Mish's Global Economic Trend Analysis

ECRI Says Global Slowdown Will Hit This Summer
ECB Ostrich Maneuver; Euro-Zone Comedy Show: Junker Proposed "Re-Profiling" Greek Debt, Now He Wants "Soft Restructuring"; Targeting Short-Selling
Who’s Right on Medicare Reform, Ryan and Rivlin or Obama and Gingrich? Cato Institute Praises Paul Ryan's Medicare Voucher Proposal
Invisible Stock Bubble; Russell Napier sees S&P 500 Drop to 400

ECRI Says Global Slowdown Will Hit This Summer

Posted: 18 May 2011 07:56 PM PDT

Inquiring minds are watching a video with Lakshman Achuthan at the ECRI who says "Global Slowdown to Hit by Summer, Even for U.S."

The world is headed for an economic slowdown, according to the Economic Cycle Research Institute's (ECRI) Long Leading Index of global industrial growth.

"It is not country specific, but imagine if you could add up all the activity in factories around the world and see if it was accelerating or decelerating, that is what this indicator is focused on," says Lakshman Achuthan founder and managing director of the research center. "And it has been telling us very clearly, unambiguously, that we have a peak in global industrial growth this summer."

I commend Achuthan for a good interview and for insisting last year that a double-dip recession was not in the cards.

Many of you know that I got into a spat with the ECRI a while back. The issue was not that on the merits of the ECRI's indicators, but rather their claim the indicators never missed a recession call and never predicted a false recession.

Inquiring minds may wish to consider ECRI's Lakshman Achuthan Still Blowing Smoke

However, the ECRI and I now see things alike.

On Monday May 16 I wrote Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected.

That is consistent with what Achuthan said to Aaron task yesterday in that Tech Ticker interview.

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

ECB Ostrich Maneuver; Euro-Zone Comedy Show: Junker Proposed "Re-Profiling" Greek Debt, Now He Wants "Soft Restructuring"; Targeting Short-Selling

Posted: 18 May 2011 10:52 AM PDT

No matter how you label it, Greece is going to default. Nonetheless, like an ostrich with its head in a hole, the ECB remains in firm denial of the obvious.

The situation is made all the more humorous because Jean-Claude Junker, the head of the euro-zone finance ministers, keeps looking for words other than default or restructuring to describe the default that is clearly coming.

A couple days ago Junker proposed "re-profiling". When that went over like a lead balloon, he trotted out the phrase "soft Restructuring".

Comedy Show Continues

MarketWatch reports ECB holds line against Greece restructuring

Call it by any name, but restructuring Greece's sovereign debt remains a bridge too far for European Central Bank officials, who made a concerted effort Wednesday to undermine speculation such a move could be part of a solution for the euro-zone debt crisis.

Jean-Claude Juncker, the Luxembourg prime minister who also chairs meetings of euro-zone finance ministers, had said on Tuesday that a "soft" restructuring may be an option if Athens undertakes added measures. This came a day after he said a "re-profiling" of Greek debt could be an option.

On both occasions, he ruled out a large-scale restructuring of the nation's sovereign obligations.

But the idea of restructuring has never flown at the European Central Bank, concerned that such a move would raise worries about banks in Greece and elsewhere in the euro zone that are loaded up on Greek and other peripheral debt.

Lorenzo Bini Smaghi, a member of the central bank's executive board, warned in a speech in Milan that restructuring by any nation would put all of Europe in jeopardy by potentially wrecking the banking sector.

"Time has been lost talking about how to come up with a way to reduce the debt, but if we accept this we'll jeopardize all of Europe," he said, according to Bloomberg. "A solution for reducing debt but not paying for it will not work."

Juergen Stark, also a member of the executive board, warned that restructuring would be a "catastrophe" and insisted at a conference in a resort south of Athens that any attempt to restructure the nation's debt would be a "catastrophe," Dow Jones Newswires reported.

"It is an illusion to think that a debt restructuring, a haircut, or whatever kind of rescheduling you have in mind would help to resolve the problems this country is facing," Stark said. "There is no other way than to continue with fiscal consolidation, and I would even say to double the effort in fiscal consolidation."

