Fitch Downgrades Spain, Italy on "Intensification of Euro Zone Crisis"; Outlook Negative; Greek 1-Year Bond Yield Hits 144%

Bloomberg reports Spain, Italy Credit Ratings Lowered by Fitch as Europe Debt Crisis Worsens

Spain and Italy, the euro region’s fourth- and third-largest economies, were downgraded by Fitch Ratings on concern they will struggle to improve their finances as Europe’s debt crisis intensifies.

Spain had its foreign and local currency long-term issuer default ratings cut to AA- from AA+, while Italy had the same set of ratings to A+ from AA-, the company said in statements today. The outlook for both countries is negative. Fitch also maintained Portugal’s rating at BBB-, saying it would complete a review of that ranking in the fourth quarter.

The downgrades reflect “the intensification of the euro zone crisis,” which “constitutes a significant financial and economic shock,” Fitch said, citing risks to Spain’s “fiscal- consolidation” efforts. “A credible and comprehensive solution to the crisis is politically and technically complex and will take time to put in place and to earn the trust of investors.”

Fitch’s cut of Italy was its first since October 2006. It follows downgrades of Italy by Moody’s Investors Service on Oct. 4 and Standard & Poor’s on Sept. 19, which both cited concerns that the country’s weak economic growth means it will struggle to reduce Europe’s second-largest debt, at about 120 percent of gross domestic product.

Spain’s rating, which was AAA until 2010, has now been lowered twice by Fitch as the deepest austerity measures in three decades fail to convince investors the nation can stem the surge in its debt burden. Moody’s also warned “all but the strongest euro-area sovereigns” are likely to see further downgrades, when it cut Italy’s rating for the first time in almost two decades.

Socialist Government

Spain’s Socialist government, which faces a general election on Nov. 20, has said the country may miss its 2011 growth forecast of 1.3 percent as the recovery slows. Unemployment remains above 21 percent and the manufacturing industry contracted the most in more than two years in September. Regional governments, which are responsible for health and education and hire half of Spain’s public workers, are behind schedule to meet their deficit targets, preliminary data showed on Sept. 8.

The People’s Party, which polls indicate may win an outright majority in the vote, has pledged a stricter budget law, spending limits for the regional governments, and tax breaks to encourage companies to hire workers and become more competitive. PP leader Mariano Rajoy said on Sept. 15 he would send a “strong signal” to markets and wouldn’t deviate from the budget-deficit goal of 4.4 percent of gross domestic product in 2012 “under any circumstances.”

Nothing has been solved in Spain, Portugal, Italy, Greece or for that matter Europe in general.

The yield on Greek 1-Year Government Bonds ended the day at 144%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Brief Note on the Unemployment Rate

I had to rush this morning for an appointment and did not get the following point expressed properly.

Addendum to Payrolls +103,000 Jobs , 444,000 Part-Time on Household Survey

In the household survey (data repeated below for convenience) there was a gain of 398,000 employed. However, the labor force rose by 423,000 explaining the flat unemployment rate.

Of the 398,000 increase in employment, 444,000 were part-time jobs. This can be interpreted two ways. The first way is 46,000 full-time jobs were lost. The second way is 398,000 people who did not have a job, now have one.

The correct interpretation depends on the status of those workers over time. My guess now is this is unusual seasonal strength and will not be repeated.

End of Addendum

Here are the charts once again

Household Data



click on chart for sharper image

In the last year, the civilian population rose by 1,749,000. Yet the labor force dropped by 107,000. Those not in the labor force rose by 1,856,000.

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

A year ago there were 8.6 million people who wanted a full-time job but could only find part-time work. Now there is 9.27 million.

In the last month, the number of people working part-time for economic reasons jumped by 444,000.

Part-time jobs are volatile but this is a huge jump.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Payrolls +103,000 Jobs , 444,000 Part-Time on Household Survey

Jobs Report at a Glance

Here is an overview of September Jobs Report, today's release.

• US Payrolls +103,000
• 45,000 Striking Workers Return
• Net effect is +58,000 jobs
  
• US Unemployment Rate Flat at 9.1%
• Participation Rate +.2 to 64.2%
  
• Actual number of Employed (by Household Survey) rose by 398,000
• Unemployment rose by 25,000
  
• Those not in the labor force dropped by 224,000
• Civilian population rose by 200,000,
  
• Civilian Labor Force rose by 423,000
  
• Average Weekly Workweek rose .1 hours to 34.3 hours
  
• Average Private Hourly Earnings rose 3 Cents 10 $19.52
  
• Government employment decreased by 34,000
  

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.

For a change, the labor force actually rose today. This is a welcome sign. However, were it not for people dropping out of the labor force for the past two years, the unemployment rate would be well over 11%.

September 2011 Jobs Report

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

Nonfarm payroll employment edged up by 103,000 in September, and the unemployment rate held at 9.1 percent, the U.S. Bureau of Labor Statistics reported today. The increase in employment partially reflected the return to payrolls of about 45,000 telecommunications workers who had been on strike in August. In September, job gains occurred in professional and business services, health care, and construction. Government employment continued to trend down.

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

Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

In the last year of the weakest recovery on record, 2+ years old, the economy averaged about 116,000 jobs a month.

Since April, the economy has averaged 72,000 jobs a month, a downright pathetic number.

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

Nonfarm Employment - Payroll Survey Details - Seasonally Adjusted



Average Weekly Hours



Index of Aggregate Weekly Hours



Average Hourly Earnings vs. CPI



"Success" of QE2

Over the past 12 months, average hourly earnings have increased by 1.9 percent. The consumer price index for all urban consumers (CPI-U) was up 3.8 percent over the year ending in August.

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 BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The BLS has moved to quarterly rather than annual adjustments to smooth out the numbers.

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.

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 Adjustments For 2011



BLS Back in Outer-Space

Do NOT subtract the Birth-Death number from the reported headline number. That is statistically invalid.

I am nearly in shock over the negative BLS adjustment this month. The two revision months historically have been January and July. We have not see a negative number other than January or July for as long as I can remember.

Household Data



click on chart for sharper image

In the last year, the civilian population rose by 1,749,000. Yet the labor force dropped by 107,000. Those not in the labor force rose by 1,856,000.

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

A year ago there were 8.6 million people who wanted a full-time job but could only find part-time work. In the last month, the number of people working part-time for economic reasons jumped by 444,000.

Part-time jobs are volatile but this is a huge jump.

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 9.1%, U-6 is much higher at 16.5%. The jump in U-6 this month is from part-time workers.

Things are much worse than the reported numbers would have you believe. Moreover, the unemployment rate is barely better than it was a year ago. It would actually be worse than a year ago were it not for people dropping out of the labor force.

Addendum:

In the household survey there was a gain of 398,000 employed. However, the labor force rose by 423,000 explaining the flat unemployment rate. Of the 398,000 increase in employment, 444,000 were part-time jobs. This can be interpreted two ways. The first way is 46,000 full-time jobs were lost. The second way is 398,000 people who did not have a job, now have one. The correct interpretation depends on the status of those workers over time. My guess now is this is unusual seasonal strength and will not be repeated.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Spain's Net Foreign Debt Exceeds One Trillion Euros for First Time; How does US, Italy, UK, Australia Compare?

Courtesy of Google translate and my friend Bran who sends links nearly every day from Spain, please consider Spain's net foreign debt for the first time exceeded one trillion euros

Note: The Google translation says billion. The correct translation is trillion, and I modified the references below.

