Mish's Global Economic Trend Analysis

Is Australia Next in Competitive Currency Debasement?
Muniland Disclosure Problem; Philadelphia's Closed-Door Two-Day Schmoozefest Backfires With Unwanted Publicity
Deposit Leak in Southern Europe as Money Heads for Germany; Stress Indicators from Saxo Bank

Is Australia Next in Competitive Currency Debasement?

Posted: 17 Apr 2013 04:00 PM PDT

Japan, the US, the UK, Switzerland, China, and even the EU with the LTRO (and upcoming hinted at rate cuts) are all in on competitive currency debasement.

The question at hand is "who is next?" How about Australia?

The Sydney Morning Herald reports RBA May Have to Cap Australian Dollar

Ross Garnaut, one of the authors of the float of the Australian dollar 30 years ago, warns that the Reserve Bank might have to consider intervening to push the currency down to minimise the recession he sees coming as the mining boom goes bust.

Professor Garnaut, of the University of Melbourne, says he would rather see the Reserve cushion the economy's looming fall and bring down the overvalued dollar by cutting interest rates to bring them closer to those of other Western countries.

While the International Monetary Fund forecast Australia will stay on its present track, with growth of 3 per cent this year and 3.3 per cent next year, Professor Garnaut warned that mining investment would fall from 8 per cent of gross domestic product back to its long-term average of 2 per cent.

He said the fall in China's use of coal in electricity generation last year was a forerunner of its shift to a new, less resource-intensive phase of growth, which would trigger a plunge in Australian mining investment. ''We can be pretty sure that we'll be [losing] 5 or 6 per cent of GDP from expenditure, and that's one hell of a fall,'' he said.

The bank's assistant governor for financial markets, Guy Debelle, told the Melbourne Institute that the way mining companies have financed the resources boom has contributed to pushing up the dollar's value to a level ''higher than one would expect, given [the] fundamentals''.

Dr Debelle said 75 per cent of the record investment by mining companies since 2003 has been financed from cash flow. As the mining industry is overwhelmingly foreign-owned, the Reserve estimates that 80 per cent of the investment was funded by overseas owners and lenders. He would not estimate how much it had raised the dollar's value, but ranked it with the massive foreign purchases of Australian government bonds as one of the key factors holding up the dollar's value despite the sharp falls in commodity prices and interest rates.

Interview with Ross Garnaut

In case the above interview does not play, simply click on the link at the top.

Mathematical Absurdity

I would like one of these economic illiterates to explain how Australia can cap the Australian dollar when Japan wants to cap the Yen, when Switzerland wants to cap the Swiss Franc, when the ECB wants to cap the euro, when the US wants to cap the US dollar, when China wants to cap the yuan and the UK wants to cap the British pound.

Competitive currency debasement mathematically cannot and will not work. Period.

The only possible outcome is economic distortion, mispricing of capital, and sponsorship of more bubbles. Yet economic fools everywhere sponsor the idea.

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

Muniland Disclosure Problem; Philadelphia's Closed-Door Two-Day Schmoozefest Backfires With Unwanted Publicity

Posted: 17 Apr 2013 12:17 PM PDT

I received several emails regarding my post Philadelphia, 5th Largest City in US is Effectively Bankrupt; Mayor Holds Closed Meeting With Wall Street to Discuss Asset Sales.

The emails were from disgruntled people hoping to leave the area for the usual complaints: unions, schools, crime.

One reader sent a link to a Philly.Com article by Joseph N. DiStefano titled Philly effort to keep well-known troubles quiet wins new attention.

Philadelphia's closed-door two-day schmoozefest with 100 bond underwriters and other would-be lenders keeps generating unwelcome publicity for the nation's brokest big (million+ resident) city.

"Retail investors own about 50 percent of municipal bonds directly and another 20 percent through mutual funds. If the media is not allowed to attend the [Philadelphia debt] conference, then retail is at a distinct disadvantage," scolds Cate Long for Reuters.

Muniland Disclosure Problem

The link to Cate Long's article was broken (it may be fixed now as I notified DiStefano), but I traced it to Muniland has a disclosure problem.