Illusions Indeed

The illusion is insisting what cannot possibly be paid back will be paid back.

Inquiring minds may be wondering why the ECB remains in denial of the obvious. Here is the answer.

Haircuts would "Wreck the Banking Sector"

Today is actually the first day we see a ranking ECB official state the real problem. Did you catch it?

Lorenzo Bini Smaghi, a member of the central bank's executive board, said restructuring by any nation would put all of Europe in jeopardy by "potentially wrecking the banking sector".

Who's Being Bailed Out?

It is important to recognize that no countries are being bailed out. Greece is not being bailed out, nor is Ireland, nor is Portugal.

Rather, the emergency loans serve to bail out the banks on the backs of Greek taxpayers, on the backs of Irish taxpayers, on the backs of Portuguese taxpayers.

All the countries have to sign off on these bailout maneuvers. Finland came close to trashing the arrangement but conditionally hopped on the Portugal bailout train.

However, public sentiment against more bailouts is building in Germany, Finland, Ireland, and other countries.

Can-Kicking Exercise is Over

What the ECB ostriches don't recognizing is the can-kicking exercise has gone as far as it is going to go.

Ilargi mocked Jean-Claude Junker in an Automatic Earth article yesterday simply titled Reprofiling.

Ok, kids, look at the blackboard now, we're going to learn a new word today.

The word is "reprofiling". Reprofiling is a term invented over the past few days by one or more negotiators at the table discussing how to hide the fact that Greece is disappearing into the Aegean Sea slowly but surely, a while longer.

In normal days and circumstances, Greece would default on its debt. The parties holding that debt would reach a hard-fought agreement to take losses on various percentages of their claims, and the next morning, the sun would rise again, as it always has, over all 100,000 (crude estimate) or so Greek islands.

Not this time. This time, Greece is part of the EU and the Eurozone, and, more importantly, the country owes its debts to financial institutions all across the globe that can't afford the losses any hard-fought agreements would force upon them. Whether it's Wall Street banks, or the German Landesbanken, or French giants Paribas and Crédit Agricole, they're all tilting so close to the edge that any such loss recognitions might do them in.

German banks alone have €28 billion in Greek debt on their books. That does not include any swaps! A haircut such as that which would probably be required in a run-of-the-mill debt restructuring might be in the vicinity of 50% or more. Which would take €14 billion out of German banks' books. And many billions more out of other global banks. They would need to recapitalize, and some might not be able to do so.

But that's not the worst part. Those same German banks carry €114.7 billion in Irish debt, and €146.8 billion in Spanish debt. That is still only the German banks. What British, French, Dutch and Spanish banks hide in their vaults at 100 cents on the dollar (or euro) is easily an order of magnitude more.

And that's how we get to our word of the day. Reprofiling.

Put the IMF on the Curb with the Rest of the Garbage

Ilargi goes on to blasts Dominique Strauss-Kahn, "DSK", the IMF chief who faces rape charges in New York.

We need to ask ourselves why we allow these folks the control of what remains of our wealth, and the very control of our lives. Whether DSK is found guilty or not, the very idea that a guy who stays in a $3000 a night hotel suite can run for president of France for the Socialist Party kind of says it all, when it comes to being twice removed from the real world, doesn't it?

I see lots of people writing about how the IMF needs to change, or something, because it will have to play a major role in the financial problems of countries all over in the future, but I'm thinking it should just be absolved and abolished. The IMF has only ever served the needs of financial elites, like the World Bank has, and since the controlling interests behind both firmly control the politics of all relevant nations these days, why not put them by the side of the curb with all the other garbage?

I could not possibly agree more when it comes to the IMF. Indeed I said the same thing a few days ago in IMF Chief Pulled from Plane in New York on Rape Charges; Greece Says "Nothing Changed"; Talks Persist in Brussels; Time to Dissolve IMF

IMF Leadership Vacuum

Right now there is an IMF leadership vacuum. It would be best for the world if it stayed that way.

Countries that take loans from the IMF usually regret it.

Now would be a great time to take advantage of the situation and disband the IMF. Don't expect it to happen because IMF rescues are not aimed at rescuing countries, but rather rescuing big banks that made stupid loans to countries like Greece, Ireland, Portugal, Argentina, etc.

