Global Economic
Trend Analysis

Recent Posts

Sunday, June 30, 2013 10:06 PM

China Manufacturing Conditions Deteriorate, New Export Orders Fall at Fastest Rate Since March 2009

Mish Moved to MishTalk.Com Click to Visit.

In what should be no surprise to Mish readers, the HSBC China Manufacturing PMI™ shows Operating conditions deteriorate at quickest pace since last September, and new export orders plunge.

Key points

Output contracts for first time since last October
New export orders fall at the joint-fastest rate since March 2009
Job shedding intensified

Manufacturing PMI

After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index™ (PMI™) – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – posted at 48.2 in June, down from 49.2 in May, signalling a modest deterioration of business conditions. Operating conditions have now worsened for two successive months.

Chinese manufacturers signalled a first reduction of output for eight months in June. The rate of contraction was modest, and generally attributed to weaker client demand, as total new orders declined for the second month in a row. New business from abroad also fell in June, with the rate of contraction the fastest since last September, and the joint-sharpest in over four years. Anecdotal evidence suggested that reduced client demand, particularly from Europe and the US, led to fewer new export orders.


Commenting on the China Manufacturing PMI™ survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: “Falling orders and rising inventories added pressure to Chinese manufacturers in June. And the recent cash crunch in the interbank market is likely to slow expansion of off-balance sheet lending, further exacerbating funding conditions for SMEs. As Beijing refrains from using stimulus, the ongoing growth slowdown is likely to continue in the coming months.”
I frequently disagree with Markit economic comments but these comments from Hongbin Qu are spot on.

Mike "Mish" Shedlock

2:13 PM

Spying Out of Control: NSA Bugs EU Offices, Gathers Routine Info On US Citizens; Is NSA Surveillance Legal? Constitutional?

Mish Moved to MishTalk.Com Click to Visit.

Just to show how far out of line NSA surveillance has gotten, the US is gathering routine information on US citizens and has also been bugging EU offices.

Der Spiegel reports "Senior European Union officials are outraged by revelations that the US spied on EU representations in Washington and New York. Some have called for a suspension of talks on the trans-Atlantic free trade agreement."

Please consider Spying 'Out of Control': EU Official Questions Trade Negotiations

Europeans are furious. Revelations that the US intelligence service National Security Agency (NSA) targeted the European Union and several European countries with its far-reaching spying activities have led to angry reactions from several senior EU and German politicians.

"We need more precise information," said European Parliament President Martin Schulz. "But if it is true, it is a huge scandal. That would mean a huge burden for relations between the EU and the US. We now demand comprehensive information."

Schulz was reacting to a report in SPIEGEL that the NSA had bugged the EU's diplomatic representation in Washington and monitored its computer network (full story available on Monday). The EU's representation to the United Nations in New York was targeted in a similar manner. US intelligence thus had access to EU email traffic and internal documents. The information appears in secret documents obtained by whistleblower Edward Snowden, some of which SPIEGEL has seen.

The documents also indicate the US intelligence service was responsible for an electronic eavesdropping operation in Brussels. SPIEGEL also reported that Germany has been a significant target of the NSA's global surveillance program, with some 500 million communication connections being monitored every month. The documents show that the NSA is more active in Germany than in any other country in the European Union.

German Justice Minister Sabine Leutheusser-Schnarrenberger, who has been sharply critical of the US since the beginning of the Prism scandal, was furious on Sunday. "If media reports are correct, then it is reminiscent of methods used by enemies during the Cold War," she said in a statement emailed to the media. "It defies belief that our friends in the US see the Europeans as their enemies. There has to finally be an immediate and comprehensive explanation from the US as to whether media reports about completely unacceptable surveillance measures of the US in the EU are true or not. Comprehensive spying on Europeans by Americans cannot be allowed."

Elmar Brok, chairman of the Foreign Affairs Committee in European Parliament added his opprobrium. "The spying has reached dimensions that I didn't think were possible for a democratic country. Such behavior among allies is intolerable." The US, he added, once the land of the free, "is suffering from a security syndrome," added Brok, a member of Chancellor Angela Merkel's conservative Christian Democrats. "They have completely lost all balance. George Orwell is nothing by comparison."

Green Party floor leader in European Parliament Daniel Cohn-Bendit went even further. "A simple note of protest is not enough anymore. The EU must immediately suspend negotiations with the US over a free trade agreement," he said. "First, we need a deal on data protection so that something like this never happens again. Only then can we resume (free-trade) negotiations."

The US has thus far declined to respond to the revelations printed in SPIEGEL. "I can't comment," Deputy National Security Advisor Ben Rhodes told journalists on Saturday in Pretoria, according to the German news agency DPA.
Evidence Overwhelming

The US has not officially acknowledged that fact but nor has the US denied it. But the evidence is overwhelming. "I can't comment". is the best the US can do.

The Financial Times comments on the mess in EU demands answers over claims US bugged its offices
A diplomatic row over communications surveillance deepened as European ministers reacted with disbelief and fury to reports that EU offices were bugged by US intelligence services.

Der Spiegel said it had gained partial access to a NSA document dated 2010, which was obtained by Edward Snowden, the NSA contractor turned whistleblower.

The document revealed the NSA had placed bugs and tapped into internal computer networks at the EU’s offices in Washington, as well as at the EU’s mission to the UN, according to Der Spiegel. The White House declined to comment.

In Germany, especially, where sensitivities over spying remain acute because of large amounts of snooping conducted before 1989 by the Stasi, the East German secret police, the revelations about extensive US surveillance have caused a political furore.

“It defies all belief that our friends in the US see Europeans as enemies,” Ms Leutheusser-Schnarrenberger said. “If EU offices in Brussels and Washington were indeed monitored by US intelligence services, that can hardly be explained with the argument of fighting terrorism.”

Although Germany and the US co-operate extensively on intelligence matters, the partnership is not as deep as that between the US and UK. Together with Australia, New Zealand and Canada, the UK enjoys a privileged status. However, Germany is classified as a “third-class” partner.

“We can attack the signals of most foreign third-class partners, and we do it too,” Der Spiegel quoted a passage in an NSA document as saying.

Meanwhile, Rafael Correa, Ecuadorean president, said on Sunday that Mr Snowden’s fate was in the hands of Russian authorities. The man who first brought the snooping allegations out in the open is thought to still be in a Moscow airport transit zone awaiting news of his asylum request from the South American country.

Legal But Unconstitutional

Washington Post writer Laura K. Donohue, professor at Georgetown University Law Center and director of Georgetown’s Center on National Security and the Law, says NSA surveillance may be legal — but it’s unconstitutional.
The National Security Agency’s recently revealed surveillance programs undermine the purpose of the Foreign Intelligence Surveillance Act, which was established to prevent this kind of overreach. They violate the Fourth Amendment’s guarantee against unreasonable search and seizure. And they underscore the dangers of growing executive power.

The intelligence community has a history of overreaching in the name of national security. In the mid-1970s, it came to light that, since the 1940s, the NSA had been collecting international telegraphic traffic from companies, in the process obtaining millions of Americans’ telegrams that were unrelated to foreign targets. From 1940 to 1973, the CIA and the FBI engaged in covert mail-opening programs that violated laws prohibiting the interception or opening of mail. The agencies also conducted warrantless “surreptitious entries,” breaking into targets’ offices and homes to photocopy or steal business records and personal documents. The Army Security Agency intercepted domestic radio communications. And the Army’s CONUS program placed more than 100,000 people under surveillance, including lawmakers and civil rights leaders.

After an extensive investigation of the agencies’ actions, Congress passed the 1978 Foreign Intelligence Surveillance Act (FISA) to limit sweeping collection of intelligence and create rigorous oversight. But 35 years later, the NSA is using this law and its subsequent amendments as legal grounds to run even more invasive programs than those that gave rise to the statute.

We’ve learned that in April, the Foreign Intelligence Surveillance Court (FISC) ordered Verizon to provide information on calls made by each subscriber over a three-month period. Over the past seven years, similar orders have been served continuously on AT&T, Sprint and other telecommunications providers.

Another program, PRISM, disclosed by the Guardian and The Washington Post, allows the NSA and the FBI to obtain online data including e-mails, photographs, documents and connection logs. The information that can be assembledabout any one person — much less organizations, social networks and entire communities — is staggering: What we do, think and believe.

To the extent that the FISC sanctioned PRISM, it may be consistent with the law. But it is disingenuous to suggest that millions of Americans’ e-mails, photographs and documents are “incidental” to an investigation targeting foreigners overseas.

Congress didn’t pass Section 215 to allow for the wholesale collection of information. As Rep. F. James Sensenbrenner Jr. (R-Wis.), who helped draft the statute, wrote in the Guardian: “Congress intended to allow the intelligence communities to access targeted information for specific investigations. How can every call that every American makes or receives be relevant to a specific investigation?”

