Mish's Global Economic Trend Analysis

Unemployment "Unexpectedly" Rises in Australia
US Treasury Bull Market Not Over; Record Low Yields; Shades of Japan; Why QE3 Totally Useless
Bank of America CEO Discusses Letting Countrywide Financial Go Bankrupt as Separate Legal Entity; Conference Call Shows Signs of Delusion
European Banks Hammered; Societe Generale "Denies All Rumors"; French Bank Option Prices Soar; Credit Default Swaps on France Under Attack
The "She Loves Me Not" Economy
Return of the Bear; De-mystifying Interest Rate Policy; Do Central Bankers Lead or Follow the Market?

Unemployment "Unexpectedly" Rises in Australia

Posted: 10 Aug 2011 08:57 PM PDT

Were it not for the amusement of it all, I am getting sick of these "unexpected" happenings that economists and politicians who cannot find their ass with two hands and a roadmap cannot see.

Here is another case in point: Australian Jobless Rate Rises Most Since 2010

Australia's jobless rate unexpectedly rose to an eight-month high last month as employers cut full-time staff, prompting investors to increase bets the central bank will lower the developed world's highest interest rates.

Unemployment jumped to 5.1 percent in July from 4.9 percent a month earlier, the first increase since October, the statistics bureau said in Sydney today. The number of workers fell by 100 after a revised 18,200 gain in June. That compares with the median estimate for 10,000 additional jobs in a Bloomberg News survey of 25 economists.

David Jones, the nation's second-biggest department store chain, today reported second-half same-store sales declined 6.9 percent, with Chief Executive Officer Paul Zahra saying "we are facing an extremely difficult trading environment."

Investors are betting the central bank will cut rates by at least 125 basis points by December, interbank cash-rate futures show. Economists surveyed by Bloomberg News on Aug. 9 say RBA Governor Glenn Stevens will keep borrowing costs unchanged at 4.75 percent this year.

Complete BullSwill from Australian Treasurer

If you live in Australia (or even if you don't) and want to hear complete "bullswill" about the Australian economy, I can deliver. Simply listen to this nonsense from Australian Treasurer Wayne Swan.

Is anyone else tired of this bullswill?

In a sense I am appreciative because it makes for easy-to-rebut commentary, but if Bloomberg had a clue (Bloomberg do you have a clue?), it ought to be talking to Australian economist Steve Keen, not some political hack with a vested interest in sounding the perpetual drumbeat that "everything is rosy".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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US Treasury Bull Market Not Over; Record Low Yields; Shades of Japan; Why QE3 Totally Useless

Posted: 10 Aug 2011 04:42 PM PDT

Curve Watchers Anonymous proudly proclaims "Treasury Bull Market Not Over" pointing out as evidence Record Low Yield at 10-Year Auction

Records Fall

The difference in yield between two- and 10-year Treasuries was 1.92 percentage points, touching the least since April 2009. A narrower yield difference, or flatter curve, indicates investors are betting on lower growth and inflation.

The 10-year note auction drew a yield of 2.140 percent, below the previous record of 2.419 percent in January 2009.

Yield Curve as of 2011-08-10

click on chart for sharper image

Only if one insists on a new lower-low in 30-year treasuries can someone cling to the fallacy the treasury bull market has ended.

QE3 Totally Useless

People are still clinging to the hope that QE3 will accomplish something. It won't because it can't. Yes, it's as simple as that.

When Bernanke announced QE2 the stated purpose was to drive yields lower with a goal of increasing credit and hiring. It did neither, but it did ignite a speculative rally in the stock market.

Shades of Japan

03-Mo = .01%
06-Mo = .06%
12-Mo = .09%
02-Yr = .18%
03-Yr = .33%
05-Yr = .92%
07-Yr = 1.50%
10-Yr = 2.15%
30-Yr = 3.51%

Let's assume Bernanke launches QE3. Where are yields going? If 3-year yields dropped to 0% would it possibly matter? Would it matter if 10-year yields fell to 1.5%? Why would it?

QE3 will not matter anymore than it did for Japan easing dozens of times at 0%. QE3 will not spur hiring, consumption, or credit.

Businesses do not want to expand. Why should they?

Here is the bottom line: There is too much debt and no way to pay it back. Efforts to get consumers to borrow and businesses to expand remain futile.

No matter how many times I have explained this, inflationists remain oblivious to the fact that in a credit-based economy it is extremely difficult to generate inflation when credit does not expand. In such environments, talk of hyperinflation is ludicrous.

