Global Economic
Trend Analysis

Recent Posts

Friday, July 31, 2015 3:53 PM

Greek Stock Market Reopens (sort of); Math Perspective on the "Bailout"

Mish Moved to MishTalk.Com Click to Visit.

The Greek news of the day is Greek Stock Market to Reopen, With Restrictions.


  1. People cannot draw on their Greek bank accounts to buy shares
  2. People can only buy shares with existing brokerage account cash

I supposed people could transfer cash from elsewhere into stocks but no one in their right mind would do such a thing.

And what about taking cash out of brokerage accounts, wiring it elsewhere? The article did not say, but I suspect that has capital restrictions as well.

Will the market really reopen Monday?

I suggest not.

Reader "Bailout" Perspective

Reader "AC" occasionally pings me with some interesting comments and perspectives. Here's another one.
Ciao Mish,

I wanted just to share some elements to put in perspective things about Greek bailout.

Greece is a small country with small GDP, but please consider the ratio of the bailout and guarantee vs GDP.

Greek GDP is around $238 billion in 2014 (€216 billion).

The new bailout is €86 billion. That is 40% of GDP! Should people put the same percentage to the size of the state they live in, they would understand much better what this bailout means.

Schauble asked for €50 billion guarantee. In effect, Schauble seeks a Greek guarantee 1/4 of the country's GDP. Is this reasonably possible?

People involved in the matter have simply lost the sense of proportions and contact with reality.

Best Regards,

Additional Math 

To further add to AC's perspective, the existing bailouts equal €240 billion. The total bailout will be €326 billion (not counting additional money needed to stabilize the banks, and not counting Target2 imbalances of about €120 billion and growing).

€326 billion exceeds 150% of GDP.

Germany wants Greece to have a current account surplus of 3% of GDP.
3% of €216 billion (2014 GDP) is €6.48 billion.

At zero percent interest, assuming a 3% surplus every year, and also assuming every penny of the surplus goes to creditors, it will take Greece 50 years to pay back €326 billion.

Of course, Greek GDP is expected to rise. Then again, I assumed 0% interest, and I also assumed a 3% current account surplus from now until seemingly ever. The math gets much more cumbersome at interest rates that exceed a mere 1%.

Pardon me for asking, but ...

  1. Who is it that's really being "bailed out"?
  2. How the hell can this proposal possibly work?

Mike "Mish" Shedlock

1:43 PM

Rabbit-Hole Math: Chicago Proposes Bonds that Make No Periodic Payments; When Does Stupidity Stop?

Mish Moved to MishTalk.Com Click to Visit.

Chicago Eyes Bonds that Delay Repayments

Chicago Mayor Rahm Emanuel has his eyes on raising money via Capital Appreciation Bonds.

CABs saddle taxpayers with higher costs because they delay interest and principle payments until a final lump-sum payment at the end.

CABs have fallen out of favor because of risk. Some cities and states have outlawed them.

Nonetheless, Chicago Mulls Borrowing That Puerto Rico Rejected as Too Risky.

Mayor Rahm Emanuel proposed issuing $500 million of bonds this week in an ordinance that would permit the use of capital appreciation bonds, where borrowers postpone interest and principal payments into one big sum at the end of the term.

Chicago is struggling to plug its deficit and $20 billion of unfunded pension liabilities. Emanuel’s move would give the third-most-populous city a means of borrowing without having to face the costs right away.

Texas restricted the use of CABs in June and California has limited them since 2013. The Puerto Rico Electric Power Authority dismissed a bondholder plan last week to restructure its debt using capital appreciation bonds, citing the disproportionate risks.

Former California Treasurer William Lockyer called the debt “abusive” because it passes on large payments to future generations.

“They increase the total cost and lower flexibility going into the future,” said Steve Murray, a senior director at Fitch Ratings. “They can limit future borrowing ability.”

Emanuel also proposed selling $125 million of wastewater revenue bonds to fund swap termination payments, Poppe said. A separate ordinance would authorize $2 billion in bonds for O’Hare International Airport, including $1.7 billion of refunding for savings, and about $300 million of new money for capital projects and interest, according to Poppe.
Rabbit-Hole Math

Given Chicago's junk bond rating, no investor in their right mind would purchase Chicago CABs. Default risk is enormous.

Also note that Emanuel needs to sell bonds to "fund swap termination payments". Those termination fees came into play because Chicago issued taxpayer-risky bonds that required repayment if the bonds dropped into junk territory.

Those bond are now junk, so Chicago has to borrow money to get out of swaps it never should have gotten into in the first place.

And $1.7 billion in bonds for "refunding savings". Say what? Borrowing to refund savings?

That statement caught my eye, but a vice president of US bank pinged me with this explanation:

"In muni land, refunding is another word for refinancing. So when the City of Chicago is talking about 'refunding for savings' they are referring to refinancing for interest savings. Not sure where the term originated, but that's what we call it."

Desperation Tactics

These are the tactics of a city that is clearly in serious trouble. Is there no end to stupidity?

Here's the deal.

  1. Chicago pension promises cannot be met.
  2. The Chicago Board of Education is bankrupt.
  3. The City itself is bankrupt as well (but no one can really say that, especially when they cannot admit points one and two).

Until there is an honest discussion about the above three points, Emanuel has proven he is willing to go further down the rabbit hole in search of solutions that cannot possibly work in the real world.

Emanuel Needs Another Choice

The Illinois legislature contributes to the problem. Chicago needs choices. One of those choices is to declare bankruptcy.

Because bankruptcy is different for municipalities than corporations, Chicago itself cannot declare bankruptcy now. But the school system can and should.

Unfortunately, Illinois municipalities cannot declare bankruptcy until the state allows it. The legislature needs to give Chicago that choice.

Perhaps that choice would wake up the mayor. Perhaps not.

Question of Mushrooms

Did Emanuel eat too many funny mushrooms in his travels in Wonderland to understand a good option when he sees it?

Mike "Mish" Shedlock

4:21 AM

IMF Reiterates Greece Disqualified for Bailout, Participation Depends on Debt Relief and Reforms

Mish Moved to MishTalk.Com Click to Visit.

Once again the IMF is back in the news in regards to Greece.

The IMF staff told the board of directors Greece Disqualified from New IMF Program.

Yet, Germany insists IMF be a part of the program. The reason for the latter is Germany will have to pony up lots more money if the IMF is not involved. The staff presented this message to the board this week, along with the message eurozone bailout lenders first need to agree on "debt relief".

From the above link (Financial Times) ...

The International Monetary Fund’s board has been told Athens’ high debt levels and poor record of implementing reforms disqualify Greece from a third IMF bailout of the country, raising new questions over whether the fund will join the EU’s latest financial rescue.

The determination, presented by IMF staff at a two-hour board meeting on Wednesday, means that while IMF staff will participate in bailout negotiations currently under way in Athens, the fund will not decide whether to agree a new programme for months — potentially into next year.

The IMF’s assessment adds another source of complexity, just as Athens and its bailout monitors begin discussions to try to conclude a deal before a tight August 20 deadline.

According to a four-page “strictly confidential” summary of Wednesday’s board meeting, IMF negotiators will take part in policy discussions to ensure the eurozone’s new bailout “is consistent with what the fund has in mind”.

But they “cannot reach staff-level agreement at this stage”. The fund will decide whether to take part only after Greece has “agreed on a comprehensive set of reforms” and, crucially, after eurozone bailout lenders have “agreed on debt relief”.

[Germany] now faces the prospect of trying to move an €86bn bailout through a sceptical Bundestag in a matter of weeks, without the IMF’s imprimatur.

Some Greek officials suspect the IMF and Wolfgang Schäuble, the hardline German finance minister, are determined to scupper a Greek rescue, despite the July agreement to move forward with a third bailout.

In a private teleconference made public this week, Yanis Varoufakis, the former Greek finance minister, said he feared that his government would pass new rounds of economic reforms only for the IMF to pull the plug on the programme later this year.

According to its own rules, the IMF cannot participate in any new bailout. I mean, they’ve already violated their rules twice to do so, but I don’t think they will do it a third time,” said Mr Varoufakis. “Dr Schäuble and the IMF have a common interest: they don’t want this deal to go ahead.”

Senior EU officials have insisted that Christine Lagarde, the IMF managing director, signalled her willingness to participate in a new bailout at the high-stakes summit that agreed the new rescue earlier in July.

