| Update on Brazil, BRICs Posted: 28 Dec 2011 02:30 PM PST In response to Brazil is World's 6th Largest Economy, Overtaking UK Earlier this Year. Can Brazil Overtake France by 2016? What about BRICs in General? I received a nice email from Felipe Fiel, an economist from Brazil working in the hedge fund industry for Fram Capital. Felipe writes ... Hi Mish, hope is all well with you. First of all I would like to congratulate you for your blog and outstanding contribution do financial observers. I´m an economist who lives in Brazil, working for the hedge fund industry.
I agree entirely with you about Brazil´s skepticism.
I would like to highlight that the way you show inflation and GDP might cause a distorted impression to your readers.
You show GDP growth quarter-over-quarter seasonally adjusted, without annualizing it, which is the norm for US viewers. It was running at almost 8% annualized growth before 2008 crises and even recently it grew at 3.2% in the 4 quarters before stagnating in 3Q.
For next year, even the most pessimistic projections see growth at 4.3% on average, which is more or less what is seen at GDP potential. However, I personally think we cannot growth at that rate without generating too much inflation.
Best,
Felipe Fiel BRIC Decade Ends as Growth Peaked According to Goldman Sachs, BRIC Decade Ends as Growth Peaked Dec 28, 2011
In the past decade, mutual funds poured almost $70 billion into Brazil, Russia, India and China, stocks more than quadrupled gains in the Standard & Poor's 500 Index and the economies grew four times faster than America's.
Now Goldman Sachs Group Inc. (GS), which coined the term BRIC, says the best is over for the largest emerging markets.
BRIC funds recorded $15 billion of outflows this year as the MSCI BRIC Index sank 24 percent, EPFR Global data show. The gauge, which beat the S&P 500 by 390 percentage points from November 2001 through September 2010, has trailed the measure for five straight quarters, the longest stretch since Goldman Sachs forecast the countries would join the U.S. and Japan as the top economies by 2050.
BRIC indexes may fall another 20 percent next year, buffeted by the liquidity squeeze stemming from Europe's sovereign debt crisis, Arjuna Mahendran, the Singapore-based head of Asia investment strategy at HSBC Private Bank, which oversees about $499 billion, said in an interview. Nations such as Indonesia, Nigeria and Turkey may overshadow the BRICS in the next five years as they expand from lower levels of growth, he said.
"The slowdown we're seeing in the BRICs will continue for most of the first half," Mahendran said. "Compared to the U.S., corporate profits haven't been that good as companies face higher wages, higher interest rates and currency volatility, and at best, we'll only start to see the effects of monetary policy loosening in the second half of 2012."
2011 Losses
The BSE India Sensitive Index led declines among BRIC equity gauges this year, falling 23 percent. China's Shanghai Composite Index also dropped 23 percent, while Russia's Micex retreated 18 percent and Brazil's Bovespa sank 16 percent. The 21-country MSCI Emerging Markets Index (MXEF) lost 20 percent, while the S&P 500 gained 0.6 percent. The time to warn about BRICs and emerging markets was a year ago, which I did, specifically in regards to China (but also with many references to trade surplus nations and commodity producers throughout the year). Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| "It's a Mistake To Pursue a United States of Europe" says German Supreme Court Justice in Spiegel Interview ; Interpretation of Interview from Saxo Bank Chief Economist Posted: 28 Dec 2011 09:31 AM PST Those looking for a reason for a sinking Euro and falling stock markets today just may find the answer in a Spiegel Interview with German Constitutional Court Judge Udo Di Fabio who says " It's a Mistake To Pursue a United States of Europe". SPIEGEL: Didn't the court's decision on the Lisbon Treaty in effect place strict limits on further European integration by banning the transfer of important political powers from Germany to the EU?
Di Fabio: The decision on the Lisbon Treaty pinpoints the sensitive areas, such as budgetary autonomy. Furthermore, in the euro-zone bailout ruling, issued on Sept. 7 of this year, the court made it clear once again that this particularly concerns the parliament's power of disposition over revenue and expenditure.
SPIEGEL: But this is precisely the aim of the fiscal union to control the debt crisis. If the national budget falls under the control of the European Commission, the next Constitutional Court veto will be just around the corner.
Di Fabio: Not necessarily. Since no politician really intends to transfer their power of disposition over the substance of the national budget at an EU level, there is no insurmountable obstacle.
SPIEGEL: Does it concern the substance when a Brussels fiscal commissioner says to the German parliament, the Bundestag: You're not allowed to pass this budget?
Di Fabio: If Brussels only more closely supervises whether the member states are adhering to the agreements that they have concluded, then this does not constitute an infringement on their identity. Anyone who voluntarily agrees to something has to accept that they will be checked to ensure that this contractual obligation is fulfilled. Such a veto could come from Karlsruhe, however, if there were a violation of the new debt brake (an amendment to Germany's constitution that requires the government to balance its budget each year by 2016).
SPIEGEL: The president of the European Court of Justice in Luxembourg nonetheless recently said that he's not happy to hear that Karlsruhe wants to have the last word.
Di Fabio: I'm also unhappy to hear certain things, but I accept them.
SPIEGEL: How long can this really work, this coexistence of authorities to adjudicate in Europe?
Di Fabio: As long as we don't have a United States of Europe, we will continue to have a polity that has a certain network character.
