ECB Considers Interest Rate Caps; Can Such a Scheme Possibly Work?

Monday, August 20th, 2012

by Michael ‘Mish’ Shedlock, Global Economic Analysis

Economic Times reports European Central Bank mulls caps on borrowing costs

The European Central Bank is considering buying the bonds of crisis-wracked eurozone countries to ensure borrowing costs do not rise beyond a pre-determined level, German newsweekly Der Spiegel said Sunday.

The bank will define an upper limit for borrowing costs in countries such as Spain and Italy and intervene in the markets to ensure it is not breached, Spiegel said, without citing its sources.

At the end of trade on Friday, Spain was paying 6.39 per cent to borrow for 10 years and Italy 5.76 per cent. In contrast, Germany was paying 1.49 per cent, as investors trust Europe’s top economy to repay them.

The so-called spread, or difference, between benchmark German bonds and the debt-wracked countries would be decisive for the proposed rate cap, Spiegel said.

ECB President Mario Draghi announced earlier in August that his institution “may” buy bonds of struggling countries if they first apply for EU bailout funds and accept tough conditions in return.

He said the details would be worked out before the next meeting of the ECB, scheduled for September 6. Spiegel said that ECB governors would decide then whether to implement the proposed borrowing cost cap.

Here is a link to a translated article in Der Spiegel: ECB is planning to challenge interest rate speculation

The European Central Bank (ECB) is considering to establish in its future bond purchases interest rate levels for each country. Thus, they would state papers of the crisis countries always buy when interest rates exceed a certain impact on their yields German Bunds. Sun investors would get a signal that interest rates, the ECB considers appropriate.

Because the Fed has unlimited funds – they can even print the money eventually – it would not succeed even more speculators to drive the returns of the targeted rate also. Thus, the ECB wants to keep not only the financial costs of ailing countries in check, but also to ensure that the general level of interest rates in the euro zone is not too much drifting apart.

At its next meeting in early September, the Governing Council will decide whether the interest rate target is actually installed. One thing is certain, that the ECB will continue to practice their bond purchases more transparent. In the future, they will announce each country, in which capacity she has taken the bonds from the market. This information should be released immediately after the purchases. So far, the ECB had only ever made known Monday how much money she spent on purchases in the previous week as a whole.

Can This Work?

It depends on the definition of “work”. In general, if central planners (and it is important to understand that is what we are talking about here) set prices too high there will be unlimited supply.

Likewise, if central planners set prices too low, there will be shortages.

When it comes to money, recall that Switzerland capped the rate of the Swiss Franc vs. the euro. To defend that cap the Swiss National Bank has to offer unlimited money at the target exchange rate.

When it comes to interest rates, the ECB must be willing to buy an unlimited number of bonds (up to the total supply of all bonds).

Theory vs. Practice

So yes, the ECB can “in theory” defend a price target on bonds, but only at the risk of owning every bond.

What about an exit mechanism? How will the ECB get rid of all those bonds down the road? To who, at what price?

Will Germany go along with this ridiculous scheme? For how long?

As is always the case, interference in the free market by central planning fools always fails in the long run.

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

Tags: Article In Der Spiegel, Bailout, Borrowing Cost, Crisis Countries, Ecb President, Economic Times, German Bonds, Global Economic Analysis, Governors, India, Interest Rate Caps, interest rates, Investors, Mario Draghi, Michael Mish, Mish Shedlock, Rate Cap, Speculation, Speculators, Spiegel
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IMF Proposes Trillion Dollar Lending Expansion

Wednesday, January 18th, 2012

Here’s a dead on arrival proposal: IMF Proposes Trillion Dollar Lending Expansion

Most European stocks rose, erasing earlier losses, as the International Monetary Fund was said to propose a $1 trillion expansion of its lending resources. Asian shares and U.S. index futures advanced.

The IMF is proposing an expansion of its lending resources to safeguard the global economy against any worsening of Europe’s debt crisis, according to an official at a Group of 20 nation. The lender is pushing China, Brazil, Russia, India, Japan and oil-exporting nations to be the top contributors, according to the official, who spoke on condition of anonymity because the talks are private.

China Rejected Bailout Request Already

For starters, China already rejected bailout requests by Europe.