But Greece has become a growing source of rancour within the fund and among its shareholders. People who have spoken with senior IMF officials say Ms Lagarde is facing a unified staff view that the fund’s reputation is on the line and that it cannot agree to a new programme without significant changes.

According to the board minutes, several non-European board members — including from Asia, Brazil and Canada — gave warning over the need to “protect the reputation of the fund”, and the document says Ms Lagarde acknowledged their concerns.

“[Ms Lagarde] stressed that in their engagement they have to be mindful about the reputation of the fund,” the summary says.

According to the summary, IMF staff concluded that Greece no longer cleared two of the four requirements in the IMF’s “exceptional access criteria” — the fund framework that allows it to grant bailouts of larger-than-normal size.
Same Old Same Old?

This is essentially the same story we heard two weeks ago in another "confidential" leak.

Nathan Tankus writing on Naked Capitalism presented this view on July 16: Lagarde Distances the IMF From Implications of Leaked Debt Sustainability Report.
In general, when discussing large complicated institutions distinctions must be made between parts of this institution. The mainstream press is particularly bad at that kind of nuance because these organizations are already complicated: making further distinctions between IMF managing directors, IMF staff and the IMF executive board gets needlessly obscurant in their view. However, these distinctions are important. The report that was leaked two weeks ago and the latest update to that report was written by IMF staff and specifically “neither discussed with nor approved by the IMF’s Executive Board”. Additionally, Christine Lagarde or her title “managing director” appear nowhere in this document. Thus to say that the “IMF” is saying anything in this report is deeply misleading.

The reporting of this latest update was even more muddled because it was combined with an anonymous statement from a “senior IMF official” by the Financial Times.

In my mind this anonymous official’s statements only make sense in three situations:

  1. Christine Lagarde is both unwilling to sign on to a deal the Eurogroup would currently agree to and unwilling to overtly and strongly pressure them to create a “better” deal they could sign. Thus she is aiming for a Grexit and no deal.
  2. Christine Lagarde is willing to sign on to whatever deal the Eurogroup would currently agree to but wants to covertly pressure them to offer more debt restructuring. In other words it’s a point of contention but not a dealbreaker.
  3. Many on the IMF staff don’t want Lagarde to sign whatever deal the Eurogroup is currently considering and specifically want much more debt restructuring. They have and are willing to leak things to the media to attempt to create this outcome whether by embarrassing their own Managing Director or putting indirect pressure on the Eurogroup.

To me option three seems like the most plausible. The same FT reporters (Peter Spiegel in Brussels and Shawn Donnan in Washington) reported over three weeks ago that a “senior [IMF] official” says many staff at the IMF “would rather cut off their little finger” than continue being involved in Greek bailouts. The use of similar descriptions (“senior official” and “IMF senior officials”) implies that the same sources at the IMF that said this over three weeks ago have been leaking the Debt Sustainability analysis and interpreted them for the press. This suggests a revolt among the rank and file of the IMF that doesn’t extend to the people who will ultimately make the decision.
Options Four, Five, Six

The above analysis seemed plausible at the time. It doesn't anymore. For starters, the report has now been presented to the executive board.

And a four-page “strictly confidential” summary appears to be in the Financial Time's hands.

We need to now consider options four, Five, and Six.

  1. IMF executive board no longer want to be part of this mess. They cannot directly say so because it implies that Varoufakis was correct in his assertion. Rather than a staff revolt, the staff may have been authorized to leak its findings in advance
  3. The IMF executive board is willing to be part of this mess, but only if Germany goes first. The risk here is the deal blows up entirely, but Germany would likely get the brunt of blame. Again, the staff may have been authorized to leak its findings in advance.
  5. The IMF executive board is internally fighting, not just the staff. Many may be ganging up on Lagarde.

Option six is not incompatible with either 4 or 5. The staff revolt and the leak may not have been authorized by Lagarde herself, but by others on the executive board.

This brings us back to "Senior EU officials have insisted that Christine Lagarde, the IMF managing director, signalled her willingness to participate in a new bailout at the high-stakes summit that agreed the new rescue earlier in July."

It's possible EU "senior officials" are mincing words, not Lagarde. Willingness to participate does not imply "on German terms". Certainly, senior EU officials have lied before.

It still may very well be that Nathan Tankus is correct, but more options are clearly in play. I suspect option six coupled with either four or five, perhaps over the wishes of Lagarde herself.

Mike "Mish" Shedlock

Thursday, July 30, 2015 4:26 PM

Which Will It Be: United States of Europe OR United States of Germany?

Mish Moved to MishTalk.Com Click to Visit.

Socialists Seek to Outvote Germany

In the wake of the near-Grexit, France and Italy seek more powers for the European Commission (EC).

And both countries want another parliament with more power. Their unstated goal is to create a United States of Europe where socialists would outvote the Germans.

Germany Seeks to Prevent Being Outvoted

German finance minister Wolfgang Schäuble has a completely different idea: Schäuble Outlines Plan to Limit European Commission Powers.

German finance minister Wolfgang Schäuble is proposing to strip the European Commission of some of its core oversight powers in an effort to avoid politicising EU decision-making at a time when the executive body has touted its new partisan role in Europe.

The European Commission has quasi-judicial authority over some of the most sensitive Europe-wide decision making, particularly in the area of merger approvals and antitrust monitoring, powers that could be moved to independent bodies under Mr Schäuble’s plan.

Berlin has also long called for the eurozone’s budget rules to be triggered automatically when a country breaches EU debt and deficit ceilings, and has complained bitterly that France has been given repeated waivers by the commission despite violating those limits for years — waivers some have viewed as politically motivated.

François Hollande, the French president, pressed for the eurozone overhaul almost immediately after the Greek deal was reached and, in a recent interview in the Financial Times, Italian finance minister Pier Carlo Padoan called for a rapid move to a full political union.

However, the new ideas being advanced have highlighted the differences between eurozone countries on the way forward, particularly between the French and Italian camp and Berlin.

Both Paris and Rome are emphasising a pooling of resources, either in the form of a eurozone budget or a common EU unemployment scheme, while Berlin is focusing on giving the eurozone’s rules more bite and less interference from political forces.
Battle Line

The battle lines are clear: Stricter Rules and Less EC vs. Fewer Rules and More Politics.

Let's not kid ourselves here. This is not an "effort to avoid politicising EU decision-making". Schäuble is scared to death about what the socialists have in mind.

If there is a new parliament, France, Spain, Italy, and Portugal will all seek to "pool resources", the same general idea as "transfer German savings for politicians to spend elsewhere".

Instead, Schäuble seeks "independent" bodies. Let's translate that as well. "Independent" really means "appointed by and to the liking of Germany".

Because politics can change, Schäuble also seeks a fallback mechanism: "budget rules to be triggered automatically".

Of course, France, Italy, Spain, etc., want no part of automated budget rules; they want to vote on rules because they know they can collectively outvote Germany any time they want. Here are the French and Italian proposals:

United States of Europe Proposals

Which Will It Be?

Let me summarize the debate with a question: Which will it be:

  1. United States of Europe
  2. United States of Germany

Please think before you vote. The answer could be neither.  I purposely left out a key choice: The eurozone may still break apart.

Mike "Mish" Shedlock

1:54 PM

GDP Bounce: Disappointing Mixed Bag of Expectations and Revisions; Where to From Here?

Mish Moved to MishTalk.Com Click to Visit.

This morning, the BEA reported Second Quarter GDP was 2.3%.

2.3% was at the low end of the Consensus Range of 1.9% to 3.5%. On the plus side, first quarter was revised way higher.


  • First quarter 2015 revised up from -0.2% to +0.6%
  • 2013 GDP revised lower from 2.2% to 1.5%
  • 2012 GDP revised lower from 2.3% to 2.2%

Evolution of First Quarter 2015 GDP

  • +0.2% Initial
  • -0.7% Revised
  • -0.2% Revised
  • +0.6% Revised

GDP is the most lagging of all indicators. By the time all the revisions are in (years later), no one even cares.

I suspect after the "final" revision, first quarter 2015 GDP will be back in the negative column, with all of 2015 revised lower as well.

Don't hold your breath waiting.

Weak First Half

Meanwhile, the first half of the year looks pretty weak.

Last year, a first quarter GDP of -0.9% was followed by a huge second quarter surge to +4.6%, sustained with a strong third quarter +4.3%.

In comparison, this bounce was feeble.

Where to From Here?

