Posts Tagged ‘Global Economic Trends’

Shilling Sees Evidence of Deflation in 5 of 7 Key Areas; Bernanke Begs Congress for Fiscal Stimulus, Admits Fed is Out of Bullets

Friday, September 30th, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

Shilling Sees Evidence of Deflation in Financial Assets, Tangible Assets, Median Income, Commodities, Currencies

Shilling says “Forces of deleveraging and deflation are greater than the Fed can handle.”

I certainly agree and have been saying the same thing (correctly I might add) for several years. All the Fed has ever managed to do is slow the deflationary outcome and that is in spite of $trillions in both monetary stimulus from the Fed and fiscal stimulus from Congress.

Once again, if you mistakenly think inflation and deflation are about consumer prices instead of vastly more important credit, you will come to a different conclusion.

For further discussion as to what deflation is all about, please see

Fed Out of Bullets

In spite of what the Fed says and wants everyone to believe the Fed is Out of Bullets

Let’s Twist Again (and Not Much More) as I expected

There were a lot of expectations regarding numerous options the Fed might take today. I did not expect the Fed would risk trying them.

See Six Things the Fed May Announce Tomorrow (But Likely Won’t); Would Any of Them Matter? Gaming the Reaction for details.

The Fed said “Let’s Twist Again” and not much more other than throwing a bone at mortgages. Neither will work and the Fed is out of bullets.

Bernanke Begs Congress for Fiscal Stimulus

In a question session following Bernanke’s speech Lessons from Emerging Market Economies on the Sources of Sustained Growth (in which Bernanke proves he does not really understand what is really happening in China), Bernanke begged Congress for help and admitted the Fed is out of bullets.

Yahoo Finance reports Bernanke: Long-term unemployment a national crisis

Federal Reserve Chairman Ben Bernanke said Wednesday that long-term unemployment is a “national crisis” and suggested that Congress should take further action to combat it. He also said lawmakers should provide more help to the battered housing industry.

Bernanke said the government needs to provide support to help the long-term unemployed retrain for jobs and find work. And he suggested that Congress should take more responsibility.

In the question-and-answer period, Bernanke cautioned U.S. lawmakers against cutting deficits too quickly to reduce budget deficits. He has said that could put the fragile economy at risk.

In practical terms, Bernanke was begging Congress for help, and in the Q&A session, Bernanke went even farther.

Please consider Everyone Missed It, But Ben Bernanke Peed On The Fed Again Last Night by Joe Weisenthal.

We’ve talked about this before, the fact that Ben Bernanke is growing increasingly vocal about his skepticism that monetary policy can do much to save this economy.

This is a HUGE change from someone who once said that the Great Depression was entirely the Fed’s fault, and that the Fed would never let that happen again!

In his daily note, Art Cashin caught a key bit from a Ben Bernanke Q&A last night after he gave a speech, further emphasizing that Bernanke has radically changed his views.

“Monetary policy can do a lot, but monetary policy is not a panacea,” Bernanke said.

That is a close an admission that the “Fed is out of Bullets” that you are ever going to see.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

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Posted in Commodities, Markets | Comments Off

Recession for Brazil and Canada?; Asian Exports Shrink; Global Economy Slows, BRICs First; Asian Stagflation; PIMCO Admits Error

Thursday, September 1st, 2011

by Mike “Mish” Shedlock, Global Economic Trends Analysis

In spite of all the denials, the US, Europe, and Australia are in recession. Brazil and Canada just entered the recession zone as well.

This economic turn of events has PIMCO CEO Bill gross admitting a mistake. Let’s take a look starting with Brazil.

62 of 62 Analysts Miss Call on Brazil Interest rates

Given that central banks most often telegraph their moves, the one place analysts are typically correct is on interest rate policy. That wasn’t the case this time as Brazil Cuts Key Interest Rate to 12% as Recession Risks Outweigh Inflation

Brazil’s central bank unexpectedly cut interest rates as the risk of recession in Europe and the U.S. shifted policy makers’ focus away from the fastest inflation in six years.

The bank’s board, led by President Alexandre Tombini, voted 5-2 to cut the benchmark rate a half point to 12.0 percent after raising rates at each of the previous five meetings. All 62 analysts surveyed by Bloomberg had forecast rates would be left on hold.

“Re-evaluating the international scenario, the Committee considers there was a substantial deterioration, reflected in generalized reduction of great magnitude in the growth projections for the major economic blocs,” policy makers said in their statement posted on the central bank’s website.

Stunning Reversal

That is a stunning reversal and I would not have gotten it correct either. Normally there is some sort or warning or at least a pause.

