Mish's Global Economic Trend Analysis

We Want to Have Our Cake And Eat It Too; Another Hotel California Setup; One Million Tiny Miseries
Debt Sells Like Hot Cakes as Corporations Raise Cash; Bernanke Fed Distortions
Yield Curve: Where To From Here? Extreme Complacency in Face of Bernanke Shift

We Want to Have Our Cake And Eat It Too; Another Hotel California Setup; One Million Tiny Miseries

Posted: 09 Jan 2013 07:47 PM PST

UK prime minister David Cameron has promised to renegotiate terms of its membership in the EU and put the measure to a popular referendum.

In response, Business leaders warn UK's David Cameron that leaving the EU would be bad for economy.

Top business executives have warned U.K. Prime Minister David Cameron that he could damage Britain's economy if he seeks to renegotiate the terms of its membership in the 27-country European Union.

In a letter published in the Financial Times on Wednesday, Virgin Group's Richard Branson, London Stock Exchange head Chris Gibson-Smith and eight other business leaders challenged Cameron's plan to renegotiate the U.K.'s EU membership terms and put the matter to a referendum.

However, popular distrust of the EU has grown in Britain — one of the 10 countries in the region that doesn't use the euro. The British public shows no interest in the EU's plans to move closer together. Most can't even seem to stomach the current level of power of the EU, which many Britons see as meddlesome and inefficient.

Though the business leaders urged EU reform in their letter, they argued "we must be very careful not to call for a wholesale renegotiation of our EU membership, which would almost certainly be rejected."

"To call for such a move in these circumstances would be to put our membership of the EU at risk and create damaging uncertainty for British business, which are the last things the prime minister would want to do," they said.

But while Cameron wants Britain to remain in the EU and to retain influence in the body, he is also resisting a push by many member states, like France and Germany, to grant central authorities in Brussels greater powers over financial and legal affairs for the whole of the EU.

In the long run, many EU countries want to turn the bloc into a United States of Europe, an idea British politicians, particularly among Cameron's Conservatives, abhor.

We Want Our Cake And Eat It Too

Note that it is not just UK businesses that want their cake and eat it too. So does Cameron.

The irony is that everyone is tired of the nonsensical nannycrat rules of the EU, and those rules will only get worse as time goes on.

For example, the nannycrats in Brussels are hell-bent on financial transaction taxes, high VATs, and onerous corporate income taxes. The bureaucrats also have gone along with absurd crop subsidies demanded by France. The result is everyone in Europe overpays for food (and nearly everything else) on account of tariffs that have not saved a single job.

For now, the EU has backed down on a ridiculous airline carbon tax scheme, but rest assured the subject will come up again. Indeed, all the nannycrats did in November was suspend the proposal for a year, hoping for less opposition next time.

One Million Tiny Miseries

Bureaucrats never give up on stupid ideas, they just set them aside for a while. Proof is in the pudding. In the EU, inane rules, regulations, and fees are everywhere you look.

In case you think I am exaggerating, Pater Tenebrarum has an excellent writeup in his post One Million Tiny Miseries Inflicted by Government Policy

Hotel California Setup

Cameron sees some of those things and wants to renegotiate special rules for the UK. In effect, he wants to have his cake and eat it too, just like the business leaders. His hope is to keep the nannyrules he likes, and toss out a plethora of rules he doesn't like.

The problem with his approach is this is a Hotel California setup. As with the Euro, you can check in anytime you like, but it is damn hard to leave.

If Cameron commits (or the referendum passes), sometime down the road, after he is gone as Prime Minister (which could be rather soon), some other prime minister is likely to agree to god-knows-what, and without a referendum giving UK citizens any say in the matter.

Note that had it not been for that absurd transaction tax idea last December, Cameron may have signed on the dotted line already.

US Voices Concern

The Telegraph reports US publicly voices concerns over Britain leaving EU

Philip Gordon, the US assistant secretary responsible for European affairs, said that Britain's membership of the EU was "in the American interest".

His remarks came as David Cameron prepares to deliver a speech on Europe later this month. The Prime Minister is expected to promise to renegotiate Britain's membership and then put the new terms to a referendum. Many Conservatives, including some Cabinet ministers, believe that a 'No' vote would mean Britain leaving the EU, although Mr Cameron says he opposes an exit.

One Last Chance to Get this Right

The UK has one last chance to get this right. The way to get this right is simple: Ignore pleas from the US, put the matter to a vote (including an option to leave the EU as opposed to renegotiate terms), openly campaign to exit, then politely tell the EU to go to hell when the result comes in.

Simply put, it is preposterous to expect one nation out of 27 to have significant leverage over a group of dedicated nannycrats, all wanting some inane rule, regulation, or tax.