Don't look for a lasting rally if and when Bernanke does announce QE3. That announcement may ignite a 1-week wonder rally or it may cause immediate panic. Either way, the emperor has no clothes and the market at long last has caught on.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bank of America CEO Discusses Letting Countrywide Financial Go Bankrupt as Separate Legal Entity; Conference Call Shows Signs of Delusion

Posted: 10 Aug 2011 12:51 PM PDT

In a 90 minute investor conference call, BofA's Chief Defends the Core, but Sounds Sour on Countrywide

Bank of America Corp. Chief Executive Brian Moynihan, in a 90-minute phone call with thousands of investors, defended his performance as the top, said the company won't divest itself of Merrill Lynch and said demand for new loans is slow.

Mr. Moynihan spoke Wednesday during an unusual conference call, in which Bruce Berkowitz of Fairholme Capital Management, a mutual-fund manager that is a large owner of Bank of America stock, had invited "skeptics" to pass along their toughest questions to Moynihan.

In Mr. Moynihan's most candid remarks yet about the troubled mortgage business, he told the 6,000 listeners who Mr. Berkowitz said were on the call: "Obviously, there aren't many days when I get up and think positively about the Countrywide transaction in 2008." Bank of America acquired mortgage lender Countrywide Financial in 2008, before Mr. Moynihan was CEO, and has struggled since with losses and with financial demands from investors in securities backed with Countrywide mortgages.

Asked whether he would consider letting Countrywide, which remains a separate legal entity, go into bankruptcy to limit Bank of America's legal obligations to the troubled unit, he said: "We thought of every possible thing we could and but I don't think I'd comment on any outcome and the path we've taken is the best for the shareholders and this company."

Mr. Moynihan said customers want the bank to provide core services, including investment banking and brokerage. "That's what the customer needs." And capital markets, where its Merrill Lynch business is key, "is where we earn the bulk of our money right now."

"Why would you sell the core assets," he asked, when the bank can continue to sell noncore assets like mortgage-servicing rights.

Signs of Delusion

That Moynihan would choose to defend his performance now, smack in the face of massive problems and share prices down 55% since mid-January is a sign of delusion or a sign of a blatant lie. I suspect both.

Either way Moynihan should leave, preferably by force of receivership with bondholders wiped out, just as they should have happened in 2008.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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European Banks Hammered; Societe Generale "Denies All Rumors"; French Bank Option Prices Soar; Credit Default Swaps on France Under Attack

Posted: 10 Aug 2011 10:16 AM PDT

Today we saw yet another wild reversal in the markets led this time not by the US or Asia-Pacific but by Europe. When I went to bed this morning around 3:00 AM central, European futures were solidly in the green.

This is what European markets look like now.

European Stock Markets

Carnage Everywhere

There is carnage everywhere and all of those indices were in the green not that long ago. Here is a chart I picked up from Andrew Horowitz on The Disciplined Investor.

click on chart for sharper image

I added the box in red to highlight the year-to-date losses.

Last night I was on Coast-to-Coast AM for a few minute live chat update on the economy.

I told host George Noory and the listeners that daily volatility in stocks and banks was so wild I could not help thinking there was an immediate major problem at some bank (or banks) that was not yet disclosed. Here are some headlines that suggest just that.

Record Plunge in French Bank Societe Generale

SocGen Stock Tumbles, Leads Fall in French Banks

Societe Generale (GLE) SA posted a record decline and led a drop in French banking shares as the cost of insuring the country's government bonds increased. UniCredit SpA (UCG), Italy's biggest bank, paced a retreat in Italian banks after the country's credit-default swaps widened.

Societe Generale shares slumped as much as 23 percent and were down 16 percent at 21.89 euros at 4:27 p.m. in Paris. Credit-default swaps on the bank rose 29 basis points to a record 299 basis points.

"If credit default swaps on France are under attack, that's not a good sign," said Yves Marcais, a sales trader at Global Equities in Paris. "That means that France is under attack and that's worrisome. French banks hold a lot of French bonds."

The cost to insure French government debt against default rose 10 basis points to a record 171 basis points, according to CMA.

The FTSE Italia All-Share Banks Index fell as much as 9.4 percent, the most since May 2010. UniCredit dropped as much as 9.1 percent, and was down 8.9 cents to 98 cents by 4:40 p.m., giving the bank a market value of 19 billion euros ($27 billion). Intesa Sanpaolo SpA (ISP), the second-largest lender, lost as much as 13 percent, and was down 17 cents to 1.14 euros.

