Home Refinance Calculator: October 2011

Monday, October 31, 2011

Mish's Global Economic Trend Analysis

Australia Cuts Rate .25%, Core Inflation on Weakest Pace in 14 years; China PMI Lowest in 3 Years; Wen Pledges to "Firmly" Maintain Property Curbs
Merkel Sells Soul for Applause from the Devil
Papandreou Calls for Voter Referendum on EU Debt Deal
In 2009, Greek Debt-to-GDP was 127%; Target for 2020 is now 120%; Is this Progress?
Dear Christina: Reflections on Economic Fools and the Policies they Espouse
Europe to Recapitalize Banks Without Raising any Capital; Berlusconi Defiant as Focus Shifts to Italy; Sarkozy Under Fire for Seeking China’s Help

Australia Cuts Rate .25%, Core Inflation on Weakest Pace in 14 years; China PMI Lowest in 3 Years; Wen Pledges to "Firmly" Maintain Property Curbs

Posted: 31 Oct 2011 11:23 PM PDT

The Reserve Bank of Australia cut rates .25% as housing weakens and core inflation was a tame .3%, the lowest in 14 years.

I have been saying for quite some time the next move would be a cut, and here it is. I expect more, as do interest rates futures, but some others do not see it that way.

Please consider RBA rate cut sparks bank response

The Reserve Bank of Australia has cut interest rates for the first time in more than two and a half years, bringing relief to households and corporate borrowers.

The Australian central bank today lowered its key cash rate by 25 basis points to 4.5 per cent. The move reversed the increased imposed on Melbourne Cup Day last year, the most recent time the RBA has shifted rates.

More to come?

Some economists say the moderate language used in the RBA's accompanying commentary suggest today's move may be a one-off by the central bank for now.

"There are no hints in the statement that the RBA is considering further moves at this time," said HSBC chief economist Paul Bloxham. "In large part it seems to be characterised as a shift back to 'neutral' given that the inflation concerns that the RBA had previously seemed to have dissipated."

Financial turmoil

RBA Governor Glenn Stevens noted that recent sharp moves on financial markets were likely to drag on Australia's economy. "The effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households," he said in a statement accompanying today's decision.

"Over the past year, the Board has maintained a mildly restrictive stance of monetary policy, in view of its concerns about inflation. With overall growth moderate, inflation now likely to be close to target and confidence subdued outside the resources sector, the Board concluded that a more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2-3 per cent inflation over time," he said.

Last week, core inflation data - the measure watched by the RBA - slowed to 0.3 per cent in the September quarter, the weakest pace in 14 years.

Financial markets were earlier today pricing in four cuts of today's size over the next 12 months, with three more now to come. That estimate remains little changed after the verdict.

Expect Australian Dollar to Weaken

The Australian dollar weakened from 1.10 to .94 in the "risk off" trade but soared back to 1.06 in October in the "risk on" trade. If Australian housing and retail sales weaken, and I expect both will, look for more cuts by the RBA, sooner, rather than later. In turn, rate cuts will put downward pressure on the Australian dollar.

China PMI Drops to Lowest in Almost 3 Years

Bloomberg reports China PMI Drops to Lowest in Almost 3 Years

A Chinese manufacturing index dropped to the lowest level since February 2009, bolstering the case for fiscal or monetary loosening to support the expansion of the world's second-biggest economy.

The Purchasing Managers' Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said in a statement today. That was lower than any of 16 economist estimates in a Bloomberg News survey that had a median forecast of 51.8. A reading above 50 indicates expansion.

An index of export orders contracted for the second time in three months as Europe's failure to resolve its debt crisis dims the outlook for shipments to China's biggest market.

Weakening PMI Suggests Weakening Commodity Prices

Exports are down because of the slowdown in both Europe and the US. Europe is clearly in recession, the US headed towards recession. Moreover, the Chinese slowdown suggests more weakness to come in commodity prices which should be good for the US dollar.

Chinese PM Pledges to 'Firmly' Maintain Curbs

Bloomberg reports China's Property Stocks Decline as Wen Pledges to 'Firmly' Maintain Curbs

China property stocks fell for the first time in six days in Shanghai trading after Premier Wen Jiabao doused speculation the government will ease curbs on the industry.

The government will "firmly" maintain restrictions on real estate and local authorities should continue to strictly implement its policies, Wen said according to a statement following a State Council meeting.

Treadmill to Hell

China is on "a bigger and faster treadmill" than ever as property sales slow, Jim Chanos, president and founder of $6 billion hedge fund Kynikos Associates Ltd., said in a Bloomberg Television interview from Singapore on Oct. 28.

Chanos has forecast since at least February 2010 that the property market will slump, saying that China is Dubai times a thousand and on a "treadmill to hell" because of its reliance on real estate. Property transactions in the past two months in so-called tier one, two and three cities his firm tracks are down 40 percent to 60 percent year on year, said Chanos, who predicts "the property slowdown or worse has started."

The hedge-fund manager's views are at odds with those of Stephen Roach, non-executive chairman of Morgan Stanley Asia, who said in New York last week that the government has had some success in deflating a housing bubble and that concerns of a hard landing are "overblown."

Expect Property Bubble Implosion

I will side with Chanos over Roach. China's property bubble is the largest in the world and it will crash hard. Once again, the bursting of the Chinese property bubble as well as the credit bubble suggests more weakness to come in commodity prices.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Merkel Sells Soul for Applause from the Devil

Posted: 31 Oct 2011 06:58 PM PDT

German Chancellor Angela Merkel Merkel went out of her way to prove she is just like the vast majority of vote-buying hypocrite politicians willing to say or do anything to advance personal agendas and get reelected.