If retail sales do not pick up, and especially if auto sales slide as I suspect they will, third quarter will shock the economists who believe this economy is strong and getting stronger.

Mike "Mish" Shedlock

4:03 AM

Police State "Ministry of Truth" Hits Spain; Man Fined for Calling Police "Slackers" on Facebook

Mish Moved to MishTalk.Com Click to Visit.

On July 1, the Spanish Government went to "Full Police State", with enactment of law forbidding dissent and unauthorized photos of law enforcement.

Spain's officially a police state now. On July 1st, its much-protested "gag" law went into effect, instantly making criminals of those protesting the new law. Among the many new repressive stipulations is a €30,000-€600,000 fine for "unauthorized protests," which can be combined for maximum effect with a €600-€300,000 fine for "disrupting public events."

This horrible set of statutes has arisen from Spain's position as a flashpoint for anti-austerity protests, the European precursor to the Occupy Wall Street movement. Fines, fines and more fines await anyone who refuses to treat authority with the respect it's forcibly requiring citizens to show it.

The law also extends its anti-protest punishments to social media, where users can face similar fines for doing nothing more than encouraging or organizing a protest. Failing to present ID when commanded is another fine. And then there's this:

Showing a "lack of respect" to those in uniform or failing to assist security forces in the prevention of public disturbances could result in an individual fine of between €600 and €30,000.

A clause in the wide-ranging legislation that critics have dubbed the "gag law" provides for fines of up to 30,000 euros ($33,000) for "unauthorized use" of images of working police that could identify them, endanger their security or hinder them from doing their jobs.
Man Fined for Calling Police "Slackers"

We now have our first test case of this inane law.

The Independent reports Spanish man fined up to €600 under new gag laws for calling police 'slackers' in Facebook post.
A young man in Spain has been fined for calling the police lazy in a Facebook post – becoming the first citizen to fall foul of a series of controversial new “gag” laws.

The 27-year-old man, identified only as Eduardo D in national media reports, described the local police force as a “class of slackers” in a series of online posts which he described as humorous.

According to the Spanish daily El Pais, Eduardo made three comments on Facebook criticising the money spent on police facilities in his town of Güímar, Tenerife.

He also accused local authorities of misappropriating a public building, and in a third post suggested local police were so lazy they might as well have “a hammock and a swimming pool” at each station.

Eduardo made the comments on 22 July, according to the Spanish edition of The Local, and that afternoon he received a visit from police accusing him of “making comments on social media that showed a lack of respect and consideration for Güímar’s local police”.

He now faces a fine of between €100 and €600, and told El Pais he had appointed a lawyer to fight the “madness” of the penalisation process.

One of the first uses of the nationwide so-called “gag laws”, Eduardo’s case comes amid a backdrop of a range of bizarre new laws across Spanish municipalities following the sweeping success of left-wing groups at elections two months ago.

They included the introduction of a compulsory siesta in the town of Ador near Valencia, attempts to limit tourists only to the most popular destinations in Barcelona, and the setting-up of a so-called “Ministry of Truth” in Madrid.
Is the US next?

Mike "Mish" Shedlock

Wednesday, July 29, 2015 6:56 PM

"Selfie" Fashion Trends: Cheap Dresses and "Rentabag"; Mish Handbag Tips

Mish Moved to MishTalk.Com Click to Visit.

Impact of the "Selfie"

Are you into Facebook, Instagrams, and "Selfies" (taking lots of pictures of yourself and sharing them instantly)?

I'm not but, but in my travels I see lots of it. The popularity of sending "selfies" has even influenced retail sales and women's fashion. After all, one cannot be seen in the same outfit too often!

Here's an amusing video that discusses the impact of the "selfie".

In the above video, FT’s Andrea Felsted visits online fashion retailer Asos to see how it is adapting its business model in the era of the selfie.

Link if video does not play: How the Selfie Is Shaking Up Retail.

Cheap Dresses and Rentabag

Allegedly it's a faux pas to be seen too often with the same bag. So enter the "rentabag". I had to look this up. There's a huge selection of choices.

  • Bagborroworsteal: Rent Luxury Bags Online - Huge Selection of Designer Bags‎ - Get A New Bag Every Month
  • Supursestyle: Rent designer handbags at affordable prices
  • Bagdujour: Handbags for rent - Wear a Beautiful Designer Bag Today Authentic, Affordable & Convenient
  • Renttherunaway: Fashion accessories, jewelry, handbags, and wraps for women
  • Armgen: The Netflix of handbags. We rent trendy designer handbags at a fraction of the cost!
  • Rentmeahandbag: Rene Caovilla Shoes Sandals
  • Lovemeandleaveme: Buy designer bags outright, hire bags or use payment plan options
  • Bagtropolis: Buy, layaway and rent borrow luxury pre-owned authentic designer handbags, bags, purses, pocketbooks at affordable prices, including Balenciaga, Celine
  • Luxurylana: Rent from your favorite designer handbag online
  • Monluxe: MonLuxe the european bag and jewelry rental company. Delivery in 24 hours in France, Benelux, Germany Italy, Spain, Portugal


There's even a site promoting Make Extra Money Renting Handbags and Purses.

Really Expensive Bags

$100,000 for a bag? That is the full price though, not a rental. Phew!

For comparison purposes, who wouldn't want this "beautiful" Valentino Leopard Calf Hair Rockstud Trapeze Bag, bargain-basement priced at $3,995?

How about this trendy Fendi Baguette Bag Bugs Shoulder Bag "beauty" for a mere $2,610?

$100,000 Bags Totally Worth It?

Those prices seem shocking, but the PurseBlog gives 8 Reasons Spending $1,000 or More on a Bag is Totally Worth It.

Real Reason for $100,000 Bags

For those looking for the real reason behind $100,000 handbags that sometimes look rather ordinary and sometimes purposely gaudy, blame the Fed and central banks in general.

The income inequality the Fed and politicians rail against comes directly from middle class killing policies of the Fed and government officials.

What Your Money Rents

Who in their right mind wants to pay $300 a month to rent this ordinary brown bag?

For a "mere" $45 a month you can rent these sunglasses.

Designer Bags

BagDuJour offers the following designers for rent.

  • Alexander McQueen
  • Anna Sui
  • Anthony Luciano
  • Anya Hindmarch
  • Burberry
  • Charlotte Olympia
  • Chloe
  • Diane von Furstenberg
  • Dolce & Gabbana
  • Edie Parker
  • Emilio Pucci
  • Ermanno Scervino
  • Fendi
  • Givenchy
  • Gucci
  • Isabel Marant
  • Jimmy Choo
  • Kate Spade
  • Kotur
  • Louis Vuitton
  • Marni
  • Mary Katrantzou
  • Michael Kors
  • Miu Miu
  • Piero Guidi
  • Pierre Hardy
  • Prada
  • Proenza Schouler
  • Roberto Cavalli
  • Saint Laurent
  • Stella McCartney
  • Tiffany
  • Valentino
  • Versace
  • Versus Versace
  • Victoria Beckham

With so many "designers": Would anyone really know if you had a designer bag or something similar?

One final question: Is it really millennials renting this stuff for selfie instagrams, or do the bulk of these rentals go to people pretending to be youthful and rich?

Designer Bags For Cheap

I did some searching and found some genuine leather bags that look nice (at least to me). Here's a couple from DesignerHandbagRescue.

That's a Coach Bag (I have no idea how popular that brand is or isn't) but I like the clean looks of it. It retails for $235, but went for $89.95 used but in near-perfect condition.

Sorry ladies, sold out.

Here's a Michael Kors Rhea Medium Zip Shoulder Bag for just under my top-end splurge limit. It retails for $268 but you can still get it for $124.95.

With that, my fashion preferences are now exposed and subject to immense criticism from all my female readers (as well as any males who happen to like purses).

By the way, I get nothing for promoting any company mentioned in this article. I Just decided to see what I could get and stumbled on that site.

I suspect there are numerous nice-looking purses under $50, and even $300+ designer purses for close to or under $100.

Mish Practical Tips

  1. Buy a bag, don't spend more than $50, be creative, and hardly anyone will know it's not a designer bag.
  2. If you really want to splurge, spend $125 or less for designer bags.

Finally, if you select option number 1 and someone asks about your bag, just tell them it's a soon-to-be-very-popular, genuine MishabagTM.

