Mish's Global Economic Trend Analysis

Republicans Hold Wisconsin Senate in Recall Effort
Raping US Taxpayers to Bailout Banks Continues; Prudent Idiocy
Reader Asks "Why Does Euro Rally When Trichet Buys Bonds and Dollar Sink on Essentially the Same Thing?"
Trichet's Secret "Dragon Transfer" Letter to Italy PM; Watch France CDS Rates as France is "New Italy"; Trichet Illegally Usurps Judge-and-Jury Power
Fed Opts for Japan Strategy of Permanently Low Rates; Three Fed Governors Dissent ; Market Reacts With Big "Ho-Hum" Sell the News on No Hint of QE3
Worst Demand on Record for Japanese 40-Year Bonds; Can Japan Service its Debt? How?
More Overnight Intervention; Bear Market Vacuums and Heroin Rallies; Is the World Saved?

Republicans Hold Wisconsin Senate in Recall Effort

Posted: 09 Aug 2011 09:51 PM PDT

Six Republicans faced recall elections in the Wisconsin state Senate. Democrats needed to pick up three seats to have a chance at taking control. They picked up two seats, falling short.

Next week Senate Democrats face two recall elections. Thus, the Democrat's gains may be short-lived.

5 Seats were decided earlier, the last seat was just announced. With 96% of the vote in, News 3 is calling District 8 for Incumbent Sen. Alberta Darling.

The Washington Post has the story on Wisconsin recall elections: Results live blog.

The two Democrat pickups were in liberal-leaning districts, with one Senator who barely won in the general election having other personal issues.

11:36 P.M.: Democrats have won a second state senate district — Oshkosh Deputy Mayor Jessica King (D) has beaten state Sen. Randy Hopper (R). King lost narrowly to Hopper in a 2008 race that went to a recount; this time around Hopper took hits not just for his voting record but for his messy divorce and relationship with a staffer.

Democrats have taken down two state senators — Dan Kapanke (R), and Randy Hopper. They need to win the final remaining race — against state Sens. Alberta Darling — to have a chance at taking back the state senate. Both Democratic state senators facing recalls next Tuesday will also have to hold onto their seats for the senate to change hands.

These elections mean Governor Scott Walker can continue with his common-sense efforts to reform Wisconsin.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Raping US Taxpayers to Bailout Banks Continues; Prudent Idiocy

Posted: 09 Aug 2011 06:22 PM PDT

The Congressional unlimited bankroll guarantee of Fannie Mae at the insistence of the Fed has just cost US taxpayers another huge chunk of money.

Up-Font Addendum

A reader informs me that my take on the following story may be inaccurate, that Bank of America did not sell the loans but rather the servicing rights. A closer reading suggests he is correct. However, I am not going to let a good rant that follows go to waste. Whatever the sale price, or the sale, US taxpayers should not be involved - period. The title of this post was modified.

The Wall Street Journal reports BofA Sells Part of Mortgage Portfolio to Fannie Mae

Bank of America Corp. has agreed to sell part of its home-loan portfolio to government-controlled housing giant Fannie Mae, as the bank looks to shed assets and pare its exposure to an array of mortgage woes.

The deal, finalized last Friday, will deliver the rights to process and collect payments on a pool of 400,000 loans with an unpaid principal balance of $73 billion, people familiar with the deal said. The purchase price is more than $500 million, one of these people said.

The move is part of the Charlotte, N.C., lender's strategy to sell noncore holdings, rid itself of mortgage problems and preserve capital as it repositions its balance sheet to withstand future economic shocks. The bank's shares are down 43% this year amid concerns about BofA's ultimate exposure to mortgage-related losses and lawsuits.

The rights to the 400,000 loans will be transferred to Fannie Mae over four months, starting in September with the first slug of 100,000.

Taxpayers on the Hook

Note: I believe what follows to be in error, yet the essential idea is not. I will strike-through the parts in error as per the above addendum.

Those loans have a negative value. ~~Now taxpayers are stuck with $73 billion in troubled loans and had to pay $500 million for the privilege. This is yet another outrage in a long series of bank bailout outrages.~~

The idiots at Bank of America who purchased these loans in the first place should all be fired and Bank of America should be in receivership because it is clearly bankrupt.

Instead Bank of America executives receive massive bonuses for the rape and pillage of US taxpayers.

~~If you are looking for a reason Bank of America plunged 43% this year, you now have it. It had at a minimum, $73 billion in mortgages clearly not marked-to-market. How much more is it hiding?~~

And how much more garbage is the Fed going to concoct to ram down taxpayer's throats before US citizens throw the Fed out on its ass? The time to abolish the Fed is long overdue. There never should have been a Fed in the first place.