SPIEGEL: Wouldn't it be easier to form a democratic United States of Europe with separation of powers?
Di Fabio: I think it is a mistake to pursue a United States of Europe model. There is no ideal solution on earth, nor is there one that dates back to the 19th century. The supposed universal remedy of a United States of Europe could cause even greater conflicts than the current union with its many weights and counterweights that allow for a balance. Interpretation From Saxo Bank Via email Steek Jakobsen, chief economist for Saxo Bank in Denmark writes ... This was a very open and interesting interview. The "killer stuff" is in the late part of the interview. Here are my notes:
- Di Fabio does not see Constitutional Court and Basic Law as Euro unfriendly, actually states the opposite
- Euro-bonds are "illegal" in his view (p.5 top)
- Wrong to pursue United States of Europe – you need intra- government coordination but also strong individual states – not one without the other
- No state can save the world on its own!
- Europe…a "security construction" – (the good old excuse for slow non-working EU)
- EY SENTENCE (p.2 top) : "….. Anyone who voluntarily agrees to something has to accept they will be checked to ensure that this contractual obligation is fulfilled. Such a veto could come from Karlsruhe, however, were a violation of the new debt brake (an amendment to Germany's constitution that requires the government to balance its budget each year by 2016!)
The last sentence – extremely critical – I must admit I did not know this. However, knowing this, Germany's position makes sense! – They need "order" before anything and it also makes their compromise with France less "solid" as this exercise of buying time will end by 2012/13 – where they need to "structurally" get their budget down.
Germany looks to have weak growth in 2012 – and government is spending more money not tightening. However, Germany CAN'T stimulate when they need to be at ZERO deficit by 2016.
NOTE to ALL politicians – this is major, major, major statement – the new RULE is to BALANCE by LAW your fiscal imbalances. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| European Bank-to-Bank Lending Mistrust Hits Second Consecutive High; ECB's LTRO Won't Stop Collateral Contagion Posted: 28 Dec 2011 02:04 AM PST Bond action in the Eurozone has modestly picked up (yields steady or falling) since the ECB's 3-Year LTRO program - Long Term Refinance Operation. However, European banks still do not trust each other, not even for overnight lending. Instead, banks park all available funds with the ECB, as noted by the Wall Street Journal in Deposits at ECB Hit Record High. Use of the European Central Bank's overnight deposit facility hit the second all-time high in a row Tuesday as euro area banks increased the amount of cash they park at the central bank's safe haven, ECB data showed Wednesday.
Banks parked €452.034 billion ($589.72 billion) at the ECB, up from €411.813 billion the previous day. The high level reflects prevailing distrust among banks which prefer using the ECB's facility rather than lending to each other.
The increase in deposits follows the ECB's first-ever three-year liquidity tender last week in which it allocated nearly half a trillion euros to more than 500 banks.
The ECB also said banks borrowed €6.225 billion via its overnight lending facility, up from €6.131 billion the previous day. When markets are functioning properly, banks use the facility to the tune of a few hundred million euros overnight. The " first-ever three-year liquidity tender" offer cited by the Wall Street Journal is the 3-year LTRO that I mentioned at the top. ECB's LTRO Won't Stop Collateral Contagion Gordon Long put out an outstanding report on his website on why the ECB's LTRO Won't Stop Collateral Contagion. I picked up the link from Zero Hedge. Following are a few snips: Here is the stark reality of what forced the ECB to offer unprecedented three year loans at absurd rates and most alarmingly, the acceptance of collateral that no other financial institutions will accept. The ECB has sacrificed its balance sheet in yet another EU "kick at the can".
1. COLLATERAL CONTAGION: There is a cascading Collateral Contagion crisis in which secured lending, based on sound assets, has replaced unsecured lending based on future expected cash flows.
2. WHOLESALE LENDING: Wholesale bank lending, which is a unique cornerstone of European banking, has completely frozen since the failure of Dexia and US Money Market Funds will no longer risk short term capital having learned their lesson in 2008.
3. BANK RUNS: Bank Runs are quietly and insidiously occurring throughout the peripheral EU countries as corporate and private depositors seek safe havens for their cash holdings.
...
WHOLESALE LENDING
There are approximately $55T of banking assets in the EU. This compares to only $13T in the US. Bank Assets in the EU are 4 times as large as the US.
In the US, debt held by the bank is smaller because retail deposits are a primary source of funds. EU banks use wholesale lending and, as a consequence, the debt held by banks is closer to 80% versus less than 20% by US banks.
Wholesale bank lending in the EU approximates $30T versus only $3T in the US, a 10 X differential.
Wholesale lending is fundamentally borrowing from money market funds and other very short term, unsecured instruments. The banks borrow short and lend long. It all works until short term money gets scarce or expensive. Both have occurred in the EU and this recently placed DEXIA into bankruptcy, forcing them to be taken over by the Belgium and French governments. The unsecured bond market fundamentally closed in the EU in Q3 2011, as fears mounted that an EU solution was not forthcoming.
Assuming $30T of loans is spread over three years, EU banks have a requirement for $800B / Month of rollover financing for wholesale lending outstanding.
Where is this money going to come from? No one is waiting around to find out as there will be cascading counterparty failures soon surfacing. Banking money in Europe is fleeing to custodial and official accounts of the ECB, the US Federal Reserve and any other central Bank willing to accept their cash. Excerpts do not do the article full justice. It's well worth a read in entirety. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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