The latest figures from the Bank of Spain show that the net debt-the difference between what foreigners due to Spain and which in turn owes Spain abroad, not only not reduced but increased. In fact, at the end of the second quarter of 2011 for the first time broke the trillion euro barrier. In relative terms, this means a foreign debt equivalent to 93.7% of GDP, six points more than in 2010.

International Investment Position of Spain was, in particular, at 1.02 trillion euros, the highest ever level. In gross terms, external debt also has picked up , to 1.77 trillion euros, the second worst record in the series, surpassed only very slightly, and by data from the first quarter of 2010. The cause? The increased borrowing by the public and the financial system.

As a result of these developments, Spain's foreign debt now accounts for 163% of GDP. Spain, thus, has become the second country in most major foreign debt of the world, behind only the U.S., as recently published McKinsey . Below are Australia, Brazil and Italy. The ranking of Mckinsey, in any case, does not include Portugal, which, according to data from the central bank, would be over Spain, although its weight in the global economy is much smaller.

Net External Debt Position



Take a good look at that chart.

Spain has 41% of the external debt of the US on an economy about 9% as big. Does anyone think that will be paid back? When?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Yet Another Piss Poor Idea to Stimulate Housing: Tax Breaks for Rental Units Proposed by Peter Orszag, Vice Chairman at Citigroup Global Banking

It is depressing to see an endless parade of foolish and/or self-serving ideas to "fix" the housing market.

Here is yet another one, this time from Peter Orszag, vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration.

Please consider the self-serving plea of Peter Orszag posing as Boomberg news: U.S. Can Rent Its Way to a Housing Recovery

No matter what the government might try to do to break the housing-economy cycle, the deleveraging process will still be painful and take some time. But that’s not an argument against action; just because a headache can still hurt some even if you take aspirin doesn’t mean you should skip the aspirin. One thing the Obama administration could do now -- probably with Republican support -- would be to attack the oversupply of housing stock by allowing a tax write-off for investors who buy empty properties and rent them out.

Plea to Help Citigroup Unload Property

It should not be difficult to read between the lines. This is nothing more than a plea to help Citigroup. I am sick and tired of tax breaks for anything to promote anything, especially self-serving interests of banks.

Seen vs. Unseen

Orszag only looks at the "seen" (alleged help for housing but in reality nothing more than unwarranted help to Citigroup to unload distressed properties)

Government interference in the free market always creates distortions and for that reason alone government ought to get the hell out of the way.

One easily identifiable "unseen" (except to those like Orszag who really don't give a damn) is that tax breaks for rental houses would put multi-unit rental property owners at a disadvantage. Many of them are struggling already.

The second easily identifiable "unseen" (except to those like Orszag who really don't give a damn) is that multi-family unit construction is on the rise. Orszag's proposal might squash that.

The third easily identifiable "unseen" (except to those like Orszag who really don't give a damn) is that the best thing for housing (but not Citigroup) is for home prices to fall to the point where there is genuine demand.

Actions designed to prevent prices from going where they need to go (just to benefit banks like Citigroup and Bank of America) are the wrong thing to do.

I am quite sure I missed more "unseen" problems as well. Thus I have a far better idea than Orzag's. Let's stop all this government intervention in the free markets and stop all the self-serving bank bailout proposals in disguise at the same time.

Extreme Positions Wrong

At one extreme we have self-serving "help for bank" schemes proposed by Peter Orszag and the bank lobby. At the other extreme we have socialist insanity proposed by the likes of Michael Moore. Both extremes are wrong.

Best Thing to Do is Nothing

The best thing to do is clear: nothing. The free market will solve this on its own accord.

Moreover, were it not for the Fed manipulating interest rates, the SEC giving its blessing to the big three rating agencies, Citigroup and other banks hiding assets off balance sheets in a massive use of leverage, and absurd promotion of the "ownership society" by president Bush, Barney Frank, and nearly everyone in Congress, we would not be in this mess in the first place.

Who Should Bear Consequences for Economic Decisions?

I finished the above post hours ago and just received an email from a reader saying the same thing in a different way. Thomas Doniger of Doniger & Fetter writes ...

Hello Mish

Of late, the columnists and bloggers seem to have forgotten that assuming a mortgage or refinancing one's home is a voluntary economic decision. Those who are "underwater" are there as a result of a decision they made. These people did not enter these transactions in reliance on any disposition or securitization of their mortgage and cannot complain they were misled by the same. Why should the taxpayer or society as a whole share the risk these people took? Would the taxpayers or society as a whole have shared in the upside of these investments if the real estate market had continued to rise and the mortgagors sold their properties at a substantial gain? No bail out is appropriate or even fair. Most home mortgagors were not genuinely deceived or the victims of fraud -- they bet on a rising real estate market and lost. That risk, over which society had not control, should not be socialized.

Thomas Doniger
Doniger & Fetter
Los Angeles, CA

Those Who Take Risks Should Face the Consequences (Good or Bad)

A couple of bloggers - including me - have never wavered from the Libertarian stance that the best thing to do is nothing.

Otherwise, Thomas is correct. History proves that government intervention invariably makes matters worse.

Philosophically, morally, and ethically those who take risks should be the ones who pay the price. That applies to Wall Street, to Main Street, to banks, to bondholders, and to homeowners foolishly buying property at inflated prices.

In regards to homeowners, the law provides an exit, actually several exits: Bankruptcy, walking away, and short sales.

However, I repeat my advice: please consult an attorney who specializes in real estate law before taking any action. Laws vary state by state, and mistakes can be extremely costly.

Please see House is Gone but Debt Lives On; Expect Huge Surge in Deficiency Lawsuits for one of the things that can go wrong if you fail to seek proper legal advice.

Addendum:

It has come to my attention that Peter Orszag is as clueless now as he was in 2002 as referenced in Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard by Joseph E. Stiglitz, Jonathan M. Orszag and Peter R. Orszag.

The expected monetary costs of exposure to GSE insolvency are relatively small — even given very large levels of outstanding GSE debt and even assuming that the government would bear the cost of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is less than $2 million. To be sure, it is difficult to analyze extremely low-probability events, such as the one embodied in the stress test. Even if the analysis is off by an order of magnitude, however, the expected cost to the government is still very modest.

Peter Orszag is as clueless now as he was then. He and his ilk, together with the Fed are largely responsible for this mess. Why Bloomberg gives the time of day to self-serving buffoons is the real mystery here.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Regarding Foreclosures: How Dark will Social Mood Become?

There were a number of interesting comments to my post "Does Anyone Really Know What is Going on with Foreclosures?"

Here are a couple in particular worth citing.

Greg Fielding writes ...

I'm in the business and, of the bunch, Laurie Goodman's analysis makes the most sense. And, she gets bonus points for having generally been right about all of this (unlike Zandi).

The bigger point is that the number today doesn't make any difference. If Uncle Sam can keep home prices propped up, then the total numbers could be smaller. But, if prices continue to slide, the total numbers could be far worse than even Lauri Goodman expects.

In the details of the Amherst report, she states that her 10.4M foreclosures assumes a 5% decline in prices. However, a 10% decline could trigger a "death spiral" where the number of foreclosures would be much greater.

Point is, social mood will drive this over the next 5 years, and it's impossible to say just exactly how dark social mood will become.

In response, Patrick Pulatie replied ....