Prudent Idiocy

The Fed is nothing but a transfer-of-wealth tool from taxpayers to bumbling idiots at banks who cannot see bubbles to save their lives. Then again, the moral-hazard bailout policy of the Fed suggests the prudent thing for bank CEOs to do is to act like stupid idiots.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Reader Asks "Why Does Euro Rally When Trichet Buys Bonds and Dollar Sink on Essentially the Same Thing?"

Posted: 09 Aug 2011 05:21 PM PDT

In response to Trichet's Secret "Dragon Transfer" Letter to Italy PM; Watch France CDS Rates as France is "New Italy"; Trichet Illegally Usurps Judge-and-Jury Power reader Paul asks ...

Hello Mish

Really great work on Europe.

I'm so confused as to why in the USA when the Fed directly buys bonds and pumps $$ into the economy, it pushes our currency down, yet in Europe, when the ECB adds 800 billion to its bond buying program, it firms up the euro.

Can you help me understand this?

Paul

Two Reasons

If the ECB does not straighten this mess out, there will not be a Euro, or if there is one, it will be a Euro minus some countries. That is of paramount importance.
The Fed is simply printing money. In the Eurozone, there is an implied assumption that taxpayers, primary German taxpayers but secondarily French taxpayers will bankroll whatever idiotic thing Trichet does.

Whether the assumption regarding German taxpayers is true or not remains to be seen. The immediate problem is concerns the Euro is about to fly apart here and now.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Trichet's Secret "Dragon Transfer" Letter to Italy PM; Watch France CDS Rates as France is "New Italy"; Trichet Illegally Usurps Judge-and-Jury Power

Posted: 09 Aug 2011 12:05 PM PDT

Last week, ECB president Jean-Claude Trichet sent a secret letter to Silvio Berlusconi, Italy's Prime Minister demanding various labor reform actions from the Italian government. Leaks of that letter have appeared in Italian media, but there has been no comment on the letter in the US although there has been some discussion of announced Italian labor reforms.

Dragon Transfers

Courtesy of Google Translate, please consider Letter of Trichet and Dragons Transfers, liberalization and labor.

This is my modified as well as re-ordered translation.

A letter from Trichet and Mario Draghi was written and delivered to last Thursday or Friday to Italian Prime Minister Silvio Berlusconi.

The letter is most delicate because it concerns the labor market, a sector historically outside the European Central Bank. Trichet demands in detail: less rigidity in the rules on dismissals of permanent contracts, actions for the public service sector, and various corporate productivity incentives.

It was clear for days that the ECB was able to dictate the pace of Italy, if the government wanted to work with the help of Frankfurt on government bonds.

However, the level of detail of the letter must have surprised even those who received it: there are measures to be taken, there is the calendar that should be applied and there are not legislative instruments that the ECB claims that the government should adopt: the more expeditious and more effective. Moreover, the same Franco-German declaration of Nicolas Sarkozy and Angela Merkel yesterday in Parliament calls on Italy to introduce the measures already announced "by September."

Email From Steen Jakobsen on Things to Watch For

Via Email from Steen Jakobsen, Chief Economist, Saxo Bank in Denmark ....

Things to Watch:

Germany's stance – still the key to resolving EU issue – Bundesbank and Merkel needs to stand behind EFSF and we need details on size of EFSF – I see need for 2.5 trillion Euros to stop this contagion.
Banks - Bank of America under huge pressure yesterday. Funding an issue like in 2008.
Will Fed move to QE3? Bernanke surely would like to, but anything possible. Obama is desperate, Bernanke is desperate.
Short selling banned – So far Korea and Greece have done it. Germany and EU never far behind.
Some talk – not confirmed – about Trichet/Draghi demanding "Italy moves forward via "decreet" – It should be said that this is said to be media's interpretation, however people are already loudly protesting in Italy
Italy = Greece now
Italy is now sideshow and France the real show. Watch the CDS for France.
Riots: London, demonstrations in Israel, soon even the Italians could be out on the streets

"Decreet" is a legal term meaning "final judgment or sentence of a court". The term is a good one. Trichet is now acting like judge and jury, clearly outside his legal powers as ECB president.

The opening translation was the "media interpretation" of which Steen spoke. Here is chart from Steen on France CDS.

France 5-Year CDS

click on chart for sharper image

Fed Uncertainty Principle In Action

The actions by Trichet and the ECB are one of the best examples of the Fed Uncertainty Principle you can find. Simply substitute "ECB" where "FED" appears below and it tells the story of what is happening.

