| Lollipops and Tantrums; Is the Fed Promoting Recovery or Desperation? QE "Appears" to Works Until It's Obvious it Never Did Posted: 10 Apr 2012 12:35 PM PDT Lollipops and Tantrums The Fed is much like a rotten mother who throws her spoiled brat a lollipop as a reward for a temper tantrum says John Hussman in yet another excellent missive: Is the Fed Promoting Recovery or Desperation? On Friday, the Department of Labor reported that March non-farm payrolls increased by 120,000, falling well short of consensus expectations in excess of 200,000. For our part, we continue to expect a deterioration in observable economic variables, with weakness that emerges gradually and then accelerates toward mid-year. On the payroll front, our present expectation is that April job creation will deteriorate toward zero or negative levels.
Immediately after the payroll number was released, CNBC shot out a news story titled "Disappointing Jobs Report Revives Talk of Fed Easing." Of course it does, because this remains a market dependent on sugar. And with little doubt the Fed will eventually deliver it - perhaps following a market plunge of 25% or more - but with little doubt nonetheless, because like the indulgent parent of a spoiled toddler, the FOMC can't stand to see Wall Street throw a tantrum without reaching for a lollipop.
How QE "works"
Keep in mind that the U.S. banking system has trillions of dollars sitting in idle deposits with the Fed already. Quantitative easing simply does not relieve any constraint that is binding on the economy. Rather, QE is a method by which the Fed hoards longer-duration, higher-yielding securities like U.S. Treasury bonds and replaces them with cash that bears zero interest. At every moment in time, somebody has to hold that paper. The only way for the holder to seek a higher return is to trade it for a more speculative asset, in which case whoever sells the speculative asset then has to hold the cash. The process stops when all speculative assets are finally priced so richly and precariously that the people holding the cash have no further incentive to chase the speculative assets, and are simply willing to hold idle, zero-interest cash balances.
Why does the Fed want this? Simple. Chairman Bernanke believes that by creating a bubble in speculative assets, people will "feel" wealthier and keep consuming - regardless of the fact that real incomes are stagnant and debt burdens are already intolerable, and despite the fact that there is extremely weak evidence for any such "wealth effect" in the historical record. Undoubtedly, it would be difficult for Bernanke to refrain from these reckless policies when everyone is crying "do something!" But the willingness to tolerate short-term criticism in the interest of long-term benefit is part of what separates leadership from cowardice.
In my view, individuals like Sheila Bair - the former head of the FDIC, Paul Volcker - the former Fed Chairman, and Elizabeth Warren - the former head of the Congressional oversight panel for TARP, demonstrated leadership in elevating the interests of the public over the interests of bank bondholders and entrenched interests. Unfortunately, all of their voices were stifled during the credit crisis - though hopefully some provisions of the Volcker Rule will survive, particularly those related to bank restructuring. We would be far along the road to economic recovery had we dealt with our crisis the way Sweden durably dealt with its own a decade ago (essentially taking a large portion of the banking industry into receivership, wiping out existing shareholders, writing down bad assets, and then taking the banks public to recapitalize them under new owners). Bernanke, in contrast, has been at the forefront of the kick-the-can strategy of bailouts, accounting changes, customizable stress tests, and helicopter money.
Given the bubbling concerns among various FOMC members about inflation risk, the next round of QE is likely to be "sterilized." Essentially, the Fed would buy Treasury bonds from banks, and would pay for them with newly created cash, but the Fed would then borrow those funds back from banks, holding them as idle deposits with the Federal Reserve. By definition, the additional "liquidity" created by a sterilized round of QE would not be available for new lending (as if there aren't enough idle reserves in the banking system already). So again, the main goal is to increase the outstanding stock of zero- and low-interest assets in the economy, in order to lower the yields and increase the prices of more speculative investments.
The reason for doing QE through the Fed (rather than simply changing the maturity profile of the new Treasury debt) is that Wall Street - at least - believes that the Emperor is actually wearing clothes. Despite the fact that the main effect of QE is to boost speculation and release brief bursts of pent-up demand, both which immediately soften when the policies are suspended, this recurring pattern is still unclear to many investors and analysts. As long as that delusion persists, we can expect the Fed to periodically exploit it.