BRIC Growth Engine Dies

Bloomberg reports BRICs No Cure for Global Economy This Time

Stocks of international companies that depend most on emerging markets for sales show developing nations won’t be strong enough to buoy the global economy.

Goldman Sachs Group Inc.’s gauge of U.S. companies with the most developing-nation revenue fell 15 percent since April, the biggest drop since the bull market began in 2009. Avon Products Inc. (AVP), which gets at least 74 percent of operating profit from emerging markets, sank 15 percent in New York last month. Siemens AG (SIE), which doubled sales from the nations in five years, lost 21 percent in Frankfurt, the most since October 2008.

“The policy driven boom of the past couple of years will not be repeated any time soon,” said Stephen King, chief economist at HSBC Holdings Plc in London and author of “Losing Control: The Emerging Threats to Western Prosperity.” It’s “difficult to see how emerging nations can ride to the rescue once more,” he said.

Citigroup, the third-largest U.S. lender by assets, gets more than half its earnings from emerging markets, CEO Vikram Pandit said in March. While second-quarter revenue from the consumer bank’s Latin American and Asian units rose 13 percent to $4.46 billion, profit fell 14 percent. Shares of the New York-based bank retreated 19 percent last month, more than the 11 percent drop in the S&P 500 Financials Index.

Whirlpool, based in Benton Harbor, Michigan, relied on developing nations for at least 32 percent of its second-quarter revenue, according to data compiled by Bloomberg. The world’s largest appliance maker reported a 92 percent plunge in operating profit in Asia, more than the 62 percent decline in North America, the data show. Whirlpool’s shares fell 8.7 percent in August, extending this year’s retreat to 29 percent.

China Suffers Sharp Drop in Export Orders

Reuters reports Asia’s factories quieter as exports slip

The Purchasing Managers Indexes showed manufacturing contracted in South Korea and Taiwan as new export orders fell sharply. China’s official PMI increased slightly, the first rise since March, but it also reflected the effects of slowing demand in the United States and Europe.

China’s overall PMI rose to 50.9 in August from 50.7 in July, according to government data, a touch weaker than economists polled by Reuters had predicted. The new export orders index dropped to 48.3 from July’s 50.4.

Beijing pinned the blame for the sharp fall in export orders at least partly on the debt crises in advanced economies. The National Bureau of Statistics said the export sector was “facing challenges.”

Taiwan’s PMI dropped to 45.2 in August, the lowest reading since January 2009, which was in the middle of the global financial crisis that crushed world trade. A reading below 50 indicates contraction.

China is battling inflation at a three-year high, and Premier Wen Jiabao said on Thursday that Beijing would try to engineer a bigger drop in consumer prices in the second half of the year. Chinese officials have said repeatedly that fighting inflation is the top priority despite sluggish growth abroad.

Thursday’s data showed input prices rose in China last month, suggesting price pressures remain acute.

Brazil unexpectedly lowered interest rates on Wednesday because of concern about a global economic slowdown.

China isn’t the only Asian economy struggling to contain inflation. In South Korea, the consumer price index hit a three-year high, up 5.3 percent in August from a year earlier, marking the eighth consecutive month that inflation has exceeded the Bank of Korea’s target.

Thailand’s CPI was also higher than expected.

This puts Asia’s central bankers in a bind. Hot inflation points to more interest rate hikes, but the darkening global outlook argues for a policy pause.

Asia Stagflation

Stagflation is one of those muddled terms that people debate over. The definition I prefer is inflation and recession at the same time. Using that definition, Brazil and parts of Asia are in stagflation now.

Recall that Keynesian theory stated recession and inflation at the same time were impossible. The 1970′s proved that theory to be rubbish.

Keynesianism should have died in the 70′s, totally discredited, but somehow it survived in academia where its nonsensical ideas still haunt us to this day.

Canadian Economy Contracts

The Globe and Mail reports Canadian Economy contracts for first time since recession

Canada now has its own two-speed recovery, with the domestic economy holding firm even as exports falter amid a slumping global rebound.

The economy shrank at an annualized rate of 0.4 per cent in the second quarter, the first contraction since the Great Recession, and a sharp reversal from the 3.6-per-cent growth rate of the first quarter, Statistics Canada figures showed. It’s a sign that Canada, envied by many countries as a bastion of stability since the financial crisis, is not immune to global economic malaise.

In fact, among the Group of Seven club of rich economies, only Japan had a worse second quarter.

Sales abroad staged their steepest drop in two years, with exports plummeting more than 8 per cent on an annual basis. The high-flying Canadian dollar made it harder for businesses to sell their goods to weakening markets in the United States and Europe. Also, Japan’s natural disasters created havoc in the automobile industry, while wildfires in northern Alberta and maintenance shutdowns in the oil industry curtailed energy production.

