Mish's Global Economic Trend Analysis

China Manufacturing PMI 7-Month Low, Sharpest Decline in New Export Orders Since March 2009
Nigel Farage: "EC president Jose Barroso is a Delusional Idiot, The Whole Thing's a Giant Ponzi Scheme!"
European Crisis Summit Score 0-18 With Another Coming Up June 28; Is Merkel Misinterpreted? Will the FOMC Move Decisively?
Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks "Can You Please Explain Target2?"

China Manufacturing PMI 7-Month Low, Sharpest Decline in New Export Orders Since March 2009

Posted: 20 Jun 2012 09:20 PM PDT

The global economy continues to slow led by Europe and China. The HSBC Flash China Manufacturing PMI is at a 7-month low. Moreover manufacturers report the sharpest decline in new export orders since March 2009.

Key points

Flash China Manufacturing PMI™ at 48.1 (48.4 in May). 7-month low.
Flash China Manufacturing Output Index at 49.1 (49.7 in May). 3-month low.

Summary

Note that inventories of finished goods are up, everything else is down. It's time to admit the global economy is in recession. The US is there too, or soon will be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Nigel Farage: "EC president Jose Barroso is a Delusional Idiot, The Whole Thing's a Giant Ponzi Scheme!"

Posted: 20 Jun 2012 03:19 PM PDT

Those needing a laugh today need only listen to another rant from UKIP leader Nigel Farage who says "Listen! The Whole Thing's a Giant Ponzi Scheme!"

Select Quotes

"EC president Jose Barroso is a delusional idiot and was a supporter of Chairman Mao"
"America, you are not to blame"
"The only buyers of Spanish bonds are Spanish banks"
"Listen. The Whole Thing's a Giant Ponzi Scheme!"
"At the end of the day, this whole thing is going bust"
"We have been led by a group of ex-communists to a total disaster"
"What we're doing in Brussels with Barroso, and the other joker Van Rumpoy, is we are actually rebuilding a model of centralized undemocratic government run by bureaucrats"

UKIP Creed

That is one of the most amusing interviews Farage has given. Moreover, Farage is correct on every point.

The Republican party would do well to adopt the UKIP Party Creed as shown.

We believe in the minimum necessary government which defends individual freedom, supports those in real need, takes as little of our money as possible, and doesn't interfere in our lives.

That interview was published on June 19. I posted a take on Barroso on the 18th in G-20 Summit in Flames Already as EC President Blames US For Financial Crisis in Europe

Let's be honest here. Yes the US caused lots of problems. So did the ECB, and so did the nannycrats. China played a part as well. Thus, those comments by Barroso are strictly from Fantasyland if not Idiotland. Europe created the euro, not the US. Europe foolishly pledged more and more money to Greece, not the US. And eurozone rules are at the heart of Europe's mess, not anything the US did.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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European Crisis Summit Score 0-18 With Another Coming Up June 28; Is Merkel Misinterpreted? Will the FOMC Move Decisively?

Posted: 20 Jun 2012 10:03 AM PDT

Steen Jakobsen, chief economist of Saxo Bank in Denmark, asks via email: "Is Merkel Misinterpreted? Will the FOMC Move Decisively?"

The misunderstood Chancellor.

The market clearly believes Ms. Merkel will, ultimately, not withstand the pressure - and she will end up collateralizing rising debt. I remain extremely skeptical. I even dusted off my school German to read Der Spiegel and Focus, two major German weeklies, which give you a very different perspective.

As a generalization, the Anglo-Saxon driven investment banks and media tend to rely on poorly translated English versions of domestic financial papers, hence they lose the subtle difference on what Merkel is REALLY saying. This is what I believe Ms. Merkel, and Germany, think.

When countries join the euro, they also directly and indirectly accept the Stability-and-Growth Pact, hence anything that moves Germany and Europe closer to Stability-and-Growth will be supported by Germany.

Germany knows it will take time - more time than the market wants it to take. But Germany also realizes it will probably mean more crisis before the whole of Europe moves in the same direction.

The big loser if Germany "caves in" is Germany. Bund yields will rise and all of Europe will have to finance itself at higher rates - the exact same reason the Alexander Hamilton sinking fund will not work - why should Germans pay more for issuing debt and the high debtors pay less?

Germany has a game-theory upside in Greece failing to comply - only through more crisis will Club Med (Italy, France and Spain) move to more Europe. (The only thing Club Med wants for now is more German money, not more Europe...)

Merkel needs to reach across to SPD, the opposition, to get her 2/3 majority for the Fiscal Compact. Watch closely what "concessions" she is willing to give SPD. That will give us clear indication on where she stands vis-a-vis the Club Med call for the easy solution of Euro-bonds and Banking Union.

Merkel and Germany are pro-European. They want the EU to succeed and they will never leave the euro. But they are also aware that collateralizing debt without the Stability-and-Growth pact will end in tears as it will be extend-and-pretend squared. Throwing liquidity at a solvency issue avoids any real reforms and will be the fastest way to Japanisation.

From this old cynical trader's point of view, the more likely Merkel and Germany give up and bow to the pressure, the sooner will we face a full-blown crisis and collapse of Europe.

European Crisis Summit Score 0-19

Rhetoric and non-plans cannot continue to dominate the agenda at the EU Summits. The meeting on the 28/29 June is, by my count, meeting number 19 without a real result. Zero from nineteen games - talk about a team going towards relegation!

FOMC - more of the same The US data is still getting weaker, but not weak enough to warrant a panic from the FOMC tomorrow. Bernanke failed to provide the juice in his speech last week, so now the consensus is it will have to happen tomorrow. Otherwise... you know the rest of the sentence. The Fed will lower growth; it will probably also extend Operation Twist, but I doubt it will go all in considering the banking system issues and the overall need for having reserves.