Illegal And Unconstitutional

New York Times op-ed contributors Jennifer Stisa Granick and Christopher Jon Sprigman make the case that the NSA Actions are both illegal and unconstitutional in their article The Criminal N.S.A.
THE twin revelations that telecom carriers have been secretly giving the National Security Agency information about Americans’ phone calls, and that the N.S.A. has been capturing e-mail and other private communications from Internet companies as part of a secret program called Prism, have not enraged most Americans. Lulled, perhaps, by the Obama administration’s claims that these “modest encroachments on privacy” were approved by Congress and by federal judges, public opinion quickly migrated from shock to “meh.”

 It didn’t help that Congressional watchdogs — with a few exceptions, like Senator Rand Paul, Republican of Kentucky — have accepted the White House’s claims of legality. The leaders of the Senate Intelligence Committee, Dianne Feinstein, Democrat of California, and Saxby Chambliss, Republican of Georgia, have called the surveillance legal. So have liberal-leaning commentators like Hendrik Hertzberg and David Ignatius.

This view is wrong — and not only, or even mainly, because of the privacy issues raised by the American Civil Liberties Union and other critics. The two programs violate both the letter and the spirit of federal law. No statute explicitly authorizes mass surveillance. Through a series of legal contortions, the Obama administration has argued that Congress, since 9/11, intended to implicitly authorize mass surveillance. But this strategy mostly consists of wordplay, fear-mongering and a highly selective reading of the law. Americans deserve better from the White House — and from President Obama, who has seemingly forgotten the constitutional law he once taught.

 Edward J. Snowden, the former N.S.A. contract employee and whistle-blower, has provided evidence that the government has phone record metadata on all Verizon customers, and probably on every American, going back seven years. This metadata is extremely revealing; investigators mining it might be able to infer whether we have an illness or an addiction, what our religious affiliations and political activities are, and so on.

The law under which the government collected this data, Section 215 of the Patriot Act, allows the F.B.I. to obtain court orders demanding that a person or company produce “tangible things,” upon showing reasonable grounds that the things sought are “relevant” to an authorized foreign intelligence investigation. The F.B.I. does not need to demonstrate probable cause that a crime has been committed, or any connection to terrorism.

Even in the fearful time when the Patriot Act was enacted, in October 2001, lawmakers never contemplated that Section 215 would be used for phone metadata, or for mass surveillance of any sort.

Representative F. James Sensenbrenner Jr., a Wisconsin Republican and one of the architects of the Patriot Act, and a man not known as a civil libertarian, has said that “Congress intended to allow the intelligence communities to access targeted information for specific investigations.” The N.S.A.’s demand for information about every American’s phone calls isn’t “targeted” at all — it’s a dragnet. “How can every call that every American makes or receives be relevant to a specific investigation?” Mr. Sensenbrenner has asked. The answer is simple: It’s not.

 Let’s turn to Prism: the streamlined, electronic seizure of communications from Internet companies. In combination with what we have already learned about the N.S.A.’s access to telecommunications and Internet infrastructure, Prism is further proof that the agency is collecting vast amounts of e-mails and other messages — including communications to, from and between Americans.

The government justifies Prism under the FISA Amendments Act of 2008. Section 1881a of the act gave the president broad authority to conduct warrantless electronic surveillance. If the attorney general and the director of national intelligence certify that the purpose of the monitoring is to collect foreign intelligence information about any non­American individual or entity not known to be in the United States, the Foreign Intelligence Surveillance Court can require companies to provide access to Americans’ international communications. The court does not approve the target or the facilities to be monitored, nor does it assess whether the government is doing enough to minimize the intrusion, correct for collection mistakes and protect privacy. Once the court issues a surveillance order, the government can issue top-secret directives to Internet companies like Google and Facebook to turn over calls, e-mails, video and voice chats, photos, voice­over IP calls (like Skype) and social networking information.

Leave aside the Patriot Act and FISA Amendments Act for a moment, and turn to the Constitution.

The Fourth Amendment obliges the government to demonstrate probable cause before conducting invasive surveillance. There is simply no precedent under the Constitution for the government’s seizing such vast amounts of revealing data on innocent Americans’ communications.

 One of the most conservative justices on the Court, Samuel A. Alito Jr., wrote that where even public information about individuals is monitored over the long term, at some point, government crosses a line and must comply with the protections of the Fourth Amendment. That principle is, if anything, even more true for Americans’ sensitive nonpublic information like phone metadata and social networking activity.

We may never know all the details of the mass surveillance programs, but we know this: The administration has justified them through abuse of language, intentional evasion of statutory protections, secret, unreviewable investigative procedures and constitutional arguments that make a mockery of the government’s professed concern with protecting Americans’ privacy. It’s time to call the N.S.A.’s mass surveillance programs what they are: criminal.
Criminal is Correct Viewpoint

There is no doubt that actions by the NSA are both illegal and unconstitutional.

Yet, instead of going after the perpetrators of crimes, the US is going after Edward Snowden, the former U.S. intelligence contractor who leaked the documents detailing the illegal surveillance to various news agencies.

Rand Paul on Snowden

Finally, please consider Rand Paul: Clapper Lied, Snowden Told the Truth.
Senator Rand Paul told CNN yesterday that NSA whistleblower Edward Snowden will be historically viewed as a truth teller whereas Obama national security director James Clapper will be judged as a liar for telling Congress that the NSA was not spying on Americans.

“I would say that Mr. Snowden hasn’t lied to anyone,” Paul told CNN’s Candy Crowley. “He did break his oath of office, but part of his oath of office is to the Constitution, and he believes that, when James Clapper came in March, our national director of intelligence came and lied, that he [Snowden] was simply coming forward and telling the truth that your government was lying. This is a big concern of mine, because it makes me doubt the administration and their word to us when they talk to us, because they have now admitted they will lie to us if they think it is in the name of national security.”

Paul is referring to Clapper’s March testimony in front of the Senate intelligence committee, during which he claimed that the National Security Agency did “not wittingly” collect data on Americans’ communications.

Following Snowden’s revelations about the PRISM program, Clapper tried to clarify his remarks by stating, “I responded in what I thought was the most truthful, or least untruthful, manner by saying ‘no.’”

“Mr Clapper lied in Congress in defiance of the law in the name of security – Mr. Snowden told the truth in the name of privacy, so I think there will be a judgment because both of them broke the law and history will have to determine,” added Paul.
So, who is the criminal here, and who is the hero? One is wanted on charges of treason, the other is not wanted or charged with anything.

Mike "Mish" Shedlock

Saturday, June 29, 2013 12:23 PM

Bill Gross Discusses the "Tipping Point" For Bonds; Does He Miss the Boat?

Mish Moved to MishTalk.Com Click to Visit.

Bill Gross did not see this major selloff in bonds coming. He discusses the setup in his recent Investment Outlook called The Tipping Point.

Much of the article is about how he almost tipped a ship while in the Navy. He uses the tipped ship metaphor to talk about the position in bonds.

Gross says "Markets just had too much risk, and in PIMCO’s opinion, too much hope for a constant QE and for the growth that it would produce. In effect, the ship was top heavy with too little ballast. Guess I should have known, huh?"

That's water over the dam at this point so the question Gross asks now is "Well where does the ship go from here?"

Here is a snip of Gross' explanation.

Should you as a bond investor jump overboard and risk the cold money market Atlantic Ocean at near zero degrees? We don’t think so – and not because we want to keep you on board – we just don’t think so. Why not?

1) The Fed’s forecast of the economy which prompted tapering panic is far too optimistic. If 7% unemployment is tapering’s final port of call, we simply think that we’re much further away than the Fed’s compass would suggest. We argue for structural headwinds – demographic, globalization, and technology influences – that have had and will continue to have dampening effects on domestic and global growth. The Fed, we would argue, is too cyclically oriented, focusing substantially on housing prices and car sales. And speaking of housing, since mortgage rates have risen by 1½% in the last six months and the average monthly check for a new home buyer is up by 20–25% as well, then as I tweeted several weeks ago, “Mr. Chairman are you serious?” Growth will be negatively influenced.

2) Inflation, according to the Fed’s own statistics is running close to a 1% pace. The Fed has told us that they “target,” “ target” 2% and for the next 1–2 years are willing to accept even 2½% until they reverse engines. Fed Governor Bullard of the St. Louis Fed was in our opinion correct where he dissented from the majority decision several weeks ago, citing the distant shores of 2%+ inflation and the seeming inability to even move in that direction. 

