Mish's Global Economic Trend Analysis

Ex-Goldman Sachs Managing Director is Leading Candidate to Replace Trichet as ECB President
Is this more like 2007 or 1998?
Gas Pump Prices Hit Highest Level Ever for Mid-February; Gas Price Seasonality, Where to from Here?

Ex-Goldman Sachs Managing Director is Leading Candidate to Replace Trichet as ECB President

Posted: 12 Feb 2011 01:54 PM PST

ECB President Jean-Claude Trichet's term expires in October. Alex Weber president of Bundesbank (Germany's Central Bank), an inflation hawk was widely recognized to be the leading candidate to replace Trichet.

However, that idea came to a crashing end last week when Alex Weber resigned from Bundesbank.

Supposedly Trichet's replacement is a wide-open race. However, Mario Draghi, an Ex-Goldman Sachs Managing Director has the clear inside track.

Please consider Axel Weber Resigns Bundesbank, Throws ECB Race Open

Bundesbank President Axel Weber resigned, ending three days of confusion and opening the field for candidates from Finland to Italy to become the next chief of the European Central Bank.

Weber, 53, "expressed the wish to resign" and will leave office on April 30 with a successor to be named during the next week, Steffen Seibert, a German government spokesman, said today after Weber met in Berlin with Chancellor Angela Merkel. Weber is leaving for "personal reasons" after deciding to step down a year early on Feb. 8 and then being asked by Merkel to postpone the announcement, the Bundesbank said.

Attention shifts from Weber to the qualities of other candidates who, according to 1991's Maastricht Treaty, must be from the euro area and boast "recognized standing and professional experience in monetary or banking matters." Likely meeting that criteria are central bankers Mario Draghi from Italy, Luxembourg's Yves Mersch and Erkki Liikanen of Finland. German Klaus Regling, head of Europe's bailout fund, may also do so even if he lacks monetary policy experience.

This week's decline in the euro against the dollar suggests the "FX market is not pleased" by the loss of Weber given his status as an inflation fighter, said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. The ECB's credibility may nevertheless be safe given "the assessment of a central bank should not depend on one person alone," he said.

Philosophical Reasons For Weber Leaving

Weber is not leaving for "personal personal" per se. He is leaving because of huge feuds with current President Jean-Claude Trichet, and the likelihood he would be in disagreement with the the rest of the ECB as well.

For example, please consider ECB's Trichet Rejects Weber's Call to End Bond Purchase Program

European Central Bank President Jean-Claude Trichet rejected Bundesbank President Axel Weber's call to end the bond purchase program that has provided a lifeline for European governments and banks trying to shore up their finances.

"This is not the position of the Governing Council, with an overwhelming majority," Trichet said when asked to respond to Weber's Oct. 13 call for an end to the program, according to the a transcript of an interview published yesterday in Italian newspaper La Stampa.

Weber, who also sits on the ECB's 22-member decision-making council, said the risk of "exiting too late" from the emergency measures was greater than pulling out too soon. The remarks, the strongest from any ECB official advocating a removal of stimulus, came as governments and banks in Ireland, Portugal and Greece struggle to convince investors they can control their finances in the aftermath of this year's sovereign debt crisis.

"Trichet is sending a clear signal to Weber," said Carsten Brzeski, an economist at ING Group NV in Brussels. "The majority seems to favor a safety belt option for the moment and isn't comfortable with sending conflicting signals to the markets."

"There is only one single currency; there is one Governing Council, only one monetary policy decision, and one president, who is also the porte-parole of the Governing Council," Trichet told La Stampa.

Weber was never in favor of the ECB's bond program to begin with, and that caused a feud at the outset.

Weber felt the ECB was not only violating the Maastricht Treaty, but making unsound decisions on monetary policy as well. Given Weber was in a distinct minority on many decisions he decided to say to hell with it.

Mario Draghi is now recognized as the leading candidate to replace Jean-Claude Trichet.

Mario Draghi's Background

Inquiring minds are interested in Mario Dragh's Background

Mario Draghi is a member of the Governing and General Councils of the European Central Bank and a member of the Board of Directors of the Bank for International Settlements. He is also governor for Italy on the Boards of Governors of the International Bank for Reconstruction and Development and the Asian Development Bank. In April 2006 he was elected Chairman of the Financial Stability Forum, which became Financial Stability Board in spring 2009.

He graduated from the University of Rome, received his Ph.D. in economics from the Massachusetts Institute of Technology, and subsequently served as professor of economics at the University of Florence from 1981 to 1991.

Prior to taking the helm of the Bank of Italy, he was vice chairman and managing director of Goldman Sachs International and a member of the firm-wide management committee (2002-2005). He was director general of the Italian Treasury (1991-2001), chairman of the European Economic and Financial Committee, a member of the G7 Deputies, and chairman of OECD Working Party 3. He was appointed chairman of the Italian Committee for Privatisations in 1993, and, from 1984 to 1990, was an executive director of the World Bank.

Mario Draghi's Role In Greek Debt Swaps Under Review

Please consider Mario Draghi and Goldman Sachs, Again

March 17, 2010

The latest revelations regarding the Goldman-Greece relationship (on the Senate floor, no less) clearly indicate that Goldman was a lead manager of Greek debt issues in spring 2002, i.e., when Mr. Draghi was on board.

This raises three entirely reasonable and straightforward questions.

Was Mr. Draghi involved in the Goldman-Greece relationship? Sources indicate that this was very much part of his set of responsibilities, but this may be disputed.
If Mr. Draghi was involved in marketing Greek debt, did he at that time know the true Greek debt numbers - i.e., was he aware of the "debt swap" arrangement? Perhaps his Goldman colleagues concealed that information from him.
And when/if Mr. Draghi became aware of the inherent misrepresentation involved this transaction, did he take steps to fully informed investors (and any relevant regulatory bodies)? Again, it is entirely possible he learned of this matter only recently and from the newspapers.

