Mish's Global Economic Trend Analysis

Avalanche of "Bids Wanted" for Munis, but "Nobody’s bidding"
Video: Fire bombs, Stones Fly in Greek Riots; All Flights to/from Athens Cancelled
Obama Gives Legislature Perfect Reason to NOT Pass Compromise Tax Bill: Says it would "End His Presidency"
Jerry Brown: "We've Been Living in Fantasy Land. Budget Much Worse Than I Thought. I'm Shocked."; Cuts Coming, Expect Union Fearmongering
Interactive Map Showing Where $130 Billion in Earmarks Went, by State, District, and Politician
PIGS Exposure Table, Explaining the Panic by Numbers; Credit Warning in Spain, Belguim; Piecemeal Proposals Doomed

Avalanche of "Bids Wanted" for Munis, but "Nobody’s bidding"

Posted: 15 Dec 2010 10:34 PM PST

The municipal bond market is going up in smoke once again with yields highest since August 2009. An "avalanche" of supply is coming, with few takers. Bloomberg reports 'Avalanche' of Sales Drives Rates to 16-Month High

Yields on top-rated tax-exempt securities due in 30 years climbed twice as fast as those on U.S. Treasuries, reaching the highest level in almost 16 months.

The prospect that tax-free municipal issuance will surge if the Build America Bonds program isn't renewed after Dec. 31 drove 30-year tax-exempt rates up 20 basis points, or 0.2 percentage point, to 4.84 percent, the highest since Aug. 17, 2009, according to a Bloomberg Valuation index.

Bondholders sought buyers for $1.4 billion in debt yesterday, the most since June 15, 2006, according to a Bloomberg bids-wanted index.

"Nobody's bidding," Tony Shields, a principal in the public-finance department at Williams Capital Group LP in New York, said in an e-mail. There's "an avalanche of bid-wanteds, and there is just not enough liquidity to accommodate this much sell-side pressure."

Amid the rising yields, New York City cut today's tax- exempt offering by two-thirds to $100 million citing "volatile market conditions," the Office of Management and Budget said in a press release yesterday.

Long-term rates may increase more than 50 basis points next year if the Build America program isn't renewed, according to a research note by analysts led by John Hallacy, manager of municipal research at Bank of America Merrill Lynch in New York.

I am strongly opposed to BABs because the last thing we need right now is a government takeover of the municipal bond market. Taxpayers are already on the hook for hundreds of billions of dollars of Fannie and Freddie debt. We do not need taxpayers on the hook for trillions in municipal debt.

For more details on the need to stop BABs and how you can help, please see Time to Kill Build America Bonds (BABs).

For more details on the muni massacre, please see Bloodbath in Muni Bond Funds; Reasons for the Muni Selloff; Will it Continue?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Video: Fire bombs, Stones Fly in Greek Riots; All Flights to/from Athens Cancelled

Posted: 15 Dec 2010 04:53 PM PST

If you had plans to take a holiday in Greece, my advice would be to switch those plans. The following video is much more violent than protests we have seen in the past.

Strikers Halt Flights, Buses

Bloomberg reports Greek Strikers Halt Flights, Buses as Bailout Bites

Greek unions grounded flights, kept ferries docked at ports and shut down public services today to protest wage cuts as the government sticks to conditions of an international bailout. Protesters clashed with police in Athens.

Air-traffic controllers walked off the job, canceling all flights to and from Athens International Airport. Public transport workers, whose salaries were cut 10 percent under a bill approved early today in parliament, worked on and off between 9 a.m. and 5 p.m. to carry protesters to rallies.

About 20,000 people heeded a call from the country's two biggest union groups to protest in Athens, according to police estimates. Some protesters threw fire-bombs at officers deployed outside parliament and at the Finance Ministry in the center of the capital. Police responded with tear gas and flash grenades.

Former transport minister Kostis Hatzidakis was attacked by protesters and led to safety after receiving cuts to the face, television footage showed.

"You can tighten your belt up to a point and then you reach a point where fiscal austerity is self defeating and I think they've reached that point," said Diego Iscaro, an economist at IHS Global Insight in London. "Now they really have to concentrate on these kinds of measures."

"Right now we have a common enemy, those who are in government, the IMF and the EU," said Klapsis [a stationmaster at a suburban bus depot in the capital Athens for 31 years.] The IMF "wherever they pass through is scorched earth, the same as fire. They leave nothing behind," he said.

