powers should be shifted more to Brussels. "If the analysis shows that the ultimate purpose has already been exceeded, skills are transferred back."

Dobrindt criticized the ECB's role in the € crisis. "There needs to be examined in particular whether the purchase of government bonds, debt-EU countries with the legal foundations of the ECB is compatible."

The above translation is choppy. However, choppy translation or not, the point is crystal clear: Power increasingly concentrates in the hands of those who caused the crisis. In the US that it the Fed. In Europe, it applies to the ECB.

Here is the original link in German: "Fortschreitende Machtverschiebung in Richtung Brüssel"

Although it is perfectly obvious, I did not think of Trichet's role in terms of the Fed Uncertainty Principle until reading that translation.

ECB president Jean-Claude Trichet was one of the original architects of the Maastricht Treaty, and he has violated that treaty at will ever since.

For further discussion, please see Trichet Calls for Creation of European "Nanny-State" and Fiscal "Nanny-Zone".

German Finance Ministers Wants Haircuts

As long as we are in the German to English translation mode, inquiring minds should consider Schäuble wants to take private creditors in the duty

Federal Finance Minister Schäuble (CDU) said at the weekend, including the private creditor would have to contribute. In the euro zone, he finds it, but so far little backing.

The Finance Ministry on Sunday denied a report by the newspaper "Wall Street Journal, after which the 17 euro zone countries had already agreed that private creditors about 30 billion euro should contribute to a new rescue pact. It had still not been decided, said a ministry spokesman, the Frankfurter Allgemeine Zeitung in Berlin. The federal government set but it is extremely committed to let the private creditors not left out and formalize their financial participation.

The Federal Ministry of Finance has meanwhile prepared a paper on the involvement of private creditors in the Greece-rescue. In essence it provides that private investors to abandon some of their claims against Greece. It is not enough that they voluntarily leave their money for longer in the country, as proposed by the European Central Bank (ECB).

"Public participation should include a new three-year program from 2012 to 2014," says the paper, according to the Welt am Sonntag ". The program should be accompanied by a voluntary exchange of existing bonds into new bonds with a longer term of seven years. Those investors who are switching into could be addressed in future, preferably when further debt restructuring should be required. "Bonds that are not exchanged, would not enjoy this advantage," says the paper. In addition, should the European Central Bank to agree to release only the new bonds as collateral for refinancing banks in Greece. This would imply that exchange, the European central banks almost 50 billion euros in Greece bonds.

The original article in German is Schäuble will private Gläubiger in die Pflicht nehmen.

The ECB certainly does not want to discuss haircuts. Moreover, US media has recently portrayed the German finance minister as giving in to that concept as well. Thus things are not as portrayed.

Note that a duration change, voluntary or not, constitutes a default according to Moody's, Fitch, and the S&P rating agencies.

Addendum:

Reader EM offers a smoother translation of the FAZ article as follows:

The CSU fundamentally opposes a further transfer of power in the EU in the direction of Brussels. A "five-point memorandum" from CSU General secretary Alexander Dobrindt, a copy of which has been obtained by the Frankfurter Allgemeinen Zeitung, moreover argues for a taking back of authority from Brussels.

Dobrindt is reacting especially to the most recent proposals of the President of the European Central Bank (ECB) president Jean-Claude Trichet. A European financial authority and a European finance ministry are in contravention of the EU accords. Such demands represent "A de-democratization and de-sovereignization of the EU states", writes Dobrindt. This must be "defended against".

If more power were devolved toward Brussels, this would restrict the range of options "in Berlin and Munich", writes Dobrindt. "The power of the EU has become larger after each crisis, but the magnitude of the following crisis has not been reduced. We must therefore put the automatism that leads to a progressive shift in power towards Brussels, to the test." Criteria must be established as to at which point the European integration process is considered to be complete. At that point no further powers should be transferred to Brussels. "If the analysis shows that the finality has already been exceeded, powers are transferred back."

Dobrindt criticized the ECB's role in the EU crisis. "It must especially be examined, whether the purchase of government bonds of indebted EU countries is compatible with the legal foundations of the ECB."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Could you endure 15 seconds of waterboarding even if you knew it was a setup and could cancel it at will?

Unfortunately the video is not embeddable, but please consider this short link on waterboarding where Playboy.com journalist Mike Guy underwent waterboarding by a trained member of the U.S. military in the site's new Lab Rat feature.