The spiral is inevitable, with all things considered. Case Schilling predicts 17% further drop, and I think that is optimistic. In fact, I see much more of a drop, from 30-50% in many areas. Factor in further decrease in wages, the 3.5m excess units of housing, lack of new family formation, increasing deaths in the pre baby boom generation, and baby boom generation, lack of qualified buyers, and many other issues, and the spiral is real.

The government simply needs to get out of the housing business, privatize Fannie and Freddie with no guarantees, or let it fail, and quit trying to prop up prices. Let the market take care of business.

To which Greg Fielding responded

Agreed. The quicker Uncle Sam gets out of the way, the quicker we hit bottom and the quicker consumers can actually begin to recover.

Mish on Social Mood

Anyone correctly citing "social mood" in their analysis is going to get a closer look from me, especially if it's not done for that purpose.

Thus I invite you to read Why 1 in 5 homes with a mortgage could default in the coming years by Greg Fielding at the Bay Area Real Estate Trends blog.

How dark will social mood become?

I don't know, nor does anyone else. Much depends on protectionism, tariffs, and other misguided policy decisions by Congress and the Fed.

If Congress adopts misguided protectionist legislation on the Yuan (which in my opinion would raise prices and cost up to 2 million jobs), then social mood can get much darker than it already is. Please see Ben Bernanke Fans Fires of Protectionist Legislation to Senate Joint Economic Committee; Expect Global Depression if Obama Signs On for a discussion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Ben Bernanke Fans Fires of Protectionist Legislation to Senate Joint Economic Committee; Expect Global Depression if Obama Signs On

The one and only thing former Fed chairman Alan Greenspan was consistently right about was free trade. In contrast, Fed chairman Ben Bernanke is fanning the fires of protectionism right where he can do the most damage, in front of the Senate Joint Economic Committee.

Please consider this short exchange between Senator Robert Casey Jr., Democrat, and Fed chairman Ben Bernanke.



Link if video does not play: JEC Hearing (10-4-2011) - Exchange Between Chairman Casey and Fed Chairman Bernanke on China

Bernanke Says Yuan "Undervalued by Significant Amount"

Casey repeatedly tried to get Bernanke to quantify the magnitude of the effect the undervalued Yuan has on the US economy, jobs, and the trade deficit.

Bernanke ducked the question directly but did cite several studies by the IMF and various think tanks that the "Chinese currency is undervalued by a significant amount."

Bernanke Says "China Blocks Normal Recovery Process"

When pressed about jobs, Bernanke did not answer directly.

However Bernanke did state "The concern now is the Chinese currency policy is blocking what might be a more normal recovery process in the global economy. In particular we now have a two-speed recovery where advanced industrial countries like the US and Europe are growing very, very slowly and emerging-market economies are growing quite quickly. In a more normal, balanced recovery would have some more demand shifted away from the emerging-markets towards the industrial economies. The Chinese currency policy is blocking that progress."

Distortions Everywhere

Bernanke is partially correct. However, so is China when China accuses Bernanke and the Fed of manipulating interest rates. Moreover, actions by Japan, the ECB, and the Swiss National Bank are all "distortionary".

So were the actions by the Fed and Congress to bail out banks. One dozen wrongs do not make a right, and Bernanke failed to point those things out. Moreover, and more importantly Bernanke failed to warn about the consequences of foolish protectionist legislation.

Shades of Smoot-Hawley

As a self-proclaimed "student of the great depression" it certainly would have been fitting for Bernanke to mention something about Smoot-Hawley and how tariffs greatly magnified problems in the Great Depression.

Instead, Bernanke gave Casey all the ammo he needed to ram through ill-advised legislation. The fact of the matter is the tariffs that Senator Casey seeks will not bring a single job back to the United States.

Depending on the exact nature of the bill and how carried away Congress gets I estimate such legislation will cost somewhere between 500,000 and 2 million jobs minimum. Please see Trade War Threat Looms Once Again; Senate Takes Up Bill to Punish China for Manipulating Currency; How Many Jobs Would Tariffs Create? for my rationale.

I wrote that piece on October 2, wondering if such legislation might pass. Thanks to the complete lack of common sense by Ben Bernanke and his fanning of protectionist legislation instead of defusing it, I now think passage is odds on. If so, expect a global depression if Obama signs the bill.

Solution to the Global Trade Problem

I presented my solution to the trade dilemma on July 8, in Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited

For a followup please see Global Trade Wars, Smoot-Hawley, and Peak Oil Followup to 12 Predictions from Michael Pettis

By the way, all this talk about "fair trade" is nothing but an excuse to protect favored industries. The US and Europe with their agricultural and energy policies are among the worst.

Lower prices are a benefit to all consumers. Lower prices also provide jobs to the industries that transport and stock those goods, as well as to the industries (restaurants etc.) that serve the transportation workers. No jobs will be saved by forcing prices higher. Those are the simple facts of the matter.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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How Ben Bernanke "F*d" the Banks and Fixed Income Savers at the Same Time

Hello Ben. It seems your ploy to hold interest rates at preposterously low levels has backfired into a run on Bank of America assets.

Bank of America Customer Frustration Grows

Inquiring minds are reading Bank of America Customer Frustration Grows

Bank of America's plan to add a five dollar a month debit fee has angered customers.

Bank of America customer Molly Katchpole is one of those customers, "I'm 22 years old, I'm working two-part-time jobs, I don't have an extra 60 dollars a year to give to Bank of America," says Katchpole. "

She started an online petition calling on Bank of America to repeal the fee.

Four days later, she got 125-thousand strangers lending their support.

Meanwhile smaller, local banks are reaping the benefits from big bank customer anger, says John Heaps, President and CEO of Florence Savings Bank,"We call Bank of America and the big banks the gift that keeps on giving, because over the weekend we opened more accounts from Bank of America on line than any other time in the history of the bank," says Heaps.

Fee Parade

Things are now so "F*d" up that banks cannot make money on deposits and consumers cannot even get access to their accounts.

It's not just at Bank of America. Wells Fargo and Citigroup have joined the fee parade.

Please consider Citibank is next with a new banking fee

Another day, another new bank fee.

As the uproar swelled over Bank of America Corp.'s planned $5 monthly charge for debit card use, megabank rival Citigroup Inc. was notifying many Citibank customers that they soon would have to start paying for their checking accounts unless they maintained significantly higher balances.

Letters are going out across the country alerting Citi customers of account changes, said the bank's retail banking chief, Stephen Troutner. In many cases, that means customers will have to maintain fatter balances to avoid fees, although Troutner said a basic account option makes dodging charges easier.

Higher fees are the new reality in retail banking, where regulations adopted in the aftermath of the bank bailouts have reduced revenue from several controversial fees by billions of dollars. At the same time, banks have seen their lending income decline due to the sluggish economy and low interest rates.

That has caused major banks to impose a variety of new customer fees, although the exact formula varies. Citibank, for example, decided not to impose "usage" fees such as the $5 a month that Bank of America, starting next year, will charge most customers who use their debit cards to purchase goods and services.

"We conducted extensive surveys with our customers, and no one wanted to pay to use debit cards," Troutner said.

One day after announcing the new debit card fee, Bank of America was inundated with visits, calls and emails from customers.

"We are doing our best to explain the impacts, the value and convenience the debit card offers and how to avoid the fee if necessary," spokeswoman Anne Pace said.

By the way, this brings up another point. I worked for two decades at banks on the programming side. Evey bank wanted accounts no matter how small for economies of scale.