3) Yields have adjusted by too much. While T.V. and the press focus on 10-year Treasuries at 2.55% as their guiding star, subjective stabs by yours truly or anyone else are difficult day to day. ... To my eye, Fed Funds will not increase until at least mid-2015 and even then subject to a consistently strong economy that produces 2%+ inflation. I wonder if we can get there in this decade to tell you the truth. But the beauty of this North Star Fed Funds sextant is that it can be rather directly observed in futures markets, either for Fed Funds or for Eurodollars, which are a close companion. Right now, Fed Funds futures markets are predicting a 75 basis point yield in 2015, and Eurodollars validating a similar conclusion. That would suggest a mispricing, despite the obvious caveat of professional observers that some of the 75 is a surcharge for potential volatility. In any case, if frontend curves are up to 50 basis points cheap, then intermediate curves – the 10-year Treasury – may be as much as 35 basis points too cheap. They belong in our opinion at 2.20% instead of 2.55%.

So there you have it, fellow passengers and paying clients. Don’t jump ship now. We may have reached an inflection point of low Treasury, mortgage and corporate yields in late April, but this is overdone.

Emphasis by Bill Gross

A Tipping Point That Won't Tip

Gross' message is clearly "the ship has reached a tipping point but don't worry, the ship won't tip". Let's discuss each of Gross' three main points.

1) "The Fed's forecast is far too optimistic".

I certainly agree with Gross that the Fed (and almost everyone else) is overly optimistic.

But what if growth is not the Fed's only concern? What if the Fed is concerned about the bubbles it has blown in stocks and bonds? What if the Fed is concerned about renewed speculation in housing?

Perhaps that scenario is far-fetched, perhaps not, but at least some Fed governors have those concerns.

2) "The Fed's inflation target is 2%"

OK, the Bernanke Fed has an inflation target of 2%.  But Bernanke will soon be gone. Will the next Fed have the same target? Any target? Given that Janet Yellen is likely the next Fed Chairperson, it is likely but not a given.

And how does one measure inflation? Will the Fed ignore housing like it did between 2002 and 2007? Will it ignore all brewing bubbles?

3) "Yields have adjusted too much"

Have they? Let's assume that Gross is correct.

Gross emphasizes the yield on a 10-year note belongs at "2.20% instead of 2.55%".

Lovely! Let's once again assume Gross is right. The upside is 35 basis points. And what is the downside if Gross is wrong?

Is this what things have come to? That's it's necessary to speculate on a gain of 35 basis points because that is fair value? And where was Gross on "fair value" when the yield was 1.5%?

If it is correct to play for 35 basis points now, why was he in bonds when the yield was 70 basis points too low? Can you have this both ways?

And why is this suddenly a "3–5% for both stocks and bonds" when he tweeted "@PIMCO The secular 30-yr bull market in bonds likely ended 4/29/2013. PIMCO can help you navigate a likely lower return 2 - 3% future."

So, is this a 3-5% world or a 2-3% world?

Questions abound and answers are few.

I actually suspect Gross may have this correct, but what is the risk-reward if he is wrong? What if the bond revolt continues? What if the Fed has lost control? That's what Gross does not discuss, and that's where he missed the boat.

For further discussion, please see Calmer Waters for the Bond Market? Gold? Worst Over?

Mike "Mish" Shedlock

1:21 AM

FHA Swamped By Defaults; Congressional Report Shows FHA Could Suffer Losses as High as $115 Billion; Shut Down Fannie, Freddie, FHA

Mish Moved to MishTalk.Com Click to Visit.

An alleged "worst case scenario" shows the FHA could lose as much as $115 Billion. Since these worst case scenarios are always famously optimistic, the best course of action would be to shut the agency down.

I was quoted as saying just that by the Heartland in Congressional Report Raises Spectre of FHA Bailout.

The Federal Housing Administration's (FHA) losses over the next 30 years could be much higher than originally projected, according to the findings of a congressional committee. The dismal forecast has some bracing for another taxpayer-financed bailout.

The House Oversight and Government Reform Committee, chaired by Rep. Darrell Issa (R-Calif.) is reporting that a worst-case scenario stress test conducted last year estimated the FHA could suffer losses as high as $115 billion. That forecast is significantly worse than the one reported by independent auditor Integrated Financial Engineering Inc., which projected losses of $65 billion for the 79-year old agency.

Swamped by Defaults

The primary cause of the FHA's troubles is the plague of underwater mortgages that has struck the housing sector in recent years. During the late housing bubble, the FHA lost market share as more private lenders sold “subprime” loans to home buyers. But with the collapse of the housing market in 2007-08, much of that business returned to the FHA. While the agency has played a major role in propping up home prices, it has also been overwhelmed by defaults.

John Ligon, senior policy analyst at the conservative Heritage Foundation, writes:

The FHA has a core mission of providing targeted support to creditworthy low- and moderate-income, minority, and first-time homebuyers. The FHA cannot responsibly achieve these intended objectives when it is expanding its market share and competing with the conventional market for high-cost mortgage loans.

According to Ligon, the only way the FHA can avoid a bailout is to reduce its market share by lowering maximum loan limits to $325,000 over the next four years, raise credit requirements for borrowers, and institute “burden sharing” with loan originators by reducing insurance coverage from the current 100 percent to 50 percent by 2016.

While these reforms may improve FHA's balance sheet over the long term, they would also reduce market liquidity, which in turn could cause home prices to fall. Thus homeowners with little home equity now could find themselves underwater on their mortgages, which could trigger more defaults.

But it is precisely this apparent dilemma that government-sponsored enterprises like FHA have created with their meddling into the market that has some calling for a more radical approach.

‘Shut Down Fannie, Freddie, FHA’

“I would shut down Fannie Mae, Freddie Mac, the FHA, HUD, and such similar programs and agencies,” says Mike “Mish” Shedlock, a market analyst and host of the Web site Mish's Global Economic Trend Analysis. “The more money government threw at housing, the less affordable housing became until the bubble popped.”

He says numerous government agencies and programs “should be shut down and things would be far better off because government can never allocate money better than the free market.”
Mike "Mish" Shedlock

Friday, June 28, 2013 1:41 PM

Calmer Waters for the Bond Market? Gold? Worst Over?

Mish Moved to MishTalk.Com Click to Visit.

Curve Watchers Anonymous has its eyes on the bond market as the quarter comes to a close today. It's been a very bad stretch for US treasuries as the chart below shows.

Yield Curve as of 2013-06-28

click on chart for sharper image

  • $TYX: 30-Year Long Bond Yield - Green
  • $TNX: 10-Year Treasury Note - Orange
  • $FVX: 05-Year Treasury Note - Blue
  • $IRX: 03-Mnth Treasury Bill - Brown

The above chart shows the monthly close for the treasury symbols, except the current month is month to date (with the close coming up today).

$TNX Daily

That last candle is a feed error. The 10-year yield did not swing 50 basis points today.

So, while things have calmed down a bit over the past week, the 10-year yield has climbed from 1.614% to 2.551%, a rise of 93.7 basis points since the beginning of May.

Impact on Housing

The selloff in mortgage backed securities has been even worse. Mortgage loans have risen by as much as 175 basis points.

For details, please see 10-Year Treasury Yield Up 100 Basis Points Since May; What's That Mean for Mortgage Rates and Housing Affordability?

Gundlach Sees Calmer Waters Ahead For Bond Market

MarketWatch reports Gundlach Sees Calmer Waters Ahead For Bond Market
“From the frying pan into the fire.”

That phrase came up repeatedly during Jeffrey Gundlach’s ad-hoc webcast Thursday as the DoubleLine Capital chief executive sought to calm shaken bond investors.

His comments reflected the role that the bond market’s biggest names have recently taken on in soothing fears about the asset class after a panicked global selloff in recent weeks. Pimco’s Bill Gross also advised investors Thursday against jumping ship.

For those thinking of fleeing bonds for greener pastures, Gundlach’s webcast fittingly started with a review of gold GCQ3 +1.05% , which has taken a dive in recent days.

“Gold looks like death,” he said.

Nonetheless, the choppy seas of the bond market are giving way to smoother waters, he said. The 10-year Treasury note 10_YEAR +1.94%  yield fell 6 basis points Thursday to 2.475% after hitting a high of 2.66% last week.

“I do think the worst is over. Now we have corroborative evidence from the markets,” Gundlach said.

With the markets settling, there are deals to be had.
Markets Settling? Worst Over?

For starters there is scant evidence the treasury market is settling. Yield on the 10-year note is up to 2.517% today from 2.475% yesterday.

The weekly action looks no different that similar consolidation action in the middle of May and the middle of June. After similar-looking consolidation periods, yields blasted higher each time.

Given action in the $HUI, a better case can be made that gold is settling.

$HUI 2-Hour Chart

That's a pretty dramatic reversal in unhedged miners.

Is the bottom in? I don't know, nor does anyone else. Nor do I know whether or not a short-term top in treasury yields is in.

End of Treasury Bull Market

What I do know is that Bill Gross proclaimed on May 10, Bull Market in Bonds Is Over.