Personally I believe that it torture. So does Senator John McCain.

Regardless of whether you think it is torture, the fact is, waterboarding is counterproductive.

For more details, please consider the following articles

• Torture Never Works; Ron Paul on Torture and Secret Prisons; "Torture is What the Nazis Did"


• McCain on Torture and Waterboarding; Ron Paul on Bin Laden and Torture: Bin Laden Is Dead – Let’s Come Home!

My position is simple: "Thinking that torture is wrong is not a liberal or conservative value - it is simply a value."

Waterboarding is torture.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Guru Focus Interview with a Value Investor; Dissimilar Starting Points, Many Similar Conclusions

Inquiring minds are reading a Guru Focus Interview with Investor Arnold Van Den Berg, a value investor.

Guru Focus: You seem to believe that there will be high inflation risk in the coming years. What is the best strategy in this inflationary environment?

Van Den Berg: It is important to define what we mean by inflation. Inflation rates in the low single digits (1% to 3.5%) generally meet the definition of low and stable inflation. Inflation rates greater than 4% or lower than 0% have a high risk of destabilizing the economy. The primary risk of inflation stems from the potential for monetary policy errors. Monetary policy makers do well when the underlying environment is relatively stable. But when conditions change suddenly, there is a possibility for error. Thus, monetary policy errors can be either deflationary or inflationary. The risk is especially high in unstable monetary environments, like we are experiencing today.

Both inflation and deflation compress valuations. In the 1970s, stocks sank to single digit P/E ratios. We all know what happened to markets in the early 1930s. Generally, economic instability is bad for valuations.

We believe that we could go through a period of above-average inflation (on the order of 5%), but nothing like we saw in the 1970s. This period will be very poor for stocks. Since it is difficult to predict the timing of such episodes, we adjust for inflation (and deflation as well) by adjusting our valuations for lower price multiples. When we find bargains, we will buy them; when we cannot find bargains, we will hold cash. We expect that conditions in the economy and in the market will run counter to our investment philosophy for short periods of time, but we know that over the long run value investing outperforms.

Guru Focus: There was a piece in OID approximately eight years ago where you discussed the post-bubble periods. It was transformative for me but I wonder where you think we are at present. It seems the risks are greater than ever as our government tries to solve an over-consumption problem by issuing massive amounts of debt.

Van Den Berg: A major characteristic of bear markets is that things that would normally cause the market to explode — like low interest rates — have either minimal or temporary effects. In bear markets, earnings could continue to grow, but multiples become compressed. This causes stock valuations to trade up one to two years, but then revert back to low levels and start the cycle over. Over the duration of the bear market, the prices of stocks may not significantly appreciate. Stocks that may look cheap on a multiple basis may often get even cheaper. This is exactly what we have been seeing since 2000.

At the end of the bear market, multiples have compressed to very low levels. This sets the stage for the next bull market.

How much longer will we be in this bear market? Bear markets typically last about sixteen years, so I would say that we have about five more years to go. This coincides with our earlier comments on how long we think it will take for the real estate, unemployment, and fiscal problems to be reconciled. The way to invest in this kind of environment is to stay focused on the valuations of individual companies. You can still make money in this environment by buying stocks when they are cheap and selling when they are near fair value (remember that multiples are compressing, so stocks won’t go as high as one would expect in a normal environment). When bargains can’t be found, hold cash.

The Guru Focus interview is well worth a read in entirety.

Are Stocks Cheap?

Stocks look cheap now but they aren't because of three factors.

1. PE Compression
2. Earnings are mean-reverting
3. Record government stimulus globally
   

Van Den Berg discussed point number one in detail.

I covered points one and two in Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think.

For a follow-up on those points, please see Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble?

Earnings High From Record Global Stimulus

Point number three should be obvious, but obviously it's not given pervasive bullish sentiment nearly everywhere, including smack in the middle of article with bearish sounding titles. For example, please consider a few excerpts from Dow Has Its Longest Weekly Slump Since 2004

• Michael Shaoul, whose Marketfield Fund Ltd. beat 81 percent of competitors last year, said that while the payrolls report was disappointing, it may also be a signal the slowdown in the economic data is near its peak. He noted that weaker nonfarm payrolls reports in February and July 2004 failed to derail the last bull market, which peaked in October 2007.
• The biggest decline in the S&P 500 since August is creating a buying opportunity for investors, according to Blackstone Group LP’s Byron Wien. The price-to-earnings ratio for the S&P 500 has fallen close to its lowest level in 2011, according to Bloomberg data. The index currently trades at 14.8 times earnings, near this year’s low of 14.7 when it fell in March after Japan’s earthquake.
• “The economy is not as bad as it looks right now. Corporate profits will be good, very good. People are asking me, ‘Do you still think the market can get to 1,500 by the end of the year?’ I do.”

