Mish's Global Economic Trend Analysis

Has Ambrose Evans-Pritchard Lost His Mind?
Incredibly Anemic Performance of Chinese Stock Market; Decoupling in Reverse?
Crude Futures Have Risen Significantly, So Why are Gasoline Prices Relatively Low?
EU Bank Writedowns to Exclude Pre-2013 Debt; French Bond Yields Drop Most on Record; Italian Bond Yields Drop Below 7%

Has Ambrose Evans-Pritchard Lost His Mind?

Posted: 02 Dec 2011 12:02 AM PST

The question of the day is "Has Ambrose Evans-Pritchard Lost His Mind?" The reason I ask stems from his post on The Telegraph You are all wrong, printing money can halt Europe's crisis

This will enrage many readers — especially the "Austrian" internet vigilantes — but I have to say it.

A near universal view has emerged that Europe's crisis can only be solved by governments and fiscal policy, with varying views over the proper dosage of pain.

I beg to differ. This is a monetary crisis, caused by a jejune central bank that aborted a fragile recovery by raising rates earlier this year, allowed the money supply to collapse at vertiginous rates in southern Europe, and caused a completely unnecessary recession — and a deep one judging by the collapse in the PMI new manufacturing orders in November.

Needless to say, drastic fiscal austerity is making matters a lot worse. You cannot push two-thirds of the eurozone into synchronized fiscal and monetary contraction without consequences.

....

This crisis can be stopped very easily by monetary policy, working through the old-fashion Fisher-Hawtrey-Friedman method of open-market operations to expand the quantity of money, ideally to keep nominal GDP growth on an even keel.

This does not solve the 30pc intra-EMU currency misalignment between North and South, of course, but it quite literally "solves" the solvency crisis for Italy and Spain. They would not be insolvent if the ECB had not driven them into depression by letting their money supply implode.

Yes, I know there are lots of central bankers who say or think monetary policy cannot achieve these miracles. They are wrong. Of course it can. A whole generation of policy-makers have been side-tracked into cul-de-sacs like (Bernanke) creditism, or German religious theories of "expansionary fiscal contractions". (By the way, I learned in Ireland last week that the country's 1980s experience used as the poster child for that credo is based on false data. It does not validate the theory at all).

They have forgotten some basic lessons of economic history. As the Bank of England's Adam Posen put it, policy defeatism has taken over.

...

"Yesterday's coordinated central bank intervention was like the captain of a transatlantic flight coming on the intercom to tell us that, while three of the four engines have failed, the remaining one might get us to our destination," said Steen Jakobsen from Saxo Bank.

"The central banks are now the only source – or engine – of funding for banks. Yes, it means we now have even more guarantees of cheap money/liquidity in the system, but it's still a scary, one-engine plane. The central bank liquidity is the one engine, while the private market that used to be the other three engines, has seized up and stop functioning."

"French banks lost more than €120bn of funding in the short-term wholesale market from the US over the last month, and the duration of the funding fell from an average of 44-days to less than 5-days."

Quite.

...
Clearly a lot of investors think that Wednesday's central bank drama is a sign that something big is starting, that authorities of Europe and the world "get it" at last.

Well, I'm sorry. The world gets it OK, but Germany does not, and nor does the ECB.

Pritchard Wants to Save the Unsaveable

Pritchard clearly has it in for Germany. Why I do not know.

What's disappointing about his article is that he predicted well in advance that the Euro experiment would end in failure. Rather than bask in the glory of being correct early and often, he has now lost his mind attempting to save the unsaveable.

If that's not losing one's mind, what is?

Monetary Printing Rebuttal

I could spend a lot of time writing a rebuttal to Pritchard's monetary printing thesis, but I do not have to. Pater Tenebrarum wrote an excellent rebuttal on November 29.

Please consider Central Banks and Monetary Cranks

Monetary Cranks Unite!

Ambrose Evans-Pritchard is joining the ranks of the monetary cranks (and there are more then a few of those) sotto voce in a recent missive entitled "Should the Fed save Europe from disaster?". After counting down the litany of things that are currently going wrong and could conceivably get worse, he launches into the following diatribe:

Berkeley's Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. "The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash," he said.

The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world's paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent. One presumes that the Fed would purchase both the triple AAA core and Club Med in a symmetric blast of monetary stimulus across the board, avoiding the (fiscal) error of targeting semi-solvent states. In sense, the Fed would do quantitative easing for the Europeans, whether they liked it or not.

David Zervos from Jefferies has proposed an extreme variant of this, accusing Germany's fiscal Puritans of reducing Europe's periphery to "indentured servants" and driving the whole region into depression with combined fiscal and monetary contraction.