China’s vice foreign minister has ruled out using the country’s vast foreign exchange reserves to bail out Europe, as the debt-laden continent tries to stave off the risk of a massive default.

“The argument that China should rescue Europe does not stand,” vice foreign minister Fu Ying told an EU-China forum.

“We cannot use foreign reserves for… rescuing foreign countries. We need to ensure safety, liquidity and profit for the foreign reserves.”

Moreover, Brazil, Russia, India, and Japan have their own problems. The US is not going to contribute more and was not even asked.

Nonetheless S&P futures spiked about seven fast points overnight on the news.

That the IMF feels the need to make such a request should not be anything to cheer about. Indeed, there has been so much orchestrated “good news” that I can’t help wondering if the bottom is about to fall out of the market.

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

Tags: Anonymity, Asian Shares, Bailout, China Forum, Continent, Dead On Arrival, Debt Crisis, European Stocks, Foreign Countries, Foreign Exchange Reserves, Foreign Minister, Global Economy, Imf, Index Futures, International Monetary Fund, liquidity, Mish Shedlock, Starters, Top Contributors, Trillion
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China Manufacturing Contraction Continues – Japan Manufacturing Sentiment Sours – Asia Pacific Stocks Sink

Friday, December 16th, 2011

by Michael ‘Mish’ Shedlock, Mish GEA

All Asia-Pacific Equity indices are in the red tonight following more bad news from China and Japan.

Asia Pacific Equities

Japanese Manufacturing Sentiment Sinks

Bloomberg reports Japan Manufacturing Slides on Europe Crisis

Japan’s largest manufacturers became more pessimistic than economists expected and China reported the first decline in foreign direct investment since 2009 as Europe’s crisis drags down the global economy.

The Tankan large manufacturer index of sentiment fell to minus 4 in December, the Bank of Japan (8301) said today in Tokyo, worse than the median estimate for a reading of minus 2 by 24 economists surveyed by Bloomberg News. Investment in China slid 9.8 percent from a year earlier to $8.76 billion, the Ministry of Commerce said.

In Japan, manufacturers from Toyota Motor Corp. (7203) to TDK Corp. (6762) are also under threat from a yen that rose to a postwar record against the dollar on Oct. 31 as investors seek a haven from turmoil in Europe.

TDK, the world’s biggest maker of magnetic heads for disk drives, is among Japanese companies cutting jobs, while Panasonic Corp. (6752) has picked Malaysia as the site for a solar-cell plant, to hedge against currency risks. At Toyota, poised to lose its crown as the world’s largest automaker, currency gains have forced price increases, threatening to further erode global market share after production disruptions from the temblor and floods in Thailand.

“We raised prices of some our models on the high yen, and this is very difficult for us to admit, but we expect a drop in sales from this,” Satoshi Ozawa, chief financial officer at Toyota, said this month. “Still, the yen is too strong, and we had to sacrifice some unit sales.”

China Manufacturing Contraction Continues Second Month

MarketWatch reports China manufacturing cools further

Chinese manufacturing activity extended its decline in December, as production at factories and the volume of new orders generated eased from the previous month, according to the preliminary reading of an HSBC survey, released Thursday.

HSBC’s so-called “flash” Purchasing Managers’ Index for the month printed at 49, staying below the threshold of 50 that separates expansion and contraction.

The flash PMI number is based on the responses of 85% to 90% of the total respondents in a survey.

In response to the weakening fundamentals of China, the Shanghai Stock index is down again this evening, having fallen back to March 2009 lows.

$SSEC Weekly Chart

click on chart for sharper image

That snapshot is as of yesterday’s close. The Shanghai Index is down another 2% this evening to 2,182, approximately where the dashed blue line is in the above chart.

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

Copyright © Mish GEA

Tags: Bank Of Japan, Bloomberg Reports, China Manufacturing, Currency Risks, Floods In Thailand, Global Market Share, Japan Asia, Japan Manufacturers, Japanese Companies, Magnetic Heads, Manufacturer Index, Median Estimate, Michael Mish, Ministry Of Commerce, Mish Shedlock, Pacific Equity, Postwar Record, Tdk Corp, Toyota Motor, Toyota Motor Corp
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Only True Role of Central Banks is to Print Money – Why Else Have It?

