Mish's Global Economic Trend Analysis

Cameron Rebukes Euro Leaders at Davos, Calls Financial Transaction Tax "Quite Simply Madness" ; Mathematical Impossibilities
Steen Jakobsen on Maximum Intervention "Now is the Time You Need Metals – Particularly Gold and Gold Stocks"; Fool in the Shower
Chart of the Day: Central Bank Balance Sheet as Percent of GDP: Fed, ECB, BOJ, BOE

Cameron Rebukes Euro Leaders at Davos, Calls Financial Transaction Tax "Quite Simply Madness" ; Mathematical Impossibilities

Posted: 26 Jan 2012 12:47 PM PST

Bickering in Davos at the World Economic Forum has taken center stage as U.K. Prime Minister Cameron rebukes euro leaders over crisis

David Cameron has delivered a firm rebuke to Germany at the World Economic Forum, calling on Berlin to contribute significantly more resources and guarantees to help solve the eurozone crisis.

The British prime minister stressed on Thursday that although progress had been made, particularly with the European Central Bank's funding of the European banking system, policymakers were still far from finding a solution to the underlying problems of the crisis. He criticised eurozone leaders for being distracted by other issues, such as the introduction of a financial transaction tax – an initiative he described as "quite simply madness".

His speech in Davos reflected British officials' long-standing and deep frustration with Germany's leadership of the single currency area and called for a much stronger firewall to prevent contagion within the eurozone, common European sovereign debt and for powerful countries committing to reduce their trade surpluses as much as the struggling countries seek to minimise their deficits.

The sentiments chimed with many British and US delegates at the WEF who have criticised Germany for seeking to persuade other countries to "become more German" without the corollary that Germany must "become less German" by importing more and allowing its trade surpluses to shrink.

Tobin Tax

Cameron is correct regarding the financial transaction tax, commonly known as a "Tobin Tax" named after Nobel Laureate economist James Tobin who originally proposed the idea for currency transactions only. Now they want to tax everything.

Mathematical Impossibilities

The sentiment expressed by Germany that other nations need to become "more like Germany" as in "export more" sounds good when you hear it, but it is a mathematical impossibility.

Not every nation can be an exporter. If one country has a balance-of-trade trade surplus, another country must have a trade deficit.

Thus, the only way for other countries to become more like Germany is for Germany to become less like Germany.

The same holds true for the trade relationship between the US and China.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Steen Jakobsen on Maximum Intervention "Now is the Time You Need Metals – Particularly Gold and Gold Stocks"; Fool in the Shower

Posted: 26 Jan 2012 08:36 AM PST

Steen Jakobsen, chief economist for Saxo Bank in Denmark has some interesting thoughts to share on gold an metals in an email update that just came in.

Steen writes ...

Interesting session with Fed yesterday! Both the ECB and the FED have now clearly showed that the changed board of directors is far more willing to print money and keep rates low forever than ever before in central banking history – which is probably not a good thing or is it?

It's a wait and see game now – the FOMC action left plenty on the table for both the bulls and the bears. For the bulls this is 'easy money' for longer and low rates will have to work.

For the bears it's sign of incoming depression when Fed feels obliged to signal low rates for longer.

The truth is probably somewhere in between. There is reason for low rates, but also printing money to the extend the major central bank does it makes all of us speculators chasing, again, investments which we would not normally engage in as commodities, metals, housing et al. We are effectively all being forced to take more risk for same return with low interest now predicted into the financial "forever".

Sometimes the best analysis on an issue, and in my case almost always, comes from someone else – with reference to the FOMC I personally really enjoyed Caroline Baum's piece: 'Fool in the shower' to Give Fed a Good Scalding

Not only a gifted journalist and writer but excellent arguments and stories. Please do read her take on Fed's difficult balance.

Today's market open carry plenty of positive momentum, however Greek PSI and Portugal could ruin the party short-term.

Medium-term all things positive seems to have been priced in:

More QE in both US, UK and Europe including low rates and basically banks funded through 2012

A forced voluntary deal in Greece – the real test is the next payment three month down the road

A fiscal compact by next Monday where Germany will declare victory and then allow EFSF/ESM to be merged

Iran on the back-burner at least for now.