"We in the US need to snuff out these sado-fiscalists and fast, they are a danger to the world. The US can force monetisation at the ECB. We should back up the forklift and buy Euro area bonds. Lots of them," he said."
Berkeley's Brad DeLong said it is time for Bernanke to act on this as the world lurches straight into 1931 and a Great Depression II. "The Federal Reserve needs to buy up every single European bond owned by every single American financial institution for cash," he said.

The Fed could buy €2 trillion of EMU debt or more, intervening with crushing power. The credible threat of such action by the world's paramount monetary force might alone bring Italian and Spanish yields back down below 5pc, before one bent nickel is even spent. One presumes that the Fed would purchase both the triple AAA core and Club Med in a symmetric blast of monetary stimulus across the board, avoiding the (fiscal) error of targeting semi-solvent states. In sense, the Fed would do quantitative easing for the Europeans, whether they liked it or not.

David Zervos from Jefferies has proposed an extreme variant of this, accusing Germany's fiscal Puritans of reducing Europe's periphery to "indentured servants" and driving the whole region into depression with combined fiscal and monetary contraction.

"We in the US need to snuff out these sado-fiscalists and fast, they are a danger to the world. The US can force monetisation at the ECB. We should back up the forklift and buy Euro area bonds. Lots of them," he said."

If adding to the money supply is truly beneficial, why not allow every citizen to set up his own money printing press? That would surely 'increase spending', and therefore should, following the logic of the likes of Bernanke and DeLong, lead to 'economic growth'. If they disagree with this proposition, they must explain what difference it makes when the Fed (and the associated banking cartel) does it. As far as we can tell the main difference is in who gets to profit from the redistributive effects of money printing. Of course it could be argued that if everyone were free to print, there would be no way of controlling the amount that is created. In that case, how about crediting every citizen with a pro rata amount of the newly printed money? Why is it not done in this manner?

Evans-Pritchard seems to indicate here that one should prop up unsound debt by hook or by crook, if need be even against the wishes of those concerned. However, what can be expected to change if the debt is not propped up is in the main that the ownership of assets will be transferred from inept stewards of capital to decidedly more prudent ones. The assets concerned will not disappear.

So what good exactly is supposed to come of keeping the inept guys in charge at the expense of those who were prudent? We are eagerly awaiting an explanation.

Always Wrong to Bail Out Banks

Bear in mind that much of the austerity measures Pritchard rails against are designed to bail out the French and German banks. On that point Pritchard is correct.

It is always wrong to force tax hikes and other austerity measures on private citizens simply to bail out reckless bank behavior. Every Austrian economist in the world would agree.

Pritchard Poses False Dichotomy

Pritchard poses a false dichotomy: print money or impose various austerity measures like hiking taxes to bail out banks. Why do either?

I wrote about this disgusting situation on Thursday in EU Bank Writedowns to Exclude Pre-2013 Debt; French Bond Yields Drop Most on Record; Italian Bond Yields Drop Below 7%

EU officials have hatched a plan to make banks and bondholders take losses for risks, not now of course, but after 2013. In the meantime, taxpayers will shoulder 100% of the losses for bank lending stupidity. On this confidence inspiring news, European bonds rallied sharply.

Three Key Provisions

Taxpayers would be screwed for all losses up to 2013

The year can be extended

Writing down Derivatives is a last-resort

Since the market likes a free lunch at taxpayer expense it's no wonder the debt markets rallied somewhat. However, to what extent the market will believe "no losses" and for how long remains to be seen.

Bailing Out Banks at Taxpayer Expense is 100% Wrong

Bailing out banks that take stupid risks is always wrong, in every situation. Taxpayers will suffer from higher inflation (notably in food and energy), wages will not rise, banks will pass out big bonuses once they are bailed out, and taxpayers will still be stuck with the debt.

That by the way is exactly what happened in the US and it is one of the reasons hiring is anemic and lending is weak.

In the US, but even more so in Europe, banks cannot lend because they are capital impaired. The solution is not austerity and higher taxes, but rather a writedown of that debt.

However, various structural reforms surely are needed, free-market reforms. France needs to stop protecting farms at the expense of the UK, Greece needs to get rid of its public union problems, Italy needs to shed a plethora of inane rules and regulations. I can go on and on about structural problems in the US, UK, EU, and every European country.

Printing money will not fix a single structural problem, all it will do is bail out the banks (yet again), leaving private citizens with debt they cannot pay back or inflation that punishes savers.

Yes, Ambrose Evans-Pritchard has indeed lost his mind because printing money will not solve a damn thing. It will only provide an illusion of temporary success, requiring still more printing when the stimulus dies.