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.

Inquiring minds will note that Corollary Numbers Three and Four apply as well.

Uncertainty Principle Corollary Number Three: Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Uncertainty Principle Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

The Fed Uncertainty Principle was written April 03, 2008, long before massive Fed and Congressional interference into the markets. The Fed's actions were not legal. Nor are the ECB's. This is what the already "not-free" markets have become. Sadly, people blame the "free market" and not the FED, Central Bankers in general, and Congress for the fiscal and financial madness we see today.

I assure you this: Fed and ECB hubris will fail, and when it does the results will likely be catastrophic.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fed Opts for Japan Strategy of Permanently Low Rates; Three Fed Governors Dissent ; Market Reacts With Big "Ho-Hum" Sell the News on No Hint of QE3

Posted: 09 Aug 2011 11:44 AM PDT

The Fed keeps postponing normal policy action. Why doesn't it just come out and announce permanently low rates instead of setting ridiculous dates? Clearly that is Fed policy now, as noted in Fed to Keep Rates at Record Lows at Least Through Mid-2013.

The Federal Reserve pledged for the first time to keep its benchmark interest rate at a record low at least through mid-2013 in a bid to revive the flagging recovery after a worldwide stock rout.

The Federal Open Market Committee discussed a range of policy tools to bolster the economy and said it is "prepared to employ these tools as appropriate," it said in a statement today in Washington. Three members of the FOMC dissented, preferring to maintain the pledge to keep rates low for an "extended period."

The Fed offered a dimmer view of the economy than it did in the last statement in late June. "Economic growth so far this year has been considerably slower than the committee had expected," it said. The Fed also said it expects a "somewhat slower pace of recovery over coming quarters," adding that "downside risks to the economic outlook have increased."

The Fed left its target for the federal funds rate in a range of zero to 0.25 percent, where it's been since December 2008. It said it will maintain its policy of reinvesting maturing securities without saying for how long.

Market Reacts With Big "Ho-Hum"

So far we have a mild "sell the news" reaction from the markets that clearly wanted a hint at QE3. I do note that the DOW is already in the red at 1:38 PM central by about 40 points and S&P futures are sinking fast.

However, recent history suggests that anything can happen within minutes, so we must wait for the final verdict at the close.

In edit, and literally just minutes later, before hitting send, the DOW is down 200, and the S&P is solidly in the red. Swings in the Nasdaq have been spectacular. I sense everyone is looking for safe havens and there are none.

If this down move holds, expect more wild action in Asia tonight.

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

Worst Demand on Record for Japanese 40-Year Bonds; Can Japan Service its Debt? How?

Posted: 09 Aug 2011 09:25 AM PDT

Inquiring minds may be wondering "With a Debt-to-GDP ratio exceeding 200%, how is Japan going to service its national debt?"

I have been wondering that for for years. Adding fuel to the debate, please consider Worst 40-Year Bond Sale Shows Cash King as Investors Flinch

The worst demand on record for 40- year Japanese bonds sold yesterday signals growing concern about Japan's ability to service the world's biggest debt pile and the risk of holding long-term securities while markets are volatile.

The 400 billion yen ($5.2 billion) sale drew bids valued at 2.03 times the amount on offer, the weakest since the Ministry of Finance began selling the securities in 2007.

The yield on the 2.2 percent bond maturing in March 2051 jumped 15 basis points to 2.335 percent as of 5:07 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker.

Japan's Ministry of Finance said that every 1 percentage- point increase in 10-year yields above 2 percent would add 1 trillion yen in debt-servicing costs to a projection of 22.9 trillion yen for the fiscal year starting April 2012. The nation's total debt may reach 219 percent of gross domestic product next year, according to the Organization for Economic Cooperation and Development.

Double-Edged Sword

Please note that was not a failed auction. Indeed it was oversubscribed. However, nearly all of that demand is internal.

Internal demand is a double-edged sword. Right now it is still sufficient. However, when (not if), Japan ever needs foreign buyers for its bond market, rates will not be 2.3% on 40-year bonds.

On account of miserable and worsening demographics, bond redemptions have started. However, those redemptions are a still a trickle. That trickle will at some point turn into a torrent.

Balance of Trade a Key Issue

People have been talking about this for years, although I have not seen discussion of the trade angle before.

Here is the key: If Japan does not maintain a trade surplus covering both interest on its national debt and bond redemptions, all hell will break loose. This gives rise to the question as to how long Japan's vaunted export machine can remain intact. I do not have the answer to that question, but China and the rest of Asia are nibbling away bits and pieces now. The tsunami sure did not help.