But there’s a bright side to Canada’s performance. Company purchases of machinery and equipment in Canada soared at a 31-per-cent annualized pace in the second quarter, the biggest surge since 1996.

That shows businesses remain upbeat about their prospects, but also illustrates the gulf in confidence between Canadian executives and their U.S. competitors, analysts said.

No Bright Side to Canada’s Performance

There is no bright side to Canada’s performance. The confidence is misplaced. The global economy is in complete shambles. The US, Eurozone, UK, Australia, Brazil, and parts of Asia are in recession.

Moreover, austerity measures are about to smack Europe, the Australia housing bust is in full swing, and Brazil just joined the recession party. To top it off, China and India are fighting huge inflation problems.

If Canada is ramping up productive capacity now, it is a huge mistake, not a bright spot. Moreover, Canada’s enormous property bubble will collapse and perhaps a global slowdown is just the right catalyst this go around.

PIMCO Admits Mistake

Reuters reports PIMCO says betting against U.S. debt was a mistake

Bill Gross, the manager of the world’s largest bond fund, feels like “crying in his beer” for having bet so heavily against U.S. government-related debt earlier this year, the Financial Times reported on Monday.

Showing a more bearish view on the U.S. economy, Gross said PIMCO had initially dumped all of its U.S. debt holdings in March as he expected economic growth to be higher, resulting in inflation down the road.

That decision greatly undermined the performance of PIMCO’s Total Return Fund. As Treasuries prices rallied, the fund lost 0.97 percent in the past four weeks, while the benchmark Barclay’s U.S. Aggregated Bond Index rose 0.23 percent in the same period, according to Lipper data.

So far this year, the fund has returned 3.29 percent, less than the 4.55 percent recorded by the Barclay’s benchmark index.

“When you’re underperforming the index, you go home at night and cry in your beer,” the Financial Times, in its online edition, quoted Gross as saying. “It’s not fun, but who said this business should be fun. We’re too well paid to hang our heads and say boo hoo.”

Gross, who oversees $1.2 trillion at PIMCO, said it was “pretty obvious” he wishes he had more Treasuries in his portfolio right now.

“I get that it was my/our mistake in thinking that the U.S. economy can chug along at 2 per cent real growth rates. It doesn’t look like it can.”

Six Reasons to Fade Bill Gross

Flashback March 10, 2011: Pimco Dumps All Remaining Treasuries in Total Return Fund; Six Reasons to Fade Bill Gross

Six Reasons to Fade Pimco

I view this setup as favorable for US Government bonds. For starters there is no Pimco selling pressure, only potential buying pressure when Gross changes his mind.

Second, everyone seems to think the end of QE II will be the death of treasuries. While that could be the case, sentiment is so one-sided that I rather doubt it, especially is the global recovery stalls.

Third, the US dollar is towards the bottom of a broad range and any bounce could easily wipe out gains in higher yielding emerging-market debt.

Fourth, the global macro picture is weakening considerably with overheating in China, state government austerity measures in the US, and a renewed sovereign debt crisis in Europe on top of a supply shock in oil. Emerging markets are unlikely the place to be in such a setup.

Fifth, chasing yield means chasing risk, and that is on top of currency risk. Chasing risk is highly likely to fail again at some point, the only question is when.

Sixth, several interest rate hikes are priced in by the ECB this year. Will all those hikes come? I rather doubt it, and if the ECB doesn’t hike, look for the US dollar to rally, perhaps significantly.

The US dollar has not significantly rallied yet, but otherwise I am pleased with what I said back in March.

Pettis 12 Predictions

I have to say that Michael Pettis’ Long-Term Outlook for China, Europe, and the World; 12 Global Predictions is looking fabulous now, and possibly way ahead of schedule, even in China.

If so, the much beloved BRICs and commodities in general (with the possible exception of gold), will not be the place to be.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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Posted in Bonds, Brazil, Canadian Market, Commodities, Gold, India, Markets, Outlook | Comments Off

Global Currency Wars Enter New Stage … A Race to Debase?

Thursday, August 4th, 2011

Japan Intervenes, Yen Plunges; What’s Next?

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

No major country or central bank wants a strong currency, not Japan, not the ECB, not Brazil, not Bernanke, not the Fed. The central falsehood is that every country and every central bank seems to think they can export their way out of this malaise if only their currencies would sink.

History has proven time and time again that intervention does not work, but that never stops countries from trying.

Bloomberg reports Yen Slumps After Japan Intervenes to Curb Rise; Most Asian Stocks Advance

The yen dropped the most in about five months against the dollar after Japan intervened in the foreign-exchange market to weaken its currency. Most Asian stocks rose, paced by exporters, and metals rebounded.