Blaming the Speculators

Stupid banks that made stupid loans are the problem. The correct solution is to make stupid banks who made stupid loans pay for their stupid mistakes.

But NO!

The EU blames short-sellers not the banks.

Please consider EU countries back plans to tackle short-selling

European Union countries presented plans to curb the short-selling of government debt and shares Tuesday, as the bloc edged closer to tighter controls on speculators many blame for compounding the credit crisis.

The regime will require investors to reveal big short-selling positions to regulators and empower an EU watchdog to ask for sensitive information and temporarily stop short-selling. EU countries will, however, be allowed veto such a ban.

If both parliament and EU member countries reach agreement, the law could be in place by the end of this year.

"We had major issues particularly with Greece where clearly there were significant (market) movements totally unidentified," France's Christine Lagarde told a meeting of European Union finance ministers in Brussels.

"We are trying with this piece of legislation to remedy that situation."

Expect the comedy show to continue. The ostriches at the ECB do not want to discuss "re-profiling" or "soft restructuring" or any proposal except one that rapes taxpayers for the primary benefit of German and French banks who made stupid loans for greedy reasons.

When Spain joins the list of countries needing a bailout, this whole ridiculous scheme is going to blow sky high. Note how much more difficult the ECB made matters. By extending still more loans to Greece and still more loans to Ireland, it dramatically increased the amount of money that will blow up in default.

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

Who’s Right on Medicare Reform, Ryan and Rivlin or Obama and Gingrich? Cato Institute Praises Paul Ryan's Medicare Voucher Proposal

Posted: 18 May 2011 08:24 AM PDT

Who's Right on Medicare Reform, Ryan and Rivlin or Obama and Gingrich?

Paul Ryan has a plan to fix Medicare with a program of vouchers. Surprisingly, Newt Gingrich blasted Ryan's plan calling it "right-wing social engineering." Gingrich is opposed to "Radical Change".

The LA Times reports Paul Ryan defends Medicare plan in wake of Newt Gingrich's slam

Rep. Paul Ryan spent Monday defending his plan to radically rework Medicare after it came under fire in surprising fashion from a fellow Republican, Newt Gingrich.

Gingrich became the first GOP presidential candidate to openly rip the plan, which would convert Medicare into a private insurance program, after the proposal -- part of a House budget blueprint to tame federal spending -- drew heavy criticism from some voters, and polls showed it to be unpopular.

"The budget passed by the House last month takes credible steps to controlling healthcare costs," Ryan, chairman of the House Budget Committee, said in a speech to the Economic Club of Chicago. "It aims to do two things: to put our budget on a path to balance, and to put our economy on a path to prosperity."

Gingrich had called Ryan's proposal "right-wing social engineering." He said the effort imposed "radical change."

Ryan's plan would provide those 54 and younger with subsidies to purchase private health insurance, rather than relying on the government as the insurer. His speech appeared to be an attempt to draw a sharper distinction between his approach and the healthcare overhaul passed last year by the Democratic-led Congress and backed by President Obama. He argued that his plan will make Medicare more efficient while the Democratic plan would lead to rationed care for seniors.

"Our budget makes no changes for those in or near retirement, and offers future generations a strengthened Medicare program they can count on, with guaranteed coverage options, less help for the wealthy and more help for the poor and the sick," Ryan said. "Our plan is to give seniors the power to deny business to inefficient providers. Their plan is to give government the power to deny care to seniors."

Meanwhile, Gingrich began a campaign swing in Iowa as a full-fledged candidate for the presidential nomination, and he too turned to healthcare in remarks in Dubuque, calling for a repeal of the new healthcare law.

Cato Institute Praises Paul Ryan's Medicare Voucher Proposal

Cato weighs in on the side of Paul Ryan with a video that explains how a "premium-support" plan would solve Medicare's fiscal crisis and improve the overall healthcare system.

Dan Mitchell at the Cato Institute created the above video and commented on it in Who's Right on Medicare Reform, Ryan and Rivlin or Obama and Gingrich?

I took a few snapshots from the above video.

Medicare Costs

Costs Born by Consumers

No Incentive For Consumers To Reduce Costs

Cosmetic Surgery Shows What Happens When There Is Competition

Vouchers or Rationing?