Bill Gross said the three-decade bull run in bonds ended last week when the 10-year Treasury yield hit 1.67%. The manager of the world’s largest bond fund stressed that a bear market in bonds won’t start until economic growth and inflation pick up — an arrangement that he doesn’t expect to see immediately.

"Tweet" from Bill Gross on May 10

"@PIMCO The secular 30-yr bull market in bonds likely ended 4/29/2013. PIMCO can help you navigate a likely lower return 2 - 3% future."

Let's assume Bill Gross is correct. And if he is, then there is little value in bonds. There was negative value in them at the time Gross made that tweet.

It's hard enough to navigate a cyclical bear market. And it's a brutal mistake for investors to believe they can navigate a secular bear market in anything, especially on the long side.

Since 1980, treasuries have been in a secular bull market. Investors have not known anything else. Might not Gross be wrong when he says "a bear market in bonds won’t start until economic growth and inflation pick up."

I think he already is, by any reasonable definition. If the bull market is over, a bear market has started.  

It remains to be seen if the secular bull market in gold is over, but if I believed that, I would not be heavily in gold.

Mike "Mish" Shedlock

3:19 AM

Unpaid Interns Get Scrutiny; Reader Mailbag on Internships

Mish Moved to MishTalk.Com Click to Visit.

Reader Mailbag

Reader "CM" writes ....

Hello Mish

Just two weeks ago, our human resources department blocked us from taking on an unpaid summer intern. The college student did not have any professional experience, but was trying to do something productive with his summer. My colleague decided to give him a shot. HR blocked the internship for fear of breaking the law.

How ridiculous is that? A college student with no professional experience wants to work as an intern and we would like to extend him an offer, but we didn't take him on for the summer yet due to the concern that we would be breaking the law.

Unpaid Interns Get Scrutiny

It's easy to explain why HR nixed the deal.

A federal judge in New York recently ruled moviemakers violate labor laws if they do not pay interns.

Bloomberg reports Sleeping-Giant Issue of Unpaid U.S. Interns Gets Scrutiny
[Student internships], especially common in competitive industries like journalism, finance and filmmaking, could change if the appeals court upholds the ruling of a federal judge in New York who found that moviemaker Fox Searchlight Pictures Inc. violated labor laws by not paying two of its interns. Cases have also been brought against Hearst Corp., Conde Nast Publications and the Public Broadcasting Service’s Charlie RoseShow.

“This question of whether private-sector internships violate the minimum wage laws has been sort of a sleeping-giant issue for many years,” said David Yamada, director of the New Workplace Institute at Suffolk University Law School in Boston. “The absence of payment is done with a wink and a nod. Interns know they better not make any trouble about this.”

Half Unpaid

According to a survey by the National Association of Colleges and Employers, a Bethlehem, Pennsylvania-based recruiting and research group, more than 63 percent of graduating seniors in 2013 either had an internship or a co-op, a position more closely tied to an educational curriculum. About 48 percent of those were unpaid, according to the survey.

To critics, unpaid internships are an abuse of the labor system, a way for employers to take advantage of desperate job seekers. Supporters, including some former unpaid interns, see it as a way to get training and career contacts.

Eric Glatt, 43, The lead plaintiff in the case against Fox Searchlight, Glatt had left a job at the insurer American International Group Inc. in New York to pursue a career in film. After earning a certificate in film editing, he eventually took two temporary positions on the set of the movie “Black Swan,” where he spent much of his time learning the art of making copies.

Taken Advantage

“I knew I was being taken advantage of,” Glatt, now a law student at Georgetown University in Washington, said in an interview. “I just didn’t think there was anything I could do about it.”

If Pauley’s decision is challenged and later affirmed by the U.S. Court of Appeals in Manhattan, the case might be considered in conflict with the Ohio federal appeals panel, raising the possibility that the issue could end up before the U.S. Supreme Court.
‘Legal Uncertainty’

The ruling in the Fox Searchlight case “creates a significant legal uncertainty,” said Samuel Estreicher, professor of labor and employment law at New York University. He said he would advise employers not to use unpaid interns in light of the decision.

Who Took Advantage Of Whom?

Glatt's complaint is absurd. He was extremely lucky to get experience on the "Black Swan" movie set. He brought no experience to the table. And it is crystal clear he does not even want a career in movie editing, something very valuable he may have learned as an intern.

Thousands of people would have welcomed the opportunity he got. And if he did not like the offer, then he should not have accepted. So who took advantage of whom?

Should that ruling be upheld, look for internships to become a thing of the past. That's unfortunate for college students struggling to gain work experience.

Mike "Mish" Shedlock

Thursday, June 27, 2013 2:46 PM

Michael Pettis on the China Liquidity Crunch; China Bulls Beware

Mish Moved to MishTalk.Com Click to Visit.

Michael Pettis at China Financial Markets commented on the liquidity crunch and spike in SHIBOR a few days ago via email.

His comments came in before China intervened to quiet the markets as noted in China Acts to Calm Markets; Stock Market Rebounds From 6% Plunge After Central Bank Pledges More Liquidity; Wet Nurse Action.

Nonetheless his comments are still relevant and much worth a review. What follows is a guest post from Micahel Pettis.

Pettis Guest Post

Special Points

  • Short-term rates in the interbank lending market rose steadily over the past two weeks and then suddenly soared Thursday amid rumors of the market’s having frozen up and one or more large banks having missed payments.
  • For the past ten years China’s soaring credit has been accommodated by rapid money expansion as the PBoC was forced to monetize large net inflows on the current and capital account. This year, however, while credit continued to expand at historically unprecedented rates, net foreign exchange inflows seem to have dried up, especially after the authorities clamped down some time in May on the over-invoicing of exports that had been used to bring “carry trade” money illegally into the country.
  • The tension created by accelerating credit expansion (much of it supporting activities that were not generating sufficient cashflow to repay the associated debt) and decelerating money creation has created liquidity strains for much of the past year. Last weeks’ events were likely to have been simply an exacerbation of those strains.
  • I believe talk in the market of China’s experiencing its own “Lehman moment” are very much exaggerated. There is liquidity in the system and the PBoC still has the tools needed to alleviate a short-term liquidity crunch before it leads to a banking crisis. Government credibility is high, and given the wide-spread assumption that the government stands behind the banks, I do not expect anything approaching a bank run.
  • There are however two important lessons to be drawn. First, we are likely to see similar stress in the banks many times again (and have seen it before) as a financial sector wholly addicted to cheap and plentiful credit struggles to accommodate Beijing’s determination to control credit growth.
  • Second, the way the crisis was handled should make it clear that volatility in the financial sector is suppressed by administrative measures. This, however, may increase the risk of a future gapping in confidence and volatility.
  • During the coming week I believe that a significant amount of Wealth Management Prodiucts (WMP) will mature, and because of asset/liability mismatched this WMP must be rolled over. Beijing, correctly in my opinion, continues to be eager to clamp down on risks within the shadow-banking sector. This is likely to create further stress in WMP placement, which, if mismanaged, could create a run on WMP.
  • If there is indeed a reduction in the amount of funding available for WMP, the money will have to flow into some other sector. Given the large size of the WMP market, these flows might be significant, although it is not yet clear to me where they will go.
Probably the main lesson of last week is that systems in which volatility is suppressed often seem less volatile, but this is only true when shocks are small. Large shocks tend to result in increases in volatility that far exceed expectations.

I have always argued that China’s lack of transparency wouldn’t matter too much during the bull phase of the market. It is when market sentiment turns negative that we see the real cost of a lack of transparency. When investors and businesses are nervous, they are likely to over-interpret bad news and to fill in knowledge gaps with the most alarming of the various plausible scenarios.

Lack of transparency, in other words, is a kind of positive feedback mechanism that exacerbates volatility. It can increase buying appetite on the upside (limited information gives us greater scope to assume best-case scenarios) and it hurts prices on the way down (uncertainty rises dramatically and worst-case scenarios become plausible).

This means not only that non-transparent markets are likely to be more volatile, but also that this volatility can be suppressed when adverse shocks are small and exacerbated when adverse shocks are large. Markets lacking transparency, in other words, are more likely to experience lower volatility during normal times and more likely to “gap” when conditions change. Market participants may not have access to negative information until the negative information has accumulated and there is no longer any way to prevent it from becoming widely known, in which case the decline in the market can be sudden and even out of proportion to the value of the negative information.

This is why I think we need to watch carefully what happens this week. It is not clear to me how widely Chinese depositors knew about or understood the events of last week. Although they were discussed in the specialized financial press, the accounts tended to be very “factual”.

By this I mean that the articles provided the raw data – money market interest rates surged during the week and peaked on Thursday – but there was little attempt to explain why this happened, or to discuss the seemingly credible rumors of bank defaults, or to analyze the terrific stress in the payments system. To the extent that the press covered the events, they were more likely to focus on the fall in the stock market than on the liquidity squeeze among the banks.