The yen dropped 2.3 percent to 78.84 per dollar as of 11:52 a.m. in Tokyo, set for the largest intraday decline since March 18, when the Group of Seven nations jointly sold the currency.

Finance Minister Yoshihiko Noda said Japan took unilateral action to sell the yen, which earlier this week neared a postwar record.

Yen Intraday Chart

click on chart for sharper image

A Look at Prior Interventions

Flashback December 18, 2008: Japan Announces Currency and Stock Market Intervention

It is absolutely not clear that Japan needs to do anything here. In fact, it is absolutely clear that Japan should not do a thing. It has been proven time and time again that currency intervention does not work.

Flashback March 17, 2011: Coordinated G-7 Yen Intervention in Progress; Currency Interventions Never Work

Inquiring minds are once again watching central banks intervene in the forex markets.

Japanese Finance Minister Yoshihiko Noda said Japan agreed with central banks of the United States, Britain and Canada as well as the European Central Bank to jointly intervene in the currency market, the first joint action in over a decade.

“This entire move can be pinned down to speculative positioning rather than any repatriation flows,” said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.

“Since it is speculative, intervention in this case should work and clear out some of the long yen positions.”

Care to change your mind Mr. Hardman?

This is what I said …

Currency Interventions Never Work

Several people asked me to comment on this. I am not sure what I can add given my stated position that “currency interventions never work”.

However, to add some color, I will say this is an act of desperation as well as a sign of hubris by central bank clowns to think they are more powerful than the markets.

Short of complete self-destruction, no one can defeat the primary trend. They can slow it down, or temporarily buy some time but not reverse it.

That said, central banks certainly can enhance the current trend. Indeed, asinine policies by the Greenspan Fed certainly made the housing bubble much larger than would have happened otherwise.

Thus, there is always a slight chance that by accident, central banks step in at precisely the right time (as a trend is about to reverse on its own accord), giving the appearance of intervention success.

Could this be one of those rare instances central bankers step in at the right time? I suppose so.

Nonetheless, as I said just yesterday in Wild Moves in Yen; Best Move for Japan is to Not Intervene; Yen Hits Record High; Carry Trade Blows Up, the best thing for central banks is to leave this alone.

Yen Weekly Chart

The chart above from today looks ominous. A weekly chart puts things in better perspective.

click on chart for sharper image

The currency intervention in March gave the appearance of working for 4 weeks or so. However, it is not clear it did anything ever. There is often a correction following a new spike high. At best, the intervention increased the strength of the correction for a few weeks.

The same applies to Greece, not with currency intervention, but interest rates. The ECB stepped in on multiple occasions to support Greece by buying Greek government bonds. The first time it worked for a couple months, the second time intervention lasted a month, and the latest effort lasted about a week.

Simple Math

Mathematically it’s impossible for every currency to sink vs. each other. However they can all sink against something. That something is gold and there should be no doubt that gold is reacting to competitive currency devaluation schemes of central banks.

To update the chart click on Yahoo Finance Major World Indices

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Posted in Brazil, Canadian Market, Markets | Comments Off

Boehner Humiliated, Cancels Vote, Stock Futures Tank; Stocks and Treasuries Unusually Correlated

Friday, July 29th, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

Thursday morning Bloomberg reported House Majority Leader Cantor Predicts House Republicans Will Pass Debt Plan Today

House Majority Leader Eric Cantor predicted Republicans would pass a debt-limit increase plan today as some freshman lawmakers pledged support for the measure in the face of unified Democratic opposition in the Senate.

Vote Cancelled

Kiss that prediction of Cantor goodbye. Thursday evening Republicans put off vote on debt limit because Boehner clearly lacks the votes.

An intensive endgame at hand, Republican leaders abruptly postponed a vote Thursday night on legislation to avert a threatened government default and slice federal spending by nearly $1 trillion.

“The votes obviously were not there,” conceded Rep. David Dreier, R-Calif., after Speaker John Boehner and the leadership had spent hours trying to corral the support of rebellious conservatives.

The decision created fresh turmoil as divided government struggled to head off an unprecedented default that would leave the Treasury without the funds needed to pay all its bills. Administration officials say Tuesday is the deadline for Congress to act.

Senate Democrats stood by to scuttle the bill — if it ever got them — as a way of forcing Republicans to accept changes sought by Obama.

Based on public statements by lawmakers themselves, it appeared that five of some two dozen holdouts were from South Carolina. The state is also represented by Sen. Jim DeMint, who has solid ties to tea party groups and is a strong critic of compromising on the debt issue.

Others said conservatives wanted additional steps taken to try to ensure that a constitutional balanced-budget amendment would be sent to the states for ratification. As drafted, the legislation merely requires both houses of Congress to vote on the issue.