In the meantime, expect nannycrat proponents to pound the airwaves with threats of Armageddon sometime before the vote.

It will be interesting to see if common sense secures a victory over the nannycrats, the socialists, and the half-baked conservatives expecting to have their cake and eat it too. Don't count on it.

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

Debt Sells Like Hot Cakes as Corporations Raise Cash; Bernanke Fed Distortions

Posted: 09 Jan 2013 12:05 PM PST

In five January business days, corporations sold $52.75 billion in debt according to Informa Global Markets. MarketWatch highlights that point in companies sell debt like hot cakes

Companies have flooded the market with new debt to start the year, even after the recent jump in Treasury yields, as they deem market conditions good enough and eager buyers plentiful enough to make deals go smoothly.

Companies have already sold $52.75 billion in debt this month — in five business days, according to the firm.

"Many issuers are taking advantage of the stable markets before their earning blackouts begin," said Edward Marrinan, a credit strategist at RBS. "We expect more of the same today and see no reason for the extremely strong market tone to change anytime soon."

Analysts expect companies to sell about $111 billion this month, according to a poll by Informa.

On the sovereign side, MarketWatch reports Mexico issued $1.5 billion in 30-year bonds at a record low yield of 4.19%. Turkey sold $1.5 billion in 10-year debt at a record low 3.47%

Flooding the Market With Debt

Bank of America Corp. BAC sold $6 billion in debt on Tuesday
Staples SPLS and Toyota Motor Credit each sold more than $1 billion
Berkshire Hathaway Finance Corp. BRK.A issued $500 million
Comcast Corp. CMCSA sold $2.95 billion in bonds.

Little to No "Net Cash"

As a result of these operations, cash on corporate balance sheets will rise. In turn, expect to see more nonsensical reports about "cash on the sidelines".

I have discussed this point many times before.

On May, 11, 2012, In Cash Cow Liquidity Comparison: Where's the Cash and Where's the Debt? A Look at the Top 50 Companies, I noted "net cash on hand at the top 50 companies is negative to the tune of $1.479 trillion. If one considers short-term investments to be cash equivalents, then net cash is negative $1.251 trillion. Only if long-term investments are included does the number go positive."

At the time of that report, cash was approximately $4.554 trillion and debt was $4.503 trillion.

Simply put there is no net cash on the sidelines. Companies are raising cash, but they are also raising debt.

Apple and Microsoft are two companies with genuine cash on the books. I will do a "Cash Cow" update again.

Bernanke Fed Distortions

By the way, this action is one of the severe distortions of actions by the Bernanke Fed. In pushing rates low, those on fixed income have to accept pathetic yields on treasuries and corporate bonds.

This has had a net positive effect on equities but it has also royally screwed those needing income to survive. For further discussion, please consider Hello Ben Bernanke, Meet "Stephanie"

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

Yield Curve: Where To From Here? Extreme Complacency in Face of Bernanke Shift

Posted: 09 Jan 2013 12:46 AM PST

After a somewhat lengthy hiatus, Curve Watcher's Anonymous is taking a good long look at the US treasury yield curve.

Treasury Yield Curve

click on chart for sharper image

QE Ending in 2013?

There have been three consecutive headfakes higher in treasury yields only to see yields plunge to new lows on repeated QE announcements by Bernanke.

Is the fourth time a charm? Certainly Bernanke is not about to hike interest rates as Greenspan did. But what happens to the long end of the curve if Bernanke simply ends QE later this year?

The question stems from Minutes of the December FOMC Meeting released last week.

While almost all members thought that the asset purchase program begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased. Various members stressed the importance of a continuing assessment of labor market developments and reviews of the program's efficacy and costs at upcoming FOMC meetings.

In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases.

Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.

Extreme Complacency in Face of Bernanke Shift

Steen Jakobsen, chief economist for Saxo Bank in Denmark reflects on the minutes of the latest FOMC meeting in his post on Tuesday Two Ways to Be Happy.

There were two ways to be happy: improve your reality, or lower your expectations ― Jodi Picoult, Nineteen Minutes.

We all know which method the market uses to be happy!

I have to admit I am still fighting to understand what I think was a dramatic change in FOMC Minutes, which it should be said, the Ivory Tower Wall Street banks are busy ignoring, but a few points:

It does reflect a change from the Fed. Is Bernanke trying to protect his legacy as Bruce Krasting cleverly suggests in his piece: Ben Bernanke is facing a legacy problem. The argument here is that Bernanke leaves in just over a year from now and wants to leave US Monetary policy closer to a "neutral stance" relative to the present "emergency levels". Greenspan did the same for Bernanke as he hiked rates from 1% to 6% over 22 months, trying to unwind the easing of monetary policy following the 2000 IT bust. Anyone inclined to ignore bureaucrats' need for securing their legacy only has to look at how Greenspan spent two to three years trying to defend his record while at the Fed after he left (with no success).