If the foreign and Hong Kong press makes a big deal about trying to understand what happened last week, concerns may filter back into the mainland and may affect behavior. The impact on the behavior of market participants might be very limited, as it usually is when transparency is limited, but the risk is that when it does affect behavior we are more likely to see significant “gapping” in market behavior.

The most important effect is likely to be on demand for wealth management products. I believe that there is RMB 1-2 trillion of WMP coming due before the end of June, and most if not all of this will have to be rolled over. Already it seems that WMP rates are rising. Several friends received SMS offers on their mobiles (this happens a lot in China) for short-term WMP deposits at 6%, which is 100-200 bps higher than we have seen in the past and higher than the 5% cited in the People’s Daily article. Until recently, the average rate on WMP seems to have been around 4.3%.

So what can we conclude from the events of last week? The good news is that the new administration seems far more determined than the previous to rein in credit growth and restructure the economy. Clearly the PBoC’s refusal to provide liquidity to bail out the interbank market reflects Beijing’s tougher stance on speculative excesses. The bad news is that the credit system is so distorted and over-leveraged that any attempt to rein in credit growth creates enormous stress in the system.

By the way I seriously discount much the overexcited talk in the market about how the PBoC engineered the freeze the markets in order to punish the banks and to force discipline onto the financial system. Clearly there is some truth to this argument, and the PBoC certainly did refrain from bailing out the liquidity needs of the banks for the past two weeks as rates rose, but we shouldn’t let lack of information lead us into conspiracy theories.

I suspect the PBoC never expected this to happen the way it did and they were caught as flatfooted and confused as everyone else. Remember that the PBoC has almost no experience of any kind of financial market condition except that of soaring money creation and credit expansion. Until last year they have never had to deal with a stable or even contracting money supply, and consequently they have had little experience in dealing with these kinds of conditions. This was new for everyone.

In fact there is an important lesson here for the PBoC, and investors more generally. Chinese financial markets often seem less volatile than one would expect for a poor, developing country, largely because of administrative measures that intentionally or unintentionally suppress normal volatility. These kinds of systems, however, are not less volatile. They seem less volatile because small shocks have minimal impact. Larger shocks, however, tend to cause a much greater than expected surge in volatility. Perhaps last week was a case in point.

Going forward we will probably see more of this in China. Volatility will be suppressed for periods of times only to erupt in greater than expected volatility from time to time. This is not only a China problem, of course. One can easily argue that the Fed’s actions under Alan Greenspan seemed to induce a “great moderation”, but only temporarily, and when the great moderation became less moderate, the economy was always likely to be more disorderly than expected. The euro, similarly, sharply reduced volatility in peripheral Europe for many years until it suddenly exacerbated it. Of course no student of Hyman Minsky would be surprised by any of this.

Beyond the lesson of unexpected surges in volatility, this coming week is likely to be important. One of my colleagues tells me that according to Fitch there is RMB 1.5 trillion of WMP coming due in the next ten days. I want to confirm this number but haven’t yet had the time to do so, although this information is from a credible source, so I assume it is correct. This matters because there may be real trouble rolling over some of these WMP and we know that there is likely to be a huge maturity mismatch in the funding of WMP. The demand for short-term funding might be quite high this coming week and it will be interesting to see how the PBoC reacts.

Stay tuned. This is not a "Lehman moment" and we are not likely to see a sudden crisis, but it certainly indicates just how strained the money markets have become. Some questions:

1. If there is indeed enough money in the system, as the PBoC says there is, and the problem was just that the big banks were hoarding money, where did that hoarded money show up? Was it in higher excess reserves at the PBoC, or higher central bank bill purchases, or somewhere else? We will need to wait for the next PBoC data release in July to see whether excess reserves went up in June, although we will only get month end numbers, which won’t tell us much about what happened last week.

2. Why hasn't this received more attention in the mainland press? Are they trying to prevent Chinese depositors from knowing how risky things are? If the foreign press makes this into a big deal, eventually ordinary Chinese are going to find out. How will they react? Will they close out WMP positions?

3. If demand for WMP drops, where will the money that until now went into WMP show up? I can only think of the following: more outflows from China, higher deposits in the banks, stock markets, real estate markets, cash hoarding.

This coming week is quarter end, and we are likely to continue seeing tough liquidity conditions in the markets. I will be watching interbank interest rates closely, of course, as well as trying to get a sense of what the perceptions might be among ordinary households. I will also be watching WMP closely. I think we can safely discount warnings that China’s financial system is about to collapse. For many years it was impossibly difficult to convince many people that China’s growth model was leading inevitably to a serious debt problem, and it is sort of ironic that it has become equally hard to convince people nowadays that we are not going to see a financial collapse.

Because of limited investment alternatives, a more-or-less closed capital account (unless you are rich or powerful), and resilient government credibility, we are unlikely to see bank runs among the large banks or a financial collapse (which is ultimately just a kind of bank run). The huge maturity mismatches in the banking system are effectively “hedged” by the inability of bank depositors to leave the system. But one way or another we do have to write down the huge hidden losses in the country’s balance sheet, and this will mean not a collapse but rather many years of Japanese-style slow growth as the system grinds its way though its excesses.

Pettis Guest Post End

China Bulls Beware

The last sentence above is worth repeating "One way or another we do have to write down the huge hidden losses in the country’s balance sheet, and this will mean not a collapse but rather many years of Japanese-style slow growth as the system grinds its way though its excesses."

Those still bullish on base commodities because of demand for China, and those who think China will pass the US in GDP this decade are about to find out how wrong they are.

Mike "Mish" Shedlock

1:09 PM

22% Think Obamacare Will Make Their Situation Better, 42% Say Worse

Mish Moved to MishTalk.Com Click to Visit.

A new Gallup poll shows Americans Wary of Health Law's Impact.

Americans are more negative than positive about the healthcare law's future impact on their family and on the U.S. in general. Forty-two percent say that in the long run, the law will make their family's healthcare situation worse; 22% say it will make it better. And almost half believe the law will make the healthcare situation in the U.S. worse; 34% say it will make it better.

Question: In the long run, how do you think the healthcare law will affect your family's healthcare situation and the healthcare situation in the US? Will it make things better, not make much difference, or will it make things worse?

These data are from a June 20-24 Gallup poll, conducted as the Obama administration and its supporters are trying to raise awareness of the Affordable Care Act. A new nonprofit group, Enroll America, just launched a campaign, "Get Covered America," to help the uninsured in particular learn about the new law and how to sign up for health coverage, which everyone is required to carry starting in 2014.

It is possible that once Americans start to learn more about the law -- and see it in action, with the uninsured able to start shopping for coverage Oct. 1 -- they will change their perspective on its potential impact.

The uninsured are slightly more likely than the insured to think the law will make the healthcare situation for their family and for the U.S. better. But even the uninsured are divided as to whether the law will make their healthcare situation and the country's better or worse.

Majority Disapproves of the Affordable Care Act

Fifty-two percent of Americans say they disapprove of the 2010 Affordable Care Act, while 44% approve. Last fall, 48% said they approved of the law and 45% disapproved. Americans have generally been divided in their views of the law since it was passed in 2010, in response to slightly different question wordings.

The healthcare law itself elicits highly partisan responses, with Republicans nearly unanimously disapproving (89%) and a smaller but still large majority of Democrats (76%) approving. Democrats' and Republicans' views are essentially unchanged from November 2012. It is independents whose views have changed -- they have become more likely to disapprove now. The majority of independents (52%) approved of the law last fall, while now a majority disapprove (53%).

Those without health insurance -- a group that most benefits from the new law -- are slightly more likely to see it as having a positive effect, but even they are not ardent supporters.
If people were more aware of the impact Obamacare had on part-time hours I suspect the poll showing would be much worse. Still, it's significant that independents have changed their minds.

And if premiums soar as expected, even Democrats may wake up.

Mike "Mish" Shedlock

2:17 AM

Destruction of French Manufacturing Placed Squarely on Euro

Mish Moved to MishTalk.Com Click to Visit.

Inquiring minds are digging into a 23 page report by Dr Eric Dor, Directeur IESEG School of Management, Université Catholique de Lille, regarding the consequences of monetary union on the destruction of French manufacturing industry.

Eric Dor writes "The launch of the euro brought about an impressive decrease of manufacturing production in France and huge losses of market shares."


Since the launch of the euro, French and German industrial productions have extremely diverged. French manufacturing production decreased while German manufacturing industry very strongly increased. The decrease or stagnation of exports of French products contrasts with the strong increase of German exports. France lost market shares on the foreign markets. This evolution is a direct consequence of the flaws of the monetary union as it has been organized. Also, due to sharp differences in the average degree of sophistication of French products, sharing a common currency with Germany inevitably had to lead to a loss of competitiveness of France on foreign markets.