Anyone who think Greece will pay back all of its debt obligations is not thinking clearly. The same applies to Ireland, Portugal, and Spain.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Obama Gives Legislature Perfect Reason to NOT Pass Compromise Tax Bill: Says it would "End His Presidency"

Posted: 15 Dec 2010 04:06 PM PST

Here's a welcome choice: Obama tells lawmakers not passing tax deal could end presidency.

In urging lawmakers to vote for his tax deal, President Obama is using one of his go-to lines from the healthcare debate, according to a Democratic lawmaker.

Obama is telling members of Congress that failure to pass the tax-cut legislation could result in the end of his presidency, Rep. Peter DeFazio (Ore.) said.

"The White House is putting on tremendous pressure, making phone calls, the president is making phone calls saying this is the end of his presidency if he doesn't get this bad deal," he told CNN's Eliot Spitzer.

During the end of the healthcare debate, Obama reportedly told Democrats upset that the bill did not contain a public healthcare option that not passing it could put his presidency on the line and stall the liberal agenda for decades.

Stalling the liberal agenda for decades is just what we need. Now, if Obama would just pledge to resign if the bill did not pass, we might see some interesting vote switches in both the Senate and the House.

Otherwise, does anyone actually believe the House will not pass this thing? Given the odds of the bill not passing are .5% or less, this needless hot-air posturing makes the president look like a complete fool.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Jerry Brown: "We've Been Living in Fantasy Land. Budget Much Worse Than I Thought. I'm Shocked."; Cuts Coming, Expect Union Fearmongering

Posted: 15 Dec 2010 11:37 AM PST

California's "Fantasy Land" budget finally comes to light of day. Jerry Brown said "I'm shocked. The mess is much worse than I thought."

In turn, educators and unions were shocked by Jerry Brown's and state treasurer Bill Lockyer's statements "cuts are coming". Brown promised more cuts but no tax increases without voter approval.

The LA Times reports Brown wants to fast-track budget agreement within 60 days.

Gov.-elect Jerry Brown said Tuesday that he wants to complete a budget agreement within two months of unveiling his budget, an accelerated timeline that would allow a late-spring special election for potential tax increases or other revenue generation.

"We'll present a budget on Jan. 10. It will be a very tough budget, but it will be transparent," he said. "We'll lay it out as best I can. We've been living in fantasy land. It is much worse than I thought. I'm shocked."

A spokesman later sought to play down the timeline, calling it "an ambitious goal."

Brown has refused to publicly discuss his budget plans, but he has met privately with lawmakers and interest groups. People involved in the meetings expect him to enact an austerity budget in the spring, then hold a special election in which voters can decide whether to raise taxes or other revenues in order to restore services. He pledged during the campaign not to increase taxes without voter approval.

"This is really a huge challenge, unprecedented in my lifetime," Brown told hundreds of educators, union representatives and parents who had gathered at UCLA. "I can't promise you there won't be more cuts, because there will be."

"The day of reckoning is upon us and I'm determined to bite the bullet, get it done in whatever way the consensus of California can be built," he said. "Fair, transparent and enduring — that's my goal."

Expect Union Fearmongering

Jerry Brown sounds serious, but does he mean it? The unions are whining already. No doubt they will put every available penny into fearmongering in support of higher taxes. I sure hope the governor puts this to a vote.

The most encouraging sign at the conference came from State Treasurer Bill Lockyer who said "So far, I've heard good ideas about how to spend more money. Great. It ain't there. It's time to make cuts, I believe deep cuts. I'd do the 25% across the board and just say those who wanted less government, you're going to get your wish. In other communities that are willing to put something on the ballot to make up that difference, they're going to have a higher service level."

Educators were horrified of course.

No Meat on the Bones

"There is no more meat on this bone to carve, the only thing left is amputation," said David Sanchez, president of the California Teachers' Assn. "If we do what Mr. Grinch wants us to do, the possibility of shutting down schools is a reality. Is that really what we want to do?"

Of course there is meat on the bones. Not a single has to teacher lose their job. All they have to do is grant reasonable concessions on union wages and pension benefits, then rein in absurd administration costs. That's it. Instead they will whine and bitch and moan begging for more handouts from taxpayers.

In one sense, David Sanchez is correct. There is no meat on the bones, taxpayer bones. Should it come to a vote, taxpayers should tell David Sanchez and the California Teachers' Association to "Go to hell".