The reasons for that policy are that it costs next to nothing to process incremental accounts, and costs can be spread out over all of those accounts.

I fail to see how the same cannot be true today. After all, if savings and loans and small banks with no economies of scale can handle these smaller accounts and at least break even, then why can't Citigroup and Bank of America?

Two Answers

1. Organizations of large banks are so bloated with multiple layers of fat, they need increasing numbers of fees to make a profit.


2. Major banks are so capital impaired they desperately need new fees to cover losses elsewhere.
   

Ultimate Irony of Fed Policies

Here is the ultimate irony in the asinine policies of Ben Bernanke and the Fed:

As a result of "too big to fail" policies of the Fed, the big got so big they are not even profitable at the low interest rates Bernanke has set for the alleged benefit of the banks and the economy.

Not only did Bernanke "F" those on fixed income, he "F*d" all the banks that cannot make a profit on small accounts.

Congratulations Ben. It is not easy to be that big a failure.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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It's Fashion Week in Paris (and I have Pictures to Prove it)

In the lighter side of the news of those who comment on the news, I am pleased to report that Max Keiser won an Honorary Life Membership from University of Limerick for His Work as a Journalist Exposing Financial Terrorists

Moreover, I am also pleased to report that Charlotte Kemp Muhl, an American model and actress from suburban Atlanta, Georgia, and the youngest model to appear on the cover of Britain’s Harper’s and Queen magazine, just happens to be a big fan of the Max Keiser Report.

Given that it's fashion week in Paris, it is only fitting that Muhl would seek out the ever-stylish Max Keiser for a photo-op.



Given that it's extremely difficult to judge who in that picture is more stylish, I defer to my readers to decide for themselves.

In God I love fashion week in Paris!!! Max Comments: "This photo was taken by Charlotte’s boyfriend and band mate Sean Ono Lennon in the lobby of their hotel earlier this evening. Turns out Sean and Charlotte are big Keiser Report fans…. but I noticed they seemed to ask Stacy all the serious questions. Maybe I should go back to go-go dancing in the West Village."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Does Anyone Really Know What is Going on with Foreclosures?"

Patrick Pulatie at LFI Analytics has noticed a huge discrepancy in the number of reported foreclosures by varying organizations. Via Email Pulatie writes ...

Much of my off time is spent in reviewing the reports of other entities regarding the foreclosure crisis, correlating data and trying to forecast what to expect in the future.

Frankly, I am at the point where I am wondering whether anyone has a true reading on what is happening.

Office of the Comptroller of the Currency

At the end of the 2nd Quarter, the OCC reports:

• It Monitored 32.7 million first mortgages out of 53 million total, representing 62% of all first mortgages.
• 4.9% or 1.57 million were more than 60 days late, or at least 1 month late while in Bankruptcy.
• 5.5 million are late by over 30 days, or in the foreclosure process.
• 1.3 million in some stage of foreclosure.
• 88% of mortgages were current. (This would mean that 3.944 million were not current of the 32.7 million being monitored.)
• 800,000 REO’s

If 1.57 million loans are more than 60 days late and 5.5 million are late by over 30 days, then 3.8 million must be between 30 days and 60 days late.

Even worse, this only represents 62% of all first mortgages.

Amherst

Amherst’s Laurie Goodman comes up with different numbers.

• Of 55 million mortgages, 4.5 million are non-performing or delinquent. (Non-performing would be those that are 30 days late or more.)
• 10.6 million “at risk” of foreclosure.
• 400,000 REO’s (compare to OCC 800,000)
  

Corelogic

Corelogic does not match any numbers except REOs of OCC but not Amherst

• Current Residential Shadow Inventory is 1.6 million homes.
• Of the 1.6 million shadow inventory, 770,000 loans are “seriously delinquent”.
• 430,000 are in some stage of foreclosure. (Compare to the OCC saying 1.3 million are in foreclosure.
• 800,000 REOs

Rick Sharga – formerly of RealtyTrac/Moodys

Sharga says:

• 800,000 are in foreclosure.
• 1.5 million are delinquent. (Does this include the foreclosure loans?)

LPS

This is what LPS says:

• 8.13% total loan delinquency rate.
• 4.11% of loans in the foreclosure process.
• 12.44% total delinquent or in foreclosure.
• 2.38 million loans less than 90 days delinquent
• 1.87 million loans 90+ days delinquent.
• 2.15 million loans in foreclosure process.
• Total of 6.40 million loans delinquent or in foreclosure in August.

Why does the OCC, which looks at 62% of the loans tend to have numbers that if extrapolated over the total amount of loans, would suggest much higher numbers than all other entities?

I have to ask: "Does anyone really know what is going on with foreclosures?"

Data Sources for Figures Cited Above

• Corelogic Report
• LPS August Report
• Rick Sharga, Realty Trac
• Jim Saccacio, RealtyTrac CEO
• OCC
• Amherst - Laurie Goodman

Addendum:

As a comment to this post, Pulatie added ...

OCC is likely getting their information from the GSE's, since that would be easy to track. I "assume" this because they only follow 62% of the loans, which is about the size of the market that the GSE's held during the peak of the boom.

Either LPS or Corelogic gets their foreclosure numbers from 2200 counties in the US. However, there are 3143 counties in the US. Likely, they use electronic reports, but if almost 1000 counties are missed, then what good is the reporting?

RealtyTrac uses county data. But, RealtyTrac is actually Moody's. And with Mark Zandi, who knows what the hell that they doing and coming up with.

Amherst Holdings appears to be fairly accurate, based upon what information that they actually reveal. The do consider some outside influences that the other companies do not consider. Laurie Goodman appears quite knowledgeable when she reports to Congress in her testimony..

Amherst actually provides a "best case" scenario, and a "reasonable" scenario, at least in regards to their projections. However, "reasonable" appears to be at least 20% below what "worst case" would suggest at the moment. At this time, I think that "worst case" is more important than all others.

A potential source for delinquencies may be the Credit Reporting Agencies. Each lender would detail in their monthly tapes who was delinquent, and by how many months. Then, it would be a matter of actually determining what one considers seriously delinquent. (This is especially important to know, but in my view, since once a loan goes 30 days late, it is a 90% likelihood of default and foreclosure occurring.)

How they are determining "underwater" loans, I haven't got a clue. Perhaps they are trying to incorporate Automated Appraisal Date sources. Or they take the original loan to value as reported in monthly reports on lending, and then apply general decreases in value in geographic areas to arrive at "underwater" numbers.

I believe that there is a tendency for the different companies to want to under report what is happening. This would be in part to try and stabilize housing to some degree. If the public thought things were much worse, then it would only worsen the public perception.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Open Letter to Merkel, Trichet, Sarkozy, Papandreou, Berlusconi: Extend-and-Pretend Session is Finished, It's Do or Die

Dear Chancellor Merkel, President Sarkozy

The market has indicated the extend-and-pretend session that you have come to love, is over. It's now time to do or die.

Hoping-against-hope the problems will go away will no longer work, and in fact never worked ever (it just eventually made the problems worse).

So, either you put together a credible plan for a fiscal union or you put together a credible plan for a breakup of the Eurozone. Since the former is impossible because of German supreme court rulings, common sense would dictate you start working on the latter.

In the meantime, if you come up with a credible plan to recapitalize insolvent banks, a plan that sticks it to bondholders and not taxpayers, a plan that lets Greece default, perhaps you can appease the market and buy additional time while working on a vitally needed plan B (a breakup of the Eurozone).