Manufacturing industry production in France

The detailed data computed in this paper shed light on the magnitude of French disindustrialisation since the launch of the euro. Before EMU, the rates of growth of French and German industrial production were close to each other. For example, from January 1995 to December 1998, the cumulated rate of growth was 5.5% in France and 6.4% in Germany. However, since the launch of the euro, from January 1999 to April 2013, French industrial production decreased by 11.4% while German industrial production increased by 32.8%!

Even before the financial crisis, from January 1999 to December 2008, the divergence was obvious. French manufacturing production only increased by 3.4% while German manufacturing industry increased by 32.4%. The crisis was destructive for France, where manufacturing production decreased by 15.2% from January 2009 to April 2013, while Germany resisted with a decrease limited to 1.5%. The data on manufacturing industrial production also show that since the start of EMU, the UK has performed better than France, which is clearly close to the distressed economies of the periphery, like Spain and Italy.

Disaggregated data of Cumulated growth of industrial production in % show that the divergence between France and Germany occurred in nearly all sectors of industrial activity.

The shortcomings of the monetary union were known from the start

The responsibility of those who pushed ahead with the EMU project is enormous, because many of them were aware of the flaws of its design. This awareness is very well documented by Geert De Clercq (2011).

It must be pointed out that it was known by experts that the mechanics of the common currency would lead to a likely implicit funding of the southern countries by northern countries. Before joining the ECB in 1998, Otmar Issing himself had published a paper where he warned that a single currency would require transfers of cash between the member countries and that it would cause political tensions. While the enormous TARGET related claim of the Bundesbank on the rest of the Eurosystem has recently raised major concerns in Germany, such a likely phenomenon had been very early identified, even before the launch of the Euro, for example by Garber.

The consequences for France

While France did not experience a real estate bubble and an excessive private sector indebtedness that could compare with those of other European southern countries, the competitiveness of the country and the profitability of its industry have dramatically deteriorated since the launch of the euro. As a result the trade deficit has continuously increased and the losses of productive capacity in the industry have been huge.
The PDF paper is 23 pages long and is loaded with charts like these.

Cumulated Industrial Production

click on any chart for sharper image

Trade Balances


Euro Exacerbated Existing Imbalances

To be completely fair, problems in France (Spain, Greece, Italy, etc) cannot be pinned entirely on the euro. However, it is 100% certain the euro exacerbated existing problems, and in a major way.

Instead of being a savior, the Euro has been more like an anchor to most of the economies in the eurozone.

Mike "Mish" Shedlock

Wednesday, June 26, 2013 3:18 PM

Plague of Gold Bears Now Say "Gold Unsafe at Any Price"; What's the Real Long-Term Driver for Gold?

Mish Moved to MishTalk.Com Click to Visit.

Over the past week I received numerous emails regarding my June 13 post Mish Buys a Basket of Miners.

People want to know if I am still in the trade. Others taunted they will buy when I sell. Well good luck with that idea, because this is an investment not a trade.

One reader proposed "My prediction is when the Fed finally stops printing, gold will drop to $750 and when they start raising rates gold will drop to $500. What do you say about that?"

I answered "Your prediction seems as silly as those who knew gold would be at 2400 or even 3000 by now. No one can accurately predict such things."

I bought with the intention of holding for a lengthy period, stating "I believe precious metal miners represent true value, but I cannot state when the market will come to the same conclusion."

What's changed? The answer is "nothing". So am I selling? Of course not, and it seems silly to even ask.

Anti-gold sentiment is amazing, but sentiment alone is not a good timing factor. It can always get worse.

A Plague of Gold Bears and The 'Tapering' Myth

Acting Man touched on the sentiment theme in A Plague of Gold Bears and The 'Tapering' Myth.

Readers may recall that in 2010 and 2011, after largely ignoring the fact that gold had been going up for more than a decade, virtually all the major mainstream banks and brokers suddenly turned bullish on gold. It was a huge warning sign as we now know with the benefit of hindsight (and as a few people suspected at the time). At the time target prices for gold were all of a sudden raised by all these worthies. Not even one of them sounded an alarm.

These days, not a day passes when they are not ganging up on gold, practically falling over each other with ever more bearish forecasts. Here is the harvest from just the past two days:

Gold to Drop Even Further as Fed Increases Real Rates: Goldman Sachs

Deutsche Bank cuts gold, silver forecast for 2013

Credit Suisse cuts gold, silver, Brent forecasts

"Paradigm shift" to send gold sliding to $1,200 an ounce: SocGen

And last but not least, what is probably the funniest headline yet delivered by all these newly minted gold bears:“UBS Says QE's End May Render Gold 'Obsolete'”

A major theme of these forecasts is, you guessed it, the Fed's alleged imminent 'QE tapering', and/or 'raising of real interest rates'.

To the latter we would point out that real interest rates (nominal interest rates relative to inflation expectations) have indeed risen lately, but it was certainly not the Fed's fault. They are rising in spite, not because of the Fed. In fact, their recent rise, which has surely sent a few 'players' scrambling for cash (and many imaginary bank profits into the nether reaches of money heaven), is a strong reason to suspect that monetary pumping will not only not be 'tapered', but may well end up being increased. But that is of course speculation and is neither here nor there. Instead, we want to point out a different error in the thought process described above.

Keep in mind by the way, that the same banks that are bearish on gold due to the 'tapering' mirage are bullish on stocks inter alia because 'tapering' is thought to be 'still far away'. In reality, all they are doing is extrapolate recent trends, while making up 'reasons' for these extrapolations that are meant to make it sound as though they actually knew why markets are doing what they are doing.

It is really quite remarkable: for ten years while gold did nothing but go up, most of these these guys were largely silent. Their gold price forecasts were on average dead wrong with unwavering regularity – they kept predicting price declines. Then, as it approached its peak, they suddenly turned bullish and finally raised their price targets (again, on average). Now that it is going through the first major correction since the bull market began, its decline is accompanied by inordinate sound and fury. No other market has produced such a flurry of widely and loudly telegraphed grave dancing.

Grave Dancing

I invite you to read the rest of the article because it's worth a closer look.

Curiously, Just as Acting Man discussed above, talking heads say the stock market is up today because the lower GDP print means the Fed will not taper bond purchases, yet tapering is bad for gold.

For discussion of ECB and Fed tapering as well as the unexpected slowdown in US GDP, please see Draghi Announces ECB Exit From Easing Remains Far Off; Think the Fed Has an Exit Strategy?

What's the Real Long-Term Driver for Gold?

Most analysts are totally clueless about gold and gold markets. They cite jewelry, mining production, central bank sales, and all sorts of other irrelevant factors in their analysis.

If you really want to understand what gold is all about, I suggest you read an interview on Gold Switzerland with Robert Blumen: “What’s really key for the price formation of gold?

Blumen discusses assets vs. consumption, mine supply, jewelry, marginal demand, the alleged (and nonexistent "gold deficit"), and sentiment.

Blumen does not offer much commentary on the GATA price manipulation thesis other than say it's "plausible". I suggest most of what GATA says is at best strongly over-hyped, including the GATA alleged "gold deficit" (a point on which Blumen agrees).

Rather than excerpt the interview, I simply suggest you read the article in entirety, save this one humorous anecdote at the end:

"People who say [gold is in a bubble]did not identify the equity bubble, did not believe that we had a housing bubble, nor have they identified the current genuine bubble, which in the bond market. But now these same people are so good at spotting bubbles that they can tell you that gold is in one. Most of them did not identify gold as something which was worth buying at the bottom, have never owned a single ounce of gold, have missed the entire move up over the last dozen years, and now that they’re completely out of the market, they smugly tell us for our own good that gold is in a bubble and we should sell."

Unsafe At Any Price

Indeed, sentiment has soured so much that MercBloc president Dan Dicker says Gold Is Unsafe at Any Price

I leave it to the reader to decide if that headline is even more ridiculous than UBS Says QE's End May Render Gold 'Obsolete'

Mike "Mish" Shedlock

12:10 PM

Draghi Announces ECB Exit From Easing Remains Far Off; Think the Fed Has an Exit Strategy?

Mish Moved to MishTalk.Com Click to Visit.

The Financial Times reports ECB exit from easing remains far off, Draghi says.

Speaking to committees in the French lower house of parliament, Mr Draghi said there were still downside risks to growth in the eurozone economy and the ECB was ready to take fresh action if needed.

"On our policy stance, let me say that it's been accommodative in the past, it is accommodative in the present time and will stay accommodative for the foreseeable future," Draghi said.

"Our exit – as Benoit Coeure [ECB executive board member] said a couple days ago – remains distant. At the same time we have an open mind about all other possible instruments that we may consider proper to adopt . . . we stand ready to act again when needed."
Taper Talk on "Strength" of US Economy

Bernanke says the US economy is solid enough that the Fed can begin tapering its balance sheet purchases later this year.