Even before the House voted, Reid served notice he would stage a vote to kill the legislation almost instantly.

“No Democrat will vote for a short-term Band-Aid that would put our economy at risk and put the nation back in this untenable situation a few short months from now,” he said.

Boehner Humiliated

Boehner was humiliated and justifiably so. He had nothing to gain and everything to lose by attempting to ram-rod a gaseous bill through the House that was guaranteed dead-on-arrival in the Senate.

Majority leader Cantor made matters worse by predicting passage.

Stock Futures Tank in Unusual Correlation with Treasuries

Please consider U.S. S&P 500 Futures Retreat as McCarthy Says No Vote on Debt Plan Tonight

Futures on the Standard & Poor’s 500 Index fell after the U.S. House of Representatives postponed a vote to increase the nation’s debt limit, boosting concern that the lawmakers are far from an agreement to avoid default.

S&P 500 futures expiring in September lost 0.8 percent to 1,286.9 at 12:28 p.m. in Tokyo. The decline suggests the U.S. equity benchmark may extend its 3.3 percent slump from the past four days when markets open in New York.

Stocks and Treasuries are moving in tandem twice as often as they normally do, a sign investors are growing convinced the U.S. will lose its AAA credit rating and that an impasse among lawmakers may spur losses in both markets. The S&P 500 has risen or fallen together with 10-year Treasury notes 80 percent of the time in the last 10 days, compared with the average since 2000 of 41 percent, according to data compiled by Bloomberg.

Not Raising the Debt Ceiling Would be Blessing

I am sticking to what I said in Not Raising the Debt Ceiling Would be Blessing; Debt Limit Analysis; Interactive Map, You Decide What Not To Pay

All things considered, especially since Boehner’s credibility is gone in his latest gaseous proposal, the best thing for Congress to do would be to NOT hike the debt ceiling and work out a credible plan over the next month.

Is Mish a “closet Liberal-humanist?”

In response to that post I received a humorous email from “BC” who wrote…

Mish, your choices reveal your empathy! Are you a closet Liberal-humanist?!

Your choices favor the elder working class, the working-class and poor ill, unemployed, poor and “food challenged”, and imperial legionaries and auxiliaries against the corporate-statists!!!

Are you one of those maladjusted working-class types who just doesn’t “get it”?!

Wink , wink ;-) ;-).

To see my choices as to what I would cut and to make your own choices about what to do if the debt ceiling is not raised, click on the above link for an interactive map.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Copyright © Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

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Jim Grant on Future Gold Standard: “This is not a threat, this is not a promise, it’s going to happen”

Thursday, July 21st, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis
Jim Grant speaks about going forward with gold standard, and away from a “PhD Standard” ruled by academics like Fed chairman Ben Bernanke.

Link if above video does not play: U.S. Debt Crisis Is Contrived, James Grant Says

Select Quotes

  • Debt crisis is contrived
  • Treasury market operating on muscle memory, up in price down in yield for 30 years.
  • People have come to view treasuries are intrinsically safe when in fact pieces of paper emitted by a government that is cash-flow negative and the printer of the world’s reserve currency.
  • On going forward with a gold standard, “This is not a threat, this is not a promise, it’s going to happen”
  • The gold standard is a better alternative for money management. The historical evidence is incontrovertible.

Jim Grant essentially describes the problems and solutions presented in Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold’s Honest Discipline Revisited. Please give that a read if you have not yet done so.

Mike “Mish” Shedlock
Copyright © http://globaleconomicanalysis.blogspot.com

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Moody’s Puts US AAA Credit Rating on Review, Places 7,000 Municipal Ratings on Review as a Result; Bernanke Slapped Already?

Thursday, July 14th, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

At long last the bond vigilantes have a spotlight on US debt. Please consider Japan Stock Futures Fall as Yen Rises as Moody’s Reviews U.S Credit Rating

Moody’s Investors Service put the U.S., rated Aaa since 1917, under review for a credit-rating downgrade for the first time since 1995 on concern the government’s $14.3 trillion debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low. The rating would likely be reduced to the Aa range and there is no assurance that Moody’s would return its top rating even if a default is quickly cured.

Federal Reserve Chairman Ben S. Bernanke told Congress the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling. The Fed last month completed a program to buy $600 billion of Treasury bonds that aimed to stimulate the economy by reducing borrowing costs, boosting stock prices and spurring consumer spending.

Moody’s Places 7,000 Municipal Ratings on Downgrade Review

Bloomberg reports Moody’s Places 7,000 Municipal Ratings Tied to U.S. on Downgrade Review

Moody’s Investors Service placed 7,000 municipal ratings on review for possible downgrade after it warned the U.S. may lose its Aaa investment grade.