I am not sure how long the market will give you on the these plans. It could be as little as two days or as long as five weeks, but action in the banking sector and stocks in general says not long.

cc

ECB President Jean-Claude Trichet, Prime Minister Papandreou, Prime Minister Berlusconi, Eurogroup Chairman Jean-Claude Juncker

Mish

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Reader Question Regarding the Role of Credit in Inflation/Deflation; US vs. Europe

A reader from Germany has questions regarding the role of credit in my deflation thesis. Josef writes:

Hello Mish

I am trying to understand your reasoning in the discussion about inflation vs. deflation.

One of the things I don't understand is the role of "credit". You write that "the market value of credit is collapsing at an amazing rate".

But isn't "credit" the same as "debt"?

When the market value of debt falls, then I wouldn't I need less "real estate" to get rid of my debt? Please, can you spend a minute to clarify this contradiction.

No Contradiction

Hello Josef

An accepted offer for credit is a loan, resulting in debt for the borrower, and an asset (the loan) on the balance sheet of the lender (typically a bank or finance company). So yes debt = credit extended (plus agreed upon interest).

When the value of assets (loans) drop significantly, banks become capital impaired and cannot lend. This is happening now even though banks are hiding losses by not marking assets to market prices.

We have heard absurd statements from the Central bank of France that there are no toxic assets on French bank balance sheets. The market price of Greek debt says otherwise.

Plunge in Mark-to-Market Prices of Bank Assets

We can infer marked-to market plunges in value of bank assets by the enormous drops in financial stocks this year. We know the value of debt on the balance sheets of banks has collapsed, even if banks deny it.

Inability to pay back debt also shows up in credit default swaps, sovereign debt ratings, and soaring bond yields of Greece, Portugal, Spain, and Italy vs. Germany.

These credit actions show a demand for safe hiding places such as US and German government bonds and cash. We can see that in record low US treasury yields and German government bond yields.

Debt Not Marked-to-Market

The second question is where your error is "wouldn't I need less real estate to get rid of my debt?"

The debt remains until it is written off. In the US, people still owe more on their houses than they can pay back. The money is owed but will not be paid back. The same applied to may types of loans including auto loans, credit card debt, home equity lines, etc.

Enormous Foreclosure Backlog

US Banks have the value of their assets (mortgage loans, commercial real estate loans, consumer credit loans), at prices that do not reflect likelihood of default and thus that debt is not marked-to-market.

Writedowns are deflation in action, and they are coming.

In many instances, people walk away from mortgage debt. In those cases banks eventually foreclose. The key word is "eventually" as the list of pending foreclosures is measured in decades at the current rate.

Please see First Time Foreclosure Starts Near 3-Year Lows, However Bad News Overwhelms; Foreclosure Pipeline in NY is 693 months and 621 Months in NJ for details.

US Writedowns Coming on REOs

When homeowners walk away or go bankrupt, generally they are relieved of debt. However the problem for banks does not go away.

After foreclosure, banks have a different asset on the books. It is no longer a loan, but rather REO (Real Estate Owned).

What do you think those houses on the balance sheets of banks are worth vs. the value banks hypothesize they are worth?

Once again, this capital impairment shows up in banks inability and unwillingness to lend. When banks don't lend, businesses don't expand, and when businesses don't expand unemployment stays high.

This deflationary cycle feeds on itself until home prices fall to the point where there is genuine demand for them and banks are recapitalized.

European Writedowns

The biggest debt problem in Europe is in regards to loans made by French and German banks to Greece, Spain, Portugal, and Italy.

The ECB, EU, and IMF compounded the problem by throwing more money at Greece, on terms and timelines Greece cannot possibly pay back.

Europe has other huge structural issues regarding productivity in Spain and Greece vs. Germany, and in currency union that cannot possibly work given the lack of a fiscal union.

Poor Policies by IMF, EU, ECB, Fed

EU, IMF, ECB, and Fed policies in the US and Europe were designed to hide losses on real estate loans, to hide losses on sovereign debt loans to Greece, Spain, Portugal etc, and to prevent losses to banks and bondholders.

Barry Ritholtz had an excellent column on that yesterday called Banking’s Self Inflicted Wounds.

Policies of governments and central banks that bail out private banks are wrong because they place more burden on already over-extended and deep in debt taxpayers who are not equipped to take on more debt.

The deflationary backdrop will persist until debt is written off, consumer deleveraging peaks, home prices fall to affordable values, and global structural imbalances fixed. The situation is not encouraging because of five critical problems.

Five Critical Problems

1. Keynesian clowns everywhere refuse to accept the fact that debt is the problem and one cannot possibly spend one's way out of debt crisis.
2. Europe has structural problems related to the currency union, productivity, union work rules, pensions, retirement, and country-specific fiscal problems.
3. The US has structural problems related to prevailing wages, collective bargaining of public unions, corporate tax policies, etc.
4. Stimulus and bailouts are bad enough in and of themselves, but stimulus and bailouts without fixing structural problems is insanity.
5. Politicians on both continents refuse to address structural issues
   

Process is Important, Not the Term

It's important to not get hung up on the term "deflation" but rather to understand the process I am describing, the implications of that process, and why the policy actions taken have not worked (and cannot possibly work), all called well in advance.

For more on the process of deflation (regardless of what one wants to call it), please see Bizarro World Inflation; About that 2011 Hyperinflation Call ...

Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Restructuring Plans Underway for Another 21 Banks Says Vice President of the European Commission; What's the Real Number?

Inquiring minds are reading details of a Speech by Joaquín Almunia Vice President of the European Commission responsible for Competition Policy on October 4, 2011.

Since 2008, people throughout the EU have been asked to accept the huge government bailout of the financial sector and to endure the austerity measures required to bring public finances under control.

These measures touch directly the lives of citizens; this is why I believe that we need to be as transparent as possible with them. And – of course – we need to do our utmost to make the most efficient use of public money.

It is crucial that we explain to our citizens why this aid was necessary to avert the collapse of the financial system. ...

We are all aware of the seriousness of the situation and of what is at stake.

Of course, the control of the State aid given to the banks under restructuring is not the only task to overcome the consequences of the financial crisis.

The financial sector must be oriented – first and foremost – towards its core function of meeting the financing needs of firms and households.

To this end, the Commission is in the process of changing the regulatory landscape for the financial industry.

Recent steps include, among others, the proposals on capital requirements – the so-called CRD IV – and the European Market Infrastructure Regulation, or EMIR.

President Barroso also announced a proposal for a tax on financial transactions in last week’s State of the Union speech to the European Parliament. ...

The Commission's work has reduced the amount of taxpayers’ money that has gone to financial institutions and has addressed the moral-hazard issue.

Since October 2008, under the crisis regime, we have taken restructuring decisions on 25 banks and we have seen the orderly liquidation of 11 more. The only negative decision we had to take involved a small Portuguese bank.

At present, we are working on restructuring plans for another 21 banks and we cannot exclude that this number could grow in the near future.

The emergency package to rescue and restructure banks is temporary by definition. As soon as the crisis is over, the exceptional rules will disappear – and the sooner, the better.

I have said many times that, when market conditions improved, we would replace the crisis rules with the new rescue and restructuring measures that we have been preparing for some time now.

Only a few months ago, we hoped we could make the switch at the end of this year; we were ready for it. Unfortunately, the conditions on the markets have deteriorated again and it would no longer be safe to press ahead with that plan.