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

Incredibly Anemic Performance of Chinese Stock Market; Decoupling in Reverse?

Posted: 01 Dec 2011 08:24 PM PST

Every day I watch the relative performance of various equity markets. Since April, the Shanghai index has been the last to rally and the first to go down.

$SSEC Shanghai Composite Index

click on chart for sharper image

On recent news China Cuts Bank Reserve Ratios by .5 Percentage Points; Central Banks Cut Rates on Dollar Swap Lines global equities soared.

However, the Shanghai stock index stands alone in failing to hold the gains, a pattern I have seen and commented about for months.

Note the Shanghai Index was the last global index to rally in late October. Also note that in November the index gave up nearly the entire October rally.

Yesterday the index gapped up strong but gave back much of the gains.

The night is young, but so far today (morning in China) the index is strongly in the red, down 34 points (1.44%) to 2,352 as of 11:12 PM EST.

Chinese Manufacturing in Contraction

Earlier today I commented China Manufacturing PMI Plunges to 32-Month Low of 47.7; Reflections on Stocks Rallying on "Bad News"

Yesterday stocks rallied on news China Cuts Bank Reserve Ratios by .5 Percentage Points and Central Banks Cut Rates on Dollar Swap Lines.

However, the reason Chinese central bank reacted is hugely deteriorating conditions in China. The reason the Fed reacted is hugely deteriorating conditions in Europe.

Equities have rallied on reported "good news". However the first irony is the global economic picture outside the US is horrendous. The second irony is bottoms are formed on bad news (and tops on good news), but central banks intervention is really bad news widely recognized as good news.

Decoupling in Reverse?

The equity markets can rally all the want on deteriorating fundamentals but it will not change the facts one bit.

Europe is in recession, Australia is in recession, Chinese manufacturing is in recession, and the US cannot carry the global economy on its own.

Note the irony in that last sentence. Peter Schiff and others mistakenly thought in 2008 the global economy would decouple from the US economy. The idea was silly then and it is silly now (in reverse).

The US will not decouple from the global economy. China is slowing and faces a hard landing, Europe is in recession, and a Fed inspired rally in commodities will end in pain given the slowdown in China and Europe. Gold may be the exception.

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

Crude Futures Have Risen Significantly, So Why are Gasoline Prices Relatively Low?

Posted: 01 Dec 2011 04:06 PM PST

West Texas Intermediate Crude is back above $100 from a plunge to $76 at the beginning of October. Brent is $112. So why are gasoline prices lagging the rally in crude?

Reader Tim Wallace writes

Hello Mish

I am now paying $3.15 for gasoline here in North Carolina while the price of oil flirts now around $100 for the past several weeks. Historically I would have expected to see the price now moving up towards $3.50 per gallon.

So why is the price so "low" - a relative term - with the oil price escalating since summer?

The only reason I can assume is per the attached spreadsheets - the demand of gasoline is once more heading down, once again at a rate that brings it well below the crash of 2008/2009.

I have attached the database from the EIA with two charts I added at the front. The first chart shows the annual year on year changes in usage in thousands of barrels from 2005 to today. You can see the constant growth the first three years of the chart as all data points show growth above the zero line. We then have the plummet of '08 on '07 - the same time period oil was going speculatively through the roof.

You can see that '09 was also below the zero line, showing that all growth from 2004 on was gone. We finally had growth last year, although marginal compared to the three positive years prior to the downturn. Now this year we are once again plummeting, in fact well below 2005 supply levels. This is possibly what is putting pressure on price as companies try to keep the volumes up to support their top lines. If this is so, domestic profits will take a hit this year.

The second graph shows the total annual usage with 2011 pro-rated to the year end based on 47 weeks of data.

Tim

click on charts for sharper image

Gasoline Usage

Gasoline Usage Growth

What About Cash-for-Clunkers and Better Fuel Mileages in General?

I asked Tim Wallace how cash-for-clunkers and better fuel mileages may have played into the decline. Here is his response.

There are over 250,000,000 vehicles registered in the USA. In the average year there used to be about 6% are "retired" - scrapped - out of the fleet. In the Cash for Clunkers year the scrap rate was 14,000,000 cars, coming close to 5.6% "retired".

People are holding on to cars longer as is shown by the reducing number of car sales each year, and in fact for the first time in history the fleet may be shrinking as well.

Also note cash-for-clunkers happened in 2009. The entire resulting fleet was on the road in 2010.

What happens to the graph in 2010? UP.

As with all things in our economy, if the economy is growing consumption will go up.