We now see market slightly expensive relative to historic numbers in our bottom up models, but not enough to create warning signal, however our cyclical/technical model are turning down s from here. Plenty of talk of Demark highs, cyclical tops in place, fresh money now being invested and very high survey data combined with bull/bear ratio and VIX volatility all indicating "full speed ahead", so the momentum is positive and the mean-reverting models are very negative. May the best 'model' win! I am still 70 per cent in cash for the rest.

My good colleague Peter Garnry kindly provided me with this chart(which is now part of Stress Indicators) on key central bank' balance sheet in percentage of their countries GDP. Simple stuff, scary stuff:

Note how Europe or rather ECB in the space of six month have done more expansion than the FED has done in three years in terms of printing money(relative to GDP) – again – buy some paper producers! The world could run out of paper to print those debasing currencies on pretty soon!

Now is the time where you need your metals – particularly gold and gold stocks. The above issues shows you clearly and forcefully that we have moved from a 'Maximum Intervention' period into a 'Maximum printing' phase – this will give the policy makers a false sense of "improvement" and hope for a turning point not dissimilar to the comments seen exactly one year ago in Davos –

This new hope will stop the move towards the "Endung" – as the ultimate solution remains the same: Germany needs to decide for or against Europe – end of story – they will cave in last day, last minute but only if forced to do so, this more of same pretend-and-extend will delay this from Q1 to Q2 or Q3 meanwhile the balances or rather imbalances inside the system will increase making the ultimate price(loss) yet higher – but why bother with something which is more than one week away? As someone commented today by this time next year most of today's politicians could be out of office anyway: China, France, Italy, Greece etc…

The story is always the same: Politicians spend money – the private economy tries to keep up. Meanwhile the challenge for us skeptics is best defined by Keynes old comment: 'The market can stay irrational longer than I can stay solvent' – and that is the bet Princess Merko-cy is playing when she kissed the frog and got an Italian prince with a huge balance sheet in Frankfurt. A true fairytale it is!

Safe travels,

Steen

As pertains to metals and Baum I agree. Here is my favorite line from "Fool in the Shower".

Two policy makers -- no names were attached to the forecasts -- expect the funds rate to first begin rising in 2016. (My money is on New York Fed President Bill Dudley and Governor Janet Yellen.) That would mean eight years of 0 percent interest rates. There will be a revolution in this country before then if the economy is lousy enough to warrant 0 percent interest rates for that long. Even the fool in the shower knows that.

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

Chart of the Day: Central Bank Balance Sheet as Percent of GDP: Fed, ECB, BOJ, BOE

Posted: 26 Jan 2012 08:20 AM PST

Here is an interesting chart by Peter Garnry, an Equity Strategist at Saxo Bank in Denmark.

The race is on to see which central bank can load up its balance sheet with the most garbage the fastest.

Reader Scott says ...

Lemme see here, the EFSF was, once upon a time, going to lever itself up by taking the first 20% of losses on PIIGS sovereign bonds. This would give it the 'firepower' to quell the crisis in the Eurozone. How laughable that now seems. Such an arrangement would not even protect the ECB's 'investment' . Instead we hear rumors of schemes to foist the ECB's holdings off onto the EFSF with the ECB's 30% haircut already attached. So now, if I get this right, the EFSF is now the bailout mechanism for the ECB's SMP and that the PSI must now be broadened to become the PPSI or Public Private Sector Involvement and ESM is to be readied by this summer to take the place of the EFSF . And all of this just to deal with Greece. Given the failed bailouts, collapsed arrangement, lies, violations of EU law, summits, press conferences can Merkel, Sarkozy, Barroso and Rehn cobble together only to have fall apart before everyone realizes the jig is up? That they have no solution because there is no solution. The system is bankrupt.

The system is indeed morally and mathematically bankrupt. Some points above may not be perfectly accurate in entirety but the idea conveyed is certainly accurate. The key question is "when does everyone realize the jig is up?"

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

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Thursday, January 26, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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