Mike "Mish" Shedlock

1:47 PM

Fed Sheds No Light, Plays Charades with Media; Tiptoe Balancing Act

Mish Moved to MishTalk.Com Click to Visit.

Fed Says Little, Sheds No Light

If the Fed had a clue as to what it will do in September, it likely would have said so. Instead, it reiterated the same hash we have been hearing for years.

Here is the complete text of today's FOMC Press Release.

Information received since the Federal Open Market Committee met in June indicates that economic activity has been expanding moderately in recent months. Growth in household spending has been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year. Inflation continued to run below the Committee's longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey‑based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.

I suspect the Fed is concerned about retail sales, sentiment, housing, China, Greece, oil, Canada, the US dollar, and a host of other things.

At this stage in the charades game, the Fed cannot possibly come out and say any of that. Nor can the Fed hint at a September hike, even though it wants to, because retail sales may continue to slump and auto sales could easily collapse.

The Fed expects "further improvements" in the labor market, but what if all these inane minimum wages hikes kill jobs.

High consumer sentiment has not led to higher retail sales as the Fed seems to believe it would (See Sentiment Measures vs. Retail Spending: Clueless Clues and Random Noise).

Tiptoe Balancing Act

To avoid saying anything that might be seriously wrong, the Fed says the risks are "nearly balanced" then disproves that with lovey-dovey hogwash about "keeping the target federal funds rate below levels the Committee views as normal in the longer run."

I just happen to have the right musical clip for the Fed's tiptoe charade game.

Link if video does not play: Tiny Tim Tiptoe Through Tulips

No doubt you can stand no more than 30 seconds of that, which is also about how long a knowledgeable reader can stand the Fed's charade game playing.

 Mike "Mish" Shedlock

Tuesday, July 28, 2015 10:04 PM

Sentiment Measures vs. Retail Spending: Clueless Clues and Random Noise

Mish Moved to MishTalk.Com Click to Visit.

Economists Shocked

Economists were shocked by the plunge in the Conference Board Consumer Confidence Index this morning, well below any economist's guess in Bloomberg's Econoday Forecast.

The consensus estimate was 99.6. The consensus range was 97.0 to 102.0. And the actual result ... 90.9.

Consumer confidence has weakened substantially this month, to 90.9 which is more than 6 points below Econoday's low estimate. Weakness is centered in the expectations component which is down nearly 13 points to 79.9 and reflects sudden pessimism in the jobs outlook where an unusually large percentage, at 20 percent even, see fewer jobs opening up six months from now.

A striking negative in the report is a drop in buying plans for autos which confirms weakness elsewhere in the report. Inflation expectations are steady at 5.1 percent which is soft for this reading.
Survey Methodology

How many people does the conference board survey each month? The answer is 3,000. Supposedly that's all it takes to determine car sales, job prospects, economic slowing, home purchases, etc.

Bloomberg reports "While the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month."

I will return to that idea in a bit. But first let's take a look at what others say.

Risk for the Economy

Please consider Plunge in Consumer Confidence Exposes Risk for U.S. Economy.

A less optimistic outlook for the labor market, and perhaps the uncertainty and volatility in financial markets prompted by the situation in Greece and China, appears to have shaken consumers’ confidence,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement.

Really? US consumers care about the Chinese stock market and Greece? Since when?

"A drop in U.S. sentiment this month that results in weaker retail spending would represent a challenge to the Fed," said the article.

Other Measures of Sentiment

The Conference Board "Consumer Confidence" report is not to be confused with the University of Michigan "Consumer Sentiment" report or the Gallup "Confidence Index" survey.

With that confusion out of the way, and in reference to the University of Michigan sentiment numbers, please consider the July 17 MarketWatch report Consumer Sentiment Drops from Five-Month High.
Consumers’ attitudes soured in July, with a gauge of their sentiment pulling back from June’s five-month high, according to reports on the University of Michigan gauge released Friday.

The University of Michigan’s gauge of consumer sentiment fell to a preliminary July reading of 93.3 from a final June level of 96.1. Economists polled by MarketWatch had expected a July figure of 95.

Economists follow readings on confidence to look for clues about consumer spending, the backbone of the economy. Earlier this week the government reported retail sales fell in June, the first drop in four months. Americans spent less at car dealers, and furniture and clothing stores, among other areas.

However, the retail-spending drop may be short-lived, economists say. A growing economy that’s adding a healthy number of jobs should boost confidence and support spending.

”Despite the decline, consumer sentiment remains relatively high, reflective of continued improvement in job market conditions, limited inflation, and an economy that appears to have re-gathered some momentum after stumbling out of the gate early this year,” said Jim Baird, chief investment officer for Plante Moran Financial Advisors. “Recent stock market volatility, increasing gas prices, and the most recent tensions around the ongoing debt crisis in Greece were likely the key drivers of the drop."
Proposed Survey Question

MarketWatch repeats nonsense about Greece once again.

I suggest a survey question: "Do you give a rat's ass about Greece?"

Whether or not Greece or Italy eventually matters is irrelevant. Until they do matter, US consumers will not care one iota.

Gallup Confidence Index Continues Slide

In contrast to the Conference Board and University of Michigan volatility, the Gallup Confidence Index has been trending lower most of the year.

Gallup's Economic Confidence Index is the average of two components: how Americans rate the current economy and whether they feel the economy is getting better or getting worse. The index has a theoretical maximum of +100, if all Americans rate the economy as excellent or good and improving; and a theoretical minimum of -100, if all Americans rate the economy as poor and getting worse.

The current conditions score fell four points from the week prior to its current score of -9, accounting for the entire decline in the overall index. This was the result of 23% of Americans saying the economy is "excellent" or "good" and 32% saying it is "poor." Meanwhile, 39% of Americans said the economy is "getting better," while 57% said it is "getting worse." This resulted in an economic outlook score of -18, unchanged from the previous week.

Bottom Line

Though Americans' confidence in the national economy has skewed negative for six months now, the recent drop of the current conditions component comes on the heels of a new path for solving the Greek debt crisis and amid a tumultuous period for Chinese stocks. The instability abroad could be fueling Americans' doubts about the health of the U.S. economy, not to mention that the Dow closed lower several days in a row last week.
Another Blame on Greece

There you have it: Another blame on Greece and China with the addition of the DOW dropping last week.

Might I point out to Gallup ....

  • The Gallup Index has been sinking since mid-January
  • The Plunge in China started in mid-June
  • The plunge in the DOW (that no one really follows anyway) is essentially nonexistent

Rather than asking, analysts leap to what I believe are absurd conclusions about Greece. Why don't they just ask: "Do you give a rat's ass about Greece?"

Poll Discrepancy

Note the discrepancy in the three polls. Supposedly all these surveys are statistically valid measures of sentiment.

It seems the polls forgot to measure the same 3,000 people.

Retail Spending

Let's return to the notion that confidence equates to retail spending. Bloomberg Econoday states "Typically retail sales will move in tandem with consumer optimism - although not necessarily each and every month."

This notion is widely believed, even by the Fed. I have questioned this belief before, but let's put the idea under the microscope for further examination.

Consumer Confidence vs. Retail Sales

Unfortunately, that data only goes back to 2012 (without paying for it). But the chart, as shown, ought to raise some eyebrows on widely believed theory.

The next set of charts is even more interesting.

University of Michigan Sentiment vs. Retail Sales

That chart is certainly amusing. It suggests retail sales go up except in recessions, and perhaps even in recession. But let's look at this still one more way.

Year-Over-Year Percentage Changes: Sentiment vs. Retail Sales

Same Chart with Discrepancies Noted

Random Noise on Leading Indicators

The above chart shows year-over-year percentage changes in sentiment vs. retail sales.

The result: random noise.

Note that retail sales are not adjusted for CPI or for population growth (putting an upward pressure on sales). Nor do economists factor in demographics of aging boomers or changing attitudes of millennials (putting downward pressures on sales).

Some attitudes are fleeting, others not. And debt remains a huge overhang.

Expecting retail sales to match sentiment is a hopeless proposition, yet one economists cling to.

Supposedly, sentiment is a "leading indicator".

A leading indicator of what?

Mish Economic Prognosis

  1. Retail spending does not follow sentiment in any predictable pattern.
  2. Sentiment measures often conflict.
  3. Sentiment is not a valid leading economic indicator.
  4. Consumers are not concerned about Greece.
  5. Consumers are concerned about rising rent.
  6. Consumers are also concerned about rising health care costs.
  7. The decline in gas prices that economists erroneously expect consumers to spend on junk, pales in comparison to points 5-6.
  8. A decline in auto sales, long overdue, will shock economists and the Fed.
  9. Rising minimum wages will take a huge bite out of job growth.
  10. This economy is much weaker than most assume.