By the way, massive state cuts are coming one way or another. The states can do it the proper way and stick it to the public unions, or states can rob taxpayers like they usually do. Either way it will be a hit to the economy. The first way would be a short-term hit for a long-term gain; The second way, raising taxes to fund union greed, would be a long-term disaster.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Interactive Map Showing Where $130 Billion in Earmarks Went, by State, District, and Politician

Posted: 15 Dec 2010 10:01 AM PST

Inquiring minds are investigating where $130 billion in earmarks for 2011 went, state by state, district by district, and in some cases by politician. The following interactive map is courtesy of Ellie Fields and Ross Perez at Tableau Software.

Ross Perez writes ...

As you may know, the administration has made numerous promises to make earmark data available to the public and congress has basically blown it off. The folks at the Sunlight Foundation, with help from others, have taken the time to go through and actually enumerate and record every single earmark for FY 2011 and put it into a downloadable database.

I took that DB and made this viz of total earmarks by state, which you can also switch (using the select measure drop down) to see earmarks per capita. Those looking to email their reps can also click the tab at the very top and see earmarks by politician. The gist is that $130 billion is going to earmarks next year. A drop in the bucket some may say but as you know, that adds up alarmingly fast.

The video contains lots of data and it may take extra time to load. Please be patient. It takes an extra 3-5 seconds on my computer. Your results may vary. If you have an inadequate memory, the display may be slow or inoperable.

To see details such as the number of earmarks and the dollar total per district, click on "by district" then hover over one of the horizontal bars.

For additional information including the Sunlight Foundation report and data, and a discussion of the huge effort it took to compile that data, please see Leading by Example: Earmark Transparency

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

PIGS Exposure Table, Explaining the Panic by Numbers; Credit Warning in Spain, Belguim; Piecemeal Proposals Doomed

Posted: 15 Dec 2010 03:27 AM PST

To explain the ECB's panic over Spain, all one needs to do is look at this "exposure table" from the recently published BIS Quarterly Review. I highlighted areas of interest.

click on chart for sharper image

Exposure to Spain
Germany - $216.6 billion
France - $201.3 billion
Great Britain - $136.5 billion
US - $172.8 billion

Exposure to Ireland
Germany - $186.4 billion
France - $77.3 billion
Great Britain - $187.5 billion
US - $108.3 billion
Spain - $17.7 billion

Exposure to Portugal
Germany - $44.3 billion
France - $48.5 billion
US - $35.6 billion
Spain - $98.3 billion

Exposure to Greece
Germany - $65.4 billion
France - $83.1 billion
US - $36.2 billion

Note that Spain which itself needs to be bailed out, has a $98.3 billion exposure to Portugal (which will probably need to be bailed out next), as well as a $17.7 billion exposure to Ireland (bailout underway).

Spain and Ireland are the big boys here, but the whole thing is a mess. The table does explain the panic at the ECB and EU to contain this mess. However, it is simply too late. The only question is how long will it take before this blows sky high?

S&P Warns on Belgium

Within months (if not much sooner) we may need to add Belgium to to the table. Please note the S&P gives Belgium credit rating warning amid political uncertainty

S&P lowered Belgium's outlook to "negative" from "stable", because ongoing political instability is hampering efforts to bring the country's deficit under control. Unless the situation is resolved, S&P is likely to cut its rating on Belgium's long-term debt by one notch by June 2011.

Belgium has been without a government since April when its ruling coalition collapsed. A general election was held two months later, but Belgium's political parties are still trying to form a government. The country has struggled over the past few months to reach agreements on fiscal policy, social security, health care and labour market regulation.

Belgium is currently running a total debt-to-GDP level of about 100%, and its annual deficit is likely to hit around 4.8% of GDP this year. The financial markets have been fretting about Belgium's ability to cut its deficit for several weeks. In late November the cost of insuring its debt against default hit a record high.

Spain on Review by Moody's

While singing a song and dance about the strength of Spain that nobody in their right mind believes, simultaneously Moody's puts Spain's Debt Rating on Review.

Moody's Investors Service put Spain's Aa1 debt rating on review for a possible downgrade on concern over the country's funding needs, debt level and control over public finances.

"Moody's believes that the above-mentioned downside risks warrant putting Spain's rating under review for downgrade," Kathrin Muehlbronner, an analyst at Moody's, said in the report.

"Moody's also wants to stress that it continues to view Spain as a much stronger credit than other stressed euro zone countries. Moody's review will therefore most likely conclude that Spain's rating will remain in the Aa range."

How's that for a wishy-washy statement probably intended to calm nerves but likely had the opposite effect.