In contrast, I think it is crystal clear much of the recovery is a mirage based on unsustainable government stimulus, that stimulus is fading, there is little chance right now for more stimulus, and that corporate profits have peaked this cycle in conjunction with a slowing global economy.

I discussed the slowing global economy in a video: Mish on Yahoo Finance Daily Ticker on Slowing Global Economy; U.S. Manufacturing ISM Plunge; Order Backlog and New Orders Barely Above Contraction

High Inflation Coming?

Van Den Berg clearly has a different definition of inflation and deflation than I do. I prefer to view inflation and deflation in terms of money supply and credit. He looks at prices. He is calling for "high inflation" but high means 5%.

Can we see a 5% CPI with falling demand for credit? Sure, why not? And if it plays out that way, there will be no hiding places at all. Treasuries and stocks both would be hammered. It is one of the reasons I do not like treasuries now.

It is also a good reason why corporate bond rates at 2.33% for 10 years constitute a bubble. , Bear in mind that a renewed credit crunch might send treasury yields lower but it will not be good for corporate bonds, especially junk bonds.

Dissimilar Starting Points, Many Similar Conclusions

Van Den Berg does not like gold. I do. I gave my reasons in a Yahoo Finance video last week. Please see Why I Continue to Like Gold for a discussion. There are other differences as well.

However, we have both arrived at the similar conclusions regarding equity valuations in general even though we have very different starting points about what inflation is.

Conclusions

• The bear market is not over
• Valuations are not cheap
• When there is little value, then there is nothing wrong with cash

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bill Gross says QE3 Unlikely Even as Job Growth Slows; Gross Still Shuns Treasuries, Likes Dividend Yielding Equities

Bill Gross says QE3 Unlikely Even as Job Growth Slows

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said the Federal Reserve is unlikely to do a third round of quantitative easing even with the economy adding fewer jobs than forecast.

Central bankers are likely to “extend the extended period” language for longer in their policy statements, Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene. The less-than-projected pace of jobs growth in May that the Labor Department reported today shows that “there is a persistency here. It’s back to our old new normal,” he said.

“We don’t see a QE3. There has been too much discussion and dissent within the Fed to permit that type of program,” Gross said in the interview from Pimco’s headquarters in Newport Beach, California. Given the current pace of growth and inflation “they will speak to a fed funds rate that persists for an extended period of time, which in effect caps interest rates in the process.”

Investors could seek higher real returns than those now offered from government debt through investing in shares of “conservative” companies such as Procter & Gamble Co. (PG), Merck & Co. or those of utilities, according to Gross.

“The Treasury market up to seven or eight years is negative in terms of real interest rates, and that’s not a positive for savers,” Gross said. “But if they took that money and invested it in a conservative stock, such as a Proctor or a Merck or a utility yielding 4 percent; then that’s 3.5 to 4 percent real yield in comparison to those negative real yields in the Treasury side. So you have to take a little bit of a chance in order to avoid getting your pocket picked here.”

Video



I concur with Gross about the likelihood of QE3 in the near-term horizon and suggested the same thing in a recent interview on Market Ticker with Aaron Task. The key to that sentence is the phrase "near-term".

Right now, the Fed does not want more froth in junk bonds, nor does it want higher commodity prices or $150 crude, especially since QE2 was a miserable failure in producing jobs or reviving housing.

However, should the economy enter a sustained downturn, and if commodity prices plunge (giving the Fed some breathing room), it's a given the Fed will try something. Whatever the Fed tries will likely be good for gold.

Please see Why I Continue to Like Gold for a video discussion.

The problem with Gross's dividend stock play is that it is likely all stocks get hit in another sustained downturn. A 4% yield may be nice, but not if it comes at the expense of a 25% haircut in equity prices.