I believe points 1-3 are proven. Points 4-10 are my suggestions.

Mike "Mish" Shedlock

3:51 PM

Simmering Stew; Italy's Finance Minister Joins "United States of Europe" Parade; Germany's "5 Wise Men" Argue for Grexit

Mish Moved to MishTalk.Com Click to Visit.

Italy Seeks Political Union

As expected, Italy has joined the "United States of Europe" parade. And also as expected, some from Germany want no part of it. Let's start with Italy.

Italy's finance minister, Pier Carlo Padoan calls for ‘Political Union’ to Save Euro.

Italy’s finance minister has called for deeper eurozone integration in the aftermath of the Greek crisis, saying a move “straight towards political union” is the only way to ensure the survival of the common currency.

Pier Carlo Padoan’s comments reflect how the tortured and dramatic negotiations that led to this month’s deal on a third bailout of Greece have triggered a round of soul-searching about the future of monetary union across European capitals.

“The exit and therefore the end of irreversibility is now an option on the table. Let’s not fool ourselves,” he said in an interview in his central Rome office.

Italy is calling for a wide set of measures — including the swift completion of banking union, the establishment of a common eurozone budget and the launch of a common unemployment insurance scheme — to reinforce the common currency. He said an elected eurozone parliament alongside the existing European Parliament and a European finance minister should also be considered.

To have a full-fledged economic and monetary union, you need a fiscal union and you need a fiscal policy,” Mr Padoan said. “And this fiscal policy must respond to a parliament, and this parliament must be elected. Otherwise there is no accountability.”
Germany's "5 Wise Men" Argue for Grexit

In contrast to tighter integration, Germany's "5 Wise Men" say Let Debtor Nations Leave Euro.
Countries should be able to exit the euro as a “last resort” if they are unable to manage their debts, the German government’s independent economic advisers say, in a sign of Berlin’s hardening attitude towards propping up fellow members of the single currency.

The mere suggestion of a country leaving what was supposed to be an irreversible currency union had long been taboo. But Germany’s finance minister, Wolfgang Schäuble, broke it two weeks ago by suggesting a possible five-year eurozone “timeout” for Greece.

“A permanently uncooperative member state should not be able to threaten the existence of the euro,” the economists said in a special report, published on Tuesday, calling for countries to exit the eurozone if it is necessary as an “utterly last resort”.

The five-member independent panel, known as the “wise men”, also argued that creditors should be forced to shoulder losses if states go bankrupt, encouraging them to scrutinize more closely the risks before they invest.
Special Report of the Council

Here's a link to the Executive Summary, in English. The Full Text is in German only. Here are a couple of key snips from the summary.
The crisis in the euro area has revealed fundamental problems in the design of the single currency area. Firstly, there was a lack of economic and fiscal policy discipline. And secondly, there was no credible mechanism to respond to crises.

It has become evident in the past years that the euro area member countries are overwhelmingly unwilling to give up national budget autonomy. To provide a stable framework for the Monetary Union based on the principle of unity of liability and control, the German Council of Economic Experts has developed a long-term framework (“Maastricht 2.0”, see Annual Economic Report 2012
paragraphs 173ff; Annual Economic Report 2013 paragraphs 269ff.).

For the no-bailout clause to become credible, an insolvency mechanism needs to be created that requires a maturity extension of government bonds as part of future adjustment programmes if public debt is not deemed sustainable. In the event of over-indebtedness or a material breach of fiscal rules, an ESM adjustment programme should only be approved after a debt haircut is imposed on private creditors. If a member country continually fails to cooperate, the stability and very existence of Monetary Union may be at risk. A country's exit from Monetary Union must therefore be possible as a last resort.

In contrast to these reforms, short-term measures to address acute problems harbour a serious long-term threat to the stability of the euro area. This also applies to reform proposals currently under discussion, such as establishing a fiscal capacity or a European unemployment insurance. The institutional framework of the single currency area can only ensure stability if it follows the principle of unity of liability and control. Reforms that stray from this guiding principle plant the seeds of further crises and may damage the process of European integration.
Creditors vs. Club-Med Countries

The club-med countries with high unemployment seek unemployment insurance. Germany says that would "harbour a serious long-term threat to the stability of the euro area".

Germany wants tighter fiscal restraints and a "Maastricht 2.0". The club-med countries want fewer restraints and less austerity.

Germany wants to allow for eurozone exit. Italy and many other countries don't.

Inane Parliament Proposal

Like French president Francois Hollande, Padoan calls for an "elected eurozone parliament alongside the existing European Parliament ".

I mocked that idea in Hollande Pleads for Creation of Eurozone Government; United States of Europe?

Specifically, Hollande wants to eliminate "insufficiencies" (not inefficiencies) of the existing levels of government. Let's have a recap.
Counting "Insufficiencies"

  • European Commission: The European Commission (EC) is the executive body of the European Union responsible for proposing legislation, implementing decisions, upholding the EU treaties and managing the day-to-day business of the EU. The Commission operates as a cabinet government, with 28 members of the Commission (informally known as "commissioners"). One of the 28 is the Commission President (currently Jean-Claude Juncker) proposed by the European Council and elected by the European Parliament. The Council then appoints the other 27 members of the Commission in agreement with the nominated President, and the 28 members as a single body are then subject to a vote of approval by the European Parliament.[Jean-Claude Juncker is president of the European Commission and a member of the European People's Party (EPP).
  • Eurogroup: The Eurogroup is the recognised collective term for informal meetings of the finance ministers of the eurozone, i.e. those member states of the European Union (EU) which have adopted the euro as their official currency. The group has 19 members. It exercises political control over the currency and related aspects of the EU's monetary union such as the Stability and Growth Pact. Its current president is Dutch finance minister Jeroen Dijsselbloem. The ministers meet in camera a day before a meeting of the Economic and Financial Affairs Council (Ecofin) of the Council of the European Union. They communicate their decisions via press and document releases. This group is related to the Council of the European Union. The Eurogroup is also responsible for preparing the Euro Summit meetings and for their follow-up.
  • European Union: The European Union has 28 member states. It operates through a system of supranational institutions and intergovernmental-negotiated decisions by the member states. The institutions are: the European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, the European Central Bank, the European Court of Auditors, and the European Parliament.
  • European Parliament: The European Parliament is the directly elected parliamentary institution of the European Union.
  • Euro Summit: The Euro Summit (not to be confused with the EU summit) is the meeting of the heads of state or government of the member states of the eurozone (those EU states which have adopted the euro). It is distinct from the EU summit held regularly by the European Council, the meeting of all EU leaders.
  • European Council: The European Council (not to be confused with the parliamentary council of Europe or the Council of the European Union) is the Institution of the European Union that comprises the heads of state or government of the member states, along with the council's own president and the president of the Commission. 
  • Council of the European Union:  The Council of the European Union (not to be confused with the European Council or the Parliamentary Assembly of the Council of Europe), is sometimes just called "the Council". It is part of the essentially bicameral EU legislature (the other legislative body being the European Parliament) and represents the executive governments of the EU's member states.
  • Parliamentary Assembly of the Council of Europe: PACE is not to be confused with the  European Parliament or the Assembly of the Western European Union or the Council of the European Union or the European Council or the Council. The Parliamentary Assembly of the Council of Europe (PACE) is one of the two statutory organs of the Council of Europe, an international organisation dedicated to upholding human rights, democracy and the rule of law, and which oversees the European Court of Human Rights. It is made up of 318 parliamentarians from the national parliaments of the Council of Europe's 47 member states, and generally meets four times a year for week-long plenary sessions in Strasbourg.

Growth of European Council Meetings

  • Meetings of the European Council, an institution of the European Union (EU) comprising heads of state or government of EU member states, started in 1975 as tri-annual meetings.
  • The number of meetings grew to minimum four per year between 1996 and 2007, and minimum six per year since 2008.
  • From 2008 to 2015, an average of seven council meetings per year took place.
  • Since 2008, an annual average of two special Euro summits were also organized in addition - and often in parallel - to the EU summits.
Theory vs. Practice

In theory, France and Italy want another parliament. In practice, is France prepared for what that could mean?