I could not even accept a slight growth like in 2010 as a sign of the resulting fuel mileage savings of new cars in a growing economy being suppressed by higher mileage vehicles as such a high percentage of sold vehicles are the lower mileage large ones.

No, look at the historical years prior to see what one should expect, the "gains" in mileage this past year over cars/trucks manufactured and put into the fleet in those years are not that great. And there are far FEWER of these "higher mileage" vehicles being added to the fleet as well.

My hard and fast assumption is a drop in demand due to reduced driving for whatever reason.

Thanks Tim!

Gasoline Futures

West Texas Intermediate Crude

Brent Crude

Neither gasoline futures nor gasoline prices at the pump can be explained by the action in crude prices. Falling demand, which should also affect profit margins, appears to be at play.

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

EU Bank Writedowns to Exclude Pre-2013 Debt; French Bond Yields Drop Most on Record; Italian Bond Yields Drop Below 7%

Posted: 01 Dec 2011 09:30 AM PST

EU officials have hatched a plan to make banks and bondholders take losses for risks, not now of course, but after 2013. In the meantime, taxpayers will shoulder 100% of the losses for bank lending stupidity. On this confidence inspiring news, European bonds rallied sharply.

Bloomberg reports EU Bank Writedown to Exclude Pre-'13 Debt

The European Union may exempt bank debt issued before 2013 from proposals forcing investors to take losses at failing lenders, said a person familiar with the plan.

Excluding the debt is designed to prevent lenders' funding costs from rising, said the person, who declined to be identified because the discussions are private. The exemption could be extended if banks struggle to raise funds, the person said. The law would need approval from national governments and the European Parliament before taking effect.

Michel Barnier, the EU's financial services chief, has promised to propose draft rules to end the need for taxpayer bailouts of failing banks.

Under draft proposals obtained by Bloomberg News, holders of long-term unsecured senior debt in a collapsing bank would be first in line to take losses once a lender's capital and other subordinated debt is exhausted. Long-term bonds would be those with a maturity of more than one year.

A spokeswoman for the European Commission declined to comment on the draft law.

Short-term debt, with a less than one-year maturity, and derivatives should only be written down by regulators as a last resort if losses from longer-term debt aren't "sufficient to restore the capital of the institution and enable it to operate as a going concern," according to the draft.

"Exempting short-term debt and derivatives may be justifiable, but this would increase the use of systemically risky derivatives and excessive levels of short-term debt that contributed to the ongoing crisis," said Sony Kapoor, managing director of policy advisory firm Re-Define. Taxing them "may help alleviate some of these distortions."

Three Key Provisions

Taxpayers would be screwed for all losses up to 2013
The year can be extended
Writing down Derivatives is a last-resort

French Bond Yields Drop Most on Record; Italian Bond Yields Drop Below 7%

Please consider French Yields Drop Most in 20 Years, Spain Bonds Rise

France's 10-year yields fell the most since 1991 as the nation sold 4.3 billion euros ($5.79 billion) of bonds due between 2017 and 2041. Spanish notes rose for a fourth day as it auctioned 3.75 billion euros of securities, the maximum target. Italy's 10-year yields fell below 7 percent for the first time in a week as European Central Bank President Mario Draghi signaled the ECB may do more to fight the crisis as long as governments push the euro area toward a fiscal union.

"There's a generally brighter sentiment at the moment and Spain's was a very good auction with strong demand," said Norbert Aul, a European rates strategist at RBC Capital Markets in London. "There's still fuel in the tank from policy actions and the ECB will offer more next week."

French 10-year yields dropped 27 basis points, or 0.27 percentage point, to 3.12 percent at 4:01 p.m. London time. The 3.25 percent bond due October 2021 rose 2.205, or 22.05 euros per 1,000-euro face amount, to 101.030.

Ten-year Spanish rates fell 51 basis points to 5.72 percent after falling to 5.70 percent, the lowest since Nov. 9. Similar- maturity Italian yields declined 36 basis points to 6.66 percent, dropping below the 7 percent level for the first time since Nov. 24.

Spain 2-Year Government Bonds

Italy 2-Year Government Bonds

Portugal 2-Year Government Bonds

Germany 2-Year Government Bonds

Since the market likes a free lunch at taxpayer expense it's no wonder the debt markets rallied somewhat. However, to what extent the market will believe "no losses" and for how long remains to be seen. Spreads to Germany are still enormous across the board.

If this idea of "no losses" was believable, 2-year Spanish and Portuguese bonds should trade at the same yield as Germany.

It is interesting that Portuguese debt did not rally today. With a no loss guarantee, Portuguese 2-year debt is the leveraged-bet bargain of a lifetime at 18%.

The market clearly does not believe this "no loss" idea and neither do I.

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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