Home Refinance Calculator: May 2012

Thursday, May 31, 2012

Mish's Global Economic Trend Analysis

Stupid Times: NBA Star Puts ATM in Kitchen; Peak Sport Salaries?
GDP, Real GDP, and Shadowstats "Theater of the Absurd" GDP
New Confusion Over Hispanbonos and Regional Debt: Spanish Regional Government Accounting Postponed, Press Conference by Montoro is Postponed; Regional Government Debt Issuance Method Unclear
Capital Flight Intensifies to Record Levels in Spain; Outflows Make Spanish Banks Increasingly Reliant on ELA Funding
Eurozone Retail Sales Crash: Record Declines in France and Italy, Overall Revenues Drop at Near Record Pace

Stupid Times: NBA Star Puts ATM in Kitchen; Peak Sport Salaries?

Posted: 31 May 2012 07:16 PM PDT

As a prime example of the extreme disparities between the haves and the have-nots as well as how stupid things have gotten in general, please consider DeShawn Stevenson Installs ATM In Kitchen

For the sports star who has everything there remains one tiresome problem – how do you get hold of your millions without having to leave the house?

Stevenson, 31, who has earned more than $26 million so far in a 12-year playing career in the NBA, was so proud of his latest unique accessory that he posed for a photograph with it.

It was not clear whether his free-standing cash machine will charge Stevenson and his friends a fee each time they use it.

Stevenson was arrested last year for public intoxication in Texas.

Peak Sport Salaries?

A friend writes: "Mish this is proof positive sports salaries have peaked or are about to peak."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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GDP, Real GDP, and Shadowstats "Theater of the Absurd" GDP

Posted: 31 May 2012 11:43 AM PDT

Every month Doug Short at Advisor Perspective writes an excellent report on GDP. With today's release of the Q1 GDP Second Estimate, Doug Short has a new column worth a good look: Will the "Real" GDP Please Stand Up? (The Deflator Makes Big a Difference).

How do you get from Nominal GDP to Real GDP? You subtract inflation. The Bureau of Economic Analysis (BEA) uses its own GDP deflator for this purpose, which is somewhat different from the BEA's deflator for Personal Consumption Expenditures and quite a bit different from the better-known Bureau of Labor Statistics' inflation gauge, the Consumer Price Index.

The Lower the Deflator, the Higher the GDP

I have a note at the bottom showing the real GDP calculation method. Suffice to say that the higher the increase in compounded annual percentage change in the deflator, the lower the real GDP. Conversely the lower the increase (or if there is a decrease), the higher the real GDP.

GDP Four Ways

Doug Short calculates the GDP using four different deflators.

GDP deflator (official number) : GDP +1.86, 10-Yr Moving Average +1.7
PCE deflator (personal consumption expenditures) : GDP +1.13, 10-Yr Moving Average +1.6
CPI deflator (consumer price index) : GDP +1.05, 10-Yr Moving Average +1.4
Using John Williams' Shadowstat measure of inflation : GDP -10.50, 10-Yr Moving Average -5.1

The first three charts are all similar looking but charts 2 or 3 seems more reasonable than the official numbers. Here are two of the charts.

Real GDP Using PCE

click on chart for sharper image

Shadowstats GDP

click on chart for sharper image

Doug Short Writes ...

I find this "alternate Real" GDP to be interesting (in a bizarre sort of way), but I personally see no credibility in the hyper-negative GDP it produces. On the contrary, I see this chart as further evidence that the alternate CPI, despite its popular among many critics of government data, is a misguided concept.

Alternate Nonsense

Bizarre is a polite way of putting things. I would call it total nonsense. For Williams to be correct one would have to believe the economy was in a recession the vast majority of the time for the last 25 years.

Williams has a huge following, mainly by the hyperinflationist crowd. Williams himself has been predicting hyperinflation for some time.

December 12, 2010: Williams Calls for "Great Hyperinflationary Great Depression"; A Very Easy Rebuttal
May 25, 2011: Hyperinflation Nonsense in Multiple Places

All of the hyperinflation calls have been missed by a mile. The dollar is strengthening, consumer credit is once again sinking, and treasury yields just made 60-year lows.

This is what happens when you fail to take into consideration:

Credit conditions Global economic conditions
Printing by other central banks especially China
Currency instability in Europe
Untenable situation in Japan

Williams makes all of those mistakes, being far too US-centric in his analysis, and compounds the errors by methodology that produces the absurd results shown above and also by confusing unfunded liabilities with debt.

$1.06 Trillion of Consumer Debt is Currently Delinquent

Note that according to the latest HOUSEHOLD DEBT AND CREDIT report by the Fed, consumer credit other than student debt is contracting. Also note that $1.06 trillion of consumer debt is currently delinquent, with $796 billion seriously delinquent.