Given the stock and bond market bubbles the Fed has created, the Fed of course should taper (not that it should ever have expanded its balance sheet in the first place).

4th Quarter GDP barely crossed the zero line with 0.4% growth. That growth was via questionable GDP deflators.

Today, 1st Quarter GDP came it at 1.8% annualized, a dramatic downward revision from an estimate of 2.4% released last month. In turn, 2.4% was a downward revision from the first estimate of 2.5%.

GDP Trends

click on chart for sharper image

The above chart is courtesy of Doug Short at Advisor Perspectives who reports GDP Q1 Third Estimate at 1.8%: A Surprising Downward Revision

Note the linear regression trend of lower GDP over time.

Taper vs. Exit

There is absolutely no chance the Fed has any real "exit" strategy other than to hold its entire bloated balance sheet to maturity.

If the Fed "tapers" its purchases, it will not be because the economy is picking up steam, but rather because the Fed is clueless about the prospects for the economy, or perhaps out of very belated concern over the stock and bond market bubbles that it has created (nothing the Fed would ever admit of course).

Mike "Mish" Shedlock

2:42 AM

Italy Faces Huge Losses on Derivatives Restructured in Eurozone Crisis

Mish Moved to MishTalk.Com Click to Visit.

The Financial Times notes that Italy faces billions in losses on Derivatives Restructured in Eurozone Crisis.

Italy risks potential losses of billions of euros on derivatives contracts it restructured at the height of the eurozone crisis, according to a confidential report by the Rome Treasury that sheds more light on the financial tactics that enabled the debt-laden country to enter the euro in 1999.

A 29-page report by the Treasury, obtained by the Financial Times, details Italy’s debt transactions and exposure in the first half of 2012, including the restructuring of eight derivatives contracts with foreign banks with a total notional value of €31.7bn.

Experts who examined it told the Financial Times the restructuring allowed the cash-strapped Treasury to stagger payments owed to foreign banks over a longer period but, in some cases, at more disadvantageous terms for Italy.

The senior government official who spoke to the Financial Times and the experts consulted said the restructured contracts in the 2012 Treasury report included derivatives taken out when Italy was trying to meet tough financial criteria for the 1999 entry into the euro.

Three independent experts consulted by the FT calculated the losses based on market prices on June 20 and concluded the Treasury was facing a potential loss at that moment of about €8bn, a surprisingly high figure based on a notional value of €31.7bn.

Early last year Italy was prompted to reveal by regulatory filings made by Morgan Stanley that it had paid the US investment bank €2.57bn after the bank exercised a break clause on derivatives contracts involving interest rate swaps and swap options agreed with Italy in 1994.

An official report presented to parliament in March 2012 found that Morgan Stanley was the only counterparty to have such a break clause with Italy and disclosed, for the first time, that the Treasury held derivatives contracts to hedge some €160bn of debt, almost 10 per cent of state bonds in circulation.

The Bloomberg News agency calculated at the time, based on regulatory filings, that Italy had lost more than $31bn on its derivatives at then market values.
The facts seem difficult to piece together, but the amounts are significant. Some of the derivatives date back to 1994-1996 when Italy dressed up its finances to meet Maastricht treaty criteria, including a budget deficit less than 3 per cent.

"Italy had a budget deficit of 7.7 per cent in 1995" but the deficit magically shrunk to 2.7% in 1998, the approval year for Italy joining the eurozone. The odds of that being legitimate are approximately zero percent.

ECB president Mario Draghi was head of the Italian central bank at the time much of this took place, so it's no wonder details are scant.

Recall that Bloomberg lost a freedom of information lawsuit against the ECB regarding derivatives used to hide Greek debt on the basis "disclosure of the files would have undermined the protection of the public interest so far as concerns the economic policy of the European Union and Greece”.

I would be far more interested to see the complete Italy files, but clearly that's not going to happen either.

Mike "Mish" Shedlock

Tuesday, June 25, 2013 2:54 PM

Yields Creep Up in Spain, Italy, France (Actual and Also Relative to Germany)

Mish Moved to MishTalk.Com Click to Visit.

Curve Watchers Anonymous has its eye on global interest rates that are heading North practically everywhere.

Spain 10-Year Bond Yields

After hitting a low of just above 4% earlier this year, the yield is now back above 5%.

Italy 10-Year Bond Yields

After falling as low as 4.68% today, the yield close up slightly at 4.86%. The April low was 3.76%.

Germany 10-Year Bond Yields

The yield on the Germany 10-Year government bond is 1.80, up from a year-low of 1.17%.

Thus sovereign rates are up 63 basis points in Germany, but over 100 basis points (a full percentage point) in Spain and Italy.

France 10-Year Bond Yields

Even France is up relative to Germany, from 1.66% to 2.46%, a rise of 80 basis points.

In theory, all sovereign debt in the eurozone should trade at the same yield. Clearly theory is one thing, and practice another. And the divergences are getting worse.

Mike "Mish" Shedlock

12:51 PM

China Acts to Calm Markets; Stock Market Rebounds From 6% Plunge After Central Bank Pledges More Liquidity; Wet Nurse Action

Mish Moved to MishTalk.Com Click to Visit.

In the past few week, China intraday lending rates as measured by SHIBOR got as high as 25% (See China Cash Crunch: 1-Day Interest Rate Spikes to Record High 25%).

With rates spiking, global stock markets plunged.

On Monday China insisted banks had significant liquidity sending a message that banks need to manage their own risks.

A translated message by the People's Bank of China on liquidity states "Commercial banks should concentrate storage for taxes and statutory reserve deposit and other factors impact on liquidity in advance to arrange sufficient positions to maintain adequate levels of reserve ratio, to ensure the normal settlement" while warning "expansion of credit and other assets too fast may lead to liquidity risk".

That message sent the Shanghai stock market index down about 6% as shown in the following chart.

Shanghai Composite Intraday Chart

The horizontal line represents a split shift when the stock market is open.

$SSEC Shanghai Daily Chart

Since the beginning of June, the Shanghai stock index is down about 15%. Since the February high of 2443, the market is down nearly 20%. Intraday, the market was down over 25% from the year's high.

Mid-day, Tuesday, the China central bank decided it could take no more, and that's when the market rally took place, erasing nearly all of the 6% intraday drop shown in the first chart.

China Acts to Calm Markets

The Financial Times reports China in fresh effort to calm shaken markets.

China has pledged to backstop banks suffering from cash shortfalls, giving rattled investors hope the country’s money squeeze could be nearing an end.

The statement by the People’s Bank of China on Tuesday was the clearest attempt yet by the government to calm the turmoil that has shaken global markets over the past week and fuelled concerns that the world’s second-biggest economy could be on the verge of a credit crisis.

“If banks have temporary shortages in their planned funding, the central bank will give them liquidity support,” it said in the statement. “If institutions have problems in managing their liquidity, the central bank will apply appropriate measures under the circumstances to maintain the overall stability of money markets.”

In its latest statement, the central bank said money markets were already on the mend after interbank rates spiked to double digits last week. It noted that the overnight bond repurchase rate had fallen to 5.83 per cent, more than half what they were last week, though still about twice as high as normal.

“Several strong banks have already started to play an important role in providing funds to the market and stabilising interest rates,” it said.

A commentary earlier on Tuesday in the People’s Daily, official newspaper of the Communist party, called on authorities to continue an unyielding stance.

“The central bank is not a wet nurse to the stock market. If it saves the stock market, it will in fact be harming it,” the paper wrote.
Wet Nurse Action

The central bank efforts to provide liquidity are highly unlikely to work. The structural problems are immense:

  1. China's shadow banking system is a mess
  2. Property bubbles are immense
  3. Infrastructure malinvestment is unprecedented
  4. Rolling over of loans of State Owned Enterprises (SOEs) is going to be very problematic with any increase in interest rates

For further reading, please see ...

In theory the central bank could paper over this mess with massive amounts of liquidity, but in practice, such action will either further fuel China's immense structural problems, or more likely, the credit bubble in China has gotten as big as it is going to get, no matter what the Central bank does.

The world is not remotely prepared for a major slowdown in China. Yet, China's credit bubble has popped, and growth going forward will plunge as China rebalances.

Mike "Mish" Shedlock

1:57 AM

Immigration Bill Incentivizes Employers To Fire Americans and Hire Amnestied Immigrants; Immigration and Obamacare’s Employer Mandate

Mish Moved to MishTalk.Com Click to Visit.

Obamacare is bad enough in and of itself. An immigration bill in the Senate is about to compound the problem.

Brietbart reports Senate Bill Incentivizes Employers To Fire Americans and Hire Amnestied Immigrants.

Under the Gang of 8’s backroom immigration deal with Senators Schumer, Corker and Hoeven, formerly illegal immigrants who are amnestied will be eligible to work, but will not be eligible for ObamaCare. Employers who would be required to pay as much as a $3,000 penalty for most employees who receive an ObamaCare healthcare “exchange” subsidy, would not have to pay the penalty if they hire amnestied immigrants.