It could mean the end of inane work rules such as no work on Sunday. It could also mean higher retirement ages and the end of collective bargaining. Topping things off, it could mean the end of agricultural tariffs, the only way many French farms survive.

The risk for Germany is that parliament passes some inane fiscal rules or decides Sundays off is a good idea for everyone.

If countries truly understand the potential implications, neither France nor Germany would risk ceding total sovereignty to yet another parliament.

My Way

Topping off the "no deal" cake, the German constitution prohibits bailouts and transfers. France and Italy are open to transfer mechanisms, but not Finland and others.

And so here we are.

Everyone wants "deeper integration" their way. It cannot be done, and it's impossible to fix key flaws inherent in the creation of the eurozone.

Simmering Stew

Creditor-debtor issues will simmer and simmer until another boiling over point is reached.

Italy may very well be next. For details, please see Record Eurozone Borrowing: Public Debt Rises With Recovery; Greece a Small Sideshow Compared to Italy.

Mike "Mish" Shedlock

1:48 PM

Another Bridge Loan Likely as Greek Talks Break Down; Shocked Over Parallel Currency Plans? Why?

Mish Moved to MishTalk.Com Click to Visit.

Greece insists it has met all of the conditions for another bailout, but only one vote matters, that of the creditors who say Greece hasn't.

One of the stickiest issues is hiking taxes on farmers.

But if tax hikes is what the creditors want, that's what they will get. Greece should realize that by now.

Nonetheless, the bickering lingers and it will continue until Greece finally is forced out of the eurozone.

Greek Talks Break Down

Meanwhile, Denials Fly in War of Nerves Over Greek Debt Talks.

Any hope of a fresh start in fraught relations between Greece's leftist government, purged of its most radical members, and the institutions representing its creditors, appeared to be dashed by the flurry of assertions and rebuttals.

The two sides couldn't even agree on when the talks began.

Differences included the pace and conduct of bailout talks, whether or not Greece needs to enact further laws before a deal, the reopening of the Athens stock exchange, and the activities of former finance minister Yanis Varoufakis, who continues to heap abuse on the creditors in his blog.

Greek official said suggestions that Greece needed to pass further reform legislation before a bailout deal were not justified by the euro summit statement or subsequent exchanges.

However, euro zone officials made clear that Athens must enact measures to curb early retirement and close tax loopholes for farmers before any new aid is disbursed. Greece needs more finance by Aug. 20, when it owes a 3.5 billion euro payment to the European Central Bank.

Hanging over the new talks is the legacy of Varoufakis, whom Tsipras sidelined in the final phase of the talks before accepting even more stringent bailout terms this month. He continues to create problems for the premier by denouncing the bailout agreement and accusing the creditors of having treated Greece like a colony.
Uproar Over Varoufakis' Parallel Currency Plan

Yahoo!Finance reports Varoufakis 'Parallel' Currency Ploy Sparks Uproar in Greece
Revelations by Greece's flamboyant former finance minister Yanis Varoufakis of secret plans for a parallel currency have sparked uproar in the country as the embattled leftist government on Monday began to rebuild tattered trust with its international creditors.

On Monday, a recording of Varoufakis' remarks was released by the Official Monetary and Financial Institutions Forum.

In it, the maverick economist said Prime Minister Alexis Tsipras had "given the green light" for a Plan B before coming to power in January.

The goal was to create a "functioning parallel system" of liquidity in case the European Central Bank cut off support to Greece's banks, as indeed it did after talks with the hard-left government on new austerity reforms broke down in June.

Varoufakis said that a five-man team under his orders had hacked into the finance ministry and obtained access to the tax file numbers of Greek taxpayers in order to create duplicate accounts.

The subterfuge, he explained, was necessary to avoid alerting Greece's EU-IMF creditors who "fully" control the revenue mechanism.

The operation was designed to enable the ministry and also taxpayers to make digital transfers without having to use the banks, which as it turned out, had to be shut down for three weeks this month to avert a run on deposits.

"Of course this would be euro denominated but at the drop of a hat it could be converted to a new drachma," Varoufakis said.

"The work was more or less complete," he added.

The news caused a political storm in Athens, with opposition parties demanding an official explanation from the government and threatening to put Varoufakis on trial.
Shocked Over Parallel Currency? Why?

No one should be shocked by any of this. In fact, a bank takeover was absolutely necessary were Greece to be forced from the eurozone. And Greece was right at that point before Tsipras caved in to every creditor demand.

Not having a "Plan B" would have been extremely incompetent. The takeover of accounts is precisely what I warned about for months on end.

Primary Account Surplus, Yet Again

Greece would have tried to remain on the euro, but would not have been able to do so unless it quickly got to a primary account surplus position (tax receipts, in euros, large enough to pay current expenses except for debt repayments and interest on debt).

Looking for a reason Germany demanded 50 billion euros in collateral for another bailout? The key is a primary account surplus.

Creditors demand a primary account surplus from Greece so that Greece can pay back the creditors from the surplus. But as soon as Greece has a surplus, the temptation would be to stop the debt payments, thus the need for collateral.

Mike "Mish" Shedlock

Monday, July 27, 2015 5:32 PM

Stench from Chicago so Bad, Fitch Finally Smells It

Mish Moved to MishTalk.Com Click to Visit.

At long last, the stench from Chicago is so strong that Fitch can finally smell it. Fitch just now downgraded Chicago Board of Education General Obligation bonds to junk status.

Fitch and the S&P were holdouts because there's money to be made by purposely pretending a manure factory is a rose garden.

MarketWatch reports Fitch Downgrades Chicago Board of Ed (IL) ULTGOs to 'BB+'.

Fitch Ratings has downgraded the Chicago Board of Education, IL's (the board) approximately $6.1 billion of unlimited tax general obligation (ULTGO) bonds to 'BB+' from 'BBB-'. The rating has been placed on Negative Watch.

Rating Drivers

  • Continued financial stress
  • Dependency on borrowing
  • Cash flow drain
  • Pension liability weakness
  • Poor labor history
  • Unfavorable debt position
  • Structural imbalances
  • Mounting fixed costs
  • Limited options to address large budgetary gaps
  • Growing gap for fiscal year 2016
  • Liquidity concerns
  • Negative cash balances
  • Swap termination triggers

Fitch can finally smell enough stench from the above rating drivers to label the bonds as junk.

The "J" Word

The downgrade from BBB- to BB+ is a downgrade to a "non-investment" rating, commonly labeled "junk". Curiously, MarketWatch just could not bear to say the "J-Word".

MarketWatch reports "Fitch would downgrade the rating further if there is not clear and meaningful progress over the next several months in reducing the large structural imbalance."

I think we can count on that.

Deep Into Junk

On May 20, I spoke with Sean Egan at the rating agency Egan-Jones how he would rate these bonds. His reply was "Deep Into Junk".

For details, please see CNBC's Santelli and Mish Discuss Municipal Bonds; Egan-Jones on Chicago; S&P Blames Moody's; Message to Bondholders.

Rate Shop Whores

S&P noses are still immune to the stench. On July 2, the S&P cut Chicago Board of Education's GO rating to 'BBB', still investment grade.

And on July 8, the S&P Lowered Chicago GO Bonds one notch to "BBB-Plus", also investment grade.

When the smell hits the collective noses at the S&P remains to be seen, but I suspect quickly. Rate shop whores simply can never be first with downgrades.

For a discussion of how the SEC is to blame for the current environment of Fantsayland bond ratings please see Rate Shopping Whores and Chicago's Bond Rating.


Instead of tackling the underlying problems, Chicago Mayor Rahm Emanuel nickels and dimes businesses to death, further makes Chicago an uncompetitive place to do business, and threatens massive property tax hikes. Emanuel also expects $500 million from the state even though the state budget (which Governor Bruce Rauner correctly refuses to sign) is $4 billion in the hole.

For details and recommended solutions, please see Santelli Exchange with Mish: Public Debt, Taxation, Legacy Issues.

Mike "Mish" Shedlock

3:44 PM

Final Second Quarter "GDPNow" Forecast 2.4% vs. Bloomberg Consensus 2.9%

Mish Moved to MishTalk.Com Click to Visit.

The Atlanta Fed second quarter GDPNow final estimate came in at 2.4%.

The second quarter GDP official "advance" estimate from the BEA is due out Thursday, July 30 along with the annual revision of the National Income and Product Accounts (NIPA).