Think that will be paid back? I don't. And Hyperinflationists fail to understand the ramifications.

I happen to agree that the US has a day-of-reckoning coming, but the entire fiat global financial system fueled by insane levels of fractional reserve lending will come crashing down at the same time.

That is precisely why this deflationist (unlike others) happens to like gold as a safe haven.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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New Confusion Over Hispanbonos and Regional Debt: Spanish Regional Government Accounting Postponed, Press Conference by Montoro is Postponed; Regional Government Debt Issuance Method Unclear

Posted: 31 May 2012 09:42 AM PDT

My friend Bran who lives in Spain writes ...

Hello Mish

There is new confusion over hispabonos and regional accounting. Spanish regional government accounting has been delayed, a press conference by Montoro is delayed, and the joint government/regional government debt issuance method is still not completely clear.

Bran

Hispabonos are central government guarantees of regional debt. The regional governments want central guarantees because without them, interest rates will skyrocket.

Presentation of Accounting Postponed

Courtesy of Google Translate from El Economista: The Government postponed the presentation of the accounts of the CCAA's first quarter

The Ministry of Finance has decided to postpone the press conference that he would publish the budget execution of the regions for the first quarter of the year in the National Accounts. Montoro endorse autonomy and park each issue of 'hispanobonos.

The hearing, scheduled for 17:00 am today, was postponed because Cristobal Montoro "presented tomorrow to the Council of Ministers a report on the evolution of these data," the statement sent by the Department.

Financing

Predictably, Montoro will also benefit the Council of Ministers to discuss a new system of funding helps communities, claimed in a while.

Autonomy asked directly the implementation of hispanobonos, although the executive has never been convinced of this option by the risk that the cost encareciera Treasury issues and weaken the 'rating' of Spain.

The most reasonable for the Department led by Montoro endorse passes through debt issues of the autonomous communities individually and provided they meet the deficit target and the corresponding recovery plan.

This would be a personal guarantee, conditional and voluntary, which should be specifically requested by a community and to be granted for specific purposes on condition that the community complies with the deficit.

Regional Governments Press for Hispanbonos

The clear gist is regional governments are in severe trouble, probably much worse than reported.

Delays are needed to present the facts to the Spanish central government which is now pressed by regional authorities once again to guarantee regional debt.

Hispanbonos Already a Done Deal?

Interestingly RTE News reported yesterday in Debt premium on Spanish bonds hits euro-era high that hispanbonos were already a done deal.

Spain's government said it would approve the issuing of joint bonds -- "hispanobonos" -- by the 17 regional governments next Friday, so as to make it cheaper for them to finance their debts.

"The goal is to reduce the pressure on the regions, which is often greater than the pressure on the state in general, with some regions not able to borrow on the market," a spokeswoman for the Economy Ministry said.

Spain's 17 regional governments have suffered a plunge in tax revenues and soaring debt since the collapse of a decade-long property boom in 2008, and they are struggling to pay suppliers.

Bankia's board on Friday asked the state to inject €19 billion to help it abide by more stringent capital rules, in addition to €4.465 billion invested by the state earlier this month.

Spanish media said other troubled banks could need yet another €30 billion.

Providing a grim backdrop, the Bank of Spain issued a report predicting Spain's recession, which began in the last quarter of 2011, would continue at least until mid-2012.

Official data also showed retail sales plummeted 9.8% in April, the steepest monthly drop in since the statistical series began in 2003.

Despite the downturn, Spain's government says it is determined to press ahead with an austerity programme to slash the deficit to 3.0% of economic output by 2013 from 8.9% last year.

Hispanbonos may (and should) trigger additional debt downgrades of Spanish sovereign debt and send yields higher. However, without guarantees, regional governments are going to have an exceptionally difficult time financing new debt and rolling over existing debt as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Capital Flight Intensifies to Record Levels in Spain; Outflows Make Spanish Banks Increasingly Reliant on ELA Funding

Posted: 31 May 2012 08:52 AM PDT

Here is a note regarding capital flight in Spain and Greece that I received via email.

Capital flight has intensified to record levels in Spain but interestingly leveled off in Greece. Capital flight from Greece is expected to resume when next reported given statements by the Greek president.

The original source of this information appears to be Credit Suisse AG.

Spanish private Sector Deposit numbers dropping at a faster rate

The Spanish bond markets continue to be viewed with both suspicion and concern by would be investors, with the shocking size of the Bankia bailout send clear warning signs of what else might yet emerge from the Spanish banking sector. Investors were also unimpressed by what appears to have been a very poorly thought out strategy for recapitalising Bankia, with the ECB indicating that they were not consulted by the Spaniard's before the bonds-for-repo strategy was announced. The Spanish government has lost further credibility because of its handling of this issue, and has since announced that it will indeed have to raise cash from the markets and use the proceeds to recapitalise Bankia.