Gold Soars as Bernanke Pledges More Stimulus

At 12:30 I reported Bernanke Pledges More Monetary Stimulus, Dollar Tanks, Gold Soars to Record High

The ping-pong match between the ECB and Fed to see who can make the worst policy decisions the fastest, switched back in favor of the Fed today with Bernanke’s pledge to pour on the monetary stimulus if needed.

Most think it’s a given that the stock market will soar when Bernanke starts QE3. I don’t. Just because it did last time does not mean it will every time.

One of these times Bernanke is going to react in a way that spooks the bond market in a major way, and the market will slap him silly just as happened to Jean-Claude Trichet and the ECB over Trichet’s “no default” insistence.

Bernanke Slapped Already?

The market was relatively giddy when I made those comments. I was on the road having lunch when I made those comments. I have internet access now at 8:46 PM, for the first time since.

This is the way things looked after the close.

S&P 500 Intraday Chart

As I type, I note that the S&P futures are down 4 points to 1308. I also note that gold held nearly all of its gains today as did the $HUI, unhedged miner index.

$HUI Intraday Chart

I caution that it is too early to say what the market is reacting to, if indeed it is reacting to anything at all. However, this could be the start of the bond and equity markets either having had more than they can take from the monetarist policies of Bernanke and/or the fiscal policies of Congress.

I repeat my caution that one of these times, the market is going to spit directly in the face of Bernanke when he pulls one of his monetarist stunts. I do not know if this is the time, but the sooner it happens the better off the US and the rest of the world will be.

University of California Economist Brad DeLong (who is calling for more monetary easing), should put this in his pipe and smoke it. DeLong is blind, but I assume he can still breathe.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

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Uneven Aging of America; Cultural Shift Coming; Competition for Resources Between Young and Old Will Be Intense

Wednesday, June 29th, 2011

by Michael Mish Shedlock, Global Economic Trends Analysis

William H. Frey, Senior Fellow, at the Brookings Institution discusses the Uneven Aging and “Younging” of America as noted in the 2010 census.

America is beginning to show its age as the baby boom generation advances toward full-fledged senior-hood. But the pace of this aging will vary widely across the national landscape due to noticeable geographic shifts in the younger population, with implications for health care, transportation, and housing, and possible impacts upon our ability to forge societal consensus.

An analysis of data from the 1990, 2000, and 2010 decennial censuses reveals that:

Due to baby boomers “aging in place,” the population age 45 and over grew 18 times as fast as the population under age 45 between 2000 and 2010.

Although all parts of the nation are aging, there is a growing divide between areas that are experiencing gains or losses in their younger populations.

Suburbs are aging more rapidly than cities with higher growth rates for their age-45-and-above populations and larger shares of seniors. People age 45 and older represent 40 percent of suburban residents, compared to 35 percent of city residents.

There are far more charts, graphs, and analysis, in the Complete PDF The Uneven Aging and ‘Younging’ of America: State and Metropolitan Trends in the 2010 Census. The excerpts above were from a summary.

Cultural Shift Coming

The Washington Post discusses demographic changes in If baby boomers stay in suburbia, analysts predict cultural shift

During the past decade, the ranks of people who are middle-aged and older grew 18 times as fast as the population younger than 45, according to Brookings Institution demographer William Frey, who analyzed the 2010 Census data on age for his report, “The Uneven Aging and ‘Younging’ of America.” For the first time, they represent a majority of the nation’s voting-age population.

The political ramifications could be huge as older voters compete for resources with younger generations.

“When people think of suburban voters, it’s going to be different than it was years ago,” Frey said. “They used to be people worried about schools and kids. Now they’re more concerned about their own well-being.”

The nation’s baby boomers — 76 million people born between 1946 and 1964 — were the first generation to grow up in suburbia, and the suburbs is where many chose to rear their own children. Now, as the oldest boomers turn 65, demographers and local planners predict that most of them will not move to retirement areas such as Florida and Arizona. They will stay put.

“If you ask younger boomers, who are 45-ish, a lot say they expect to move and retire elsewhere,” said John Kenney, chief of aging and disability services with the Montgomery County health department. “But as people get to 65 and 70, whether because of choice or default, they end up staying. We are planning on people being here.”

“Retirement used to be the golden years,” said Kenney. “No more.”

Local governments are starting to grapple with the implications.

“Clearly, the age wave is coming,” said Pat Herrity (R-Springfield), a county supervisor who heads the 50-plus committee.

Although Florida and Arizona remain retirement magnets, 17 of the 25 states with the highest concentrations of senior citizens are cold-weather states.

Older Americans now represent 53 percent of voting-age adults.

“The political clout of older Americans will be even more magnified if the traditional higher turnout of this group continues, and as the competition for resources between the young and the old becomes more intense,” Frey writes.