Friday, November 25th, 2011

Steen Jakobsen, chief economist at Saxo Bank in Denmark has a few thoughts via email I would like to share.

Steen writes …

The German “near miss” failed auction yesterday has set off several new developments and pressures – This is a major thing clearly, and some media even speculate it could change the mighty Bundesbanks’ perception of reality.

Close to home, Germany now trades ABOVE Denmark on 10 year government debt by 10 basis points! However, there is reason to believe this more a function of the illiquid markets than an endorsement of the Danish economy, where the fiscal imbalances continues to expand negatively (Unlike Sweden!)

Spread difference 10 year Denmark minus 10 year Germany

It has also increased the pressure from France to get the ECB more involved – I fail to see link between the German auction and this, but never the less the French political machine is always firmly behind the concept of “Dirigism” and in today’s meeting between Merkel, Sarkozy and Monti the topic surely will be touched again.

It’s important in historic context to remember that the only true role a central has is to … print money – why else have it?

I remain committed to my Chapter 11 concept as one of the few ways to break this deadlock.

Safe travels,
Steen

For a discussion of the “Chapter 11″ concept, please see Perfect Storm the Most Likely Scenario; Is Europe Set to Declare a Chapter 11 in Early 2012?

Steen is correct regarding the only true role of central banks. It is precisely why they they should be eliminated. Far from being “inflation fighters” they are the very source of inflation.

More correctly: Fractional Reserve Lending and Central Bank Printing do not “cause” inflation, they “are” inflation.

Deflation is the destruction of credit and debt from the preceding boom.

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

Tags: Basis Points, Boom Mike, Central Banks, Chapter 11, Chief Economist, Danish Economy, Deadlock, ECB, Endorsement, Fiscal Imbalances, German Auction, Government Debt, Illiquid Markets, Inflation Deflation, Merkel, Mish Shedlock, New Developments, Perfect Storm, Sarkozy, True Role
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Jim Grant Discusses Central Banks’ Money Printing, and the Farmland Bubble

Tuesday, November 15th, 2011

Here is an interesting video on Bloomberg with Jim Grant regarding the European Central Bank’s response to the sovereign-debt crisis, ECB policy, Fed policy, central bank printing, and farmland.

Link if video does not play: ECB’s Response to Debt Crisis, Money Printing

Grant notes that farmland in Iowa is going for $17,000 an acre far above the rental value of the land. Grant does not use the term bubble, but does suggest this is the wrong time to buy.

Bubble is the correct term.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Tags: Acre, Blogspot, Bloomberg, Central Banks, Debt Crisis, European Central Bank, Farmland, Fed Policy, Grant Money, Jim Grant, Land Grant, Mish Shedlock, Money Grant, Money Printing, Sovereign Debt, Wrong Time
Posted in ETFs, Markets | Comments Off

Good News for Bears: Torture by Rumor Ends

Thursday, October 27th, 2011

by Michael ‘Mish’ Shedlock, Global Economic Trend Analysis

A deal has been reached. While many decisions are yet to be made the agreed upon deal looks something like this:

• A “voluntary” haircut of 50% on Greek debt
• Bank recapitalization set at 106 billion euros
• EFSF will use leverage to get to at least 1 trillion Euros
• Leverage will be via a combination SIV plus Insurance plan
• Banks get an additional 21 billion Euros in “official aid”
• The ECB is going to continue to buy Italian bonds come hell or high water

A group of 70 European banks will need to raise 106 billion euros in the next eight months.

Recapitalization Breakdown

• Greek banks need 30 billion euros
• Spanish banks need 26.2 billion euros
• French banks need 8.8 billion euros
• Italian banks need 14.8 billion euros
• Remaining countries 26.6

Banks that fail to raise enough capital on the markets will first tap national governments, falling back on the EFSF rescue fund only as a last resort.

The above details pieced together from EU Sets 50% Greek Writedown, $1.4T in Fund and Impasse on Greek Debt Relief Threatens EU Crisis Summit Deal

The fuzziest point in the deal is in regards to what banks get the additional 21 billion Euros in “official aid”, with what strings, and where the money comes from.