Those looking for proof can find it in Der Spiegel article Another U-Turn For Merkel.

Chancellor Angela Merkel has performed another big U-turn by calling for a minimum wage, which she had opposed until now. She is sharpening her party's social profile in response to the euro crisis -- and, possibly, to secure her power by preparing another 'grand coalition' with the Social Democrats.

Angela Merkel has a reputation for playing the long game. But the German chancellor is no stranger to U-turns either, if it serves her political goals. There are some striking examples of Merkel vacating positions that had long been core to the agenda of her conservative Christian Democratic Union (CDU) party.

Mandatory military service, that bedrock of CDU policy for decades? Merkel ditched it last year. Nuclear power? She arranged for an early exit just months after extending the lifetimes of reactors. The three-tiered system of secondary schools? A thing of the past.

And now it's the turn of social policy. At its party congress in November, the CDU plans to pass a motion that has long been the exclusive domain of the left-wing opposition parties: a minimum wage.

The new approach fits in with Merkel's drive to sharpen the CDU's social profile in response to the euro crisis , which has triggered a wave of public anger at the financial industry and concern that ordinary taxpayers are being made to foot the bill for profligate high-debt euro member states.

Together with Labor Minister Ursula von der Leyen, and much to the annoyance of the center-left Social Democrats, Merkel has been wooing voters with decidedly leftist policies of late. Von der Leyen plans to give pensioners a financial boost to combat old-age poverty, she has taken on discount supermarkets that exploit temporary staff and has criticized German companies for resisting her plans for a minimum quota of women on company boards.

"The question is no longer whether we're going to have a minimum wage but how one negotiates the right level," von der Leyen said in a recent interview with the Süddeutsche Zeitung newspaper published on Monday. It sounded like she had been taking lessons from SPD leader Sigmar Gabriel.

Applause From Trade Unions

The trade unions are predictably elated by Merkel's leftward shift. A general minimum wage had been expressly ruled out in the coalition agreement reached between her conservatives and their junior partner, the pro-business Free Democratic Party (FDP), after the 2009 election.

Reflections on Integrity and Core Principles

So much for agreements, integrity, and core principles. Things change of course, but core principles shouldn't, at least not on a routine basis.

With this latest U-turn, Merkel just made it perfectly clear she has no core principles, that everything is for sale, including her soul and her integrity.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Papandreou Calls for Voter Referendum on EU Debt Deal

Posted: 31 Oct 2011 01:35 PM PDT

In an extremely risky move, Papandreou calls for referendum on EU debt deal

Prime Minister George Papandreou has stated his intention to hold a referendum on last week's agreement in Brussels for Greece's bondholders to accept a 50 percent haircut and the country to receive some 130 billion euros in loans from its eurozone partners.

Speaking to PASOK MPs, Papandreou also said that he would ask for a vote of confidence in Parliament. This is likely to take place next week. The referendum could happen later this year.

Papandreou said he had faith in Greeks making the right decision. "Let us allow the people to have the last word, let them decide on the country's fate," he said. He said handing the vote over to Greeks was «an act of patriotism."

The premier insisted that calling snap polls - ahead of elections scheduled for 2013 - would be "simply dodging the issue."

The vote of confidence - likely to be held next week - would come just over four months after a similar vote that Papandreou sought, and won, to bolster his government ahead of a Parliamentary vote on austerity measures.

The premier's bombshell came a day after an opinion poll, carried out by To Vima, found that 60 percent of Greeks regard last Thursday's EU debt deal as «negative» or «probably negative."

Things will become unglued in a hurry if Greek voters decide to tell the EU where to go. Moreover, but less importantly, Papandreou just may not survive the next vote of confidence.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

In 2009, Greek Debt-to-GDP was 127%; Target for 2020 is now 120%; Is this Progress?

Posted: 31 Oct 2011 12:50 PM PDT

Depending on your point of view, your holding of Greek debt, and whether or not you live in Greece, here is a humorous (or not so humorous) Google Translation on the Past and Future of Greece.

Based on official data from the Eurostat in 2009, when was the last census that pushed the deficit above 15%, Greece's debt was 127% of GDP. Today, the Government is making earnest efforts to pull Greece out of the crisis according to statements of Chancellor Angela Merkel, mortgaging much to get the debt-to-GDP ratio to 120% by 2020.

And the obvious question that arises for all is, what is so much effort for a decade? To get to where we were in 2009?

The numbers and figures, unfortunately, speak for themselves.

Eurostat census estimates real unemployment will reach 20% by the summer of 2012, Greece will close 183,000 companies, increase cuts in wages and pensions, and over-tax all its citizens just to get 2020 debt to 2009 levels.

All Pain and No Gain

The author, George Kouros perfectly describes the ramifications of stretching out debt for a decade in pretense that a 50% "voluntary" haircut on bonds will solve anything.

Greece surely does need structural reforms, but the average Greek on the street sees all pain and no gain.

A hard default and debt forgiveness of 80% by the EU would show Greek citizens they were at least getting something in return for forced (but badly needed) structural reforms and austerity measures.

Instead, the average Greek understands everything is being done to protect German and French banks, and anything that helps Greece is nothing but a fortuitous accident.

