Mish's Global Economic Trend Analysis

Fisher Calls for "Slow Slog" Recovery Yet Says Fed has "Done Enough if Not Too Much" to Stimulate Economy
Housing ATM Theory and Finland's Property Bubble
Beyond the Point of No Return; Operation Twist to Infinity
Fed Uncertainty Principle as Applied to ECB: Trichet's Power Grab

Fisher Calls for "Slow Slog" Recovery Yet Says Fed has "Done Enough if Not Too Much" to Stimulate Economy

Posted: 06 Jun 2011 08:46 PM PDT

Bernanke is calling the shots but that has not stopped a few Fed Governors from speaking their minds. Please consider Fisher Says Central Bank Has 'Done Enough if Not Too Much' to Help Economy.

Federal Reserve Bank of Dallas President Richard Fisher said the central bank has "done enough if not too much" to stimulate the economy and "one has to question the efficacy" of doing more.

While "it's going to be a very slow slog" for the economy, the U.S. should grow at more than a 3 percent annual rate in the second half of this year, Fisher, 62, said today in response to audience questions after a speech in New York.

The Fed is set to complete its second round of large-scale bond purchases this month, and Fisher has said he will be among the first policy makers to push for a reversal of policy as needed. The Dallas chief, who votes on the Federal Open Market Committee this year, dissented five times in favor of tighter policy the last time he was a voting member in 2008.

In his speech, Fisher reiterated his view that the nation's largest banks may eventually need to be broken up to prevent them from posing threats to stability and economic growth. He echoed concerns among Fed district bank presidents, including Thomas Hoenig of Kansas City and James Bullard of St. Louis, that the financial-overhaul law enacted last year may not be strong enough to solve the too-big-to-fail problem and to prevent a meltdown by one or more big banks from damaging the economy.

Too Much

One look at speculation in commodities, the stock market and junk bonds is all you need to see to understand the Fed has done too much already, yet it did not help the real economy one bit.

As for 3% second half growth, I will take the under. Moreover, barring a drop in the participation rate, I expect the unemployment rate to rise.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Housing ATM Theory and Finland's Property Bubble

Posted: 06 Jun 2011 03:39 PM PDT

Ukri who lives in Finland writes ....

We have very frothy housing prices here, especially in the capital area, and a world record of sorts in tying the loans into adjustable rate mortgages. Fixed rates are a peculiarity in Finland. Over 90% of all mortgages here are adjustable rates.

These clowns are actually trying to sell reverse mortgages for mostly elderly customers. And they are promoting them with the classic ATM-in-da-house bubble-pictures! The captions are something like "Going traveling again?!" and "Yeah since I have this home-made cash."

Above the pic it says something with a meaning of: "When you save equity by paying a mortgage, you can later utilize the equity once you retire".

Add Finland to the list of countries that will blow sky high once we get some sanity into euribor rates in terms of pricing risks accordingly instead of socializing the risk factor.

Get Your Housing ATM Reverse-Mortgage Today

Interestingly, the cartoon is supposed to depict a serious proposal from the quarterly housing market analysis of HYPO.

The captions were in Finnish but I changed them courtesy of Ukri's translations.

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

Beyond the Point of No Return; Operation Twist to Infinity

Posted: 06 Jun 2011 09:11 AM PDT

Inquiring minds are reading a post from Steen Jakobsen, Chief Economist at Saxo Bank in Denmark. Please consider Steen's Chronicle: Consensus, buying time aren't acceptable

There are three major themes this morning: the election in Portugal, Greece bail-out Part II, and confirmation of slowing US growth.

Portugal

On the surface, the Portuguese election looks like a victory for change as the Social Democrats (PSD) secured 30 per cent of the vote and appear to have a solid majority of 126 seats in the 230-seat Parliament with the support of the Conservative Popular Party. The new prime minister, Passos Coelh, has promised austerity beyond the needed cuts of 3.5 per cent of GDP per annum layed out in the IMF plan.

But real change - what change?

Portugal has become the poster child of an Entitlement Society – the public sector has extended everywhere and private capital has been crowded out by the need to keep the public sector employment in place. The only solution to Portugal's catch-22 is to create real private sector growth and to cut the public sector down in size. Portugal has one of the lowest GDP growth rates in Europe with a four-year average of -0.7%, and an outlook for -2.1% in 2011 and -1.5% for 2012, according to the ever too optimistic OECD. Even more importantly than GDP growth rates, unemployment will rise to 11.7% and then 12.7% over the next two years from present 10.8%! That's a recipe for a social upheaval.

This is the huge national dilemma – Portugal has gone beyond the point of no return – the problems facing the country are not merely those of "challenges", but massive, structural intractable problems. Even if Portugal did the "right thing" – curtailed the public sector, refinanced the banks, and created a pro-business, pro-growth agenda, it would take years, not months before Portugal again starts moving forward. My issue, as always, is not with the people or the individuals of Portugal, but with the system. The Portuguese entitlement society began collapsing years ago, and the only reason the situation has been allowed to limp along until this year was due to the artificially low rates generated by the ability to ride German credit rating for years.