Trade issues and demographics explain Japan's paranoia regarding a strengthening Yen. It is also another one of those global imbalances that "does not matter, until it does, and it will" kind of things.

It is mathematically impossible for every country to maintain a trade surplus, yet every country wants to do just that.

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

More Overnight Intervention; Bear Market Vacuums and Heroin Rallies; Is the World Saved?

Posted: 09 Aug 2011 01:29 AM PDT

Equity futures are ripping in early morning action following an equity market reversal in Asia Pacific.

Australia was down 4.7% and finished up close to 1%.
Hong Kong was down 7.35% and finished down 2.57%.
China closed flat after being down close to 4%.
South Korea was down over 8% and closed down 3.64%
Taiwan was down nearly 5% and closed down .79%

There was more red than green but the reversal off the lows was huge.

As I type S&P 500 futures are +27 after being down as much as 35. They have been going vertical for 2 hours.

Government Bonds

US Treasuries yields are up a bit across the board and yields in Europe are falling.
Spain 10-year bonds are down 15 basis points to 5.01%
Italy 10-year bonds are down 13 basis point to 5.16%

Taiwan, South Korea Intervene in Equity Markets

Bloomberg reports Taiwan, South Korea Stock Slump Prompts State Buying, Increased Scrutiny

A stock-market slump that dragged Taiwan and South Korea's benchmark indexes 20 percent below their highs prompted state-run funds to buy equities and Korean regulators to bolster scrutiny of trading activities. Benchmark indexes narrowed earlier declines.

South Korea's Financial Supervisory Service said it will monitor short selling and whether brokerages are following trading rules.

The South Korean gauge has plunged 19 percent from its May 2 record, having lost as much as 24 percent. It slumped 3.2 percent to 1,810.51 as of 2:48 p.m. in Seoul, having tumbled 9.9 percent earlier.

"We have taken actions yesterday and this morning," Taiwan's Yang said by phone from Taipei today. The four funds controlled by the government are the labor insurance fund, labor pension fund, civil-servant pension fund and postal fund.

Korea Teachers Pension, which manages about 9.5 trillion won, plans to buy more stocks if prices fall further, Chief Investment Officer Lee Yun Kyu said by phone today. Korea Teachers has room to invest 300 billion won for the rest of the year, he said.

"I think we're now at a bottom," Lee said. "It was really a broad-based sell-off so that we plan to add evenly across sectors."

Notice how pension funds are aggressively targeting a bottom already.

S&P 500 Futures - 30 Minute Chart

The bulk of the move happened in exactly 2 hours. Each candle is 30 minutes.

Action is so fast that by the time one captures and edits a screen, price data has changed substantially. In the length of time it took to type that sentence, futures fell about 8 points.

There is no associated news that I can find.

Is the World Saved?

In a word: No. We do not know yet where futures open. Indications now are it will be green after being hugely in the red. Regardless, this is typical bear market behavior.

The fastest and most furious rallies are short-covering rallies in bear markets. We saw many of them in Autumn of 2008.

Bear Market Vacuums

Intervention is not calming, it is disruptive. Intervention puts distrust in markets by sending false signals.

Intervention may seem to work for a while but when it stops working and all the shorts are pushed out, a vacuum exists below. The buyer of last resort then becomes the buyer of only resort, or as we saw with Fannie Mae and many equities in 2008, after the Fed drove out the shorts, there were essentially no bids at all.

Flashback August 18, 2008: Fannie, Freddie Bailout To Wipe Out Equity Holders

Fannie Mae Daily Chart

click on chart for sharper image

Fannie Mae (FNM) nearly tripled in 5 days but has now given every cent back. A new 52 week low was recorded today at $6.47. Freddie Mac (FRE) is back under $5. So much for blatant manipulation efforts.

I do not recall now what action the Fed or SEC took to initiate that rally, but it was fast, furious, and failed. Manipulations always fail sooner or later. That one only took 5 days to start to fail, and a month to complete the job.

Pure Heroin

The latest Greek bailout lasted 3 days before the ECB went for an injection of pure heroin straight into the European bond market veins, hoping to calm the bond markets. For two days now it has. However, one thing we know about heroin is that each dose must be progressively larger to deliver the same high.

By the way, as I type now, in a single 30 minute candle while working on this post, S&P futures are +2. Poof, in a matter of minutes futures dropped 35 points from a high of 1148 to 1113.

This my friends is not normal action and it is going to spook investors in a major way. In edit, and with this sentence I have finished for the evening, S&P futures are now down 9. This is quite amazing action. Has intervention failed already?

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

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