The ECB published the latest aggregated balance sheet of the euro area MFI's on Wednesday, which contained the usual array of interesting and relevant data. The Spanish numbers were obviously in focus given the markets current attention to the Iberian peninsula. The data showed that the run up in bank buying of Spanish Government bonds came to an end in April, with a net reduction of €3.3bn in holdings being recorded at month end.

The private sector deposit numbers were also closely looked at, with April seeing a huge €31.5bn reduction in deposits being placed by households and non-financial corporates. This was close to the all time record outflow posted back in January 2010, though that number was driven by year end reporting factors. The April 2012 number appears to be much more significant, and is likely to be repeated in May. Over the last 7 months the net reduction in Spanish Private Sector Deposits has now totalled €92.2bn. These outflows make the Spanish banks increasingly reliant on ELA funding via the Bank of Spain.

Interestingly the ECB data showed that the recent deposit flight reported in Greece appears to have levelled off, with the amount of private sector deposits actually increasing by €400mn in April. This was the second consecutive monthly increase, after two large outflows were reported in January and February. Given the commentary from the Greek President earlier this month we would expect to see a sharp increase in outflows when the May numbers are reported at the end of next month.

At an aggregate level it remains quite clear that most of the deposit outflows from the peripheral nations are being recycled to other parts of the euro-zone. Germany and Holland in particular have seen large inflows of deposits in the months where the peripheral nations have seen outflows. These balances are effectively getting recycled back to the home country each day, via the ECB's TARGET 2 cash management system. As the inflows get larger so too does the TARGET 2 imbalance, causing even greater cross border systemic risk. The Bundesbank in particular has been awake to this issue for some time, noting that the risk of losses is high if a debtor nation does decide to suddenly leave the euro-zone.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Eurozone Retail Sales Crash: Record Declines in France and Italy, Overall Revenues Drop at Near Record Pace

Posted: 31 May 2012 12:20 AM PDT

Retail sales in France, Italy, and the eurozone as a whole hit the skids according to Markit. Retail sales in Germany were positive, but barely.

Steepest Decline in French History

Further sharp fall in French retail sales during May

Key points:

Month-on-month decline in sales matches April's survey-record

Steepest year-on-year decline in series history

Purchase price inflation eases to near-stagnation

Sales fell on an annual basis at the steepest pace recorded since the inception of the survey in January 2004. Margins continued to be squeezed amid an intense competitive environment, despite purchase price inflation easing to near-stagnation.

The headline Retail PMI® registered 41.4 in May, matching April's survey-record low. French retailers indicated that actual sales came in well below previously set targets during May. The degree of undershoot was the greatest since February 2010.

Record Declines in Italy

Record year-on-year decrease in Italian retail sales in May

Key points:

High street spending down sharply, albeit at weaker monthly rate

Job shedding steepest in series history

Discounting and cost inflation reduce profitability

Summary:

The Italian retail sector remained in contraction during May, with sales again falling sharply in spite of widespread discounting. Cost pressures meanwhile grew from April's recent low on the back of rising transport costs, thereby adding more pressure to margins. Consequently, firms shed staff at a marked and accelerated rate that was the steepest since data were first compiled in January 2004.

High street spending across Italy contracted sharply on the month during May, albeit at a slightly slower rate than that registered during April. This was signalled by the seasonally adjusted Italian Retail PMI® posting at 35.8, up from 32.8. Sales fell for the fifteenth month straight, and panellists continued to highlight low consumer confidence and falling disposable incomes as the main factors behind the decline.

German Sales Show Slight Growth

German retail sales return to growth in May

Key points:

Retail PMI points to marginal month-on-month rise in sales

Like-for-like sales higher than one year earlier

Wholesale price inflation eases markedly

The seasonally adjusted Germany Retail PMI rose from 47.4 in April to 50.7 in May, to indicate a marginal increase in sales on a month-on-month basis. That said, the rate of expansion was lower than those seen throughout the first quarter of 2012. Companies that reported a rise in sales since April generally noted that more favourable weather conditions had resulted in higher customer footfall.

Survey respondents indicated that actual sales fell short of initial targets for the second month running in May.