Moreover, by fooling itself, the EU hurts itself. The longer the EU pretends haircuts are voluntary, that Greece can pay back these loans, and that Greece can be competitive with Germany, and there will be no hard default, the worse the crisis will become.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Dear Christina: Reflections on Economic Fools and the Policies they Espouse

Posted: 31 Oct 2011 09:10 AM PDT

The New York Times headline reads Dear Ben: It's Time for Your Volcker Moment.

I expected the article to be about inflation. It starts out as such, praising Volcker for his commitment to lower inflation. A third of the way through came an innocuous looking sentence "Mr. Bernanke needs to steal a page from the Volcker playbook."

From there it went straight downhill.

Here are a few snips ...

To forcefully tackle the unemployment problem, he needs to set a new policy framework — in this case, to begin targeting the path of nominal gross domestic product.

More specifically, normal output growth for our economy is about 2 1/2 percent a year, and the Fed believes that 2 percent inflation is appropriate. So a reasonable target for nominal G.D.P. growth is around 4 1/2 percent.

It would work like this: The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.

Who is this Monetarist Fool?

At that point I stopped reading and asked "who is this monetarist fool?" I went to the bottom of the article to find out it was none other than Christina D. Romer, an economics professor at the University of California, and former chairwoman of President Obama's Council of Economic Advisers.

Dear Christina ...

In case you have not noticed, interest rates are zero percent. The Fed cannot lower them any further. The Fed can of course print, but in case you did not notice again, the Fed already tried that and all it did was increase the price of food, gasoline, gold, and the stock market.

Moreover, and in case you did not notice, here is a chart of excess reserves sitting at the Fed.

You see Christina, there is 1.6 trillion dollars parked at the Fed already. Printing money in and of itself does nothing if it just sits there.

Moreover, and in case you did not notice, Japan over a 20 year period tried both quantitative easing and Keynesian stimulus (fiscal spending), and that did not stop Japan's deflation. All Japan did was dig itself a 200% debt-to-GDP hole that will at some point destroy the country.

Bernanke, a Complete Dunce, "Puzzled by Weak Consumer Spending"

On September 8, 2011 Bernanke said he was "surprised by how cautious consumers remain more than two years since the recession officially ended."

I responded with Bernanke, a Complete Dunce, "Puzzled by Weak Consumer Spending"

It does not take a genius to understand why consumer spending is weak.

Unemployment rate is 9%
Real wages are falling
Income advances go to the wealthy
Middle class is shrinking
Jobs hard to find
Approval ratings of Congress and Obama at record lows
Consumers have high debt ratios
Home prices are still falling
Homeowners are trapped in their homes, unable to refinance
Boomers need to save for retirement

However, those simple facts are far too complicated for a PhD like Fed chairman Ben Bernanke to figure out.

Is it any wonder his policies are so counterproductive when he cannot figure out simple things the average person can see clearly?

Change of Heart in Bernanke?

Christina, in case you did not notice, here are a few sentences by Chairman Ben S. Bernanke, Before the Joint Economic Committee, U.S. Congress, Washington, D.C., on October 4, 2011, regarding Economic Outlook and Recent Monetary Policy Actions
...

Fiscal policymakers face a complex situation. I would submit that, in setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal sustainability. The federal budget is clearly not on a sustainable path at present. ...

As a nation, we need to think carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of our economy in the longer term. Fourth, there is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy. In sum, the nation faces difficult and fundamental fiscal choices, which cannot be safely or responsibly postponed.

Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector. Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies--pertaining to labor markets, housing, trade, taxation, and regulation, for example--also have important roles to play.

Dear Christina, please read those three paragraphs closely.

What is it you fail to understand about all three of them, but especially the last one?

Bernanke, like yourself is a dyed-in-the-wool monetarist, who hopefully (and at long last) may realize that monetary policy is next to useless at this juncture.

Hello Ben Bernanke, Meet "Stephanie"

Dear Christina, I also invite you to read Hello Ben Bernanke, Meet "Stephanie".

The article is about an email from "Stephanie" who wrote about the difficulty of living on fixed income with rising prices and getting 0% on CDs.

I responded that "Bernanke is a Coward Hiding Behind Mathematical Formulas", that he did not know what he was doing in 2006 and he does not know now. Here is one key snip ...

Fed's Policy Is Theft

Stephanie, it's a little known fact that inflation benefits those with first access to money, such as the banks, the wealthy (via rising asset prices), and the government (think rising sales taxes and property taxes when prices go up).

Everyone else gets screwed. You are right in the middle of the pack of those most hurt by the serial bubble blowing policies of the Fed.

Viewed this way, Bernanke's policies are nothing but theft, robbing the poor, for the benefit of banks and the wealthy.

This is why I support Congressman Ron Paul's effort to end the Fed.

Currency Cranks Agree With Themselves

Christina, I read your reference to The Case for a Nominal GDP Level Target by fellow monetarists Jan Hatzius Sven and Jari Stehn, as well as your reference to Nominal Income Targeting by Robert E. Hall and N. Gregory Mankiw, also monetarists.

The opening paragraph of the latter is quite humorous:

There is increasing agreement among economists on two broad principles of monetary policy. The first principle is that monetary policy should aim to stabilize some nominal quantity. Monetarists have sought to make monetary policy stabilize the growth of the nominal money stock. In some periods of history, policy has been committed to pegging the nominal price of gold. Some economists have proposed stabilizing a bundle of commodity prices or even the consumer price index (CPI).

The second principle, which was taken for granted up until the past fifty years, is the desirability of a credible commitment to a fixed rule for monetary policy. It is now apparent that there are substantial gains if the central bank commits in advance to a set policy, rather than leaving itself free to exercise unconstrained discretion.