Retirement No Longer Golden Years

I have been discussing social trends and changing social attitudes for quite some time. Here is a snip from May 2008 on Demographics Of Jobless Claims

Structural Demographics Poor

Structural demographic effects imply that prospects in the full-time labor market will be poor for those over age 50-55 and workers under age 30. Teen and college-age employment could suffer a great deal from (1) a dramatic slowdown in discretionary spending and (2) part-time Boomer reentrants into the low-paying service sector; workers who will be competing with younger workers.

Ironically, older part-time workers remaining in or reentering the labor force will be cheaper to hire in many cases than younger workers. The reason is Boomers 65 and older will be covered by Medicare (as long as it lasts) and will not require as many benefits as will younger workers, especially those with families.

In effect, Boomers will be competing with their children and grandchildren for jobs that in many cases do not pay living wages.

One of the many consequences of boomer demographics is the longer the US opus of reform of Medicare, and Social Security, the more difficult it will become because of voting demographics.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

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Cash Crunch in China – Gov’t Cancels Bill Sale, Repo Rate Rises to 8.81%

Wednesday, June 22nd, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

Bloomberg reports China Money Rate Reaches Three-Year High as Bill Sale Suspended

China’s money-market rate climbed to the highest level in more than three years as a worsening cash crunch prompted the central bank to suspend a bill sale.

The seven-day repurchase rate, which measures interbank funding availability, has more than doubled since June 14, when the People’s Bank of China ordered lenders to set aside more money as reserves for a sixth time this year. The central bank suspended a sale of bills tomorrow, according to a statement on its website today.

“Banks have to hoard cash to meet the regulator’s capital or loan-to-deposit requirements by the end of every quarter,” said Liu Junyu, a bond analyst at China Merchants Bank Co., the nation’s sixth-largest lender. “So we won’t see the shortage easing.”

The seven-day repo rate gained 47 basis points, or 0.47 percentage point, to 8.81 percent as of the 4:30 p.m. close in Shanghai, according to a weighted average rate compiled by the National Interbank Funding Center. It touched 8.93 percent, the highest level since October 2007.

The yield on the 2.77 percent government bond due May 2012 gained two basis points to 3.63 percent, according to the Interbank Funding Center.

Shibor Rates – Overnight to 1 Year as of 2011-06-22

Here is a link to Shibor, Shanghai Interbank Offered Rates

Shibor (Shanghai Interbank Offered Rate) is calculated, announced and named on the technological platform of the National Interbank Funding Center in Shanghai. It is a simple, no-guarantee, wholesale interest rate calculated by arithmetically averaging all the interbank RMB lending rates offered by the price quotation group of banks with a high credit rating. Currently, the Shibor consists of eight maturities: overnight, 1-week, 2-week, 1-month, 3-month, 6-month, 9-month and 1-year.

The price quotation group of Shibor consists of 16 commercial banks. These quoting banks are primary dealers of open market operation or market makers in the FX market, with sound information disclosure and active RMB transactions in China’s money market.

Soaring short-term rates is a sign of lack of credit stress and lack of liquidity.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

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Merkel-Sarkozy Agreement Has Collapsed, writes Der Spiegel

Sunday, June 19th, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

Two interesting stories regarding Greece have hit the wires today. It´s difficult to know if they are related.

First, Der Spiegel claims the agreement negotiated between German chancellor Merkel and French president Sarkozy has collapsed; Second, Bloomberg reports Europe will pressure Greece by withholding half of the next tranche of money.

The pattern is for Eurozone officials and the IMF to deny Der Spiegel claims, only to find out later that Der Spiegel sources were impeccable.

Is it different this time?

Voluntary Rollover Plan Off the Table?

Please consider Germany ‘dismisses Greek debt compromise plan’

A German compromise plan to resolve a dispute with the European Central Bank over the Greek rescue that was reported by Der Spiegel magazine is no longer on the table, a government source said Sunday.

Der Spiegel had reported ahead of its Monday issue that the German finance ministry called for a beefed-up version of Europe’s temporary bailout mechanism lending to Greek banks to insure they have adequate collateral with the ECB.

It would boost the effective lending capacity of the Emergency Financial Stability Facility (EFSF) to 440 billion euros ($629 billion) and see member states double the amount of guarantees they provide the fund.

Germany’s share of guarantees would climb to 246 billion euros from 123 billion euros, according to the report.

But a German official, who spoke on condition of anonymity, said that while “several options” were being debated to involve private creditors in an Athens rescue, the reported proposal was “no longer on the agenda”.

The source added that the initial plan had differed from the reported proposal in “key aspects”.

German officials say they seek a plan with as few “unwanted side effects” as possible.