The Bloomberg Consensus Estimate for second quarter GDP is 2.9%, a half percentage-point higher than the Atlanta Fed model.

I will take the under.

First quarter GDP releases by the BEA have been all over the map. The initial reading was +0.2%, revised to -0.7%, then revised again to -0.2%.

Whatever number comes out Thursday, expect revisions, possibly in both directions. I expect the final first quarter and/or second quarter GDP to be revised lower.

Mike "Mish" Shedlock

2:08 PM

Witch Hunt is On; Foolish Ideas on Stopping the Shanghai Carnage; US Bubble Will Burst Too

Mish Moved to MishTalk.Com Click to Visit.

Nearly 1,800 stocks, over 60% of issues traded on the Shanghai and Shenzhen stock exchanges fell by the daily limit of 10% and were halted according to a Financial Times report.

When contacted by the Financial Times, the China Securities Regulatory Commission refused to answer any questions.

The amusing comment of the day comes from Zhu Ning, deputy dean at Shanghai Advanced Institute of Finance: “If [the government] does nothing then all its previous efforts will have been wasted but if they continue with the rescue efforts then the hole will get bigger and bigger. We hope the regulators will respect the market and the rules of the market.”

In reality, previous efforts were wasted the moment they were tried. Price discovery is now lacking, and that is a huge problem in and of itself.

Absurd Cries for More Intervention and Liquidity

On Monday, Zhu Baoliang, director of the economic forecast department of the State Information Centre, a government research agency, told Reuters the stock market crash was having a deep impact on the real economy and that it was "essential for the authorities to cut interest rates and loosen monetary policy further."

Bear in mind that it was excessive liquidity that created China's property bubble followed by the stock market bubble.

Thus, Zhu Baoliang is another charlatan promoting the inane notion that the cure is the same as the disease. In effect, Baoliang wants to give alcohol to alcoholics.

Witch Hunt is On

The witch Hunt is on. That means the ridiculous notion of blaming the shorts is in full swing.

Chinese regulators even launched a website encouraging people to name the shorts, further stating those found guilty will be "dealt with severely".

Loss of Control

ZeroHedge discusses shorts in What Loss of Control Looks Like.

Actually, regulators were never in control in the first place. It only appears that way when things are going well.

Shorts Not the Problem

Shorts are not the problem here. Nor were shorts the problem in 2000 and 2008 in the US. Indeed it was the shorts who understood the true nature of the stock market:

  • Dotcom companies in 2000-2001 with no earnings were absurdly priced.
  • Financial corporations, home builders, etc. were in the same situation in 2008.

"Real Economy" Worries

Chinese officials are worried the crash will hurt the "real economy". That's something they should have worried about before they blew the bubble.

Moreover, the notion that the "real economy" was doing well in the first place is silly. Rather, speculative activities, and unrealized profits on those activities only made it appear the "real economy" was doing better than it really was.

It's too late to do anything now.

The only policy that makes any sense is to stand back and do nothing. Doing anything else just fosters more "moral hazard" speculative behaviors.

Pointing the Finger in the Right Direction

The Fed had a direct role in fostering US speculation in 2000 and 2008, just as the Chinese "regulators" fostered speculation in real estate and stocks in China over the past few years.

US stocks are back in bubble territory and the only reason why that is not perfectly obvious is the crash has not yet started here.

US Bubble Will Burst Too

When the US bubble bursts, we will see more blame the shorts mentality here, just as we see in China now, and also as happened in 2000 and 2008 in the US.

The Fed will never point the finger where it belongs: At themselves.

Mike "Mish" Shedlock

3:23 AM

Chinese Stocks Plunge 8.5%, Biggest Decline Since February 2007

Mish Moved to MishTalk.Com Click to Visit.

The crash in Chinese stocks continued today following a respite last week.

Shares on the Shanghai index plunged 8.48%, the Biggest One-Day Plunge Since February 2007.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 8.6 percent, to 3,818.73, while the Shanghai Composite Index SSEC lost 8.5 percent, to 3,725.56 points.

The drops were the biggest since Feb. 27, 2007.

It wasn't immediately clear what caused such a sharp tumble in the afternoon session. At midday, the two indexes were down about 2.5 percent.

"The recent rebound had been swift and strong, so there's need for a technical correction," said Yang Hai, strategist at Kaiiyuan Securities.
Immediately Clear

It should be immediately clear stocks are in a bubble, so there is no need to search for a "reason" for the plunge.

If anything, one might wonder why the stocks rose to such absurd valuations in the first place.

$SSEC Shanghai Index

Stock rose from about 2300 in November to 5178 in June. That was an advance of 125% or so in about seven months. Today's decline is shown by the second blue arrow.

Since the plunge in June, China stepped in to directly buy stocks, prohibit short selling, halted trading on half the companies, and prohibited large shareholders from selling any shares for six months.

Expectation of such moral-hazard maneuvers coupled with cheap money is exactly what fuels bubble activity in the first place.

Amusingly, margin buying is still at or near record levels.

Mike "Mish" Shedlock

Sunday, July 26, 2015 6:55 PM

Record Eurozone Borrowing: Public Debt Rises With Recovery; Greece a Small Sideshow Compared to Italy

Mish Moved to MishTalk.Com Click to Visit.

The eurozone is supposedly in a state of recovery. However, in spite of that recovery, public debt and debt-to-GDP levels are still rising. Austerity is difficult to find in any realistic sense.

Please consider Eurozone Borrowing Rises to Record as Recovery Remains Weak.

The European Central Bank’s programme of quantitative easing has pushed down interest rates to ultra low levels, encouraging governments to borrow more in the early part of this year, despite turmoil in Greece.

Across countries that use the euro, average debt to gross domestic product reached 92.9 per cent in the first quarter of 2015, up from 92 per cent in the previous quarter and 91.9 per cent in the same period last year, according to figures from Eurostat, the EU’s statistical agency.

Greece remains the EU’s most indebted nation, with debt equal to 169 per cent of annual GDP, but Italy, Belgium, Cyprus and Portugal also carry government debt that exceeds 100 per cent of economic output.

The rise in debt comes despite a pickup in the pace of recovery in the eurozone, with the region’s economy expanding 0.4 per cent in the first quarter of this year — while the US saw a contraction.
Targets vs. Reality

The "Growth and Stability" pact on which the Eurozone was founded limits debt to 60% of GDP and deficits at no more than 3%.

Average Debt-to-GDP is 92.9% and rising.

Eurostat Data shows Ireland, Greece, Spain, France, Cyprus, Portugal, Belgium, Slovenia, and Finland all exceeded 3% budget deficit requirement in 2014.

France and Spain have been given warnings and extensions on numerous occasions.

Greece Sideshow

By any realistic measure, Greece is just a sideshow for what is to come.

Pater Tenebrarum at the Acting Man blog pinged me with this comment: "The true reason for the bust of Greece and other countries - apart from their truly atrocious socialist policies and abominable corruption - is fractional reserve banking. The euro has of course enabled an even bigger credit boom and bust than would have been the case otherwise, but it is not the fixed exchange rate that is at fault, it is the underlying economic policies and the monetary system as such."

While the politicians are are scrambling to "save" Greece, please note Italy's Non-Performing Loans Hit a New Record High.
The real danger to the euro area probably doesn’t emanate from Greece, but from two of its heavyweights, namely France and Italy. A small note in the European press reminds us that all is not well in at least one of these countries, least of all with its banks (currently this is only a “page 16 story”, but it has great potential to eventually move to the front page).

The note reads as follows: "According to Italy’s banking association ABI, non-performing loans amounted to 193.7 billion euro in May, 25.1 billion more than in the same month in 2014. This is the highest level since 1996. Non-performing loans represent 10.1 percent of all loans granted by Italian banks, ABI said on Tuesday."
Gigantic Accidents

Pater displays many other interesting charts and tables, concluding with ...
Greece is really a side-show. The euro zone remains full of accidents waiting to happen and some of them have the potential to become truly gigantic accidents. Italy has a twin debt problem and it is probably only a question of time before its giant government debtberg becomes a concern again – this would put the country’s banks into an untenable situation, given they have amassed a great deal of government since early 2012.