Good News for Bears

Although many details are yet to be resolved, the bulls got everything they wanted except endless printing by the ECB. However, the sad fundamental situation remains unchanged

1. No structural problems have been solved
2. Banks most assuredly need more than 106 billion in recapitalization efforts. The idea that French banks only need to raise 8.8 billion is preposterous.
3. No investors in their right mind will fund Greek and Spanish banks to the tune of 56.2 billion euros
4. The haircuts were not voluntary

Instead of the rumor mill of potential actions working to lift the market 24 hours a day for three straight weeks, it will be up to the EU to make the plan work. However, the plan won’t work because of point number one above: not a single structural problem has been solved.

Although this rally may run for a while longer on fumes of past rumors and blind hope, it will eventually wear itself out.

Bear market rallies tend to end on good news. What more good news is coming?

The bulls got nearly everything they wanted, putting an end to torture by rumor. What could possibly be better news for the bears?

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Copyright © Global Economic Trend Analysis

Tags: Bonds, Crisis Summit, ECB, Economic Trend, European Banks, French Banks, Greek Banks, Haircuts, High Water, Impasse, Insurance Plan, Italian Banks, Michael Mish, Mish Shedlock, National Governments, Recapitalization, Rumor Mill, Siv, Spanish Banks, Straight Weeks, Trend Analysis
Posted in Bonds, Brazil, Markets | Comments Off

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

• Yes Virginia, U.S. Back in Deflation; Inflation Scare Ends; Hyperinflationists Wrong Twice Over
• Bizarro World Inflation; About that 2011 Hyperinflation Call …

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

Tags: Bullets, Commodities, Deflation, Emerging Market Economies, Financial Assets, Fiscal Stimulus, Global Economic Trends, Hyperinflation, inflation, Key Areas, Long Term Unemployment, Median Income, Michael Mish, Mish Shedlock, National Cris, Question Session, Shilling, Spite, Tangible Assets, Trillions
Posted in Commodities, Markets | Comments Off

European Bond Spreads Show ECB Losing the Containment War on Italian Bond Yields

Tuesday, September 13th, 2011

Curve Watchers Anonymous is taking a look at 10-year bond yields and bond spreads in the Eurozone.

Interest on 10-Year bonds in Italy are down from the spike high after the ECB stepped in with purchases as shown in the following chart. However, the chart also shows rates have inched back up and have now taken back about half of the ECBs effort.

Italy 10-Year Government Bonds

Spreads vs. Germany are another way of looking at things.

Here is a table I put together with data from Bloomberg as of Sunday evening.

While some countries have gotten much tighter (notably Ireland), others have gotten worse, notably France.

I asked Chris Puplava at Financial Sense if he could chart that idea over time. Greece is so far removed for other countries and it so distorted the charts we removed it.

10-Year Government Bond Spreads vs. Germany

On a spread-basis, the only country whose yields have collapsed is Ireland.

Italy, Belgium, France and Spain are at or close to spread highs. Also note how France is creeping up.

1-Year Government Bond Spreads vs. Germany

Portugal does not have a 1-year symbol so the math is not on a consistent basis with the others.

On 1-year spreads, Italy, Spain, and Belgium are at new highs, suggesting the ECB is losing the containment war on Italian bond yields.

Mike “Mish” Shedlock

http://globaleconomicanalysis.blogspot.com

Tags: 10 Year Treasury, Belgium, Blogspot, Bloomberg, Bond Yields, Bonds, Consistent Basis, Curve, ECB, Financial Sense, Government Bond, Government Bonds, Greece, Ireland Italy, Math, Mish Shedlock, New Highs, Portugal, Puplava, Spain, Sunday Evening
Posted in Bonds, Brazil, 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

Tags: Benchmark Rate, Bill Gross, Bloomberg Reports, Bonds, Brazil, Canadian, Canadian Market, Central Banks, Commodities, Global Economic Trends, Global Economy, Gold, Goldman Sachs, Goldman Sachs Group, Goldman Sachs Group Inc, Growth Projections, Half Point, India, Interest Rate Policy, International Scenario, Mish Shedlock, Outlook, S Board, S Gauge, Sachs Group Inc, stagflation, Stunning Reversal, Substantial Deterioration
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

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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.

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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