Wednesday, November 5, 2014

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis


Ruble Slide Continues; Russia Forced to Abandon Currency Intervention as Reserves Dwindle

Posted: 05 Nov 2014 05:13 PM PST

In the wake of falling oil prices, tensions in Ukraine, and sanction madness that hurts both Russia and the Eurozone, the ruble has been on a huge slide.

Ruble Daily Chart



Since June the Ruble has slid from about 34 to the US dollar to 44.9 to the US dollar. That is a decline of 24 percent. A long-term chart shows an even bigger decline.

Ruble Weekly Chart



Since the beginning of 2011 the Ruble has gone from 28 to the US dollar to 44.9 to the US dollar. That's a decline of  37.6 percent.

Russia's Attempts to Stabilize the Ruble Fail

The decline has been pretty orderly until about June of this year. To halt recent decline, Russia hiked interest rates on October 31 to 9.5% from 8.5%.

As the first chart shows, that huge rate hike did not halt the slide.

Russia had also been intervening in the currency markets to the tune of about $2.5bn a day, but that's not a sustainable action.

Indeed, declining reserves forced the Russian Central Bank to Abandon Ruble Support.
The Central Bank of Russia announced an effective free float of the rouble on Wednesday, a step which triggered a fresh plunge in the currency but is intended to eventually stabilise it.

The rouble's slide has accelerated in recent weeks, partly because the central bank's policy of automatic intervention was an easy target for speculators making one-way bets.

Previously, the bank had been committed to interventions worth $350m each time the rouble fell outside the band – a policy that was easy for speculators to exploit and in recent weeks had cost it up to $2.5bn a day.

Following the announcement, the rouble was down almost 3 per cent against the dollar by late afternoon in London, briefly falling below Rbs45 to the dollar for the first time and nearing a symbolic threshold of Rbs50 against the central bank's euro-dollar basket.

By accelerating the transition to a fully flexible exchange rate regime – originally planned for the end of the year – the Central Bank of Russia appears to be putting its trust in market forces instead of foreign exchange controls to fight off the risk of a financial crisis.
Floating the ruble is the right thing to do. The Ruble will eventually find the right level.

Some seriously misguided economists suggested capital controls, but that is more likely to cause panic than stabilization.

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

Eurozone Target2 Imbalances Rise Again, Led by Italy

Posted: 05 Nov 2014 10:27 AM PST

Eurozone Target2 imbalances are on the rise again, led by Italy.

Target2 Refresher Course

Before showing the latest Target2 numbers, inquiring minds may need a refresher course as to what Target2 is, as well as the problems associated with rising imbalances.

Target2 stands for Trans-European Automated Real-time Gross Settlement System. It is a reflection of capital flight from the "Club-Med" countries in Southern Europe (Greece, Spain, and Italy) to banks in Northern Europe.

Pater Tenebrarum at Acting Man provided this easy to follow example "Spain imports German goods, but no Spanish goods or capital have been acquired by any private party in Germany in return. The only thing that has been 'acquired' is an IOU issued by the Spanish commercial bank to the Bank of Spain in return for funding the payment."

Also, if people in one country (Cyprus, Greece, Italy, Spain, anywhere) no longer trust their banks, they may pull their deposits and park them elsewhere.

Please see Reader From Europe Asks "Can You Please Explain Target2?" for a more compete discussion including responsibility percentages (i.e. if Greece leaves the eurozone, what percentage of the liability falls on Germany, France, Spain, etc.)

If Greece, Spain, or Italy elects to abandon the Euro, euro-based claims in those countries would receive an immediate haircut.

Watch Italy

The recent rise in imbalances is not that large, but it primarily rests on the shoulders of Italy.

With that backdrop, Variant Perception says Target2 Imbalances Widen Again – Watch Italy.
Target2 – the payment system used for intra-eurozone transfers – has widened again, with the largest two-month move since mid 2012. A look into its breakdown reveals that it is Italy that is almost completely responsible for the increase in liabilities. Ceteris paribus, an increase in the Target2 liabilities of a central bank means capital leaving the country in question, eg through the importing of goods.

Over the last two months, Target2 liabilities have increased by €67.1bn, while government deposits have fallen €56.6bn, so the net leakage abroad of liquidity in Italy is €10.5bn. Still, this is the largest such two-month net fall in liquidity since April 2012. This is worth monitoring since Portugal's Target2 liabilities flared up in April 2010 just before government bond yields spiked; Ireland's Target2 liabilities swelled up in late summer 2010 as deposit flight took root; and Spain and Italy's Target2 liabilities accelerated just before the eurozone crisis reached its nadir and breakup of the EMU looked imminent.
Target2 Assets vs. Liabilities



The above blip in the last two months does not seem that significant, but it looks more important if you see it all comes from one place.