Sharp Drop in Overall Sales, Revenues Decline at Near Record Pace

Eurozone retail sales continue to fall sharply in May

Key points:

Retail PMI improves to 43.3, but still signals steep monthly drop in sales

Near-record annual fall in sales

Wholesale price inflation slows sharply

Summary of May findings:

The Eurozone retail sector remained firmly in contraction in May, according to PMI® data from Markit. Sales fell sharply on a month-on-month basis, and revenues compared with a year ago were down at a near-record rate. There were signs of easing pressure on retailer's purchasing costs, however, as the rate of purchase price inflation slowed sharply to a 19-month low.

This should bury the notion the eurozone recession will be short and shallow.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Wednesday, May 30, 2012

Mish's Global Economic Trend Analysis

10-Year Treasury Yield Lowest Level in 60-Years; Spain 10-Year at 6.66%, Italy 10-Year 5.93%
Good News in Wisconsin: Governor Walker Leads Barrett 52%-45% in Recall Poll; Union-Busting is a "Godsend"
EU Throws Spain Two Deathlines; Spanish 10-Year Yield Tops 6.7%; ECB Rejects Madrid Ponzi Refinancing Scheme
Spexit Before Grexit? Six Reasons Spain Will Leave the Euro First

10-Year Treasury Yield Lowest Level in 60-Years; Spain 10-Year at 6.66%, Italy 10-Year 5.93%

Posted: 30 May 2012 03:48 PM PDT

Curve Watchers Anonymous is noting a record low yield on 10-Year US Treasury Notes.

click on chart for sharper image

The above chart shows the monthly close except for the current month.

$IRX 3-month discount rate : Brown
$FVX 5-year treasury yield : Blue
$TNX 10-year treasury yield : Orange
$TYX 30-year treasury yield : Green

CNBC reports US 10-Year Treasury Yield Hits Record Low of 1.62%

The benchmark U.S. Treasury yield fell to its lowest level in at least 60 years on Wednesday as worries of contagion from Spain's ailing banks raised bids for low-risk investments.

Yields on 10-year notes sank to a record low of 1.62 percent, down sharply from 1.73 percent in late U.S trading on Tuesday.

The 30-year bond yield fell to 2.71 percent, its lowest level since October, and down from a yield of 2.84 percent in late U.S. trade on Tuesday.

Spain Record High Spread to Germany

Spain 10-year bond yield hit 6.7%, a record spread vs. Germany, before settling at 6.66%.

Italy 10-year bond yield hit 6.01% then settled at 5.93%.

Yield on the 10-year German bond hit a record low of 1.27%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Good News in Wisconsin: Governor Walker Leads Barrett 52%-45% in Recall Poll; Union-Busting is a "Godsend"

Posted: 30 May 2012 01:25 PM PDT

I have good news to report in Wisconsin.

The recall election for Republican governor Scott Walker will take place on June 7. Polls show Walker Leads Barrett 52%-45%.

Wisconsin Republican Governor Scott Walker leads Democratic Milwaukee Mayor Tom Barrett by 7 percentage points in the state's June 5 recall election.

Walker widened his edge over Barrett, 52 percent to 45 percent, in a replay of the 2010 governor's race, according to the poll released today by Milwaukee's Marquette Law School. The school's May 16 survey had Walker up 50 percent to 44 percent.

Walker, whose curbs on public-employee collective bargaining last year provoked the recall campaign, received a 51 percent approval rating while 46 percent disapproved. Next week's vote is only the third ouster election of a state chief executive in U.S. history.

Union-Busting is a "Godsend"

I commend governor Walker for killing collective bargaining of some public union workers in Wisconsin. Here are the results of Walker's efforts:

Taxpayers are better off.
School kids are better off
Class sizes are down
Struggling school districts now have a budget surplus

For details, please see Union-Busting is a "Godsend"; Elimination of Collective Bargaining is the Single Best Thing one Can do for School Kids

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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EU Throws Spain Two Deathlines; Spanish 10-Year Yield Tops 6.7%; ECB Rejects Madrid Ponzi Refinancing Scheme

Posted: 30 May 2012 10:57 AM PDT

ECB Rejects Madrid Ponzi Refinancing Scheme

The markets are reeling in the wake of rejection of Spain's Ponzi Recapitalization Scheme by the ECB according to the Financial Times.

A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said.

Madrid had floated the unorthodox idea over the weekend of recapitalising Bankia by injecting €19bn of sovereign bonds into its parent company, which could then be swapped for cash at the ECB's three-month refinancing window, avoiding the need to raise the money on bond markets.

The ECB told Madrid that a proper capital injection was needed for Bankia and its plans were in danger of breaching an EU ban on "monetary financing," or central bank funding of governments, according to two European officials.

The ECB's rebuff appeared to toughen Madrid's insistence that the only solution to a crisis that is pushing its borrowing costs close to unsustainable levels is for the ECB to become a government lender of last resort.