Ants and Termites in Increasing Agreement

As with currency cranks agreeing with themselves, there is increasing agreement by ants and termites that anteaters should go vegetarian.

In short, put a bunch of monetarist currency cranks in a room, and the one thing they are sure to propose in an economic decline is currency expansion.

Is it Different this Time?

Dear Christina, in light of the facts I presented above in regards to the experiences of Japan, the excess reserves at the Fed, the increase in inflation with no increase in jobs, and the number of people on fixed income destroyed by the rise in price level while getting 0% on their CDs, you have a hell of a lot more explaining why "It's different this Time".

The ultimate irony of your preposterous proposal, is there is a chance (albeit a small one), that Bernanke's realization that there are limits to monetary policy constitutes his Volcker moment.

For the sake of the country, we should all hope so because history shows that additional monetary and fiscal stimulus will not help, no matter how many Monetarist currency cranks and Keynesian clowns think otherwise.

By the way, anyone wondering why the recovery went nowhere and will go nowhere need only look at who was advising president Obama and who has his ear now (Christina Romer and Tim Geithner, respectively).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Europe to Recapitalize Banks Without Raising any Capital; Berlusconi Defiant as Focus Shifts to Italy; Sarkozy Under Fire for Seeking China’s Help

Posted: 31 Oct 2011 12:05 AM PDT

Italy's Prime Minister Silvio Berlusconi denies entering an agreement for early elections and arrogantly insists he is the only one who can possibly save Italy from itself.

Berlusconi ruled out early elections and said the current legislature in Rome will last until 2013, according to an interview published yesterday in Corriere della Sera.

"Only I and my government can achieve this reform program for 18 months, which is why there is no way for me to stand aside," the Italian leader told the newspaper.

Sarkozy Under Fire for Seeking China's Help

Please consider Sarkozy Criticized for Seeking China's Help

French President Nicolas Sarkozy came under fire from opposition leaders for seeking China's help to resolve the euro area's debt crisis.

"It's shocking," Martine Aubry, the general secretary of the Socialist Party, said in the Sunday newspaper, Journal du Dimanche. "The Europeans, by turning to the Chinese, are showing their weakness. How will Europe be able to ask China to stop undervaluing its currency or to accept reciprocal commercial accords?"

Sarkozy reached out last week to his Chinese counterpart Hu Jintao to build support for an enlarged rescue fund designed to solve the region's sovereign-debt crisis. The leaders talked just hours after a euro-region summit on Oct. 27 ended with an agreement to boost the European Financial Stability Facility to about 1 trillion euros ($1.4 trillion), leveraging existing guarantees by as much as five times.

Financial Suicide

Aubry asks "How will Europe be able to ask China to stop undervaluing its currency?" That's a good question for Sarkozy but a far better one for Klaus Regling, head of the European Financial Stability Facility who says "Bailout Fund Could One Day Issue Bonds in Yuan".

Then again, there is a fundamental question as to whether the Yuan is really undervalued in the first place. However, issuing bonds in Yuan would be financial suicide if per chance the masses are correct or if the timing was wrong.

Moreover, begging for help is a big sign of weakness as well as an admission of fear that no other buyers may step up to the plate.

Europe to Recapitalize Banks Without Raising any Capital

Bloomberg reports Europe Tries to Recapitalize Its Banks Without Injecting Capital

European Union leaders ordered banks last week to increase the ratio of "highest quality" capital they hold by the end of June, creating a shortfall of 106 billion euros ($150 billion). Of Europe's 28 largest lenders, only eight will need to raise a total of 11 billion euros from investors, Huw Van Steenis, a Morgan Stanley analyst, wrote in an Oct. 28 report.

Rather than tapping investors or governments, firms are trying to hit the 9 percent core capital target by adjusting risk-weightings, limiting dividends, retaining earnings, reducing loans and selling assets. Banks had threatened to curb lending, risking a recession, to meet the goal rather than take government aid that would bring limits on bonuses and dividends. EU leaders already are pressing banks to restrain payments to employees and shareholders until they meet the capital target.

"Surely, no one thinks that by allowing banks to avoid raising capital in all these various ways it's going to give investors more confidence," said Peter Hahn, a professor of finance at London's Cass Business School and a former managing director at New York-based Citigroup Inc. "Part of the issue for a long time has been the lack of credibility of bank balance sheets and their risk models. This isn't going to help."

Capital Math

Let's go over the math one more time as noted previously in Capital Shortfall Estimates of European Banks Range from 8 to 413 Billion Euros; EU to Offer Additional Extend-and-Pretend Time

Analyst Estimates

Citigroup estimates there is a capital shortfall of between €64 billion and €216 billion for banks to achieve a minimum core Tier 1 ratio of 7% to 9%, respectively.

Credit Suisse came up with a similar figure of €220 billion for the potential 9% scenario.

Analysts at Espirito Santo said write-downs at current market prices on Greek, Portuguese, Irish, Italian and Spanish bonds, along with a higher minimum capital ratio of around 9%, could require as much as €413 billion in new capital across the sector.

Merrill Lynch analysts in turn came up with estimates of between €7.6 billion and €143 billion in required capital for the region's major banks, depending on various scenarios.

The IMF came up with 200 billion Euros, a figure I think is exceptionally low because it ignores writedowns on Portuguese, Spanish, and Irish debt (and of course Italian debt as well). It also presumes Greek losses will be pegged at 50% when losses are likely to be in the 70-90% range.

Nonetheless, the agreement worked out by Merkel reduced that 200 billion euro figure down to 106 billion. Now we see that of that 106 billion euros, banks claim they need only raise 11 billion euros.

