Mish's Global Economic Trend Analysis

White Knight Irony: IMF Threatens to Walk Away From Bailout Deal Citing Unsustainable Debt
Deflationary Pressures Unabated; Another One-Hit Wonder; Transitory Tales
Retail Sales Unexpectedly Sink Below the Lowest Economist's Estimate; September Hike? Really?

White Knight Irony: IMF Threatens to Walk Away From Bailout Deal Citing Unsustainable Debt

Posted: 14 Jul 2015 02:46 PM PDT

IMF to the Rescue?

In the final minutes of the gunpoint "negotiation" between Greece and its creditors, the last two sticking points were IMF involvement and €50 billion in pledged Greek assets in return for another "bailout".

Prime minister Alexis Tsipras said he could not give in on those demand. In the end, Tsipras bowed down and kissed the feet of German chancellor Angela Merkel and her finance minister Wolfgang Schäuble on those issues, and everything else they demanded as well.

Ironically, it could very well be the IMF that comes to the rescue and sinks this inane deal.

IMF Threatens to Walk

Please consider IMF Signals it Could Walk Away from Greek Bailout Deal.

In the three-page memo, sent to EU authorities at the weekend and obtained by the Financial Times, the IMF said the recent turmoil in the Greek economy would lead debt to peak at close to 200 per cent of economic output over the next two years. At the start of the eurozone crisis, Athens' debt stood at 127 per cent.

"Greece's debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far," the memo reads.

Under its rules, the IMF is not allowed to participate in a bailout if a country's debt is deemed unsustainable and there is no prospect of it returning to private bond markets for financing. The IMF has bent its rules to participate in previous Greek bailouts, but the memo suggests it can no longer do so.

According to EU officials, Ms Merkel stood firm on the issue, telling the Greek premier there would be no bailout — and therefore "Grexit" from the eurozone — without a formal request made to the IMF for participation in a new programme. The final bailout deal states that "Greece will request continued IMF support" once its current IMF programme expires.

If the IMF were to walk away from the Greek programme, it could cause significant political and financial problems for Berlin and other eurozone creditors. Without the IMF's imprimatur, German officials have said they would struggle to win approval for any new bailout funding in the Bundestag. German MPs must approve both the reopening of new talks and the final terms of the third bailout.

In addition, an EU official said that of the €86bn in Greek financing requirements, the European Stability Mechanism — the eurozone's €500bn bailout fund — was expected to put up only €40bn-€50bn.

Under the terms of IMF participation in Greece's second bailout, eurozone officials had agreed they would take steps to ensure Athens debt fall go "substantially lower" than 110 per cent of gross domestic product by 2022. The new IMF memo said it is now projected to be at 170 per cent by 2022.

It added that financing in a new programme would make Greece's bailout funding levels so large that they would exceed "the 15 per cent of GDP threshold deemed safe" under IMF rules, and would "continue rising in the long term".

EU leaders have only proposed lengthening maturities on existing eurozone bailout loans rather than full-scale writedowns, which Berlin argues is against EU law.

But the IMF memo said eurozone leaders needed to look at the issue more immediately and in amounts far larger than currently under consideration.

Among the options it suggested was a "very dramatic extension" of repayment plans with a "grace period" another 30 years on the "entire stock of European debt" — meaning Greece would not make a single interest or principle payment on eurozone loans until 2053; it already has such a grace period until 2023.

Alternatively, eurozone creditors would have to make "annual transfers to the Greek budget" — meaning eurozone grants to Athens — or "deep upfront haircuts", the IMF said.

White Night Irony

It would be fitting irony if the IMF saved Tsipras from himself.

Even if Greek parliament foolishly accepts terms that cannot possibly be fulfilled economically, the IMF may walk away, killing the deal outright.

Alternatively, the IMF may force the ball back in Germany's court.

Musical Tributes

Many songs with the word "walk" in them come to mind . In hope that the IMF does indeed walk away I offer ...

I'm Walking

Link if video does not play: I'm Walking - Fats Domino

Walk Like a Man

In contrast, Tsipras crawled like a helpless baby, at best. The next tribute is about what Tsipras should have done, but didn't.

Link if video does not play: The Four Seasons "Walk Like a Man" Music Video

Watch The Four Seasons "Walk Like a Man" music video from 1963. It features the foursome singing at a dance hall overlooking an interesting variety of energetic fans unleashing dance moves that could have only come out of the 1960s. During the recording sessions that produced the hit song, producer Bob Crewe would stop at nothing for the perfect take. After realizing that a fire had broken out in the room above the studio, he blocked the studio door and continued recording until firemen had to force their way in and pull Crewe out.

For further discussion of the gunpoint deal and humiliating cave-in by prime minister Tsipras, please see ....

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

Deflationary Pressures Unabated; Another One-Hit Wonder; Transitory Tales

Posted: 14 Jul 2015 12:55 PM PDT

Another One-Hit Wonder

In spite of counterproductive attempts by the Fed and Central Banks to foster price inflation, debt overhang has stymied those efforts, at least in regards to consumer prices and import/export prices.

Last month, following a surge in gasoline prices, import and export prices did rise a bit, but as with retail sales, the import/export price report was another "one-hit wonder".

Missed Boat Again

Bloomberg Econoday Economists again missed the boat.

Cross-border deflationary pressures are not abating as import prices fell 0.1 percent in June with export prices down 0.2 percent. Year-on-year, import prices are down 10.0 percent with export prices down 5.7 percent. These rates are not showing any improvement from prior months with import prices not even getting much of a lift from the bounce back in petroleum prices as the ex-petroleum reading fell 0.2 percent in the month. Year-on-year, ex-petroleum import prices, and this is a core reading, are down 2.6 percent.