Senior government officials in Madrid argue that bailouts in Portugal, Greece and Ireland have been catastrophic and Spain will not compromise on its refusal to accept a similar form of intervention.

Lifeline or Deathline?

Reuters reports EU throws Spain two potential lifelines

The European Commission threw Spain, the latest frontline in Europe's debt war, two potential lifelines on Wednesday, offering more time to reduce its budget deficit and direct aid from a euro zone rescue fund to recapitalize distressed banks.

EU Economic and Monetary Affairs Commissioner Olli Rehn said Brussels was ready to give Spain an extra year until 2014 to bring its deficit down to the EU limit of 3 percent of gross domestic product if Madrid presents a solid two-year budget plan for 2013-14, something it has committed to do.

Commission President Jose Manuel Barroso said tighter euro zone integration could include a joint bank deposit guarantee scheme to prevent a bank run and euro area financial supervision, saying the mood had changed since member states unanimously rejected a joint deposit guarantee fund only months ago.

"In the same vein, to sever the link between banks and the sovereigns, direct recapitalization by the ESM (European Stability Mechanism) might be envisaged," the report said.

Permitting the ESM to lend directly to banks would require a change to a treaty in the midst of ratification by member states that might come too late for Spain's needs. Spanish premier Mariano Rajoy backs the idea but Rehn appeared cool to it.

"Direct disbursements to banks are not foreseen as such in the treaty, and therefore this is not an available option ... in terms of direct recapitalization," Rehn told reporters.

I have no clue how Reuters came up with the title of lifelines. One proposal is impossible because it involves treaty changes. The other proposal, higher taxes and more austerity measures, looks like a deathline.

Spanish unemployment is at 24.1% and rising and youth unemployment is 51%. Spain's Revised Budget Deficit is 8.9% and rising not shrinking.

To go from 9% to 3% how many more jobs will have to go? What will happen to tax receipts? What will happen to prime minister Rajoy if he puts such a program in place?

Rajoy knows he cannot implement such an offer, and the ECB cannot or will not do what Spain wants.

The bond market reflects this shift. Yield on the 10-year Spanish government bond is up 21 basis points today to 6.65%, having touched the record high of 6.7%.

The only solution to this mess is Spain leaving the Eurozone. Please see Spexit Before Grexit? Six Reasons Spain Will Leave the Euro First for further discussion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Spexit Before Grexit? Six Reasons Spain Will Leave the Euro First

Posted: 30 May 2012 08:15 AM PDT

Interest rates on the 10-Year Spanish bond touched 6.7% today after the ECB shot down prime Minister Mariano Rajoy's Ponzi plan to recapitalize banks.

The Spanish banking condition is in such precarious shape that Matthew Lynn of Strategy Economics proposed 'Spexit' Will Come Before a 'Grexit'.

"The euro debt crisis, like any really spectacular geo-economic event, is spawning its own special vocabulary" said Matthew Lynn of Strategy Economics on Wednesday.

We can now add Spexit to a list which includes Merkozy and Grexit, and Lynn believes the chances of Spain leaving the euro are now higher than those of Greece leaving.

"The Spanish are a lot more likely to pull out of the euro than the Greeks, or indeed any of the peripheral countries" said Lynn.

"They are too big to rescue, they have no political hang-ups about rupturing their relations with the European Union, they are already fed up with austerity, and there is a bigger Spanish-speaking world for them to grow into," said Lynn.

"One in four Spanish households now have no bread-winner. Retail sales are falling 10 percent year-on-year. Yet the prescription from Brussels and Berlin is precisely the same as it has been for every other country struggling with the euro. Endure a deep recession. Let unemployment rise. Allow wages to fall until you claw back competitiveness," he said.

6 Reasons Spain Will Leave the Euro First

On MarketWatch Matthew Lynn gives 6 Reasons Spain Will Leave the Euro First.

The Grexit, short for Greece finally giving up on the single currency, has been trending for the last few weeks. And coming up next: the Spexit.

In Greece, people have just about put up with it — until now. So have the Irish, the Portuguese, and the Italians. The Spanish won't. Here's why.

One: Spain is too big to rescue.

Two: Spain has tired of austerity already. Remember, the protests against cuts began in Madrid a year ago with the "indignados" movement, which started sit-ins across major cities in 2011. The protests spread from there to Greece, and other euro-zone countries. The austerity had hardly even begun, yet already it has provoked strong opposition.

Three: Spain has a real economy. The Greeks understandably feel nervous about life outside the euro zone. They don't really make anything. Spain is a successful economy with a perfectly respectable industrial base – its export to GDP ratio is 26%, similar to the U.K., France or Italy. Only last week the Japanese car-maker Nissan announced a major new investment there.