Europe May Withhold Half of Greek Payment

Bloomberg reports Europe May Withhold Half of Greek Payment

European governments weighed withholding half of Greece’s next 12 billion-euro ($17.2 billion) aid payment, seeking to keep the country solvent while maintaining pressure on the government to slash the debt that pitched the euro area into crisis.

Euro-area finance ministers may authorize only a 6 billion- euro loan to tide Greece through bond redemptions in July, while further aid hinges on Greek budget cuts, Belgian Finance Minister Didier Reynders said.

“We will in any case try to release the necessary funds for the short term,” Reynders told reporters before a meeting of euro-area finance ministers in Luxembourg tonight.

Tonight’s euro-area finance ministers’ meeting coincided with the start of a three-day Greek parliamentary debate in Athens over a confidence vote in a new cabinet at what Papandreou called a “critical crossroads.” Papandreou has 155 seats in the 300-seat parliament.

Germany, which as Europe’s largest economy is the biggest guarantor of aid packages to Greece, Ireland and Portugal, insists on an “ambitious” economic overhaul in Athens, Finance Minister Wolfgang Schaeuble said.

“We will surely work on laying the groundwork for paying out the tranche,” Schaeuble said. “It also depends on Greece making the necessary decisions with a fundamental consensus of the political parties so that we can be confident that Greece will live up to its commitments.”

While Germany bowed to European Central Bank and French demands not to compel investors to buy new Greek bonds as old ones expire, the lines are blurry between a “voluntary” and “compulsory” rollover that would lead rating companies to declare Greece in default.

On the table are incentives for bondholders to maintain their exposure to Greece, said Luxembourg Prime Minister Jean- Claude Juncker, chairman of the talks. He ruled out an agreement tonight on a new three-year package for Greece, pointing to July for a “final and overall answer.”

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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Investors Bet on Prospect of ‘Greek Accident’; 2-yr Greek Bond Yield at 28.15%

Thursday, June 16th, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis

Greek, Irish, and Portuguese yields are at or flirting with new all-time highs.

Moreover, things are not looking pretty for Spanish and Italian bonds. Both trade at the upper end of their respective ranges yet German bond yields have fallen since the second week in April.

The prospect of a messy default in Greece is rising, even though it appears the IMF will hold its nose and give Greece another trance of money.

Credit default swaps price in a 75% chance of default in 5 years. However, Investors Now Bet On a ‘Greek Accident’ Within a Year.

A new bet has been placed on the Greek debt crisis. It backs a growing view among investors that Athens may be about to suffer a messy default that could spark a run on the country’s banks and a deeper euro zone crisis.

One senior investor said: “There is a meaningful chance of a Greek accident this summer. That involves a hard default and big losses for investors, which could have very worrying repercussions for the euro zone.”

These fears have prompted bets on the so-called “accident scenario”, which involves buying one-year credit default swaps that would pay out big profits in the event of a hard default, typically a non-payment of loans, in the next 12 months.

Although these funds have placed only a small amount of money on these bets, the mere fact that they are using them highlights the growing risks for the euro zone.

Greek two-year bond yields, which have an inverse relationship with prices, lurched 160 basis points higher, one of the biggest daily moves of the year, to a euro-era record of 28.02 percent.

Greek five-year CDS leapt to a high of 1,700 basis points, or a cost of $1.7 million to insure $10 million of debt annually over five years. Greek CDS is also pricing a 75 percent chance of a default by the country over the next five years – it was about 45 percent at the start of the year.

Irish and Portuguese two-year yields and five-year CDS also jumped to record highs. More worryingly, Spanish and Italian bond markets were hit too, with Spanish bond yields closing in on highs last seen in 2000.

Inquiring minds may wish to consider some charts of 2-year sovereign debt yields.

2-Year Yield Germany – 1.47%

2-Year Yield France – 1.75%

2-Year Yield Italy – 3.05%

2-Year Yield Spain – 3.52%

2-Year Yield Ireland – 12.28%

2-Year Yield Portugal – 12.44%

2-Year Yield Greece – 28.15%

If there was no risk of default as ECB president Jean-Claude Trichet insists, there would be no investor preference for German bonds over Greek bonds, Portuguese bonds, or Irish bonds.

Instead there is a significant difference between German and French bonds and the bonds of every other country.

Spain is too big to bail and Italy is much bigger still. All hell is going to break loose when yields in Spain or Italy rapidly rise, and it’s only a matter of time before they do.

Spanish 10-Year bonds are flirting with disaster right now.

10-Year Yield Spain – 5.62%

German 10-year bonds are 2.95%.

A sustained move above this level spells serious trouble for Spain.

Greek Recap

Copyright © Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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