I will therefore propose to the College to extend into 2012 the crisis State aid rules for banks. Let's hope that in the next year we will be able to come back to a normal regime of State Aid in this domain.

And in the meantime, let's hope that markets will calm down; that banks will resume lending to the real economy; that growth will take again a sustainable path; that new jobs will be created again; and that the taxpayers will recover the resources they have been obliged to put on the table to prevent an even worse crisis.

Thank you.

The EC ...

• Suspended plans to end crisis rules
• Promised to explain why taxpayer money was needed then did not explain
• Intends to proceed with a catastrophic tax on financial transactions (For details, please see Europe Plans to Tax Stock and Bond Transactions .1%, Derivatives .01% Despite US Objections; Expect More Crashes Should it Pass)
  
• Is operating on a policy of "hoping markets calm down"
• Admits 21 banks need restructuring (Which of course means the true number is well above that. I won't even bother to guess.)
• Hopes taxpayers will recover losses when it is 100% guaranteed they won't

The most galling of all is this blatant lie "The Commission's work has reduced the amount of taxpayers’ money that has gone to financial institutions and has addressed the moral-hazard issue."

If that is not enough to make you puke, nothing is.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Viral Nonsense About What Caused Tuesday's Rally

No fewer than a half-a-dozen sites featured or repeated a silly story about Tuesday's late rally that propelled the S&P 500 up 45 points in an hour. I am commenting because of all the emails I received on the idea.

Supposedly the Financial Times article EU ministers look at bank aid plans triggered the rally.

European Union finance ministers are examining ways of co-ordinating recapitalisations of financial institutions after they agreed that additional measures were urgently needed to shore up the region’s banks.

Although the details of the plan are still under discussion, officials said EU ministers meeting in Luxembourg had concluded that they had not done enough to convince financial markets that Europe’s banks could withstand the current debt crisis.

“There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states,” Olli Rehn, European commissioner for economic affairs, told the Financial Times. “There is a sense of urgency among ministers and we need to move on.”

“Capital positions of European banks must be reinforced to provide additional safety margins and thus reduce uncertainty,” Mr Rehn said. “This should be regarded as an integral part of the EU’s comprehensive strategy to restore confidence and overcome the crisis.”

Wall Street surged 4 per cent in the final hour of trading after this FT report was initially published.

This is a case of looking for a cause and finding one.

The most likely explanation of this rally is purely technical. Support was breached, no more sellers stepped in and a short-covering rally from deeply-oversold commenced as bears covered. If you prefer, "short-term psychology changed for unattributable reasons"

It is highly doubtful this all happened because of non-statements with no details from Olli Rehn. Rather, Rehn just happened to be spouting nonsense right as the market was ready to reverse on short-covering.

It is a mistake to look for an immediate explanation for every market move. Sometimes the explanation will not come for days (then be attributed to something else), and sometimes there really is no explanation other than short-term psychology changed.

When everyone starts fishing for answers, someone will find one, no matter how silly, and the story gets repeated everywhere.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Good News in Michigan: Right-to-Work Drive Gains Steam in Legislature

I am always in search of good news. Today I found some in Michigan where a Right-to-work drive gains steam

In this historic stronghold of the American labor movement, the phrase “right to work” is seen by many as fighting words.

But with a new GOP-controlled state Legislature and a Republican governor in place in Lansing, a move is afoot to make Michigan the 23rd state in the nation to adopt legislation that would prohibit unions and employers from regulating collection of union dues or requiring employees to join a union if their workplace is organized.

“We’ve got growing and substantial support in the Legislature for pursuing Michigan becoming a right-to-work state, but this is a marathon, not a sprint, and it’s all about making sure we are removing all obstacles to jobs,” said state Rep. Mike Shirkey, Clarklake Republican.

“Everyone acknowledges that overcoming the 75-plus-year history of legacy unions here is not something you do overnight. But some of the polls statewide indicate the public is moving toward a direction of supporting workers having the choice,” he said. “I’m not anti-union. I call it labor freedom, where unions are as free to make their case as workers are to make their choice.”

Despite the presence of the powerful United Auto Workers, a recent poll by the Grand Rapids Press found that 51 percent of state residents polled said they would back a right-to-work statute, compared with 27 percent opposed. The poll sample was relatively small, surveying 300 Michigan voters.

The state’s Republican governor, Rick Snyder, has said right-to-work laws are not on his agenda, calling them divisive at a time when his state must band together to change its economic direction. But some speculate that, if such a law moved through the Legislature, Mr. Snyder might quietly pass on the chance to veto it.

Among those betting on the governor’s ultimate support is Mr. Shirkey, who said Mr. Snyder, a successful entrepreneur before taking office, has done “some unbelievably courageous and gutsy things” since his election a year ago and is not afraid of going against the grain.

“He would say, ‘It’s not on my agenda,’ but he’s not saying it can’t be on his agenda,” Mr. Shirkey said.

Here's the bad news. Republican governor Rick Snyder is a wimp. If he would get behind this bill it would sail through the legislature. Right-to-work is the right thing to do and he should have no qualms backing it.

Hopefully the Republican legislature puts Snyder to the test.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Get the Heck out of Bank of America" says Senator Richard Durbin, on Senate Floor; Rep Brad Miller Accuses Banks of "Vulgar Profits"

Senator Richard Durbin of Illinois is telling Americans to "Get the heck out of that bank", right on the Senate Floor. His comments are in response to Bank of America hiking fees on debit cards.

Please consider BofA Customers Urged by Lawmakers to Quit Lender Over Debit Fee

Congressional Democrats are pushing customers to quit doing business with Bank of America Corp. and one lawmaker is looking to make it easier for them to do so as the biggest U.S. lender announced plans for new debit-card fees.

U.S. Representative Brad Miller, a North Carolina Democrat, introduced a bill today that would bar banks from imposing fees on people who close accounts, calling the proposal a response to the Charlotte, North Carolina-based firm’s plan to charge some debit customers an additional $5 a month.

“As megabanks flirt with menus of new fees, an increasing number of Americans will want to switch banks,” Miller, a member of the Financial Services Committee, said in a statement. “That is the way things work in a competitive, free market as unrepentant banks are still trying to rake in vulgar profits from their customers.”

Miller’s criticisms echoed those of Senator Richard Durbin, the Illinois Democrat who successfully pushed for legislation restricting the amount banks could collect from retailers for debit transactions. The two lawmakers spoke out after President Barack Obama questioned whether Bank of America has an “inherent right” to charge the new fee, which the company said was aimed at making up revenue lost because of the new limits on so-called interchange.

Bank of America Website Down 4th Day, "Thanks for Your Patience" Says Website

The Register reports Bank of America website disrupted for 4th day in a row

Bank of America's website continued to suffer sporadic outages on Monday, marking the fourth day that some customers have been unable to use its online services to check balances and pay bills.

"We're sorry, but some of our pages are temporarily unavailable," a note posted to the homepage for the biggest US bank read. "Thanks for your patience." The advisory, and sporadic outages, have greeted many people trying to use bankofamerica.com since Friday.

Bank of America spokeswoman Tara Burke declined to discuss the underlying cause of the outages except to say it isn't related to hacking, denial-of-service attacks, or other incidents related to security.

By not commenting, Bank of America is making matters worse.

Bank of America (BAC) Flirts With $5



Note the late-August "Buffet is Buying" spike has been taken back and then some. The $5 level is crucial. Many mutual funds cannot hold stocks whose share prices drop below $5.