Four: Spain is politically secure. For many countries, euro membership is more about politics than economics. The Greeks stay in because it locks them into Europe (rather than being part of the Turkish sphere of influence). Latvia wanted in because it made it part of the EU rather than being dominated by Russia. For the Irish, it is about separating themselves from Britain. The Germans stick with the euro because the EU still represents a break with its troubled past.

Five: Spain has bigger horizons. The Spanish economy looks partly to Europe. But it looks just as much to the booming Spanish-speaking economies of Latin America (and indeed the huge Hispanic market in the U.S.). Rather like the U.K., Spanish business has always looked to the global rather than the European market. Why tie yourself to a failing project when there are much bigger opportunities out there?

Six: The debate has already started. There is already a serious discussion underway in Spain about the future of the currency. Plenty of mainstream economists and pundits are arguing that the real problem is the euro, and Spain will only recover once it gets the peseta back. The taboo has been broken. That isn't true in Greece, where even the far-left Syriza party still clings to the idea that it should stay in the euro.

Debate in Spain

Proving point number six above, El Economista picked up on the story in Comes Spexit: Spain's Euro exit before Greece?

If prime minister Rajoy refuses a bailout by the Troika, what other options does Spain have? Is another puppet government like we saw in Greece and Italy coming up?

The sooner Spain sees the light and gets out of the euro that is strangling it, the better off Spain will be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Tuesday, May 29, 2012

Mish's Global Economic Trend Analysis

Stubborn Stupidity, Fantasyland Thinking, Hopeless Bluffs
Bailout Scam: Collecting Non-Interest on Non-Loans; "Because We’re Europe"
Competition for McJobs Hits Teens: High-School Students with Jobs Hits 20-Year Low

Stubborn Stupidity, Fantasyland Thinking, Hopeless Bluffs

Posted: 29 May 2012 10:33 PM PDT

The Financial Times says Madrid in 'game of chicken' with EU.

I disagree. I think Spain's prime minister Mariano Rajoy is a stubborn fool engaged in Fantasyland thinking, unable to think straight.

The issue regards a proposed Ponzi financing scheme to recapitalize Spanish banks.

For details of the scheme, please see Spain's Plans to Recapitalize Bankia Will Put Germany, ECB at Risk; When Does the Ponzi Scheme Collapse?

Fantasyland Thinking or Failed Bluff?

If Spain was playing a game of chicken, the ECB just ended it by rejecting the Ponzi financing scheme of Rajoy.

Please consider ECB rejects Madrid plan to boost Bankia

A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said.

News of the rejection came as Spain faces elevated borrowing costs in the bond markets, tries to persuade investors it can contain problems in a banking sector weighed down by €180bn of bad property loans and, on Tuesday, saw its central bank governor stand down early.

Madrid had floated the unorthodox idea over the weekend of recapitalising Bankia by injecting €19bn of sovereign bonds into its parent company, which could then be swapped for cash at the ECB's three-month refinancing window, avoiding the need to raise the money on bond markets.

The ECB told Madrid that a proper capital injection was needed for Bankia and its plans were in danger of breaching an EU ban on "monetary financing," or central bank funding of governments, according to two European officials.

Senior government officials in Madrid argue that bailouts in Portugal, Greece and Ireland have been catastrophic and Spain will not compromise on its refusal to accept a similar form of intervention.

They said the country had implemented reforms requested by Brussels and must now be granted relief by the ECB, or the future of the single currency will be threatened. The government would like to see the ECB restart its government bond-buying programme and wants the nascent European Stability Mechanism to be retooled as a bank bailout fund.

"This is like a game of poker now," one government adviser said, "and I don't think Spain is bluffing".

ECB Had No Choice

If this was a bluff by Rajoy, it was a very poorly conceived one. The ECB had no choice but to call it, given its disastrous position of Greek garbage on its balance sheet.

The ECB simply cannot afford to load up on Spanish garbage for fear Spain will do as Greece threatens to do: default.

Irish Turn

The Financial Times says Spain must avoid an Irish turn

"We are not going to let . . . any bank fall . . . if that happens the country will fall," Mr Rajoy said on Monday. That is the message Ireland's government insisted on as it piled private banks' debts on to its puny sovereign shoulders. By the end of 2010 markets had lost faith in Dublin's ability to repay and it was strong-armed into a eurozone rescue loan.

Ireland's folly made clear that the interdependence of sovereigns and national banks is at the heart of the monetary union's present dysfunction. But to judge from Mr Rajoy's words, Madrid will tighten this deadly embrace instead of loosening it – even as its sovereign bond spreads hit euro-era records.