Bank Options Surge to Six-Year Highs

French Bank Options Prices Surge to Six-Year Highs; Shares Fall

Credit Agricole SA (ACA) and BNP Paribas (BNP) SA options prices rose to the highest level since at least 2005 and Societe Generale SA's reached a two-year high as the cost of insuring French government bonds increased. The shares plunged.

Implied volatility, the key gauge of option prices, for at- the-money BNP options expiring in 30 days jumped to 129.44 as of 5 p.m. in Paris, triple the 40.24 average over the past four years. Credit Agricole's surged to 194.23. SocGen's rose to 100.35, the highest since March 2009, as the lender's stock had a record decline and led a drop in French banking shares.

Societe Generale SA, Credit Agricole SA and BNP Paribas SA slumped more than 9.9 percent, leading France's CAC 40 Index down 4.5 percent to 3,032.28 at 5:01 p.m. in Paris.

Societe Generale (GLE) plunged a record 15 percent to 22.08 euros, while Credit Agricole tumbled 14 percent to 5.92 euros, its lowest price ever, and BNP fell 11 percent to 35.15 euros, its lowest level since April 2009.

The cost of insuring debt of Societe Generale SA rose 29 basis points to a record 299 basis points, according to CMA prices for credit-default swaps.

Societe Generale Denies Everything

Societe Generale Denies All Market Rumors, Spokeswoman Says

Societe Generale (GLE) SA "categorically denies all market rumors," Emmanuelle Renaudat, a spokeswoman for the French bank said. Societe Generale shares have declined as much as 23 percent today.

Societe Generale did not even say what they were denying. The bank simply denied everything. Whatever the rumors are, I assure you at least some of them are true. This denial sounds just like Lehman's denial to me.

Addendum:

Reuters has more on the rumors in SocGen shares plunge on rumor whirlwind

Between the three top French banks, nearly 10 billion euros ($14.2 billion) in market value was wiped out. SocGen stock has lost 45 percent over the past two and a half weeks, while BNP is down 29 percent and Credit Agricole has plunged 38 percent.

"The rumors on the French triple-A rating are having a catastrophic impact, despite the denial from credit agencies. Shorts are on a rampage; it's a calamity. This has nothing to do with fundamentals," said Christian Jimenez, fund manager and president of Diamant Bleu Gestion, in Paris.

The three major rating agencies confirmed on Wednesday their French sovereign rating outlook was stable, while a Societe Generale spokeswoman categorically denied all the rumors.

Wild trading in SocGen and the other banks appeared to be inflamed by a perfect storm of rumors fueled by Twitter postings, market blogs and a now debunked newspaper report.

SocGen's website mentioned an apology by Britain's Mail on Sunday for a story claiming the bank was in a "perilous" state and possibly on the "brink of disaster."

"We now accept that this was not true, and we unreservedly apologize to Societe Generale for any embarrassment caused," the newspaper said.

I am sticking with my previous comments. There is a major undisclosed problem. Banks do not plunge 45% on unfounded rumors. Moreover, this decline started two-and-a-half weeks ago, not with "Britain's Mail" three days ago.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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The "She Loves Me Not" Economy

Posted: 10 Aug 2011 08:57 AM PDT

The Ceridian-UCLA index, a real-time fuel consumption index for trucking has weakened again. Edward Leamer, Chief Economist of the Ceridian-UCLA Pulse of Commerce Index describes the economy as "She loves me, she loves me not", this time "She loves me not."

I suggest Leamer is far too generous to the "she loves me" idea. The last three months have been flirting with contraction and the trend since mid-2010 is for ever-slowing growth.

Year-Over-Year Growth of PCI

Leamer writes "The PCI has consistently posted growth on a year-over-year basis for over two years. However, the rate of growth has slowed considerably and consistently since the middle of 2010. In May, the Index actually dipped slightly into negative territory before recovering in June — thus the "Whew!" in the figure. The July result was again positive, but at 1.0 percent, was far from robust. On an upbeat note, year-over-year comparisons will likely remain positive, perhaps substantially so, for the remainder of this year in light of the comparatively weak performance comparison to August through December last year."

Does beating weak numbers mean much? That is the pertinent question. And I vote "no". This chart shows the target numbers.

Interestingly that red box I added corresponds to the "weak" patch in which the Fed responded with QE2. I doubt it works next time.