With valuations stretched everywhere one looks, there is a lot to be said for waiting on the sidelines for better opportunities.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Deputies and Movers Show Up at Bank of America to Seize Bank Property Including Computers for Homeowner Wrongly Foreclosed On; The Way Forward

In Florida, a couple that paid cash for their home, and never had a mortgage was foreclosed on by Bank of America. It took 18 months to straighten out and Bank of America agreed to pay the legal expenses of the homeowners.

When the bank did not pay the couple, they foreclosed on Bank of America. A Judge authorized a deputy to seize desks, copiers, and computers that could be sold to pay the expenses.

Please consider Tables Turn: Deputies and movers show up at bank to seize property for homeowner

The foreclosure nightmare started when Warren and Maureen Nyerges paid cash for a home owned by Bank of American in the Golden Gate Estates. They never had a mortgage whatsoever. But, the bank fouled it up and wound up issuing a foreclosure through their attorney.

The couple took their case to court and after a year and a half nightmare the foreclosure was dropped. A Collier County judge said Bank of America has to pay the couple's $2,534 legal fees for the error. After more than five months the bank still hadn't paid up. So, the homeowners' attorney did just what the bank would do to get their money, legally seize their assets.

"I instructed the deputy to go in and take desks, computers, copiers, filing cabinets, including cash in the drawers," Attorney Todd Allen told WINK News.

Outside the Bank of America on Davis Boulevard, several deputies stood by with movers ready to start hauling out the bank's office supplies and furniture.

Inside, the homeowners' attorney was locked out of the bank manager's office by deputies while the bank manger tried to figure out what to do.

After about an hour the bank finally cut a check to satisfy the debt, and no furniture was taken. A representative for Bank of America issued a statement saying they are sorry for the delay in issuing funds. They claim the original request went to an outside attorney who is no longer in business.

Sensational cases like this make all the headlines, but are statistically meaningless, with a bordering on zero percentage.

That said, I side with the couple. Indeed I think suing for expenses only is a travesty of justice. Something like $100,000 would be more appropriate.

It is preposterous that it would take 18 months to determine there was never a mortgage. Unfortunately, that is how fooked the system is. Alternatively, that is how fooked Bank of America is. Most likely, it's both.

That said, two wrongs do not make a right. Letting people live in houses for years without payment is simply wrong. Either MERS is valid or not. Adding to the confusion, differing courts in differing states have ruled differing ways.

Fixing the Structural Problems

Sadly, I see little effort by anyone in proposing a solution to the mess. States Attorneys General want $17 billion in fines, but how do fines resolve the basic issues at hand? Are big fines justified? Why? How much?

I discussed some of the key issues in Foreclosure-Gate Screw Tightens: Banks Face $17 Billion in Suits Over Foreclosures; Common Sense Says $5 Billion is Very Generous

I failed to discuss one key issue: recording fees. Cities and counties may be entitled to back fees. I will leave that to the negotiators to decide.

To arrive at $17 billion, one would have to do something like charge a $5,000 to $10,000 fine for every missed recording fee. If that math is correct, I find that proposal preposterous. Note: I did not do the math, I read the number in a couple places.

I really do not care what the math is, I just want to see it.

Once again, I do not object to huge fines for complete blatant stupidity as depicted by Bank of America in the above article. If there are more cases than I think, so be it.

The Way Forward

First we need to start with a realistic assessment of errors and a breakdown of how serious those errors are. In the above instance, it is clear there was a severe error, and an errors that should have been rectified in 2 days, not 18 months. I do not object to punitive fines in such instances.

Second, we need to see a proposal as to what to do about MERS. Instead, I see cases like the above trumped up as if they are common, and I see people clamoring to give homes to people free and clear because of a messed up MERS and "show me the note" objections.

The current focus is not on justice, but rather maximum punishment.

Those who want the courts to conclude that MERS has clouded every title, better be careful of what they wish. Should that be the ultimate ruling, no one who owns a home that went through the MERS system will currently have a valid title.

Want to sell your home? Sorry you can't. Want to buy a home? Sorry, you better not because the title will be clouded. This is serious stuff. If the MERS opponents get their way, Housing in the US would literally shut down.

In their desire to punish banks and let people live in their houses for free, few have bothered to figure out the severe consequences on innocent parties who simply want to sell or buy a home.