There is a glaring gap in regulation – called Regulation Fair Disclosure – when it comes to protecting municipal bond investors. It appears that issuers may be in the habit of giving material nonpublic information to preferred institutional investors, while making retail and non-preferred investors sit out in the cold. Exhibit number one is the treatment of media members who have petitioned to attend the City of Philadelphia bond investor day scheduled for this Thursday.

Philadelphia Inquirer's editor, William Marimow, said that the issuance of new bonds is public business. But what about all the retail investors who own Philly bonds? Retail investors own about 50 percent of municipal bonds directly and another 20 percent through mutual funds. If the media is not allowed to attend the conference, then retail is at a distinct disadvantage.

Dribbling out information to select bond investors is a terrible way of building a broad base of support for a municipal issue. All investors want transparency. When they don't get it they will pass on buying a bond or demand a lower price and higher yield.

My guess is that issuers like Philadelphia and Puerto Rico are afraid of what enterprising reporters and bloggers can unearth about how they manage their public finances. But it's the people's finances. When you do it in dark places, sloppy things like "insufficient documentation" seem to happen. Open up to all investors and show muniland that you have nothing to hide.

My guess is Cate Long's guess is correct. By attempting to hide the facts and/or placate institutions, the city just made matters worse.

DiStefano continues ...

"Sam Katz, the former [muni bond] adviser who now chairs PICA, the state board overseeing city finances, said investor conferences were typically designed to permit candid conversation" between city officials and bond buyers and sellers:"You might want to say something to them that you don't want to say publicly."

Still, "where the city's headed is very much the public business," and the public would be better served if the meeting were televised, Katz added.

By closing the meeting, the city and its advisers have managed to draw more attention to its problems. It doesn't help sell bonds, especially to small and retail investors, when news accounts result in up-country investment advisors like Mish Shedlock, of Sonoma, Calif.-based Sitka Pacific Investments, telling his clients that Philadelphia "is effectively bankrupt" and likely to default, that city borrowing costs are "likely to soar," and that "the city is nothing but a walking zombie now."

Maybe Katz is right: Let the public watch. Better to bore potential retail bond investors, than leave them to be alternately starved and terrorized.

I had no particular focus in watching Philadelphia. I do now, and so do fellow bloggers thanks to the inept closed-door schmoozefest with mayor Michael Nutter.

This is not a question of boring retail bond investors; it is simply a question of telling the truth, not making one set of statements to bond underwriters and another set of statements to retail investors.

I do not play the muni bond market at all, long or short, but it's worth repeating that what happened in Stockton, California is not likely to stay in Stockton or even the state of California.

It's time Philadelphia face the truth about what needs to be done. One-time selling of assets and closed-door meetings that give the appearance of hiding something is not even a start.

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

Deposit Leak in Southern Europe as Money Heads for Germany; Stress Indicators from Saxo Bank

Posted: 17 Apr 2013 09:52 AM PDT

Steen Jakobsen, chief economist at Saxo Bank in Denmark has some interesting "stress" charts in this week's email.

click on any chart for sharper image

European Demand Deposits

Steen writes: "Europe's depositors – mainly the weak Club Med states (Greece+ Portugal) continue to take money out of the country – even increasing the speed with which they do it."

Steen sarcastically added "Sure Mr. Draghi, the ECB has been a great success. The shown data is only including January as IMF data is as slow as their willingness to accept changes. Imagine when March and April data is in."

Recall that Draghi said there was no rush to exit following Cyprus. We will see soon enough.

France Germany 10 Year Bond Spread

Steen writes "The 10 Year spread between France and Germany have totally lost value. The ECB and French government is forcing domestic players in France to buy government bonds due to regulation and pro-government incentive structures."

"France and Netherlands are two economically challenged countries in the core of Europe which continues to perform dirigisme instead of attending to reforms."

Dirigisme means economic planning and control by the state. Steen does not believe central planning works and neither do I.

Copper

Steen writes: "I added Copper to my list of stress indicators (the first future). Copper is said to have a Phd in Economics as its normally leads the direction of the growth."

Slovenia, the Next Big Thing

Steen writes "I have changed Denmark 5 YR CDS for Slovenia in order to monitor its rise to the next big thing in Euro debt crisis. Today the CDS spread fell due to good bond auction."

Previously Steen had been comparing France to Denmark.

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

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Wednesday, April 17, 2013

Mish's Global Economic Trend Analysis

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