Is that before or after Merkel agreed to kick in an extra 21 billion euros of taxpayer money to the banking sector in the recent EFSF agreement?

Regardless, the answer to the question "How Does Europe Recapitalize Banks Without Raising any Capital?" should now be perfectly clear ...

Oh Ho Ho Its Magic!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sunday, October 30, 2011

Mish's Global Economic Trend Analysis

Massive Intervention in Yen; Japan Finance Minister Promises to "Intervene Until I'm Satisfied"; Race to Debase Back On; Will It Work?
Financial Suicide: Head of EFSF says Bailout Fund Could One Day Issue Bonds in Yuan
Czech PM Considers Referendum to Halt Joining EU

Massive Intervention in Yen; Japan Finance Minister Promises to "Intervene Until I'm Satisfied"; Race to Debase Back On; Will It Work?

Posted: 30 Oct 2011 08:54 PM PDT

The headlines on the Yen tonight are rather amusing.

Two hours ago Bloomberg reported Yen Climbs to Postwar Record Versus Dollar as Traders See No Intervention

About 40 minutes ago Bloomberg reported Yen Drops on Intervention; Aussie Weakens

About 10 minutes ago Bloomberg reported Yen Tumbles as Japan Sells Currency Third Time in 2011

The yen dropped as Japan stepped into foreign-exchange markets to weaken the currency for the third time this year after its gains to a postwar record threatened an export-led economic recovery.

"I've repeatedly said that we'll take bold action against speculative moves in the market," Japanese Finance Minister Jun Azumi said to reporters today in Tokyo after the government intervened unilaterally. "I'll continue to intervene until I am satisfied."

The yen sank as much as 4 percent to 78.98 per dollar and traded at 78.19 as of 11:10 a.m. in Tokyo from 75.82 in New York Oct. 28.

I like to watch these headlines for a bit to see where they are going. Here is a chart of the action.

Yen 15 Minute Chart

Intervention Never Works

Japan has struck out twice this year on intervention efforts and numerous times before. Why should this time be any different?

Currency intervention never works. However, it may appear to work if by some lucky chance intervention came at the time the Yen was ready to reverse on its own accord.

The race to debase is back on.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Financial Suicide: Head of EFSF says Bailout Fund Could One Day Issue Bonds in Yuan

Posted: 30 Oct 2011 03:29 PM PDT

Klaus Regling, head of the European Financial Stability Facility has proposed European Bailout Fund Could 'One Day' Issue Bonds in Yuan

The euro area's bailout fund could at some point issue bonds denominated in the Chinese currency, Chief Executive Officer Klaus Regling said in Beijing today.

"We are authorized to use any currency we want if it seems efficient so we may one day issue in U.S. dollars or renminbi," said Regling, head of the European Financial Stability Facility, using another name for the yuan. "It depends whether the Chinese authorities would approve of that. I could imagine that over the years that might happen, maybe not immediately but maybe one day," he said.

European leaders are seeking financial support from China, holder of the world's largest foreign-exchange reserves, for an enlarged rescue fund aimed at containing the region's sovereign- debt crisis. Vice Finance Minister Zhu Guangyao said yesterday his government wants more details about the "technicalities" before making any decision on investment.

Regling said yesterday that China, which has been a "good" and "loyal" purchaser of EFSF bonds so far, hasn't set any conditions for buying more of the securities.

Financial Suicide

Issuing bonds in another currency risks financial suicide. Currency movements add to the already massive potential risk of huge fluctuations because of leverage.

Argentina blew up when it could no longer hold a peg in US dollars. While not a peg, imagine the losses on long-term bonds on a leveraged fund were the Yuan to rise by 33% vs. the Euro.

Many homeowners in Eastern European countries have housing loans in Euros or Swiss Francs and have paid a severe price as the value of their currency has dropped vs the Euro and even more so vs the Swiss Franc.

Perhaps the yuan would sink vs. the Euro, but anyone entertaining the risk is severely lacking in financial competence.

Moreover, that Regling would even suggest such a foolish thing says the EU not only expects this crisis will linger for a long time, and it does not believe it has buyers for the debt it issues.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Czech PM Considers Referendum to Halt Joining EU

Posted: 30 Oct 2011 01:02 AM PDT

The Czech Republic is having second thoughts about joining the EU, and rightfully so. The EU Observer reports Czech PM mulls euro referendum

The ruling euro-sceptic ODS party in the Czech Republic wants to push for a referendum on the country's future eurozone accession, claiming that the rules have changed since 2003 when Czechs said yes to the EU and the euro.

We signed up to a monetary union, not a transfer union or a bond union in our accession treaty. This is the major reason why the Czech Prime minister wishes to call the referendum on this matter," said Czech MEP Jan Zahradil, leader of the European Conservatives and Reformists.

Last weekend, at an ODS party congress, Prime Minister Petr Necas demanded a referendum on whether the country should join the eurozone.

"The conditions under which the Czech citizens decided in a referendum in 2003 on the country's accession to the EU and on its commitment to adopt the single currency, euro, have changed. That is why the ODS will demand that a possible accession to the single currency and the entry into the European stabilisation mechanism be decided on by Czech citizens," the ODS resolution says.

Prime Minister Necas also floated the idea in case Germany gets it way on another treaty change bringing about more economic integration and tougher sanctions for deficit sinners.

"In the event that there is a change to fundamental rights that would result in powers being transferred from national organs to European organs, this government is bound to ratify this step with a referendum," Necas told reporters in Brussels on Sunday evening.