Losses at Bankia – spawned of a shotgun marriage between savings banks – has made Madrid promise a bailout of €19bn on top of what the state has already provided. It may reportedly place sovereign bonds directly with Bankia so as to give the bank collateral for European Central Bank liquidity while avoiding market borrowing at current punishing yields. This trick would not change the key fact of Spain increasing a debt burden it already struggles to refinance.

Promising that no bank will fall is what truly brings a country down.

Can someone please explain the absurd line of thinking that says banks and bondholders cannot take losses?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bailout Scam: Collecting Non-Interest on Non-Loans; "Because We’re Europe"

Posted: 29 May 2012 02:00 PM PDT

The absurdity of the Greek "bailout" setup is in the news once again. The New York Times reports Athens No Longer Sees Most of Its Bailout Aid

In an elaborate payment system that began after the May 6 election that brought down the Greek government, and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payment on the Greek bonds that Europe accepted under terms of the bailout deal struck in February.

"Greece will not default on the troika because the troika is paying themselves," said Thomas Mayer, a senior advisor at Deutsche Bank in Frankfurt. "Why are we doing it like this?" Mr. Mayer said. "Because we're Europe."

A Greek government advisor who spoke anonymously, for fear of alienating the European lenders, said of the troika: "They made sure that the sum for domestic spending is kept small enough to force Greece to dramatically raise its own revenues."

On its face, the situation seems absurd. The European authorities are effectively lending Greece money so Greece can repay the money it borrowed from them.

"You send the money, you call it a 'loan' — you get it back and call it an 'interest rate,"' said Stephane Deo, global head of asset allocation in London for UBS.

Since May 2010, Greece has been sent €141.7 billion in European taxpayer money to keep the country afloat and ward off a bigger meltdown that might threaten the entire currency union. Of that amount, a full two-thirds has gone to pay off bondholders and the troika.

Only a third has been earmarked to finance government operations, with only a tiny sliver spent on stimulus projects for the anemic economy.

Greek bonds are a profitable investment for the E.C.B. as long as Greece continues to make interest payments. The E.C.B. exempted itself from the debt restructuring deal. And Greek bonds were already trading at a big discount when the E.C.B. started buying them. As a result, the central bank is earning an effective interest rate of 10 percent or so.

Non-Interest on Non-Loans

If the money never gets to the borrower, then it's not a loan. Scam is a more appropriate word. Of the €141.7 billion bailout, only €47.2 can be construed as a loan all of which nearly all went to government operations, none to the average Greek citizen.

As for Mayer's statement "Greece will not default on the troika" we will see about that. Nearly three-quarters of Greece's debt, or €182 billion, is now effectively owned by the EU the ECB or the IMF, according to estimates by the investment bank UBS.

If Syriza party leader Alexis Tsipras wins the June 17 election, the Troika is going to take a big hit. The ECB's share is estimated to be between €35 billion to €55 billion.

Mike "Mish" Shedlock
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Competition for McJobs Hits Teens: High-School Students with Jobs Hits 20-Year Low

Posted: 29 May 2012 09:26 AM PDT

High school and college kids typically get the jobs that are left over, that no one else really wants, such as working at McDonalds.

However, competition for any job is now so intense, that teens cannot find any job that no one else wants.

As a result of that increased competition, Number of high-school students with jobs hits 20-year low

The American job market is no place for students as the number of employed high schoolers has hit its lowest level in more than 20 years, according to new figures from the National Center for Education Statistics.

In 1990, 32 percent of high school students held jobs, versus just 16 percent now. Blame their elders.

"By definition, teenage workers get the jobs that are left over," said Charles Hirschman, a sociology professor at the University of Washington who has studied and written about student employment. "When you can't find someone else to bag your groceries or work construction, often teenagers are the labor force you can count on to pick up that slack for a low wage. But now, with the recession, everybody has moved down. Those jobs aren't going to teenagers."

Local McDonald's managers, for example, are no longer forced to accept young workers who can show up after class. They now have the option to hire older employees with more experience and, in many cases, much more education.

"They think, 'I can hire this old guy instead. He already knows how to work, so we don't need to teach him,' " said Andrew Sum, director of Northeastern University's Center for Labor Market Studies.

The crunch is also hitting college students. In 2000, 52 percent of full-time college students worked. That number has now fallen to 40 percent, the National Center for Education Statistics reports.

Job Demographics

Please consider these thoughts I penned on May 1, 2008 (emphasis in italics added) Demographics of Jobless Claims

Structural Demographics Poor

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

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

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

Very few are considering demographics, a change in attitudes by consumers towards spending, a change in attitudes of banks to lend, and the ability of capital impaired banks to lend even if they want to.

A structural shift in consumption to savings or at least reduced consumption, is in store for boomers. Meanwhile job prospects are looking pretty grim for some time to come across the entire economic spectrum.