Exclusive Nonsense

As an example of shoddy reporting please consider Exclusive: Buffett not worried by BofA share fall.

Billionaire investor Warren Buffett is not concerned by the sharp drop in Bank of America Corp (BAC) shares in the last couple of days, despite his $5 billion investment in the company last month, he told Reuters on Tuesday.

"We agreed to hold it for at least five years, so what I'm thinking about is where Bank of America will be in five years, and nothing in the last 24 hours or 48 hours has changed my views on that," the Berkshire Hathaway Inc (BRKa.N) chief executive told Reuters on the sidelines of Fortune magazine's Most Powerful Women Summit.

Buffett made his bet on Bank of America's survival in late August (though it closed in early September). The deal gave him preferred shares with a hefty dividend and warrants that represent 6.5 percent of Bank of America stock.

Of course Buffett is not concerned about share price of Bank of America. He owns the debt. His primary concern is the debt is paid back, not the share price. It is extremely sloppy reporting to not point this out.

Addendum:

Reader Blake writes "As a libertarian I am appalled that a senator would directly attack an individual company for pricing decisions made by that company."

Blake is correct in that stance. Senators should not make such statements on the floor of Congress.

However, the decision by Bank of America was piss poor. They misunderstood public reaction, and worse yet were not prepared for the surge in traffic. No one will remember all the other banks who followed suit. Everyone will remember Bank of America was the first to jack rates. Bank of America CEO Brian Moynihan is incompetent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Christie Blows Golden Opportunity to Lead Nation, Bows Out of Presidential Race; Prospects for US Economy Go Down the Drain

I had hopes that Christie would step up to the plate because other than Ron Paul, every other Republican candidate leaves much to be desired.

Thus, I am sad to report Christie Says No to White House Bid, Ends Speculation

New Jersey Governor Chris Christie, who spent more than a year denying he’d run for president in 2012, put an end to renewed speculation of a bid and said he won’t join the race to challenge President Barack Obama.

The 49-year-old Republican, who has been reconsidering in recent days, announced the decision during a news conference today at the state capitol in Trenton.

“My commitment to the state is what overrode everything else,” Christie said. “New Jersey, whether you like it or not, you’re stuck with me.”

I believe Christie would have become the next president had he run. Instead, expect more war-mongering, trade wars, and refusal to do anything about public unions regardless of what candidate wins.

I do not know what Christie's policies are regarding war-mongering or trade wars. However, I do know the rest of the field, including Obama is committed to doing nothing about excessive military spending. I also know that protectionist nonsense is brewing in Congress and Mitt Romney is on the wrong side of the debate.

Finally, I know (as does everyone else) what Christie has done in New Jersey to take on public unions.

Christie would have lit a fire in the middle. Instead, the nation faces the prospect of another four years of Obama or some lame Republican (assuming Paul does not win). The very best we can hope for from Romney or Perry is to not make matters worse.

Prospects for US Economy Go Down the Drain

I highly doubt Christie gets another chance, ever. Moreover, Obama's odds of winning just shot up.

Unfortunately, Christie's time has come and gone, unless by some miracle he is drafted in a deadlocked convention. The chance for a genuine outsider to lead just went down the drain, and so did prospects for the US economy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Australia Central Bank Signals Rate Cut; "Different Economic Phase" Says PM;Reflections on the "Hard Currency" Play; "Out of the Blue" Taunt Indicator

Housing, retail, and now commodity weakness have taken a toll on the Australian dollar. The final straw for the "Aussie", the hardest of "hard currencies" (currencies of commodity producing countries such as Australia and Canada) is rate cuts. They are coming.

Bloomberg reports Aussie Weakens to One-Year Low as RBA Signals Interest-Rate Cut Possible

The Australian dollar dropped to its lowest in a year against the greenback as a policy statement by the central bank suggested that an easing of inflation pressures will pave the way for possible interest-rate cuts.

The so-called Aussie slid for a third day against the yen as traders priced in an 86 percent chance the Reserve Bank of Australia will cut interest rates by half a percentage point to 4.25 percent by November. New Zealand’s dollar held a four-day loss against the U.S. currency, after touching a six-month low, as data showed business confidence fell in the third quarter.

“Taking into account all the recent information, the path for inflation may now be more consistent with the 2-3 percent target in 2012 and 2013,” RBA Governor Glenn Stevens said in a statement accompanying the board’s decision to leave rates unchanged at 4.75 percent. “An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.”

“The RBA is opening the door to a rate cut and that should put some downward pressure on the Australian dollar,” said Richard Grace, the Sydney-based chief foreign-exchange strategist and head of international economics at Commonwealth Bank of Australia. “With equity markets continuing to remain very soft, I’d suggest that the Aussie is at risk of falling below 90 cents.”

Economic Bust Hits Australia

Flashback May 13, 2011: Economic Bust in Australia:Near-Record Corporate Bankruptcies, Employment Drops Unexpectedly; Rise in Bad Home Loans;Record Low Property Transactions

Employment Unexpectedly Falls Most Since 2009

Bloomberg reports Australian Employment Unexpectedly Falls Most Since 2009, Currency Weakens

The RBA said in its May 6 quarterly policy statement that “most leading indicators point to further growth in employment over the months ahead, although at a slower pace than in 2010.” It also predicted the jobless rate would fall to 4.25 percent by December 2013.

RBA Calls For Unemployment Rate to Drop

What the hell is it that the RBA sees that I don’t? The property bust is underway and going to accelerate, retailers are going under, and consumers are tapped out.

How exactly does that translate to lower unemployment rate?’

Rise in Bad Home Loans

The Age reports a Rise in CBA bad home loans

Commonwealth Bank’s decision to aggressively grow its mortgage market share at the height of the financial crisis is starting to cause indigestion after it revealed an increase in the number of housing loans starting to turn bad.

Further stress in the housing market could emerge with CBA chief executive Ralph Norris predicting the Reserve Bank could issue as many as two interest rate increases by October.

”We’re obviously expecting the Reserve Bank to increase rates and there’s possibly one or two rises to come in the next six months,” Mr Norris told an investor briefing.

Mr Norris was speaking as CBA confirmed it was on track for a record profit result after it reported third-quarter earnings of $1.7 billion.

Norris Way to Optimistic

I disagree with the CBA chief executive Ralph Norris on nearly every point.

• I highly doubt the RBA hikes twice more.
• I expect cuts as the Australian economy slumps into a big recession.
• I expect delinquencies to rise further.
• I expect profits at CBA have peaked or will soon do so.

I expected the Australia dollar would sink for the reasons stated: Rising unemployment, recession, a housing bust, and most importantly rate cuts (when everyone else was expecting hikes).

Australia's unemployment rate rises to 10-month high

Flash Forward: September 8 2011: Australia's unemployment rate rises to 10-month high

Australia's unemployment rate rose unexpectedly to a 10-month high in August.

Joblessness jumped to 5.3% from 5.1% in July, according to the country's statistical bureau.

Some analysts say the figures will persuade the Reserve Bank of Australia (RBA) to hold the key interest rate at its current level.

Note the expectation even in September for more rate hikes. Also note how badly the RBA screwed up its assessment of unemployment.

Australian Dollar Daily Chart



click on chart for sharper image

Reversals Difficult to Time

It is exceptionally difficult to time these reversals.