Punishing the banks to the maximum extent possible to slay the evil MERS dragon, consequences be damned, should not be the focus. Instead, we need to determine actual damages before sensible fines can be levied. Meanwhile, and far more importantly, we need to determine what we need to do to fix this mess, determine how to fix or scrap MERS, and do everything we can to get the foreclosure backlog behind us.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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No Money to Pay 70,000 Employees In Castilla-La Mancha Region of Spain: Situation a "Total Failure"

My friend Bran who lives in Spain passed along this bit of news regarding Spain.

After the power change in the Castilla-la Mancha community, the new People's Party governorship effectively declares it bankrupt, with 2 billion EU unpaid service bills and 7 billion EU in debt.

70,000 state workers are only guaranteed one month's wage now.

No Money for Payrolls

Courtesy of Google Translate, please consider The PP says there is no money to pay payrolls in Castilla-La Mancha

The PP will have to find ways to pay from next month's payroll of 70,000 employees of the Junta de Comunidades de Castilla-La Mancha, because the situation is "total failure", with a debt to suppliers of 2,000 million euros , has secured the regional secretary of the PP, Vicente Tirado.

The PP leader said that this month other officials charged by the payroll but no money for months, but has sent a message of peace because the PP, he added, will find the mechanisms to pay thereafter, and cited, for example, privatization of public television.

PP general secretary of Castilla-La Mancha has criticized Barreda have "paralyzed the administration" and that since his "irresponsibility want to mount a minefield" that cannot pay anything.

He will be remembered, he added, as the "worst" president of an autonomous region that has more than 7,000 million euros of debt owed ​​on unpaid invoices more than 2,000 million, which is leading to the ruin of small entrepreneurs as well to lead the ranking of communities deficit.

Those who can read Spanish may wish to consider El PP asegura que no hay dinero para pagar nóminas en Castilla-La Mancha

The following map and facts courtesy of Wikipedia will help put the region and population in proper perspective.

Castilla la Mancha



Area-wise that is about 15.7% of Spain, population-wise, only 4.3% of Spain.

From Wikipedia

It is mostly in this region where the story of the famous Spanish novel Don Quixote by Miguel de Cervantes is situated - due to which La Mancha is internationally well-known. Although La Mancha is a windswept, battered plateau, it remains a symbol of the Spanish culture with its vineyards, sunflowers, mushrooms, oliveyards, windmills, Manchego cheese, and Don Quixote.

Castilla-la Mancha is one of the more sparsely populated regions. However, where there is smoke, there is going to be fire, and much of Spain is smoking in protests, high unemployment, property bubbles, union inefficiencies, and other related problems.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Boehner Accepts Obama's Invite to Play 18 Holes of Golf to Discuss Debt Ceiling

On the lighter side of the news, Obama Invites for Golf Summit Amid Debate Over U.S.’s Debt Ceiling

President Barack Obama has invited U.S. House Speaker John Boehner for a round of golf June 18 as the administration and congressional Republicans wrangle over federal spending and the national debt.

Boehner, an Ohio Republican who earlier this week began pressing Obama to get more directly involved in the budget negotiations, has accepted the invitation, said his spokesman, Brendan Buck.

Neither Buck nor a White House official who confirmed the invitation on condition of anonymity would say where the game would be played.

A major dispute concerns Republican insistence that no new taxes be part of any agreement, while Democrats say increased revenue has to accompany spending cuts.

The current debt stalemate could culminate in the year’s second high-level negotiation between Obama and Republican leaders on spending cuts. Obama and Boehner hashed out the final details of an agreement on the 2011 federal budget face-to-face at the White House in April, agreeing to about $38.5 billion in reductions with just hours to spare before a government shutdown.

Does anyone think this will resolve anything?

Speaking of golf, I hope to get some in myself this weekend.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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BLS Jobs Report: +54,000, Unemployment +9.1%; Awful at First Glance, Merely Bad Beneath the Surface

Thoughts on the Jobs Report Thoughts on the Jobs Report

Last month I commented that on the surface the job reports was the "best back-to-back reports we have seen for years", not as measured by a typical recovery but as measured by this so-called recovery. Beneath the surface things were awful.

This month things are awful at first glance and simply bad beneath the surface. The number of employed rose by 105,000 which is an anemic number, but for the first time in a long time those in the labor force rose by a considerable amount: 272,000.