Conditions Have Changed

It is crystal clear the rules and conditions have changed. Thus, the Czech prime minister is right to call a voter referendum.

The ESM alone is reason enough to tell the EU bureaucrats where to shove it the Euro. For details, please see Treaty of Debt - An Eye Opening Video on the ESM Bailout Mechanism

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Saturday, October 29, 2011

Mish's Global Economic Trend Analysis

Treaty of Debt - An Eye Opening Video on the ESM Bailout Mechanism
Chanos Interview: China Slowdown Just Beginning
Absurd Comment of the Week; Peter Principle in Action
Spain's Unemployment "Unexpectedly" Rises to 21.52%; Expect Market Focus to Shift from Greece to Portugal, Spain, Italy

Treaty of Debt - An Eye Opening Video on the ESM Bailout Mechanism

Posted: 29 Oct 2011 03:14 PM PDT

Inquiring minds are interested in the terms of the European Stability Mechanism (ESM) accord scheduled to replace the EFSF. The following video highlights the key sections of the proposed treaty.

Link if video does not play: Treaty of debt (ESM) - stop it now!

There are comments on The Telegraph article A German view of the bailout deal which is where I found the video.

Key Details of ESM Accord

Article 8 says "Authorized Capital stock 700 billion Euros"
Article 9 says "ESM members irrevocably and unconditionally undertake to pay capital calls on them within 7 days"
Article 10 allows the ESM board of governors to "change the authorized capital and amend article 8 accordingly"
Article 27 says ESM shall enjoy "immunity from every form of judicial process". Thus the ESM can sue member countries but no one can challenge it. No governments, parliament or any other body or laws apply to the ESM or its organization.
Article 30 says "Governors, alternate governors, directors, alternate directors, the managing director and staff shall be immune from legal process with respect to acts performed by them (...) and shall enjoy inviolability in respect of their official papers and documents"

There are no independent reviewers and no existing laws apply. Thus Europe's national budgets will be in the hands of one single, unelected body that is accountable to no one and immune from all legal actions.

Is this the future of the EU or will the German supreme court and other governments put an end to it?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Chanos Interview: China Slowdown Just Beginning

Posted: 29 Oct 2011 02:21 PM PDT

Jim Chanos Says China Slowdown has just begun.

There is not much new in the video actually. I just happen to think he is correct.

The link came in an email I played while stuck in an airport on a plane delay back to Chicago.

URL if video does not play: http://www.macrobusiness.com.au/2011/10/chanos-china-slowdown-just-beginning/

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Absurd Comment of the Week; Peter Principle in Action

Posted: 29 Oct 2011 08:55 AM PDT

The absurd comment of the week goes to Larry Summer for his statements on the irony of the financial crisis.

The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending. Most policy failures in the United States stem from a failure to appreciate this truism...

Anyone who thinks the cure is the same as the disease (as Larry Summers clearly does) is incompetent (at best).

I found the reference when Zerohedge posted the Summers link with no comment. I suspect the Summers comment was so asinine that ZH did not even see a need to state it. Because he did not comment, I will.

Peter Principle in Action

Larry Summers may be one of the best examples of the Peter Principle that you can ever find.

However, I suspect a case can be made that Summers did not rise to his level of incompetence, that he was never competent in any position, ever, and that he got where he is out of sheer luck, birthright, bribery, or some combination thereof.

Mike "Mish" Shedlock
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Spain's Unemployment "Unexpectedly" Rises to 21.52%; Expect Market Focus to Shift from Greece to Portugal, Spain, Italy

Posted: 29 Oct 2011 12:32 AM PDT

With news of a "voluntary" haircut on Greek bonds of 50%, it's time to look ahead to the next big trouble spots. By measure of 10-Year government bond yields, Portugal at 11.8%, Italy at 6.02%, and Spain at 5.51% (as compared to Germany at 2.18%), Portugal, Italy, and Spain clearly have critical issues.

Moreover, the economic data from Spain is continuously awful. For example Spain's Unemployment "Unexpectedly" Rises to 21.52%

The number of unemployed persons increased by 144,700 in the third quarter, bringing the total number of unemployed amounted to 4,978,300 people, according to Labour Force Survey (EPA) released today by the National Statistics Institute (INE). Spain has not seen such a high unemployment rate since the fourth quarter of 1996.

Austerity measures and economic reforms in the "Club-Med" Euro states are much needed. However, the short and intermediate-term effect will not be good for sovereign debt yields, budget targets, or GDP.

Spain and Portugal are accidents waiting to happen (sooner rather than later), and judging from bond yields alone, it is safe to add Italy to that mix.

The euphoria of a "settlement" (that fixes nothing) in regards to the crisis in Greece will soon give way to the massive number of even larger problems elsewhere in the Eurozone.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Friday, October 28, 2011

Mish's Global Economic Trend Analysis

Fitch says 50% Haircuts would Constitute Default; No Official Ruling from ISDA Yet; Wrong Decision Could Kill CDS Market; How Will Setup be Resolved?

Posted: 28 Oct 2011 09:34 AM PDT

The yield on 10-year Italian bonds is back over 6% following a weaker than expected bond auction. Who wants to load up on Spanish, Portuguese, or Italian bonds if they cannot hedge with credit default swaps?

No ISDA Ruling Yet

Everyone is acting as if the International Swaps and Derivatives Association (ISDA) has issued a ruling on on whether 50% haircuts forced at gunpoint are "voluntary", but there is no official ruling yet, only hints.