Consequently, employers would have a significant incentive to hire or retain amnestied immigrants, rather than current citizens, including those who have recently achieved citizenship via the current naturalization process.

Following a link from the above article, Phil Klein at the Washington Examiner explains further in Immigration and Obamacare’s employer mandate
As the implementation of Obamacare approaches, there have been many news reports about companies considering cutting back full-time workers to part-time, or taking other actions to get around the mandate penalties. The immigration bill would offer employers another way out –hiring fewer American citizens and more immigrants with provisional legal status.

It’s not surprising that this unintended consequence hasn’t yet been resolved, because there’s no easy fix. One way of eliminating the problem would be to get rid of the employer mandate in Obamacare altogether – which would be a non-starter for Democrats. The other way would be to give noncitizen immigrants with provisional status access to Obamacare’s benefits – which would destroy any hopes of garnering Republican votes.

The issue was never addressed in any of the more than 200 amendments proposed when the immigration legislation made its way through the Senate Judiciary Committee.
And so here we are. Obamacare encourages hiring part-time workers over full-time workers and an immigration bill, if passed as it currently sits, would encourage hiring of amnestied immigrants over US citizens.

For more Obamacare absurdities, please see

Mike "Mish" Shedlock

Monday, June 24, 2013 1:49 PM

10-Year Treasury Yield Up 100 Basis Points Since May; What's That Mean for Mortgage Rates and Housing Affordability?

Mish Moved to MishTalk.Com Click to Visit.

Curve Watchers Anonymous note the yield on the 10-year treasury note hit as high as 2.657% today, up a whopping 104 basis points since the early May low in yield of 1.614%.

$TNX: 10-Year Treasury Yield

The 10-year yield has been falling since the open today, but the overall rise since May has clobbered mortgage affordability.

Treasury Rise vs. Mortgage Rate Rise

My friend Michael Becker, a mortgage broker at WCS Funding Group writes ...

Hello Mish

As bad as Treasuries are selling off, the sell off in MBS is much worse. I looked at some charts this morning and the prices of Fannie Mae and Ginnie Mae coupons continue to drop.

The FNMA 3.5 coupon was trading at 106 22/32 on May 2nd, and this morning it was trading at 99 9/32. Ginnie Mae is worse. The GNMA 3.5 coupon was trading at 109 1/32 on May 2nd, and this morning it was trading at 99 24/32.

In terms of interest rates, I locked an FHA purchase on May 2nd and the rate was 3.25%, and that rate carried a 2 point lender credit to help pay for closing costs. In order to get the same deal today, (a 2 point lender credit) the rate would have to be 5% today.

This as an apples to apples comparison illustrates that FHA rates have increased 1.75% in 7 weeks.  You could get 4.625% on an FHA purchase, but you wouldn't get any closing cost help.

I was locking well qualified borrowers at 3.50% on conventional loans (Fannie Mae) at the beginning of May, and now they are looking at 4.875%.

Most of this pain has occurred since the FOMC meeting last Wednesday, and I am sure the talking heads at CNBC have no idea how much interest rates have spiked.  They keep saying that housing is strong enough to withstand this rise in rates, but I think they are deluding themselves. 

I have people who I pre-approved for a mortgage early last week prior to the FOMC meeting, and now that they are getting their contracts accepted and ratified are shocked to learn mortgage rates have spiked one percentage point in just the last few days.

Affordability Check

A one percentage point rise in rates affects affordability by 10-11%. With mortgage rates up 1 3/8 to 1 3/4 points, that equates to a rise in monthly payments (or a drop in affordability) by as much as 17%.  Anyone who stretched to buy is no longer qualified unless they locked some time ago.

Refinancing will soon be dead in the water (anyone who has not already locked no longer has any incentive) and new home affordability has taken a big hit. 

Mainstream media talking heads say this will not affect the housing recovery. Assuming this trend sticks (even if rates simply level off now), how can this bond revolt not affect housing?

Mike "Mish" Shedlock

12:03 PM

Bank Transfers and Services Suspended in China: ATMs, POS Machines, Online Banking Paralyzed 50 Minutes

Mish Moved to MishTalk.Com Click to Visit.

Several readers sent a link to an article regarding online bank outages and suspended services in China. The translation show below is very choppy. If a reader has a better translation or a different source I will post it.

Please consider Bank of China, Bank of suspension of transfers morning counters were unable to apply for online banking

WASHINGTON (correspondent with Xuan) Following the ICBC, the Bank of China also go awry again. This morning, the Bank of China Bank moratorium on transfers, online banking, counters are inoperable.

10:00 many, many people began to receive messages sent to the Bank of China, "the end result of the Bank of China Bank failures, bank customers can not carry on through the Bank transfers, please Bank online banking, bank counter or use of other bank transfer system, Bank system will be restored promptly notify you. "large number of transfer business banking needs of the people turned to online banking, counter, but according to the instructions of the public still found text messages can not handle.

Reporters call the BOC, customer service said, now silver has been fully suspended phase transfer services, online banking, the counter can not be handled, and now has the background system response, recovery time is not yet known.

As of 12:00, the Bank customer service said handle part of the user's online banking has been restored.

Just yesterday, 10:35, Shanghai and other places ICBC system failures, ATM machines, POS machines, online banking appeared paralyzed more than 50 minutes, all kinds of businesses can not properly handle.

The ICBC bank system failure comes trouble "money shortage", inevitably lead to speculation that many people guess the bank is not money.

To solve this problem, ICBC relevant person in charge told reporters that morning, business process slow, the analysis on the host software upgrade, emergency treatment, 11:27 various businesses all returned to normal.

As for speculation that the crash might be the last two days the inter-bank "money shortage" relevant, ICBC has denied.
The above is an unedited Google translation. Is this a massive software glitch or is something else in the works?

Mike "Mish" Shedlock

2:29 AM

Currency Stress Hits India: Rupee Near Record Low, Emerging Nations Face Capital Flight; Global Currency Crisis Awaits

Mish Moved to MishTalk.Com Click to Visit.

Numerous foreign exchange issues have simultaneously hit the global economy recently. Latest on the list is India where a Funding Strain Grows as Fed Outlook Hurts Rupee.

India faces growing strain to fund the widest current-account deficit in major Asian nations after the rupee slid to an all-time low on concern the U.S. will curb monetary stimulus as its economy improves.

The rupee touched the weakest level versus the dollar on June 20 after Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank will probably taper bond purchases this year if the American economy performs as it projects. The potential for reduced stimulus exposes emerging nations from India to Indonesia and Brazil to the risk of capital outflows.

“The prospect of the U.S. unwinding stimulus means that funding the shortfall will get more challenging,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “Even if the deficit narrows, it will remain too high for comfort.”

The rupee, which touched an all-time low of 59.98 per dollar last week, fell 0.6 percent to 59.6475 as of 11:33 a.m. in Mumbai.

The currency’s 9 percent tumble this quarter is the worst in Asia, according to data compiled by Bloomberg. India is prepared to take action to reduce volatility as needed, Raghuram Rajan, the top adviser in the Finance Ministry, said June 20.

The imbalance in the current account, the broadest gauge of trade, is the biggest risk to an economy that grew a decade-low 5 percent in the year ended March, according to the Reserve Bank.

Foreign-direct investment in India fell the most in more than a decade last fiscal year, increasing reliance on stock and bond inflows to fund the shortfall.

Currency reserves stood at $290.7 billion as of June 14, Reserve Bank data show, about 9.4 percent lower than an all-time high of $321 billion in 2011. They “provide a cushion” against shocks, Fitch Ratings said June 12, when it boosted the outlook on India’s sovereign rating to stable from negative.

The currency won’t stabilize until the central bank is able to “recoup” foreign-exchange reserves, Bank of America Merrill Lynch said in a note, adding the monetary authority will try to “defend expectations” at 60 rupees per dollar for now.
Defending the Rupee

Just like Brazil defending the real,  India now feels compelled to defend the rupee. Good luck with that idea if capital flight takes off in a major way (and I suspect it will).

India does have currency reserves, but those can vanish in a hurry if things get out of hand. And if India does use currency reserves to defend the rupee, I rather doubt the India bond markets will take all that kindly to it.

Thus defending the rupee against further declines is easier said than done if the markets  have indeed soured on the country, and that is precisely how it looks now.

Global Currency Crisis Awaits

A global currency crisis awaits. I do not know what country triggers first. It could easily be Japan, China, Brazil, India, Australia, Canada, the UK, or any of many countries in the eurozone (as well as numerous countries not on anyone's radar).

This sad state of affairs is courtesy of mad central bank monetary policies coupled with inane can-kicking fiscal policies everywhere you look.

Mike "Mish" Shedlock

Last 10 Posts

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