Ignore that the side-effect of this delusion is the misallocation of capital toward speculative assets in the belief that the Fed has set a "put option" under the markets. Forget that savings are discouraged, bad lending decisions are rescued, incentives and economic signals are distorted, and the accumulation of productive capital is disabled. We have the most creative, entrepreneurial nation on the planet, but our policy makers are intent on preventing debt restructuring and misallocating scarce capital. As a result, they continue to compromise long-term growth in favor of temporary bouts of short-term speculation. QE "Appears" to Works Until It's Obvious it Never Did Hussman goes on to challenge the notion the Fed's policies are actually "working". Certainly the Fed and probably more so the ECB's LTRO program lifted financial markets, but Bernanke wants consumers to spend more and banks to lend more. From that aspect, his policies have already clearly failed as I explained in The Real Consumer Credit Story: Virtually No Recovery in Revolving Credit, No Recovery in Non-Revolving Credit. Strip out student loans and there is absolutely no recovery in either revolving or non-revolving credit. Non-Revolving Credit  Non-Revolving Credit Detail  Revolving Credit  Revolving Credit Detail 
What's the Measure of Success? If the Fed's sole intent is to bail out Wall Street, then its policies have been a spectacular success. If the Fed's mandate is to get the economy back on track, spur lending, stabilize housing, and increase jobs it has failed. Please note that multiple mandates are sheer nonsense as discussed in Dual Mandates, the Price of Gold, and Tinfoil Hats. Unfortunately, dual mandates give the Fed all the leeway in the world to take whatever nonsensical actions it wants. So, in spite of the fact his policies clearly are not working, Bernanke sticks with them. He is a one-trick pony with no common sense and no real-world experience, living in academic wonderland. Above all, the Fed desperately wants to stabilize housing. The market has other ideas, proving once again the Fed can provide liquidity, but it cannot determine where it goes, or if it goes anywhere at all. The ECB is in essentially the same boat, desperate to do something except the one thing that makes the most sense: writeoff banking sector losses. One Lollipop Too Many One of these times, and I have to admit I expected it long ago, the market will not be satisfied with another lollipop. At that point, instead of cheering another lollipop, the market will throw up like a child who has eaten three donuts and five lollipops too many. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Spanish 10-Year Bond Yield Hits 5.99% as Official Denials in Spain Escalate; "Bailout" on the Way Posted: 10 Apr 2012 09:07 AM PDT 10-Year Spanish Government Bond Yield  Official Denials in Spain Escalate From Iibre Mercado with an assist from Google translate, please consider Fear pervades the Government: "We do not need a bailout" Fear among members of the Government. Featured Rajoy government ministers and Governor of the Bank of Spain have ruled on Tuesday block the possibility that Spain required some kind of international rescue.
The Minister of Finance and Public Administration, Cristobal Montoro, has said that the Government did not seek help from European Rescue Fund to clean up the Spanish banks have a liquidity cushion "considerable" after having gone to the European Central Bank auction (ECB) held in December and February.
In this sense, told RNE by Europa Press, the finance minister denied that the government will opt for this possibility to help Spanish banks, as is exploring other. "We are studying the possibilities we have in hand as a government, "he assured Montoro, who has stressed that we must go" faster "in restructuring the banking sector, because you need credit to flow to achieve economic growth and job creation.
"We have to obtain and circulate the money, we are already exploring ways to accelerate the restructuring of banks in our country," said Montoro, while predicted changes in terms of bank mergers "increasingly committed to the supply of credit" .
For his part, Minister of Economy and Competitiveness, Luis de Guindos, has said that Spain does not need a bailout right now because it has a government "absolutely clear-minded" and a coordinated economic policy with European partners.
"Obviously you do not need a bailout right now," said De Guindos in statements to the media after participating in the Forum Europe, which has ensured that you have to do is implement the reforms and carry out the adjustment. In Guindos has also highlighted the need to also implement the outstanding reforms and continue with the process of austerity and reforms to ensure a fair distribution of efforts and a return to growth and job creation.
Finally, the Bank of Spain Governor Miguel Angel Fernandez Ordonez has said that the European Central Bank (ECB) has not addressed the possibility that Spain needs to be rescued by Europe, while highlighting the recent progress with reform labor. "Bailout" of Spain on the Way There you have it, three official denials in a single day by the Minister of Finance, the Minister of the Economy, and the Bank of Spain. Translation: "we need a bailout and fast, but politically we do not want one". This bailout is going to be far more painful economically speaking than was Greece. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Inconsistencies in Spain's Budget Suggest Deficit will be 7% not 5.3%; Andalucia Regional Government Will Not Agree to Deficit Targets; Only 26% Trust Prime Minister to Overcome Crisis Posted: 09 Apr 2012 11:53 PM PDT Courtesy of Google translate, please consider The inconsistencies of the State Budget for 2012 Much is written these days about the budget submitted by the Government for 2012, which proposes that the deficit be lowered to 5.3% of GDP. In this article we focus not on a comprehensive analysis of these items but in both revenue and expenditure forecasts which seem less realistic.
The first of these items is to transfer the SPEE (State Employment Service, former INEM). The government budgeted a reduction of 15.6% (2,464,000), arguing that many are unemployed benefits are ending.