Greece Bail-Out Part II

The Greek drama continues – basically no one has a clue how to solve the issue of giving Greece more money when the funding runs out next spring. The "re-profiling" of debt (extending duration and the like through a "soft restructuring"), the Vienna solution and the new path of creating ratings default but not a CDS default event are all too complicated for me. My mentor always told me: if it takes more than one minute to understand your arguments, you have no arguments. Clearly, using Greece as the benchmark for how the EU will face down the sovereign debt issue, the EU institution is critically challenged, and Greece is even more so.

For starters, we have to shake our heads at the fact that, the EUR 327 billion in outstanding Greek debt, more than 90 per cent is under Greek law (source: Citigroup), whereby Greek bonds have no collective action clause (CAC). This would mean that a voluntary debt restructuring requires 100 per cent of investors to accept the terms to avoid triggering a default.

Furthermore, the ECB continues to object to any sort of debt restructuring as it would blow a hole in their own portfolio and create a moral hazard. Good luck to EU trying to resolve this before the June 23-24 summit.

Slowing US Growth

How low can we go on US growth? The status quo is maintained and extended in the USA – as the fortunes for Main Street and Wall Street continue to head in opposite directions. The Bernanke cocktail of lower rates for longer has only made Wall Street richer and Main Street poorer.

Where from here? We have our most likely scenario as one called 'QE to Infinity' but it may need to be changed to QE and Operation Twist to Infinity.

Bernanke thinks it's only a matter of size and objective to do what could not be achieved in the 1960s. As it happens, Operation Twist not only failed but became the Great Inflation of 1965-81. Fed rates were 3.0%, and were supposed to go back to 2.5% but ended at 6.0% before the Fed of the 1960s gave up.

We remain bearish the market as per my earlier note: "No more Silver Bullets" and I have increased the Crisis 2.0 odds from less than 10% to 25% as the amount of troublesome issues continue to rise day-by-day.

Operation Twist to Infinity

Steen cites a reference to "Operation Twist" in footnote 11 to Bernanke "famous" deflation speech from 2002: "Deflation: Making sure 'It' does not happen here" - the very same speech which was academic reasoning for QE and QE2.

An episode apparently less favorable to the view that the Fed can manipulate Treasury yields was the so-called Operation Twist of the 1960s, during which an attempt was made to raise short-term yields and lower long-term yields simultaneously by selling at the short end and buying at the long end. Academic opinion on the effectiveness of Operation Twist is divided. In any case, this episode was rather small in scale, did not involve explicit announcement of target rates, and occurred when interest rates were not close to zero.

Let's Twist Again Unlikely For Now

QE2 did not stimulate employment or housing. However, it did stimulate risk taking in financial markets, and bubbles in commodities and junk bonds. In other words, QE2 was a total failure.

Will that stop Bernanke?

Of course not. However, "Let's Twist Again" is unlikely for now given that Bernanke will not want the short end of the curve to rise just yet.

Nonetheless, I am in complete agreement with Steen on the critical point: "Bernanke thinks it's only a matter of size and objective to do what could not be achieved in the 1960s."

Bazooka Theory Revisited

Recall that Treasury Secretary Paulson's failed "Bazooka" policy was based on the construct that size matters. The EU's silly attempt of talking down problems in Greece was based on the same principle.

"If you have a bazooka in your pocket and people know it, you probably won't have to use it." Paulson said at a July 15 Senate Banking Committee hearing in regards to Fannie Mae and Freddie Mac.

Bazoooka Theory vs. Actual Results

I discussed the ECB's attempt at Bazooka policy on February 12, 2010 in EU Tries Paulson's Bazooka Ploy; Bazooka Theory vs. Historical Results.

Did the EU's ploy of talking down problems and threatening action work? No, it failed.

Did that stop Trichet? No, it didn't. Indeed the ECB, IMF, and EU tried a basket of ideas that all failed. Then Trichet went on to buy a boatload of Greek debt believing it would cap yields on Greek bonds. That did not work either.

Now Trichet has upped the ante once again as noted in his Call for Creation of European "Nanny-State" and Fiscal "Nanny-Zone"

Cure Cannot be Same as the Disease

Keynesian and Monetarist clowns always think it's just a matter of size. When proven wrong they simply grab more power and try again.

I discussed that idea just this morning in Fed Uncertainty Principle as Applied to ECB: Trichet's Power Grab

The disgusting state of affairs is that bureaucratic fools in the EU, US and everywhere else, all believe the cure is the same as the disease if only done in big enough size.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fed Uncertainty Principle as Applied to ECB: Trichet's Power Grab

Posted: 06 Jun 2011 01:37 AM PDT

My personal favorite post is the Fed Uncertainty Principle written April 03, 2008. I called for a huge power grab by the Fed well before it happened and well before the Lehman crisis and bank bailouts.