Outside of monthly gains for petroleum components, negative signs sweep both the import and export columns with agricultural exports, at minus 1.5 percent in June, extending a deep run of declines. Year-on-year, agricultural export prices are down 16.7 percent in what is not good news for the nation's farming sector. A look at finished goods categories shows no price strength anywhere with import prices for capital goods, at a year-on-year minus 1.7 percent, and export prices for consumer goods, at minus 1.9 percent, especially weak.

By country, import prices fell 0.5 percent with the NICs, down 0.4 percent with Japan, and down 0.1 percent with China. Prices rose 0.4 percent for Canada, up 0.2 percent for the EU, and up 0.1 percent for Latin America.

The strength of the dollar is pulling down import prices but the decline in export prices points to a lack of global price pressures. This report is a reminder that inflation is not yet picking up steam toward the Fed's 2 percent goal and hints at similar results for this week's later releases of producer and consumer prices.

Import-Export Prices

Crude Oil

From Mid-March to early May, the price of crude rose from $44.00 to a high of $63.61. Since then, the price of crude is down by about 17%.

Gasoline Futures

From Early March until Mid-June, gasoline futures rose from $1.70 to $2.15. Since then, gasoline futures have fallen about 10%.

Deflationary Pressures Unabated

Economists keep expecting consumers to spend elsewhere "what they save" on gasoline. Of course the idea that one can "save" this way is totally absurd.

In practice, consumers have chosen to save, the only way they really can (by not spending in the first place and instead paying down debt).

This is a consequence of a consumer that is still over-leveraged in debt.

And as I have pointed out, it is only sub-prime auto sales that has propped up the consumer economy. (See Retail Sales Unexpectedly Sink Below the Lowest Economist's Estimate).

Transitory Tales

Today's import/export and retail sales reports are more flies in the ointment of the expected September rate hike thesis.

The Fed insists the negative first quarter GDP is "transitory".

Second quarter GDP will indeed rebound, but not as much as previously expected. Third quarter and fourth quarter will tell the story.

Will the Fed hike before we know how the "transitory tale" ends?

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

Retail Sales Unexpectedly Sink Below the Lowest Economist's Estimate; September Hike? Really?

Posted: 14 Jul 2015 10:02 AM PDT

A month ago, following the Expected Retail Sales Bounce, I stated "A sales snapback was coming at some point. May was the month following months of disappointments."

Key Questions

Here were my two key questions:

Will the surge in spending continue?
How Much Longer Can Subprime Auto Sales Lead?

Economists Surprised Again

The surge in spending did not continue.

Today's report not only revised last month's sales numbers lower, this month surprised if not shocked economists, with negative numbers below any forecast in the Bloomberg Consensus Estimate.

Economists predicted a rise in sales of 0.3%. Actual sales came in at -0.3 percent, a half-percentage-point below the lowest estimate, and another wrong sign for the economists.

One month does not tell a story, but it may provide clues.

Advance Retail Sales Numbers

Let's dive into the Census report for additional details on Advance Retail Sales for June.

Business	Percent Change
	June 2015 Advance From		May 2015 Preliminary From
	May 2015	June 2014	April 2015	May 2014
Retail and food services total ………………………………..	-0.3	1.4	1.0	2.3
Total (excl. motor vehicle & parts) …..	-0.1	0.1	0.8	0.9
Retail ………………………..………..	-0.3	0.6	1.1	1.6
Motor vehicle & parts dealers ………	-1.1	6.5	1.8	8.0
Auto & other motor veh. dealers …	-1.0	7.1	1.9	8.6
Furniture & home furn. stores ………	-1.6	4.1	1.4	6.7
Electronics & appliance stores …….	1.0	-0.4	0.2	-1.5
Building material & garden supplies	-1.3	-1.4	-0.4	2.3
Food & beverage stores………………	0.0	2.4	0.5	3.6
Grocery stores …………………….	-0.2	2.2	0.6	3.4
Health & personal care stores ………	0.2	1.3	-0.4	2.9
Gasoline stations ……………………..	0.8	-17.1	3.7	-18.8
Clothing & clothing accessories	-1.5	1.9	1.4	4.1
Sporting goods, hobby, book & music	0.1	6.6	0.6	7.8
General merchandise stores…………	0.7	1.2	1.4	0.3
Department stores (ex. L.D.)……….	-0.6	-1.7	1.9	-2.0
Miscellaneous store retailers ……….	-0.2	2.9	-0.1	5.1
Nonstore retailers …………………….	-0.4	3.0	0.3	5.6
Food services & drinking places …..	-0.2	7.7	0.2	8.6

Economic Comparison

If you are a Keynesian economist, that first column of numbers will look shockingly dismal.
If you are a normal human being with an ounce of common sense, you may come to the conclusion that spending money one does not have on junk one does not need is actually a good thing.

Retail Sales vs. Last Month

Retail Sales vs. Year Ago

Subprime Auto Loans

That last chart shows the real driver for retail sales: subprime auto loans. When that goes, it's likely all over. Was this the month?

September Hike? Really?

This report will undoubtedly shave a few tenths of a percent off second quarter GDP. It will also raise questions about the strength of the economy.

Unless we see a sharp economic rebound in the next two months, the Fed won't hike in September.

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

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Mish's Global Economic Trend Analysis

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