Since the Government is assuming that unemployment will increase this year over 600,000 people, there is no reason for us to see a turnaround, quite the contrary. In view of the numbers a reasonable assumption would be a 10% increase in unemployment benefits starting in 2012. This means a delay of nearly 4,500 million from the budget, ie 0.4% of GDP.
A second item of expenditure in which there are serious inconsistencies is Social Security. In the Budget is expected to increase costs (which are mainly pensions) of 0.9%. This assumption might have been possible if the pension had not been updated with the CPI, but in current circumstances is totally unworkable. In fact, the costs to February are up 3.7%. This would lead to a lag in the game cost about 3,300 million.
Noninterest income on Social Security, the Budget provided for 119.884 million euros. However, revenues in 2011 were 118.436 million, down 0.5% compared to 2010. This projected increase is totally impossible with the dynamics of job destruction to which we have referred. Since July we have seen that affiliations have fallen to an average of 50,000 per month (corrected for seasonality), which would lead to a decrease of 3.6% at the end of the year, unless economic recovery unlikely. As wage increases are below 2% on average, this would be a scenario of falling revenues or more than 1%, which is, a lag of about 2,600 million between government forecasts and estimates more reasonable.
Revenue
On the revenue side, there are likewise transcendental inconsistencies in almost every game. Starting with the income tax, the government plans to enter under this heading 73.106 million compared to 69.803 million actually collected in 2011 (+4.7%). However, in the first two months of the year for income tax revenues fell by 2.8%.
In February, with the rise of income tax already in place, revenue rose only 1%. With the increase in unemployment that is occurring is expected that this increase of 1% will decline as the months pass and the collection ends, in a reasonable way, more in line with 2011.
Regarding indirect taxes, the picture is similar. The Government anticipates a reduction in revenue of 3%, but in the first two months of actual observed reduction is 8.4% (5.7% in February). In view of the data that come out of consumption and investment is likely that total revenue in 2012 falls into the environment seen in the month of February or possibly slightly less. This will yield a lag of about 1,500 to 2,000 million in revenue, that is, another 0.2% of GDP.
Add It Up
Adding all detected mismatches (focusing only on large items), 5.3% deficit forecast by the government would really be 7%. And even supposing that regional governments and municipalities comply scrupulously with the objectives of spending, which bodes extremely difficult, so the end result of the exercise would be even worse than the above 7%. Regional Governments in Spotlight I have been saying for what seems like forever that Spain would not makes its budget. It won't, and we have a starting point for how bad it might get. Note that text above on regional governments. My friend Bran who lives in Spain writes ... Hello Mish
Andalucia is the only autonomous region (another abstained) not to agree to a 1.5% deficit this year. Andalucia criticizes government attempts to undermine its 2011 deficit figure, and argues that according to law the limits of ratio for state debt are 20% central , 75% regional , 5% private state partnership.
They also argue that the central government has not paid several billion due to them, and that it is unfair that the state deficit is to be 5.3% , and yet regions are to only be allowed 1.5% deficit. Andalucia being 'not PP' is taking its own stance hence.
Bran No Trust in Prime Minister Mariano Rajoy That comment about Andalucia being 'not PP' refers to the "People's Party" led by Prime Minister Mariano Rajoy. Speaking of which (and also via Google translate) Only 26% of voters trust Rajoy of the PP to overcome the crisis The Prime Minister is seeing increasing pessimism among voters who supported him in November 2011. The CIS barometer of March concluded that only 26.7% of PP voters trust the new government to improve the scenario in the country.
The CIS survey also reveals that 35.7% of voters who supported Mariano Rajoy considers that the uncertainty will remain constant in Spain and 27% think worse.
These data reveal a growing tendency to pessimism by the voters themselves the Popular Party, and a bump in the strategy Rajoy, who from the campaign appealed to the confidence to regenerate the Spanish economy.
Growing pessimism in the first quarter
Increasing trend since January, when this same barometer revealed that 35% of PP voters believed that the government would achieve better Rajoy scenario in the country, representing a decrease of 10 points on the confidence generated in the last three months.
Pessimism is even higher among Socialist voters, UI and UPyD. In total, 37% opted for the situation worse, and 36% believe that there will be major changes. Spain is already in an economic depression and the situation will become much worse. Addendum: Gonzalo Lira provided a better translation to the above article. He writes ... Hello Mish,
You wrote: "Only 26% of voters trust Rajoy of the PP to overcome the crisis"
It's actually worse. The correct translation is: "Only 26% of PP voters trust Rajoy to overcome the crisis."
GL Conclusion, even members of his own political party do not think Prime Minister Rajoy can solve the problem. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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