Big Government Cannot Fix Big Government

"When people get to shop and consume with other people's money, it is a recipe for spiraling costs".

Those seeking more government regulation to fix the problem of Medicare fraud, waste, and bureaucracy fail to understand one guiding principle: Big Government cannot fix big government, it can only make matters worse.

Radical Change Needed

The above slides clearly show that radical change is needed. The pertinent question is whether or not Paul Ryan's plan is radical enough. Therefore, Gingrich blew it with his comments.

At a minimum, Ryan's proposal creates incentives for consumers to reduce cost and that is something desperately needed.

The Libertarian solution would be to simply cut Congressional funding altogether. However, regardless of how one feels about a true Libertarian approach, it is not going to happen. Congress is not going to completely abandon Medicare.

From a pragmatic standpoint, and you are going to hear me talking more from a pragmatic standpoint in the days to come, we need to focus on what is doable.

From that perspective, Ryan's proposal may not be the best theoretical approach, but it is the best proposal to-date that that has a chance of passing.

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

Invisible Stock Bubble; Russell Napier sees S&P 500 Drop to 400

Posted: 18 May 2011 01:10 AM PDT

As measured by current earnings, the stock market does not seem hugely overpriced. The question is will those earnings hold up?

SmartMoney associate editor Jack Hough addresses the question in The Invisible Stock Bubble

A new stock bubble might now be in the making, but this time the signs are less obvious. U.S. stocks, despite having racked up a decade worth of typical gains in the 26 months after their recessionary low, do not look expensive. The S&P 500 trades at 15.3 times trailing earnings, only a smidgen above its historic average of 14.5.

Those numbers might be luring investors toward a cliff, however. History suggests today's corporate earnings are unsustainably high relative to the size of the economy. The real price-to-earnings ratio, based on a more normal level of earnings, is well over 20.

To see why, consider a broad measure of America's prosperity called national income. It consists of corporate profits, worker wages, sole proprietor income and more. Corporations and workers compete against each other for income but also rely on each other for success. When profits and wages grow in tandem, the result is healthy economic expansion. When one grabs too large a slice of the nation's income pie, it usually signals a downturn waiting to happen.

For example, corporations since 1929 have collected an average of 6.4 cents per dollar of national income as after-tax profits. In 1966 corporate profits swelled to 8.3 cents per dollar of national income; they then fell 19% by the end of the decade. In 1997 they were 8.6 cents per dollar of national income; by the end of that decade they were down 13%.

Last year corporate profits reached 9.4 cents per dollar of national income. That's 47% too high by historic standards. If earnings were to shrink to their historic average, the aforementioned P-E ratio of 15.3 for the broad stock market would rise to nearly 23. The result would almost surely be a plunge in share prices.

After-Tax Corporate Taxes as % of Gross National Income

Corporate profits have commanded this large a share of national income only twice before: in 1929 and 2006. Those years preceded the past century's worst two financial collapses.

Normalized PE Ratios

SmartMoney also mentions (but not by name) "Normalized PE Ratios" something I have talked about several times recently.

Using a 10-year average of PE ratios, Robert Shiller pegs the normalized PE ratio of the S&P 500 at 24, an excessively rich valuation.

PE Compression

The article failed to mention the biggest driver of price, "PE Compression and Expansion."

Huge moves in the stock market come not from earnings, but rather from prices investors are willing to pay for those earnings. That was the case in 1929, 2000, and 2007. It was also true at bear market bottoms in numerous years where PE ratios collapsed to under 10.

For further discussion of Normalized PE ratios and Earnings compression, please see Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think

As a follow-up post, please see Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble?

Russell Napier sees S&P Drop to 400

Finally, inquiring minds may wish to consider the video Long View: Historian sees S&P fall to 400.

Russell Napier warns the real bear market in the S&P has yet to come and that could push the S&P 500 index down to 400. The trigger for this event is related to emerging market debt yields. Click on link to play the video.

I do not have a target in mind as this setup can play out in a crash, in a long sideways move where earnings catch up to valuations, in a slow drift lower over many years, or a mini-crash followed by a lengthy sideways correction.

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

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Wednesday, May 18, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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