I thought it was pretty clear in May (actually way before that because of the housing bust and retail weakness), that the next move by the RBA would be to lower rates. However, it was not until September (accompanied by the plunge in commodities and increased tension in Europe) that the market agreed.

Then it was a quick 14.5% drop in the value of the Australian dollar in two months, from 1.10 all the way to .94. That drop wiped out a years' worth of gains (or more) for anyone in the "hard currency" trade betting on short-term Australia bonds.

"Out of the Blue" Taunt Indicator

One of the signs of a huge reversal is what I call the "out of the blue" taunt indicator.

In early August several people emailed "out of the blue" telling me how horrendous my call was, how the RBA was going to hike, why commodities would not pull back, and that there would be no Australia housing crash.

They nailed the top in the Australian dollar. Congratulations!

Reflections on the "Hard Currency" Play

Those who got in the "hard currency" play in early 2009 or the dip in mid-2010 are still way ahead. However, those who chased the play anytime in 2011 are underwater. Those who chased in mid-2011 are way underwater.

The moral of this story is simple: The much ballyhooed "hard currency" play is not something you plow into and forget about.

"Different Economic Phase" Says Prime Minister

Those looking for further evidence of pending economic demise can find it when charlatans start preaching new paradigms and "it's different this time".

Australia's prime minister Prime Minister Julia Gillard did just that on Tuesday. Please consider Aussie PM says mining boom likely to be sustained

Australia's mining boom fueled by Chinese demand, which kept the economy out of recession during the global financial crisis, "is likely to be sustained for a very long period," Prime Minister Julia Gillard said Tuesday.

Gillard told a tax summit at Parliament House that the current boom in exports of iron ore and coal is different from previous cycles in Australian history that inevitably ended in busts.

"We are in a different economic phase and we shouldn't let the language of 'boom' deceive us," Gillard said.

The idea that exports will keep the Australian economy out of recession is complete silliness. Moreover, it was not commodities that kept the Australian economy humming during the great financial crisis, but an enormous property bubble that has now burst.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Goldman Sachs Says Commodities May Rally 20% on Emerging-Markets Growth; Mish Says Fade Goldman

Goldman Sachs says Commodities May Rally 20% on Emerging-Markets Growth

Commodity prices may advance 20 percent over the next year as growth in emerging markets offsets the impact of the sovereign-debt crisis in Europe and a slowdown in developed economies, according to Goldman Sachs Group Inc. (GS)

The bank reiterated an “overweight” recommendation on commodities over the next 12 months, while remaining “neutral” in the near term, analysts led by Jeffrey Currie wrote in a report today. Oil and copper forecasts for 2012 were reduced.

“With recent GDP revisions by our economists falling hardest on Europe but emerging market growth expectations still relatively solid, we continue to believe that demand growth in 2012 will be sufficient to tighten major commodity markets,” Currie wrote. “We now see a flatter upward trajectory for commodity prices.”

Cutting Calls

Goldman joins BNP Paribas SA and Commerzbank AG in cutting calls for the metal that some investors see as a barometer for economic activity. The bank also trimmed the 12-month price target for copper to $9,500 per ton from $11,000, while zinc’s target was reduced to $2,400 per ton from $2,700.

Fade Goldman

For starters, the fact that Goldman and Commerzbank trimmed estimates says they failed to spot the weakness in Europe, the US, and China and what that would do to commodity prices.

I see no reason to be bullish or even neutral on commodities now.

The idea that emerging markets will trump a recession in Europe, the US, and Australia is ridiculous to put it mildly. Moreover, the idea that emerging markets will decouple from the global economy is preposterous in and of itself.

Finally, China is overheating and a new regime change next year will likely end the huge infrastructure plays in China that have been sucking up copper and other commodities.

Goldman's Rationale Horrendously Flawed

Simply put, no matter what commodities do, Goldman's rationale is horrendously flawed. Yes, commodities "may" rally 20%. However, they "may" fall 20% or even 30% first, and I suggest that is more likely.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Dexia, Belgium's Largest Lender About to Become First Casualty of Greek Default; Emergency Meeting to Split Bank Now in Progress

In recent (and totally useless) "stress-free" tests, Dexia passed with flying colors. Dexia passed those tests only because the tests did not include any writedowns of Greek debt. Tonight, an emergency board meeting is underway because Dexia is massively undercapitalized as a result of its Greek bond position.

Please consider Dexia Board Said to Meet as Sovereign Debt Crisis Curbs Funding

The board of Dexia SA, Belgium’s biggest lender, is meeting to discuss options including a possible breakup after Europe’s debt crisis reduced its funding, a person with knowledge of the talks said.

Dexia, which finances municipalities in France and Belgium, may split off its French business partly under the oversight of state-owned Banque Postale SA, said the person, who declined to be identified because the matter is confidential. The discussions are complex because Dexia is based in Brussels and Paris, and has both governments as shareholders. An announcement may come as soon as tonight, the person said.

“Dexia is an extremely complicated file,” said Benoit Petrarque, an Amsterdam-based analyst at Kepler Capital Markets with a “hold” rating on the shares. “The fact that two countries are involved, both under pressure from rating agencies, makes it even more difficult. We are not in 2008 anymore, when you could just inject multibillions of cash.”
In September 2008, France and Belgium led the first rescue of Dexia, buying a combined 3 billion euros of stock. The bank’s existing shareholders, which include Caisse des Depots et Consignations and Belgium’s Holding Communal SA, provided an additional 3 billion euros.

Less than a month later, Dexia also obtained as much as 150 billion euros of debt guarantees from France, Belgium and Luxembourg, of which it tapped a maximum of about 96 billion euros in May 2009. The bank stopped issuing government-backed debt in June 2010. It still had 29 billion euros outstanding at the end of last month.

Belgian Finance Minister Promises Another Bailout

Euronews provides additional details in Dexia dragged down by Greek debt worries

The French and Belgian government will do the right thing to support bank Dexia in the current turbulent markets. So said the Belgian Finance Minister Didier Reynders.

It is now looking more likely that Dexia’s state shareholders will have to consider a second bailout of taxpayers’ money.

Dexia is not the only European bank facing a need for capital as regulations become tougher, profits sag and lenders face losses on sovereign bonds if the euro zone crisis isn’t resolved.

Banks face a 148 billion euro capital shortfall under a base case and a 227 billion shortfall under a stressed scenario, according to analysts at JPMorgan, who say Unicredit , Deutsche Bank, Lloyds, Societe Generale and Barclays each face a deficit of over seven billion euros under its stressed scenario.

Dexia, which received a six billion euro bailout from Belgium, France and other major shareholders at the height of the financial crisis in 2008, held 3.8 billion euros of Greek sovereign bonds at the end of June and had a credit risk exposure to the country of 4.8 billion euros.

Dexia’s market capitalisation is only 2.5 billion euros, and its core capital is seen as insufficient to absorb big hits.

The company has taken a 338 million euro hit to cover a 21 percent loss on Greek sovereign debt maturing by 2020, part of a plan agreed by private sector investors in July.

But with market prices indicating investors could suffer a loss of 50 percent or more, Dexia’s Greek bill could be more than one billion euros more.

Bondholders Do God's Work

Logically speaking, Dexia bondholders should have been wiped out in 2008. They should be wiped out again now. Instead, look for Belgium and France to throw more taxpayer money at bondholders.

The best explanation I can come up with is as follows: bondholder of banks do "God's work" just as Goldman Sachs does.

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