That suggests, momentarily that people think there may be jobs and are looking for them. That is a good thing, except for the fact they are not finding jobs. The number of unemployed rose by 167,000 and the unemployment rate ticked up by .1% to 9.1%.

Economists projected a drop to 8.9%, I called for a rise to 9.2%.

For the last two months I commented "It is very questionable if this pace of jobs keeps up." Clearly it didn't and this certainly cannot all be blamed on a Tsunami in Japan. The entire global economy is slowing rapidly.

Mish on Yahoo Finance Daily Ticker on Slowing Global Economy; U.S. Manufacturing ISM Plunge; Order Backlog and New Orders Barely Above Contraction

China's Manufacturing Slowest in 9 Months, New Orders Suggest Manufacturing May Have Already Peaked; Australia Biggest GDP Drop in 20 Years

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

Digging deeper into the Household Survey, we see some more interesting data. In the last year, the civilian population rose by 1,814,000. Yet the labor force dropped by 544,000. Those not in the labor force rose by 2,358,000.

In January alone, a whopping 319,000 people dropped out of the workforce. In February another 87,000 people dropped out of the labor force. In March 11,000 people dropped out of the labor force. In April, 131,000 dropped out of the labor force.

At long last, the labor force expanded. This month it rose by 272,000. The 5-month total for 2011 is +276,000.

Many of those millions who dropped out of the workforce would start looking if they thought jobs were available. Indeed, in a 2-year old recovery, the labor force should be rising sharply as those who stopped looking for jobs, once again started looking. Instead, an additional 276,000 people dropped out of the labor force in the first four months of the year.

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

I do not know if this is a one-month anomaly with the labor force rising. However, if it continues (and that would be a good thing), it will be very difficult for the unemployment rate to drop.

April 2011 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) May 2011 Employment Report.

Nonfarm payroll employment changed little (+54,000) in May, and the unemployment rate was essentially unchanged at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. Job gains continued in professional and business services, health care, and mining. Employment levels in other major private-sector industries were little changed, and local government employment continued to decline.

Unemployment Rate - Seasonally Adjusted



Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted

Notice that employment is lower than it was 10 years ago.

Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted



click on chart for sharper image

Ignoring the effects of the census, in the last 8 months of a recovery 2 years old, the economy is averaging 150,000 jobs a month. That is enough to hold the unemployment rate flat but is very poor as recoveries go.

Nonfarm Employment - Payroll Survey Details - Seasonally Adjusted



Total nonfarm employment has increased by 1.8 million, or 1.4 percent, since its trough in February of 2010. Between January 2008 and February 2010, the U.S. economy had lost 8.8 million jobs.

Statistically, 127,000 jobs a month is enough to keep the unemployment rate flat.

Average Weekly Hours



Index of Aggregate Weekly Hours



Average weekly hours for both all employees and production employees remained unchanged in May.

The index of aggregate weekly hours for all employees in the private sector increased by 0.1 percent. Since a low point in October 2009, the index has increased by 3.6 percent.

Average Hourly Earnings vs. CPI



"Success" of QE2

• Average hourly earnings of all employees in the private sector increased by 6 cents in May to $22.98. Hourly earnings are up 1.8 percent over the year.


• Between April of 2010 and April 2011 the consumer price index for all urban consumers (CPI-U) increased by 3.1 percent.

Not only are wages rising slower than the CPI, there is also a concern as to how those wage gains are distributed.

BLS Birth-Death Model Black Box

The big news in the BLS Birth/Death Model is the BLS has moved to quarterly rather than annual adjustments.

Effective with the release of January 2011 data on February 4, 2011, the establishment survey will begin estimating net business birth/death adjustment factors on a quarterly basis, replacing the current practice of estimating the factors annually. This will allow the establishment survey to incorporate information from the Quarterly Census of Employment and Wages into the birth/death adjustment factors as soon as it becomes available and thereby improve the factors.

For more details please see Introduction of Quarterly Birth/Death Model Updates in the Establishment Survey

In recent years Birth/Death methodology has been so screwed up and there have been so many revisions that it has been painful to watch.

Quarterly rather than annual adjustments can only help the process.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model May 2011



BLS Back in Outer-Space

Do NOT subtract 206,000 from the headline number. That is statistically invalid. That said, the BLS is back in outer-space.

It is clear the economy is slowing and the BLS has not picked it up.