Wobbly at Best

Leamer writes "The second half of 2011 has started on a down note, but is a continuation of the wobbly economic performance that has persisted since the inventory restocking period ended a year ago. Wobbly, uncertain, slow growth is likely to continue for the rest of this year as the economy seeks but does not find a catalyst. Another dip appears unlikely, however, as the traditional sources of recessions — homes and cars — are not currently positioned to produce a downturn."

Slow Note Everywhere

We have certainly seen a "slow note" but that note is everywhere. It is in Europe, Australia, Canada, the UK, and China. Europe, Australia, and the UK are in recession right now in my opinion. Moreover, if the US is not in a recession right now, it is sure flirting with one.

Cars are a Mirage

Leamer is counting on cars and homes. I suggest strength in cars is little more than "stuffing the channel". Car sales are counted when shipped to dealers, not when consumers buy them. Let's see what inventory looks like in the next few months.

Housing So Bad It Can't Get Much Worse

I agree with Leamer on housing, to this extent: Housing is so bad it is not going to subtract much from GDP. Moreover, any uptick in new sales, will be GDP additive even if it is anemic by historic standards.

However, there are no signs of improvement in housing and counting on stagnation to not pull the US into a recession can only work so long. All other stimulus is long-gone and some big negatives are coming from a forced slowdown in state spending.

Congress has had it for now, so don't look to sugar-daddy for help.

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

Return of the Bear; De-mystifying Interest Rate Policy; Do Central Bankers Lead or Follow the Market?

Posted: 09 Aug 2011 11:36 PM PDT

The bear market is back says Australian economist Steve Keen. I agree. Moreover, the recent action, including the rally, offers sufficient evidence. The biggest percentage gains in history have all been in bear market rallies.

Let's tune in to The Return of The Bear by Steve Keen.

Figure 1: Asset Prices versus Consumer Prices since 1890

Far be it from me to underestimate the stock market's capacity to pluck the embers of delusion from the fire of reality. However, the crash in the past few days may be evidence that sanity is finally making a comeback. What many hoped was a new Bull Market was instead a classic Bear Market rally, fuelled by the market's capacity for self-delusion, accelerating private debt, and—thanks to QE2—an ample supply of government-created liquidity.

That Rally ended brutally in the last week. The S&P500 has fallen almost 250 points in a just two weeks, and is just a couple of per cent from a fully-fledged Bear Market.

Figure 2: "Buy & Hold" anyone?

The belief that the financial crisis was behind us, that growth had resumed, and that a new bull market was warranted, have finally wilted in the face of the reality that growth is tepid at best, and likely to give way to the dreaded "Double Dip". The "Great Recession"—which Kenneth Rogoff correctly noted should really be called the Second Great Contraction—is therefore still with us, and will not end until private debt levels are dramatically lower than today's 260 per cent of GDP.

The most egregious cheerleader for asset price inflation was Alan Greenspan. That's why I've marked Greenspan on Figure 1 and Figure 4: if his rescue of Wall Street after the 1987 Stock Market Crash hadn't occurred, it is quite possible that the unwinding of this speculative debt bubble could have begun twenty years earlier.

Figure 4: US Private Debt to GDP since 1920

Instead, Greenspan's rescue—and the "Greenspan Put" that resulted from numerous other rescues—encouraged the greatest debt bubble in history to form. This in turn drove the greatest divergence between asset and consumer prices that we've ever seen.

Debt Deflation vs. Hyperinflation

There is much more to Keen's post, and as usual through the eyes of someone who understands debt deflation. Inquiring minds will want to give his post a closer look.

It is really quite humorous (or do I mean pathetic) to see these repeated calls for hyperinflation when demand for money (the desire to hold it) is soaring.

Negative Interest Rates

Demand for cash is so high that overnight interest rates went negative.

I commented on that demand for cash about a week ago in Bank of New York Mellon to Slap Fees on Big Deposits Following "Global Dash For Cash"; When was Hyperinflation Supposed to Start?

The BNY Mellon apparently does not want money, not to lend, not at all. In a mad dash for cash Mellon has been flooded with it. Overnight lending rates went negative.

Please consider BNY Mellon to Slap Fees on Some Big Deposits Amid Global Race to Cash

Everyone Hoarding Cash

Everyone is looking to hoard cash. Let me ask a simple question.

Does this happen in hyperinflation or does it happen in deflation?

In its grand QE experiment the Fed pushed rates to zero, flooded the world with cash, then expected banks to lend and businesses to expand. Did it work?