Please consider Voluntary or forced? The important word games of debt default

When is a default not a default?

Investors struggled with that question Thursday after European officials outlined plans that would see owners of Greek bonds take a 50 per cent loss on the face value of their holdings.

The International Swaps and Derivatives Association, an industry group that oversees the CDS market, says the Greek deal probably won't trigger default clauses in CDS contracts because the 50 per cent "haircut" is voluntary.

That view is starting to roil the $25-trillion market for credit default swaps because it calls into question the fundamental reason for purchasing insurance against losses on bonds. If investors can no longer count on being able to hedge against the possibility of a loss, they may start demanding higher yields as compensation for increased risk.

"I would think [such a ruling by the ISDA] would be quite a negative for the market," said Lawrence Chin, director of research at the Cundill division of Mackenzie Financial. "You could get hit on the debt, but you don't get the insurance [payout]."

"Based on what we know it appears from preliminary news reports that the bond restructuring is voluntary and not binding on all bondholders," the ISDA said on its website Thursday. "As such, it does not appear to be likely that the restructuring will trigger payments under existing CDS contracts."

But things can be confusing, even at the ISDA. In a version of the Q&A dated July 8, the ISDA asks, "Does it matter whether the event is 'voluntary' or 'mandatory' "? Answer: "The CDS Definitions do not refer to a distinction between voluntary and mandatory events, though it does come up indirectly."

Then there's the matter of just how voluntary the latest agreement really is. Banks may have agreed to take a 50 per cent loss on their Greek debt holdings to avoid an even worse deal.

David Geen, general counsel for the ISDA, acknowledged in an interview on Bloomberg Television that there was likely some "coercion" of banks by European officials. "There's been a lot of arm twisting," he said, but asserted that while the deal may have been "borderline." it still fell short of being a default.

The Determinations Committee of the ISDA will make a final decision on whether the Greek deal triggers CDS payouts "when the proposal is formally signed, and if a market participant requests a ruling from the DC," the association said in its Q&A.

"If you can't hedge your position, you shrink your position," said Steven Tananbaum, managing partner and chief investment officer at GoldenTree Asset Management.

Fitch says 50% Haircuts would Constitute Default

Just to muddy the waters further, Fitch says acceptance of 50% haircuts on Greek debt would constitute default. Bloomberg reports ...

If it's accepted, "the 50 percent nominal haircut on the proposed bond exchange would be viewed by the agency as a default event under its Distressed Debt Exchange criteria," Fitch said in a statement today. The accord is " a necessary step to put the Greek sovereign's public finances on a more sustainable footing."

This week's rise in the euro "shows expectations were very low for what would come out of the meeting," said Geoff Kendrick, head of European currency strategy at Nomura Holdings Inc. in London. "I am relatively skeptical about how long this will last because I think it was just another plan for a plan." Kendrick expects the euro to weaken to $1.30 by year-end.

Italian Prime Minister Silvio Berlusconi conducted the first test of investor enthusiasm for Europe's debt since the summit's plan was announced, selling bonds today at euro-era record borrowing costs.
Italian Sale

The Treasury in Rome sold 7.93 billion euros, less than the maximum 8.5 billion-euro target, of four different bonds today. The yield on Italy's benchmark 10-year bond rose 11 basis points, or 0.11 percentage point, to 5.98 percent.

Fitch vs. ISDA

We come to the very real possibility that Fitch rules one way and the ISDA another.

Voluntary "No Default" Decision Could Kill CDS Market

The Wall Street Journal reports Default Insurance Market Takes Hit

Under the broad deal reached this week to stem the euro-zone's financial crisis, holders of credit-default swaps on Greek government bonds aren't expected to receive any payout, even though a preliminary agreement between financial institutions and European policy makers would recognize just half the face value of some Greek debt.

The decision not to trigger the swaps raises questions about the value of the insurance-like contracts and exposes the limitations of the hedging strategies that banks and investors have come to rely on. The swaps are widely used by bondholders and major banks to defuse a wide range of risks, and by traders to bet on market trends. If the swaps don't pay out when bonds default, banks and funds that bought the insurance may face losses they thought they had hedged.

"You need the real money guys, the banks, to view [credit-default swaps] as a viable contract for CDS to be a real market," said Adam Fisher, chief investment officer at hedge fund Commonwealth Opportunity Master Fund Ltd., and a trader of sovereign credit-default swaps. The deal reached Thursday, he said, could "kill off the market."

"If you owned a sovereign bond and you got scared because you bought CDS thinking it would pay out, you'll realize you would have been better off just selling your bond—and you'll just get rid of everything," said Ashish Shah, co-head of credit at AllianceBernstein.

The biggest U.S. lenders don't stand to lose much on the Greek "haircut." A bigger issue is exposure to economies such as Portugal and Ireland, and much bigger countries such as Spain, Italy and even triple-A-rated France.

I Predict a Surprise Default Ruling by ISDA

The WSJ implies a "decision not to trigger the swaps" has been made. Piecing together various reports, I don't think it has.

Here is the setup. There is only $3.7 billion in CDS contracts on Greek bonds vs. €350 billion ($496 billion) government debt.

Will the ISDA be willing to risk the CDS market on sovereign debt for a lousy $3.7 billion? I believe it won't if the "Derivatives King" (JP Morgan) and a few of the other big boys decide it is in their best interest to take a small hit now to prevent killing a lucrative market.

Thus I am going to go out on a limb and predict the ruling will be a default, possibly triggering massive buying of CDS contracts on Portuguese, Spanish, and Italian debt to the huge benefit of the "Derivatives King" and other big players.