And so it is. Unfortunately it will stay that way for many years to come. Economists missed the boat on this one and still do even as it plays out as I suggested.

Because of student debt and low paying jobs, kids out of college are putting off raising families and buying homes. Headwinds on home prices are enormous.

Rather than buy cars they cannot afford, many kids tweet and send text messages.

Demographics, student debt, debt in general, and changing attitudes of youth about what is really important are huge deflationary forces that Bernanke is fighting.

Those expecting hyperinflation or even strong inflation out of this mess are simply not thinking clearly.

Mike "Mish" Shedlock
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Monday, May 28, 2012

Mish's Global Economic Trend Analysis

Ponzi Financing in Greece Continues; Greek Banks Receive €18bn Transfer

Posted: 28 May 2012 06:41 PM PDT

Greek banks have been shut off from regular ECB liquidity operations due to lack of sufficient collateral. Today the Banks have that collateral thanks to a disbursement of funds from the EFSF which in turn will be used as collateral for more loans from the ECB.

If this makes little sense to you it is because it should not make any sense to anyone. It is another act of desperation in a long line of desperate acts.

Please consider Greek banks receive €18bn transfer

Greece's four largest banks received a €18bn transfer on Monday as the first instalment of a recapitalisation plan agreed as part of the country's second bailout by the EU and the International Monetary Fund.

The funding, in bonds issued by the European Financial Stability Facility, will help banks reduce their dependence on emergency liquidity assistance, a temporary lifeline provided by the Greek central bank after they were excluded from European Central Bank liquidity operations this month.

The four banks are now expected to regain access to the ECB's liquidity operations, using the bonds as collateral for funding at cheaper rates than under the emergency liquidity arrangement.

Bankers said they hoped the funding would help stem a continuing outflow of deposits since an inconclusive general election on May 6 triggered fears that Greece would soon be forced to leave the eurozone.

Anyone who thinks this will stop outflows has holes in the head. As I see it, it will allow a means of additional outflows.

Mike "Mish" Shedlock
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Spanish 10-Year Bond Yield Hits 6.5%, Spread to Germany Hits Record; Prime Minister Repeats Lie "Spain Does Not Need Bailout"; Backdoor Bailout or Ponzi Scheme? More Questions Than Answers

Posted: 28 May 2012 10:54 AM PDT

In the wake of Bankia bailouts to the tune of €19 billion, the second bailout in two weeks, yields of Spanish debt are soaring.

Spread to German Bonds Hits 5.05 Percentage Points

At this rate I expect it will take less than a week before Prime Minister Mariano Rajoy changes his mind about not needing a bailout, but for now please consider another candidate for understatement of the month: Spain funding situation 'very difficult', PM Rajoy says

Spain's prime minister has said it is "very difficult" for the country to get funds.

The premium investors demanded for holding Spain's 10-year bonds over its German equivalent rose to a record 5.05 percentage points.

But Mr Rajoy said the banking system did not need an international bailout.

"There will not be any [European] rescue for the Spanish banking system," he said, but he backed calls for the European rescue fund to be able to lend to banks directly.

Last week Bankia, which was formed from the merger of several struggling regional lenders, requested a 19bn-euro bailout, which was a much bigger amount of help than had been expected.

"We took the bull by the horns because the alternative was collapse," said Prime Minister Mariano Rajoy, adding that Bankia customers' savings were now safer than ever.

Rather than borrowing money on the open markets, potentially at high cost, there are reports that Madrid is considering giving Bankia government bonds. The bank would then use them as collateral for loans from the European Central Bank.

One analyst said this would amount to "an ECB bailout through the back door".

Some are concerned that by doing this, the government is not tackling the problem of the huge amount of bad property loans, estimated at 32bn euros, that Bankia is holding.

"It is not dealing with the problem of bad loans, it is just keeping them going," said Kathleen Brooks, research director at Forex.com. "It risks becoming a zombie bank," she told BBC News.

Backdoor Bailout or Ponzi Scheme?

Is Rajoy's proposal a backdoor bailout or a Ponzi Scheme?

I proposed the latter yesterday morning in Spain's Plans to Recapitalize Bankia Will Put Germany, ECB at Risk; When Does the Ponzi Scheme Collapse?

More Questions Than Answers

One thing that will change Rajoy's tune in a hurry is if the ECB says no to the preposterous plan.

Then what?

What kind of interest rate can Spain get on the open market for bonds?

Doesn't the idea of recapitalization with junk bonds seem absurd enough in the first place?

I asked the key question yesterday: When does Germany say it has had enough of these preposterous schemes?

Mike "Mish" Shedlock
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