Clearly not. No one wants to put that cash to use. If you were a business would you be hiring here? I wouldn't, and neither are businesses. Instead cash sits in banks or short-term treasuries earning zero or even negative percent.

When was hyperinflation supposed to start?

Oh, I just remembered: 2011, a year chosen by at least a couple people. Others expect it next year.

Hyperinflationists simply do not understand the role of credit in a global economy. China has a huge inflation problem and various property bubbles because credit growth is soaring 30% annually.

In the US, banks want credit-worthy borrowers. However, credit-worthy borrowers are parking cash, not asking for more of it.

Do Central Bankers Lead or Follow the Market?

Please consider De-mystifying RBA Setting of Interest Rates also on Steve Keen's blog, but written by Phil Williams.

Williams posts a graph that shows "an almost 100% correlation between the cash rate and the 90-day bank bill rates. However the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it."

Williams asks:

Why do we have the RBA as an interest-rate setting body at all when all they do is follow the market?
Why does the RBA shroud itself in such mysticism when their actions are so transparent to all?
What is the quality of our economists, politicians and financial commentators that we have to go through the "Will They or Won't They" pantomime each month?
How could any economist get their forecasts wrong, particularly on the up-side?

Fed Uncertainty Principle Yet Again

Regular Mish readers know the answer to this paradox. I covered the paradox in depth in the Fed Uncertainty Principle

Most think the Fed follows market expectations. Count me in that group as well. However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? More pointedly, why isn't the market to blame if the Fed is simply following market expectations?

This is a very interesting theoretical question. While it's true the Fed typically only does what is expected, those expectations become distorted over time by observations of Fed actions.

The Observer Affects The Observed

The Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg's Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.

To measure the position and velocity of any particle, you would first shine a light on it, then detect the reflection. On a macroscopic scale, the effect of photons on an object is insignificant. Unfortunately, on subatomic scales, the photons that hit the subatomic particle will cause it to move significantly, so although the position has been measured accurately, the velocity of the particle will have been altered. By learning the position, you have rendered any information you previously had on the velocity useless. In other words, the observer affects the observed.

The Fed, by its very existence, alters the economic horizon. Compounding the problem are all the eyes on the Fed attempting to game the system.

A good example of this is the 1% Fed Funds Rate in 2003-2004. It is highly doubtful the market on its own accord would have reduced interest rates to 1% or held them there for long if it did.

What happened in 2002-2004 was an observer/participant feedback loop that continued even after the recession had ended. The Fed held rates too low too long. This spawned the biggest housing bubble in history. The Greenspan Fed compounded the problem by endorsing derivatives and ARMs at the worst possible moment.

In a free market it would be highly unlikely to get a yield curve that is as steep as the one in 2003 or as steep as it was just weeks ago when short term treasuries traded down to .21%. In other words we would not be in this mess without the Fed, or if we were, the mess would at least be smaller than the one we are in.

The Fed has so distorted the economic picture by its very existence that it is fatally flawed logic to suggest the Fed is simply following the market therefore the market is to blame. There would not be a Fed in a free market, and by implication there would be no observer/participant feedback loop.

Fed Uncertainty Principle:

The fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.

The Fed Uncertainty Principle has 4 Major Corollaries.

Interestingly enough I discussed 3 of the four corollaries yesterday in 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

Inquiring minds who have not yet read those posts are encouraged to do so.

Corollary One, Two, Three, and Four apply to the Fed and ECB and in due time the Reserve bank of Australia as well. Indeed, Corollary Number One already applies to the RBA, the Bank of England, and in general all central banks.

Addendum:

In response to the above post, via Email, Steve Keen writes:

Generally I agree with you regarding the Fed Uncertainty Principle. A lot of market action is simply trying to second-guess the Fed--and they're pretty good at getting it right. In Australia's case though, the RBA tends to take too much time before accepting reality, and then over-reacts afterward.

The market is now pricing in a 75 basis point cut next month, when I think they are likely to either keep them on hold or drop them 25 points. Then after a while when the reality of a stagnant economy hits them, they'll cut aggressively, especially if house prices tank.

A Fed is still needed, but only for its clearing house function: banks need a clearing house through which their own debts to each other can be met. But a Fed that tries to fine tune the economy by manipulating the rate of interest is likely to be a disaster, all the more so when it's staffed by neoclassical economists whose fantasy world doesn't include private debt to begin with!

Those "Down Under" or interested in housing "Down Under" are encouraged to read Secretly Broke in Australia

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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