SEC Names ex-Goldman Sachs Employee to Oversee Asset Managers and Hedged Funds

While on the subject of ex-Goldman Sachs employees turning up in high-power jobs, please consider SEC Taps Goldman Sachs Executive as Division Head

The Securities and Exchange Commission has named Goldman Sachs Asset Management Chief Investment Officer Eileen Rominger to head its division overseeing asset managers and hedge funds.

Rominger will come to the SEC after nearly 30 years in the investment management business, according to an SEC press release Tuesday.

She managed equity funds at Oppenheimer Capital and at Goldman before becoming Goldman's chief investment officer for its global portfolio management teams.

All we need now to complete the picture is for an ex-Goldman employee to run for president of the United States and for another ex-Goldman employee to replace Bernanke at the Fed.

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

Is this more like 2007 or 1998?

Posted: 12 Feb 2011 09:21 AM PST

In Thursday's Breakfast with Dave, Dave Rosenberg asks the question Is this the time to be going long?

My question is a bit different, but this is what Rosenberg had to say.

Sorry, but that time has passed. But we will probably get another kick at the can because we are sure that the "event risk", which caused so much turbulence and buying opportunities in 2010 will come around again in 2011. But this is one overextended U.S. stock market, that is for sure.

We have a dividend yield on the S&P 500 of 1.8% with a 10-year bond yield at 3.7%. Somehow that is just slightly less appealing than the 3.6% dividend yield and 2.8% bond yield we had at the March 2009 market lows. The dividend yield, by the way, is where it was at the market peak in October 2007. Food for thought.

The cyclically-adjusted P/E ratio on the S&P 500 is now 23.3x, where it was back in May 2008. At the lows, it was trading at 13.3x. So if we are talking about the best entry point from a value perspective, it was then, not now.

Amazingly, the Investors Intelligence survey now shows 53.4% bulls and 23.3% bears. At the March 2009 lows, these numbers were basically reversed.

Equity portfolio manager cash ratios today are at 3.5%; at the March 2009 lows they were closer to 6%. As an aside, the last time the liquidity ratio was as low as it is today was in September 2007.

Back at the March 2009 lows, economic indicators like the ISM was at 36 and all we could do from there was to look up. Today it is at 61 and … well, you know which way it's going from here.

When Will Global Imbalances Matter?

Everyone is partying, upping forecasts, jumping on the bandwagon, etc. Bernanke is openly bragging about his successes.

Rosenberg asked and answered his question, but I have a slightly different one: Is this more like 2007 or more like 1998 with 2 more years of partying before another crash?

No one knows for sure. Heck, most are not even aware of the question, oblivious to how overvalued this market is.

If you are in the that group, please see Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think.

As in 2007, everyone thinks they can or will get out in time. Mathematically it's impossible. Moreover, dip buying is now so firmly entrenched (again), that few will recognize the turn when it happens.

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

Gas Pump Prices Hit Highest Level Ever for Mid-February; Gas Price Seasonality, Where to from Here?

Posted: 12 Feb 2011 12:24 AM PST

Yahoo!Finance reports Gas pump prices highest ever for this time of year

U.S. gasoline prices have jumped to the highest levels ever for the middle of February. The national average hit $3.127 per gallon on Friday, about 50 cents above a year ago.

The price is about 6 percent higher than on this date in 2008. The next day, pump prices began a string of 32 gains over 34 days. They rose 39 percent over five months, eventually hitting an all-time high of $4.11 per gallon in July.

Although gas prices are expected to rise, most experts aren't expecting a reprise of 2008, when the price spike forced many drivers to join car pools and trade in gas-guzzling SUVs for fuel-efficient cars.

"It would be a mistake to think we're going to have that all over again," said OPIS chief oil analyst Tom Kloza.

He says oil demand will slide in the U.S. by May, as refineries slow fuel production while they switch to summer blends of gas. World oil consumption also may not rise as much as expected.

And Kloza contends that oil traders are more cautious now, after getting burned when oil plunged to $33 per barrel in early 2009, just six months after hitting $147 per barrel. Even the most bullish traders no longer think they can chase commodity prices higher without risk, he says.

Still, Kloza expects gas to reach $3.50 to $3.75 per gallon this spring because of the usual run-up in prices ahead of the summer driving season. That would mean an increase of 12 to 20 percent from the current level.

Crude Futures - Monthly Chart

click on chart for sharper image

Crude futures for now have stalled right at 50% retrace level of the 2008 plunge in spite of the recent turbulence in Egypt.

Unleaded Gasoline Futures - Monthly Chart

click on chart for sharper image

Unleaded gasoline futures and gas pump prices follow the price of crude as one might expect.

Note the seasonal nature of the moves. Gasoline prices (and crude futures) tend to rise from January until June or July in most years.

In 2007, there was a ramp from the beginning of the year that ended in April, followed by a pullback until July. From then it was straight up for a full year.

2009 was back to the familiar pattern of continued strength from the beginning of the year until July. 2010 had a July low instead of a high, similar to 2007.

Crude Futures - Daily Chart

click on chart for sharper image

Prices at the pump may be up, but crude prices are down since the start of the year as noted by the dashed line. Prices at the pump will head lower eventually if crude prices keep sliding.

Inability for crude prices to continue higher with events in Egypt and the Mideast might be meaningful. Moreover, interest rate hikes in China could start weighing on commodity prices in general, especially if those hikes come at a pace faster than expected.

There are a lot of variables in play, including seasonality, rate hikes in China, the extremely overbought reflation trade, Quantitative Easing, and price action weakness (except for a 2-day pop now taken back) in the face of events in Egypt.

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

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Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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