The risk-on vs. risk-off paradigm has changed.

Sure, the Fed is not going to reduce its balance sheet. Sure, the Fed can come back and do more, but.... the put is much weaker now on the market. Actually, as of now the Fed's balance sheet size is stalling, even getting smaller, and clearly from the minutes we gathered that some of the FOMC members are genuinely concerned about the size of the balance sheet. My take is that "everything being equal the put on the market is now trading at less than 50 delta forward vs. 75 delta before these minutes.

The markets are clearly reacting to this.

The move in the 30 Y US bond yield is quit dramatic(at least relative to recent years lack of upside risk). We saw 2.46% in July 2012 and are now trading at 3.08%. The move is even more puzzling considering that recently the US economy is going nowhere, if anything it's stalling.

I have commented earlier this week - Overconfidence is the new black - about the extreme complacency of the market. We entered 2013 with the notion that nothing could go wrong. The FOMC was accommodative, 2013 was going to be a transition year where investing was supposed to be on autopilot. But already in the second week of the year and, at least in momentum terms, the world's biggest monetary experiment is flagging. The market will deny it for probably a week or two more, but even in finance there is gravity.

Bernanke's Legacy Problem

Bruce Krasting notes Ben Bernanke Is Facing A Legacy Problem

The surprise of the week was not the goofy ending to the cliff. It was the minutes from the Fed.

The meeting in question took place on 12/12, just 23 days ago. Some very major announcements came as a result of that meeting. A new, and much more aggressive Fed policy was revealed.

The Fed said it would keep its foot on the monetary gas pedal until unemployment fell to 6.5%, and maybe even lower than that. The economic forecasts that the Fed released showed a consensus estimate for unemployment staying above the magic 6.5% until at least 2015. So that set a bar for any changes in monetary policy years into the future.

And then we get the minutes from the meeting where all these dramatic steps were taken. The minutes read completely different. What the hell happened?

Why would the Fed send one signal on December 12 and quite a different one on January 4? When it comes to the Fed, there is always a motive for its actions. The motives are not always clear.

I do believe this development is connected to the "legacy" issue. Bernanke's term at the Fed will set many historical precedents. To a significant extent, history will judge Bernanke on what he did while chairman of the Fed. But the books will also look at what happened after he left.

I believe that Bernanke would very much like to leave his successor with a Fed that had policy choices. As of today there are no options left. Just more useless QE. I doubt that Bernanke wants to exit with the Fed's foot planted firmly on the gas pedal. The next guy does deserve a cleaner plate than now exists.

Is the Legacy factor influencing Bernanke? I think it has some sway in his thinking. Consider what Greenspan did before he left. After years of soft monetary policy he ratcheted up the Federal Funds rate 17 times in 22 months.

Clearly, Greenspan tried to get monetary policy back to neutral before he left, I don't see any reason why Bernanke would think differently. Are we watching a repeat of history? At a minimum, his legacy, and where he wants the Fed to be when he leaves, is part of Ben's thinking today.

Reading the Fed's tealeaves is a bit of a fool's game. The chances of being right are about 50-50. But for the sake of discussion, assume that the Fed was telling the truth this past week. Monetary policy will change over the course of the year. It will go from 4th gear and full gas, to "neutral".

Reflections on the Fed's Balance Sheet

Bruce notes that there are two schools of thought regarding the Fed's balance sheet.

The size of the Fed's balance sheet is what matters most when it comes to measuring economic stimulus
The direction of the Fed's balance sheet (the daily, weekly, monthly flows) is what matters most

Bruce opines that most Fed watchers believe that size is what matters. He sides with ZeroHedge that the flow is what counts. I agree as well, especially at policy turning points.

Neither Zerohedge, nor I, nor Bruce, think the Fed is going to reduce its balance sheet by selling assets. It would put too much upward pressure on interest rates. Steen Jakobsen is in that camp as well.

Yet, if we are correct that flow is what matters, then the Fed going from huge balance sheet additions to a neutral stance, ending QE would be a big thing. This holds true whether the Fed winds down slowly (the most likely scenario) or the Fed halts abruptly (which could put an even larger shock on the system).

Guessing Game

Of course, all of us may be in fantasy land. Perhaps Bernanke has no intention of halting QE in spite of what the minutes suggest. That was indeed my first thought when I read them.

However, if it's not a headfake, both the stock market and the bond market could be in for quite a rough ride given the extreme complacency and the "belief bubble" that the Fed can do no wrong.

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

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Mish's Global Economic Trend Analysis

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