Interestingly, the Fed Uncertainty Principle, especially corollary number 2, clearly applies to the ECB as well.

Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

What brought the Uncertainty Principle to mind is a Google translation on FAZ.NET.

"The progressive shift of power to Brussels"

Please consider "The progressive shift of power to Brussels"

In a "five-point memorandum of [Christian Democratic Union party] CSU General Secretary Alexander Dobrindt, responds to the recent proposals of the President of the European Central Bank (ECB), Jean-Claude Trichet.

"The power of the EU has become larger after each crisis, not less. We must, therefore, the automatism that leads to a progressive shift in power towards Brussels, to the test. "It would have to determine criteria, is the point at which the European integration process to end. Then no other powers should be shifted more to Brussels. "If the analysis shows that the ultimate purpose has already been exceeded, skills are transferred back."

Dobrindt criticized the ECB's role in the € crisis. "There needs to be examined in particular whether the purchase of government bonds, debt-EU countries with the legal foundations of the ECB is compatible."

The above translation is choppy. However, choppy translation or not, the point is crystal clear: Power increasingly concentrates in the hands of those who caused the crisis. In the US that it the Fed. In Europe, it applies to the ECB.

Here is the original link in German: "Fortschreitende Machtverschiebung in Richtung Brüssel"

Although it is perfectly obvious, I did not think of Trichet's role in terms of the Fed Uncertainty Principle until reading that translation.

ECB president Jean-Claude Trichet was one of the original architects of the Maastricht Treaty, and he has violated that treaty at will ever since.

For further discussion, please see Trichet Calls for Creation of European "Nanny-State" and Fiscal "Nanny-Zone".

German Finance Ministers Wants Haircuts

As long as we are in the German to English translation mode, inquiring minds should consider Schäuble wants to take private creditors in the duty

Federal Finance Minister Schäuble (CDU) said at the weekend, including the private creditor would have to contribute. In the euro zone, he finds it, but so far little backing.

The Finance Ministry on Sunday denied a report by the newspaper "Wall Street Journal, after which the 17 euro zone countries had already agreed that private creditors about 30 billion euro should contribute to a new rescue pact. It had still not been decided, said a ministry spokesman, the Frankfurter Allgemeine Zeitung in Berlin. The federal government set but it is extremely committed to let the private creditors not left out and formalize their financial participation.

The Federal Ministry of Finance has meanwhile prepared a paper on the involvement of private creditors in the Greece-rescue. In essence it provides that private investors to abandon some of their claims against Greece. It is not enough that they voluntarily leave their money for longer in the country, as proposed by the European Central Bank (ECB).

"Public participation should include a new three-year program from 2012 to 2014," says the paper, according to the Welt am Sonntag ". The program should be accompanied by a voluntary exchange of existing bonds into new bonds with a longer term of seven years. Those investors who are switching into could be addressed in future, preferably when further debt restructuring should be required. "Bonds that are not exchanged, would not enjoy this advantage," says the paper. In addition, should the European Central Bank to agree to release only the new bonds as collateral for refinancing banks in Greece. This would imply that exchange, the European central banks almost 50 billion euros in Greece bonds.

The original article in German is Schäuble will private Gläubiger in die Pflicht nehmen.

The ECB certainly does not want to discuss haircuts. Moreover, US media has recently portrayed the German finance minister as giving in to that concept as well. Thus things are not as portrayed.

Note that a duration change, voluntary or not, constitutes a default according to Moody's, Fitch, and the S&P rating agencies.

Addendum:

Reader EM offers a smoother translation of the FAZ article as follows:

The CSU fundamentally opposes a further transfer of power in the EU in the direction of Brussels. A "five-point memorandum" from CSU General secretary Alexander Dobrindt, a copy of which has been obtained by the Frankfurter Allgemeinen Zeitung, moreover argues for a taking back of authority from Brussels.

Dobrindt is reacting especially to the most recent proposals of the President of the European Central Bank (ECB) president Jean-Claude Trichet. A European financial authority and a European finance ministry are in contravention of the EU accords. Such demands represent "A de-democratization and de-sovereignization of the EU states", writes Dobrindt. This must be "defended against".

If more power were devolved toward Brussels, this would restrict the range of options "in Berlin and Munich", writes Dobrindt. "The power of the EU has become larger after each crisis, but the magnitude of the following crisis has not been reduced. We must therefore put the automatism that leads to a progressive shift in power towards Brussels, to the test." Criteria must be established as to at which point the European integration process is considered to be complete. At that point no further powers should be transferred to Brussels. "If the analysis shows that the finality has already been exceeded, powers are transferred back."

Dobrindt criticized the ECB's role in the EU crisis. "It must especially be examined, whether the purchase of government bonds of indebted EU countries is compatible with the legal foundations of the ECB."

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

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Monday, June 6, 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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