As long as the ECB continues to pump €60 billion in newly created money into the system every month, such problems can probably be kept at bay. However, this comes at a price, as monetary pumping distorts prices and falsifies economic calculation, which in turn leads to malinvestment and capital consumption that is masquerading as an “economic recovery”. The structure on which all this debt rests becomes ever weaker.
Illusion of Recovery

Papering over problems with cheap money, deficit spending, and give an illusion of recovery. To keep the illusion going, the ECB made Corporate Bond Purchases QE Eligible.

According to the ECB's Website is Italian utilities Enel SpA, Snam SpA and Terna SpA - Rete Elettrica Nazionale were on the updated list of QE eligible purchases.

What's next is anyone's guess, but anything needed to keep the illusion alive will likely be given serious consideration.

Mike "Mish" Shedlock

2:27 PM

Santelli Exchange with Mish: Public Debt, Taxation, Legacy Issues

Mish Moved to MishTalk.Com Click to Visit.

I had the pleasure of being on CNBC last Friday with Rick Santelli. It was the third time we discussed the sorry state of Chicago and Illinois finances. The focus for this interview was legacy issues.

Public Debt, Taxation, Legacy Costs

Who wants to move to Illinois, with its high taxes, when the vast majority of those taxes are just to support legacy issues like pensions?

Chicago mayor Rahm Emanuel recently mentioned hiking Chicago's already obscene property tax structure. Moreover, Emanuel who claims to want to make Chicago a technology hub, just imposed a 9% data streaming tax, effectively nickel and diming businesses and residents alike when pension issues for Chicago alone are close to $30 billion.

At the state level, "progressives" in the Illinois legislature have their eyes on your pocketbook as well. They seek to hike Illinois income taxes.

It is impossible to say everything that needs to said in a 3 minute time window, but that is all the studio allows. So we focus on one key item, and the central theme this time was taxation solely to support legacy issues.

What Needs to Be Done

To spare the citizens of Illinois massive tax hikes, the only reasonable course of actions are as follows:

  1. Halt defined benefit pension plans for new employees
  2. Eliminate collective bargaining of public unions
  3. Scrap Davis Bacon and all prevailing wage laws so that cities do not have to overpay for services
  4. Enact right-to-work legislation
  5. Pass bankruptcy legislation allowing cities, municipalities, and other taxing bodies the right to declare bankruptcy

Had options 1-4 been done a decade ago, Illinois would not be as bad off as it is today. Now, even those measures cannot and will not fix the problems.

Additional Reading

Instead of tackling the underlying problems, Emanuel nickels and dimes businesses to death, further makes Chicago an uncompetitive place to do business, and threatens massive property tax hikes. Emanuel also expects $500 million from the state even though the state budget (which Governor Bruce Rauner correctly refuses to sign) is $4 billion in the hole.

Mike "Mish" Shedlock

Saturday, July 25, 2015 4:27 PM

Fed Staff Accidentally Posts Bearish Economic Forecast and Prediction Inflation Would Not Hit 2% by 2020; Upset Over Leaks? Why?

Mish Moved to MishTalk.Com Click to Visit.

The Fed created quite a stir by inadvertently posting documents on its website. The documents revealed some expected things, as well as a few startling (but not to Mish readers) projections.

Please consider Fed Inadvertently Publishes Staff Forecast for 2015 Rate Hike.

Staff economists at the Federal Reserve expect a quarter-point U.S. interest rate increase this year, according to forecasts the Fed mistakenly published on its website in a gaffe that drew criticism about its ability to keep secrets.

Federal prosecutors are currently probing an alleged leak at the Fed of market-sensitive information to a private financial newsletter in 2012.

"It regrettably appears once again that proper internal controls are not in place to safeguard confidential Federal Reserve information," said Representative Jeb Hensarling of Texas, a Republican who chairs the House Financial Services Committee and is pressing Fed Chair Janet Yellen for documents regarding the 2012 leak.

The Fed said in a statement that the forecasts were "inadvertently" included in a computer file posted to its website on June 29.

Fed officials said the disclosure was due to procedural errors at a staff level and that the mistake was discovered on Tuesday this week. The matter has been referred to the Fed's inspector general.

"It is baffling that these leaks continue to occur," said Congressman Randy Neugebauer, a Texas Republican who chairs the House subcommittee on financial institutions and consumer credit.
Unintentional Projections

  1. One hike in 2015: The staff expected policymakers would raise their benchmark interest rate, known as the Fed funds rate, enough for it to average 0.35 percent in the fourth quarter of 2015. That implies one quarter-point hike this year, as the Fed funds rate is currently hovering around 0.13 percent.
  2. Inflation: the staff did not expect inflation to ever reach the Fed's 2.0 percent target. By the fourth quarter of 2020, they saw the PCE (personal consumption expenditure) inflation index rising 1.97 percent from a year earlier.
  3. Growth: The Fed's staff also took a dimmer view of long-run economic growth, expecting gross domestic product to expand 1.73 percent in the year through the fourth quarter of 2020. The views of Fed policymakers for long-term growth range from 1.8 percent to 2.5 percent.

Upset Over Leaks - Why?

Congress is upset over leaks. Is that what people should really be upset over?

Why? We should be happy to have a glimpse of what this secret sect thinks, discusses, and wants to hide vs. the spoon-fed crap they want us to hear.

What To Be Upset Over

  • I propose people should be upset at a group of clowns who actually believe they can steer the economy like a truck, when it's obvious they cannot.
  • We should also be upset because the documents suggest that Fed official statements are nothing but souped-up nonsense to appease the financial markets and Fed egos about what they don't know but pretend to. 

History Lesson

History proves that the Fed produces bubbles and busts of increasing amplitude over time, to the detriment of the middle class.

Indeed, the Fed, along with public unions and corrupt politicians are the very sponsors of the income inequality that Janet Yellen, the unions, and politicians rail against.

It's amusing what the Fed staffers came up with. Fed officials say it's not what they believe. Does the denial ring true? Not to me. But it doesn't really matter. 

The fact of the matter is the Fed and central banks in general have no idea where interest rates should be, what the money supply should be, what unemployment should be, how many cars should be produced, how many houses should be built, or what the price of assets should be.

A group of clowns sitting in a room cannot possibly decide these things. And in attempting to do so, they send out all sorts of false economic signals about demand, creating bubbles in the wake. The housing boom-bust is a perfect example. Right up until the housing bust, it actually appeared as if there was a housing shortage. The same thing happened outside the US.

Increasing Interference

Central banks worldwide have long distorted markets with government bond price manipulation.

Now, central banks in Asia and Europe stretched the bounds by investing in corporate bonds and equities.

We can say for certain these preposterous manipulative efforts will blow sky high. What we cannot state is when. Nor can we say how much additional damage these central bank manipulators cause in the meantime.

Mike "Mish" Shedlock

Friday, July 24, 2015 3:52 PM

Hedge Funds Net-Short Gold First Time in History; Contrarian Views

Mish Moved to MishTalk.Com Click to Visit.

After being net long all the way from $1900 to $1100, Bloomberg reports Hedge Funds Are Holding First-Ever Gold Net-Short Position.

Hedge funds are holding the first ever bet on a decline in gold prices since the U.S. government started collecting the data in 2006.

The funds and other speculators shifted to a net-short position of 11,345 contracts in New York futures and options in the week ended July 21, according to figures from the U.S. Commodity Futures Trading Commission.

Gold futures on Friday fell to the lowest since 2010 on the Comex, and the short wagers show investors expect the rout to deepen.

Goldman Sachs Group Inc.’s Jeffrey Currie says the worst is yet to come for gold, and that prices could fall below $1,000 an ounce for the first time since 2009. “The risks are clearly skewed to the downside,” Currie, the bank’s New York-based head of commodities research, said in a phone interview Tuesday.

Currie isn’t alone in predicting more declines. ABN Amro Bank NV’s Georgette Boele and Robin Bhar of Societe Generale AG say bullion will approach $1,000 by December.
Contrarian Views

From a contrarian point of view, this sure seems like good news to me.

Also, my friend Pater Tenebrarum at the Acting Man blog pinged me with this thought: "Yesterday, the entire gold futures curve out to December traded in backwardation to cash. This is never supposed to happen in gold, and is a sign that physical demand is far stronger than futures prices would indicate."

Strong negative sentiment is a prerequisite for a strong rally. It would be far worse if everyone was bullish during this decline.

However, and as I have noted before, sentiment is not a timing issue. And to answer reader questions in advance, I am still holding. If I were to do anything here it would be to add. I still like the long-term prospects.

Mike "Mish" Shedlock

Last 10 Posts

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