Household Data




click on chart for sharper image

In the last year, the civilian population rose by 1,814,000. Yet the labor force dropped by 544,000. Those not in the labor force rose by 2,358,000.

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Table A-8 Part Time Status



click on chart for sharper image

There are now 8,500,000 workers whose hours may rise before those companies start hiring more workers.

The is little change in these numbers for a year.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.



click on chart for sharper image

Distorted Statistics

Given the total distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is hard to discuss the numbers.

The official unemployment rate is 9.1%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

While the "official" unemployment rate is an unacceptable 9.0%, U-6 is much higher at 15.8%.

Things are much worse than the reported numbers would have you believe, and for the second consecutive month the beneath the surface numbers were bad-to-awful.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Why I Continue to Like Gold

In the last of three videos recorded Tuesday on the Yahoo Finance Daily Ticker I explain why I continue to like gold.

Please consider Why Michael “Mish” Shedlock Is Still Betting on Deflation…and Gold



In case you missed the other Daily Ticker videos, please see

Mish on Yahoo Finance Daily Ticker on Slowing Global Economy; U.S. Manufacturing ISM Plunge; Order Backlog and New Orders Barely Above Contraction

Debt Ceiling Discussion on Daily Ticker with Mish, Aaron Task, Henry Blodget: Will the Bond Market Eventually Force Congressional Hands?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Case-Shiller Nominal and Real Housing Declines Since Peak; Home Prices Best in 25 Years, Better Prices Still Coming

Here are some charts showing nominal and real (CPI inflation-adjusted) housing declines in 20 Case-Shiller metro areas. Charts are grouped by 10 least expensive and 10 most expensive areas. Additional tables show housing declines from the peak. An explanation follows the charts.

Charts and tables are courtesy of "TC".

Case-Shiller Nominal Price History 10 Least Expensive Metro Areas



click on any chart or table for a sharper image

Case-Shiller Nominal Price History 10 Most Expensive Metro Areas



Case-Shiller Nominal Price Declines Since Peak


Case-Shiller "Real" Price History 10 Least Expensive Metro Areas



Case-Shiller "Real" Price History 10 Most Expensive Metro Areas



Case-Shiller "Real" Price Declines Since Peak



TC writes ...

Mish, I've attached several Case-Shiller graphs based upon most recent Case-Shiller data.

The charts show that all 20 metros are down from the peak prices between -10.7% (Dallas) and -58.6% (Las Vegas). Note that 13 of 20 cities tracked are presently at the lowest point in the cycle, while 7 cities are presently higher than their early 2009 low.

Of the 7 cities that are higher, San Francisco leads the way at +10.3% (+$43,461). However, San Francisco it still an amazing -40.6% (-$317,790) below peak prices.

Of particular interest is the "Price Level" column which displays how far back prices have reverted. For example, you can see that Atlanta has reverted back to April 1999 prices (and keep in mind this is nominal!). Three-fourths of the US is at the lowest point in the cycle, while 1/4 is up modestly and most likely temporarily.

The fourth chart is of March 2011 real (inflation adjusted) data. It is sorted identically to chart one and again shows that all 20 metros are down from their peak prices with again Dallas in the best shape (-21.6%) and Las Vegas the worst (-63.2%). It also shows that in real terms only 2 of 20 metros are actually higher than their early 2009 low and that both are only up +2.7% (and both still have huge declines of -47.4% and -35.3%).

The remaining 18 metros are all at their lowest point in the cycle. Again, the "Price Level" column is of interest as it shows that 10 of metros are down to levels never seen before in real terms (noted with an asterisk) and have resulted in a "lost" 20+ years of home appreciation. Long story short, housing has collapsed across the country and in real terms national pricing is back to late 1987 pricing - ouch!

I should also mention that this is based upon the latest Case-Shiller data, but many of these homes sold in very early 2011 since it typically takes 45 - 60 days to close and get recorded. So actual current prices (June 2011) are likely even lower and with the lowering of the GSE limits around the corner, we'll likely see even further declines.

On a positive note, prices today (especially when you account for near historic low interest rates) are the best they've been in 25+ years. While prices are still likely to head lower all markets have already experienced the majority of both their real and nominal price declines (i.e. San Francisco is already down in real terms -$420,000 and with median prices at $465,900 another -$420,000 is impossible). That being said, patience will still likely be rewarded with lower prices and maybe even lower interest rates. Time is on the renters side.

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