Just don't expect the same result next time if the big boys go on an insurance selling spree.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Shanghai Homeowners Smash Showroom in Protest of Falling Prices; Developer Warns on Price Drops; "Twilight Zone" of Phony Accounting and Shadow Money

Posted: 28 Oct 2011 12:51 AM PDT

The property bubble in China has finally burst. Denial has turned to anger as Shanghai Homeowners Smash Showroom in Protest Over Falling Prices

A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.

The local media reports said an unspecified number of people were injured.

Chinese media separately reported that another group of Shanghai homeowners gathered on Saturday to speak with Longfor Properties Co., after it dropped asking prices to 14,000 yuan per square meter from 18,000 yuan per square meter at a residential development in the city's Jiading district.

The Shanghai property-owner demonstration found little support on China's Internet, where most still expressed worries that housing prices are too high.

22% Drop Overnight

The drop from 18,000 to 14,000 yuan is a 22% overnight drop and that is just a down payment on the carnage that is coming.

Housing Math in China

18,000 Yuan per square meter is about $2,835 per square meter
One square meter = 10.7639104 square feet
Cost per square foot = ($2,835 ÷ 10.7639104) = $263.38

In downtown Shanghai, the price is 48,000 yuan per square meter or roughly $696.77 per square foot.

I am told these are for roughly finished units (no carpeting, appliances, etc), just stark bare units.

For more on absurd Downtown Shanghai property prices, please see Property Developers Hurting in China; New Homes Sales Down 50% in Shanghai; Preposterous Prices Won't Last; Commodities to be Hit in Building Slump

Protests Hit China as Property Prices Fall

Yahoo! Finance has additional protest details in Protests hit China as property prices fall

Hundreds of angry home buyers launched a series of protests in China's commercial hub of Shanghai this week, as owners decried falling prices for their properties, state media said Thursday.

In the latest incident, some 200 home owners on Wednesday besieged the sales office for a project of leading developer Greenland Group, demanding refunds.

"We require a refund because the loss we are suffering now is too great for us to afford," the Shanghai Daily quoted a protestor as saying.

He paid 17,000 yuan ($2,678) per square metre last year and claimed the developer had cut the price by around 30 percent to boost sales.

In a another incident, 30 home owners stormed the sales office of a project of Hong Kong-listed China Overseas Land & Investment Ltd. on Wednesday, the Global Times said, repeating a similar protest from over the weekend.

Demand for apartments has been falling after authorities, fearing a property bubble, banned the purchase of second homes, increased minimum downpayments and trialled property taxes in some cities -- including Shanghai.

At the same time, property developers have been hit by a lack of funds, as the government hiked interest rates and restricted bank lending to rein in surging inflation and bring real estate prices into line.

Ratings agency Standard & Poor's expects China's property prices to fall by 10 percent nationwide over the next year as the measures take effect.

S&P 10% Decline Prediction is Hugely Understated

Prices in many places are already down 20 to 30 percent and things will get to the 50 t0 70 percent decline mark before this is over.

"Twilight Zone" of Phony Accounting and Shadow Money

MarketWatch says Watch out for China's 'freak' economy

Ten years ago, homes in Shanghai sold for about six times an average family's income. Today that's 13 times. Shenzhen has gone from five times to 14 times. These are off-the-charts absurd ratios. This is a bona fide mania.

And it works fine until the music stops. Where are we now?

Prices have started falling. Now, fewer than 46 of 70 major cities saw prices stall or decline in September, reports the National Statistical Bureau. As recently as January the number was just 10.

In the past two and a half years, China has witnessed a staggering credit bubble. Total lending has come to about $7.8 trillion.

To put this in context, that is twice the entire net government debts of the European so-called "PIIGS" — the troubled countries of Portugal, Ireland, Italy, Greece and Spain — put together.

An alarming report from Schroders said Chinese banking operates in a "twilight zone" of phony accounting and shadow money and it's all coming apart. "Almost half of all credit creation in China is off balance sheet," wrote the team at Schroders.

They think this situation could unravel "over the next three to six months," producing a huge crisis with international implications. Most Chinese banks, they predict, will end up as "zombie banks."

Hard Landing Coming

The Financial Times reports China property developer warns on price falls

China's largest real estate developer believes the country's property market, a key driver for the economy, has turned and expects conditions to worsen in the coming months as sales prices volumes decline further.

China Vanke, the country's biggest developer by market share, said government efforts over the past year to rein in soaring prices were having a severe impact on the market and developers were being squeezed after sales volume in 14 of the country's largest cities halved in September from a year earlier.

A 30 per cent drop in property prices would precipitate a collapse in fixed investment in China and the country's investment-driven economy would experience a so-called hard landing after years of annual growth above 9 per cent, according to UBS economist Wang Tao.

Property investment accounts for more than 20 per cent of total fixed investment in China and UBS estimates almost 30 per cent of final products in the economy are absorbed by the property sector.

"A property-led hard landing scenario is quite likely in the next few years, even though we do not think the property market is about to collapse now," Ms Wang said.

Debt-laden provincial governments in China rely heavily on land sales for revenue and have poured investment into commercial housing projects in recent years.

These local authorities also account for up to 30 per cent of all outstanding bank loans, many of which are collateralised by land and housing developments, so a collapse in the property market could have a devastating knock-on effect on the financial system.

The property bust is underway in China and will spread from city to city just as it did in the US. No city will be immune and commodity prices will be smashed in the downturn.

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