Target 2 Italy



Charts from Variant Perception. I added the trendline arrows in the second chart.

In this context, Italy, which had been on the mend since July 2012, has reversed course strongly in the last two months. Italy liabilities are 200 billion euros, and that poses a big theoretical risk.

Target2 Imbalances January 2007 - April 2014

Wikipedia has some good information (but also some fluff about how Target2 makes things more stable). Here is a long-term chart from Wikipedia.



Target2 imbalances dramatically improved after ECB president Mario Draghi came out with his "Whatever it takes ... And believe me, it will be enough" statement in July of 2012.

In response, Jens Weidman, German economist and president of the Deutsche Bundesbank (Germany's Central Bank), nearly resigned.

Weidman said in a Spiegel interview that "bond buying made it look as if ECB was financing governments directly — and shouldn't go ahead".

Target2 treats all assets and liabilities equal, regardless of country. The mechanism is one of the huge structural flaws in the euro system itself.

Ultimately, what cannot be paid back, won't. Alternatively, the ECB will make up the difference via printing press. Either way, German banks on the surplus side will take a hit.

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

Worst Election Performance by Sitting President's Party Since Truman; Republicans Take Senate, Increase Lead in House and Governorships

Posted: 04 Nov 2014 11:09 PM PST

I watched the returns all evening from Start to finish, not that anything was much in doubt. I expected the Republicans would finish stronger than the polls suggested, and they did by a huge margin.

Senate Results

  • Republicans picked up at least 7 Senate seats with Alaska and Louisiana yet to come. The final tally will likely be +9, giving Alaska and Louisiana to the Republicans, and Virgina (undecided as I type) to the Democrats.
  • Republicans won a Senate seat in North Carolina with odds of that happening listed at 25%.
  • So-called close votes in Iowa, Kansas, and Colorado were not that close at all.

It could have been much worse.

In Virginia, Republican Ed Gillespie nearly pulled off an amazing victory over Democrat Mark Warner.

In New Hampshire, Republican Scott Brown nearly pulled off a huge upset over Jeanne Shaheen.

Governors

  • In Illinois, Governor Quinn held a tiny but consistent lead in the polls over challenger Bruce Rauner. The election was not that close even though Rauner had a lot of baggage.
  • In Maryland, Republican Larry Hogan beat Democrat Anthony Browns in a shocking upset.
  • In Massachusetts, Republican Charlie Baker upset Martha Coakley. The last serving Republican governor in Massachusetts was Mitt Romney, elected in 2002.
  • In Florida, Republican Rick Scott defeated Republican-turned-Democrat Charlie Crist in a very close race.
  • In Wisconsin, Republican Scott Walker has the distinction of winning his third election in four years, counting a recall. 
  • GOP Pickups: Illinois, Maryland, Arkansas, Massachusetts
  • Democrats scored a pickup in Pennsylvania

The Gubernatorial score as I type is 31-15 and will likely get worse for Democrats.

House

  • Republicans picked up at least 10 seats. 
  • Democrats had 257 House seats following the 2008 election. They lost seats in every election since then. 
  • Republicans will end up with something like 246 House seats following this election. There are 435 seats so the math will be something like  246-189 in favor or Republicans. 
  • Under Obama, Democrats stand to lose at least 60 seats in total, the "biggest loss by a president's party since Harry Truman", said CNN.

What's It Mean?

The key question is "what does it all mean?"

The short answer is this vote is an anti-Obama vote as much as anything else.

I watched Senator Ted Cruz on CNN Tuesday evening. Wolf Blitzer asked Cruz twice if he would back Mitch McConnell as majority leader. Cruz twice refused to answer.

Expect Cruz to mount a challenge to McConnell for Senate majority leader.

Cruz told Blitzer we need "much more legislation". Good grief. How about dismantling rules and regulations? And how about dropping no-win divisive issues like abortion and focusing on things the country needs?

Without a doubt Hillary will distance herself from president Obama further and further. She will also do everything she can to get the majority of female votes.

Ron Paul Chimes In

On Tuesday Ron Paul Tweeted "Republican control of the Senate = expanded neocon wars in Syria and Iraq. Boots on the ground are coming!"

Senator Rand Paul is going to have to take a stand, and hopefully the right one. You cannot disenfranchise 65% of the women in the country and expect to get elected.

If Republicans nominate another Neanderthal determined to wage more wars while taking away freedom of choice, expect to see Hillary in the White House in 2016.

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

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