Spain Pleads for More Flexibility

Spanish Prime Minister Jose Luis Rodriguez Zapatero who absolutely insists Spain is not in any trouble and will be able to meet its budget cutting austerity goals, nonetheless Asks EU to be More Flexible With Rescue Fund

Spanish Prime Minister Jose Luis Rodriguez Zapatero will ask the European Union to be more flexible with the use of the region's bailout fund, ABC reported without citing anyone.

Zapatero will request that the fund be used spontaneously to give lines of credit to member countries which are experiencing a lack of liquidity due to the excessive lack of confidence shown by markets, the newspaper said.

Game of Cat and Mouse

The IMF wants the EU to increase the size of the bailout fund, as if it would matter. It wouldn't. The situation is hopeless unless and until the ECB and EU agree to do the one thing that needs to be done - take haircuts on senior debt.

Hoping to stave off the inevitable, the ECB Plays Cat and Mouse Over the Euro

On one side is the European Central Bank, which is spending billions to prop up Europe's weak-kneed bond markets and safeguard the common currency.

On the other side are hedge funds and big financial institutions that are betting against those same bonds and, by extension, against the central bank, that mighty symbol of Europe's monetary union.

The strains grew Tuesday, when European finance ministers made no pledge to increase the emergency fund that the European Union has put in place to help protect the euro. The head of the International Monetary Fund, meantime, urged Europe to take broader action to fend off speculators.

"The game now is one now of cat and mouse," said Mohamed A. El-Erian, chief executive of the bond giant Pimco.

Already, the central bank owns about 17 percent of the combined debt of Greece, Ireland and Portugal, Goldman Sachs estimates. Yet in the bank's mano a mano with the bond market, psychology could be more important than money. No single hedge fund, after all, can hope to outgun the central bank.

What's the ECB going to do? Buy it all? Then what?

Taking a Bite out of Bondholders

Inquiring minds are reading Taking A Bite Out Of Bondholders by Tracy Alloway at Index Universe.

"The great tragedy of the 2008/9 banking debacle was, despite the presence of more than sufficient capital, that the taxpayer was placed involuntarily into the capital structure, between bondholders and equity holders, to shield the bondholders from losses that they should have suffered," said Paul Marson, of Lombard Odier private banking.
What regulators and governments are now seeking to do is to take the public element out of financial crises and make sure that big financial losses take a fair chunk out of private investors – and specifically bondholders. Burden-sharing, as it's now known now, would entail forcing debt investors to take haircuts on their investment, while bail-ins would enable regulators to compulsorily convert bonds into shares.

To understand the shift taking place, it helps to imagine banks' current capital order as something like a cake. Shareholders sit at the bottom and are most likely to take losses in a crisis. Junior debt investors sit in the middle, while senior debt investors occupy top position. Senior investors have traditionally been the last to bear losses should the bank fail, usually ranking equal with depositors under law.
Marson estimates that, as of June 2010, Europe's financial system had some US$13.8 trillion worth of bonds and just US$2 trillion worth of equity. Shifting losses onto the debt, rather than just the equity portion of banks' capital structure would therefore provide a significant cushion should a bank fail.

Part of Ireland's bailout entails the creation of a European Stability Mechanism, at the behest of German Chancellor Angela Merkel. This would allow European governments to force haircuts or change the terms on bonds after 2013.

Burden-sharing aside – momentum for bail-ins seems to be gaining pace.

In an August consultation paper, the Basel Committee on Banking Supervision outlined the idea of requiring bank debt to be written-off and converted into equity before any government-sponsored bailout could take place."A write-off can be viewed as a transfer of wealth from the [debt] instrument holder to the common shareholders," the committee wrote, which suggests a whole new world for bank credit, and for the indices which track the sector.

Specifically, bond investors will suddenly be exposed to plenty of downside risk in a crisis, while shareholders might suddenly find an added layer of protection.

The new bank capital structure cake is looking decidedly of the 'upside down' variety.

The 2013 Delayed-Haircut Non-solution

German Chancellor Angela Merkel pushed for a compromise that would allow haircuts for debt issued after 2013. She is correct in the need for haircuts, but the idea this mess can be delayed until 2013 is clearly flawed.

Even if by some miracle things could be contained until 2013, who would buy any troubled debt going forward? And who would not scramble to buy debt of the doggiest countries now if the ECB was silly enough to guarantee it?

Merkel abandoned the idea after ECB president Jean-Claude Trichet warned her not to "unsettle bondholders".

For more on the infighting between Angela Merkel and Jean-Claude Trichet please see Barbershops Open in 2013, Market Screams for Haircuts Today; European Crisis Spreads to Core as Belgian Bond Yields Surge; Another "Stress Test" Scam

The E-Bond Non-Solution

For a look at Jean-Claude Juncker's plan to spread the pain by floating European-Wide E-Bonds, a plan trashed by both Germany and France, please see France Joins Germany to Nix Junker's Junk Bond Proposal to Save the Euro.

Search for the Free Lunch Continues

With plans proposed and scrapped left and right, eventually the market will take matters into its own hands. The signal will be a sudden, steep, widening of credit spreads in Ireland, Portugal, and Spain.

Given that the current EU plan is best describes as "hoping the problem goes away", I suspect that will happen sooner rather than later.

Humorous Flashback

Flashback December 21, 2009: ECB Member Says No Bailouts

The European Central Bank won't bail out debt-stricken member states such as Greece, which must repair its public finances on its own, ECB governing council member Ewald Nowotny said.

"One has to be very clear: The ECB has no mandate or intention to take into account the situation of a specific country, especially not with regard to public finances," he said in an interview late Friday.

Please keep statements like that in mind when you hear foolish talk from Trichet and Noyer that there will not be haircuts on senior bonds.

Here is the precise quote to bookmark: "As far as I'm concerned, I exclude that there will be haircuts in the future" said Christian Noyer governor of the Bank of France.

Anecdotes From Spain

My friend Bran send me links from Spain every day, this morning he writes ...

Hello Mish,

If you haven't noticed, I am getting a little fed up with EU planning, central planning in general. All I see is large amounts of money being passed around with interest, interest, and more interest which cannot possibly be paid back.

I don't see anything sensible being arranged, just the usual unrealistic power grabs that are an insult to everyone. I don't think this will go down well overall. At some point people will turn and tell those trying to impose their will, to go home.

10-year Spanish bonds are at 5.6% this morning and the stock market is down nearly 2%. Eyes are the 10-year auction tomorrow. The EU has pulled every trick out of its hat for now, the only thing left is more ECB bond purchases which are strained already.

All the best, Bran.

Piecemeal Proposals Doomed

Writers Frank-Walter Steinmeier and Peer Steinbrück for the Financial Times suggest Germany must lead fightback

The time for stumbling through the euro crisis is over. Piecemeal approaches and wait-and-see attitudes are endangering European integration. We now need a more radical, targeted effort to end the current uncertainty, and provide stronger support for the future of Europe's common institutions. This must also protect the European Central Bank from becoming Europe's "bad bank", and ensuring its credibility and independence in guarding a strong euro.

The required solution is a combination of a haircut for debt holders, debt guarantees for stable countries and the limited introduction of European-wide bonds in the medium term, accompanied by more aligned fiscal policies. These measures would only work together; none alone would restore stability.

For example, we need a haircut for holders of Greek, Irish, and Portuguese debt. But we also must ensure that solvent member states, such as Spain and Italy, are not drawn into the downward spiral of financial speculation. We therefore must simultaneously guarantee the entire outstanding eurozone debt of stable countries, backed by an enhanced rescue fund. Here, eurobonds would send the message that Europe is strong, united and willing to deal jointly with whatever critical market situation emerges. But these bonds should only be launched with co-ordinated fiscal policies ensuring common minimum standards.

How would these three measures work? First, Greece, Ireland and Portugal urgently need to be released from a substantial part of their debt. Painful spending cuts and structural reforms alone – of an extent unheard of in modern economic history – will not allow them to escape their debt trap. In the interest of all of Europe, we need to restructure their debt.

Frank-Walter Steinmeier and Peer Steinbrück were respectively German foreign minister and German minister of finance between 2005 and 2009.

There are many more details in the article regarding what the plan entails. Inquiring minds will give the article a closer look.

Doing Nothing Won't Work

Whether or not the plan would work is debatable. However, bickering while doing nothing cannot possibly work. Nor can any proposed solution that does not include significant haircuts on senior bonds.

Unfortunately Chancellor Angela Merkel backed off her proposal to impose haircuts, and Germany and France both oppose E-Bonds. Of course Trichet and Noyer both insist "no haircuts"

Arguably, Steinmeier and Steinbrück have taken the best parts of three failed plans and combined them into one package. Will anyone go for it?

Assuming they do, please go back to that table at the top, noting the banks exposed to the PIGS. Assuming they don't please do the same thing.

One way or another, sooner or later, banks with PIGS exposure will take a hit. It may (or may not) be somewhat-orderly if the EU agrees on and carries out the Steinmeier-Steinbrück plan in a timely manner. It is 100% guaranteed to be disorderly, if the market gets tired or waiting and imposes its own solution.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Wednesday, December 15, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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