On the other hand, however, the Fed also realizes that "promising" has a real impact on the market. So, overall, expect some small adjustment from FOMC/FED, but not enough.

Strategy

We would be almost square into this meeting, but looking to be heavily bearish on equities post the FOMC and EU Summit.

We still see a summer of discontent as the misinterpretation of Germany and FOMC will lead the market to realize that, for once, central banks and the politicians can't buy more time.

It is time to reflect not act, as their five-year experiment of doing the same thing expecting different results is leading them nowhere. Probably naive thinking by me... But I think we will all lose if I'm wrong, as extend-and-pretend squared is the road to the poor house.

Safe travels,
Steen Jakobsen

Market Won't Wait

I believe Steen has this essentially correct and that Germany giving in would ultimately just make matters worse in spite of all the "mother hen calls" from nearly every other economist.

Yet, the market cannot and will not wait long enough for Merkel to be proven correct. Interest rates in Italy and Spain are at disaster levels and will likely get worse.

My position is summed up in these three posts.

In the meantime, I offer another musical tribute, this one from The Animals.

Please Don't Let Me Be Misunderstood

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks "Can You Please Explain Target2?"

Posted: 20 Jun 2012 01:22 AM PDT

Reader Thomas who lives in the Netherlands writes ...

Hi Mish,

I am a daily reader of your blog. I live in the Netherlands. Recently I saw an overview of target2 balances, including charts.

Could you explain target2 and what the graphics mean?

Does it really mean that we in the Netherlands work to export goods to the PIIGS-countries and that they are not paying for the goods we deliver?

That instead of receiving money for our goods, we get a promise from the national bank to pay the money? And that we are paying higher taxes to our government, so that they can give that money to the ESM, which gives it to the national banks of the PIIGS?

In essence: are we really giving away our goods for free?

Greetings,
Thomas

Target2 Explained

I replied to Thomas ....

Hello Thomas

Here is a Target2 Balance Example:

If a Greek depositor sends money to a foreign bank (say a German bank), that bank now has additional deposits. To the extent it doesn't want to recycle them (in the past, it may have used them to buy Greek government bonds), it deposits them with a NCB (national central bank) - in this case the Bundesbank (Germany's Central Bank).

Target claims are created because the Greek bank that loses deposits gets funding via the ECB's ELA (Emergency Liquidity Assistance) program.

Simply put, the ECB sends money to the Bank of Greece in a kind of open credit line to make up for the cash that left the Greek bank. There are some restrictions, but not many.

This is not a major problem unless Greece changes currencies or defaults. If it does, Greece will repay the credit line with Drachmas, not euros (or if the radical left had won, perhaps not at all). This is precisely one of the things that had everyone excited.

Germany is responsible for its share of any such losses at the ECB according to its percentage in the EMU, roughly 27%.

France, Italy, and Spain are next in line to take losses.

There is a table of percentage Responsibility Percentages on Wikepedia. The table may not be perfectly up to date, but it should be close enough.

The Netherlands would be responsible for about 5.7% of any Target2 losses associated with a Greek default, whether the money is sitting in German banks, Austrian banks, Dutch banks, etc.

If Spain leaves, its 11.9% will be reallocated to the other countries.

You comfortable with this setup?

I hope not.
Mish

Responsibility Percentages

click on chart for sharper image

That table refers to EFSF commitments, so the important column is percentages. Percentages apply to the ESM as well as each country's commitment should there be a default. All the percentages change should a country default.

Should Spain default, its 11.9% would have to be redistributed proportionally to the other countries.

Balance of Trade

I bounced my reply off my friend Pater Tenebrarum at the Acting Man Blog who added ...

Your explanation is correct. In the context of a default, however, Thomas is also correct about 'giving away goods for free'.

For example: Spain imports German goods, but no Spanish goods or capital have been acquired by any private party in Germany in return. The only thing that has been 'acquired' is an IOU issued by the Spanish commercial bank to the Bank of Spain in return for funding the payment.

Capital Flight vs. Balance of Trade

Thus, Target2 applies not only to capital flight but also to balance of trade issues.

There is no official breakdown, but Tenebrarum made an attempt to distinguish between the two by subtracting balance-of-payment data from Target2 balances in his May 29 post Another Look at Euro Area Capital Flight.

Tenebrarum notes a problem with delayed data.

First Rule of the ELA

Tenebrarum also points to the Bloomberg article Frozen Europe Means ECB Must Resort to ELA for Banks.

The first rule of ELA is you don't talk about ELA.

"The lack of transparency is a double-edged sword," said David Owen, chief European economist at Jefferies Securities International in London. "On the one hand, it increases uncertainty, but at the same time we do not necessarily want to know how bad things are as it can add fuel to the fire."

The ECB buries information about ELA in its weekly financial statement. While it announced on April 24 that it was harmonizing the disclosure of ELA on the euro system's balance sheet under "other claims on euro-area credit institutions," this item contains more than just ELA. It stood at 212.5 billion euros this week, up from 184.7 billion euros three weeks ago.

The ECB has declined to divulge how much of the amount is accounted for by ELA.

"ELA is a symptom of the strain in the system, and Greece is the tip of the iceberg here," Owen said. "As concerns mount about break-up, that sparks deposit flight. Suddenly we're talking about 350 billion, 400 billion as bigger countries avail of ELA."

For Citigroup chief economist Willem Buiter, there is a bigger issue at stake. ELA breaks a key rule that is designed to bind the monetary union together, he said.

"It constitutes a breach of the principle of one monetary, credit and liquidity policy on uniform terms and conditions for the whole euro system," Buiter said. "The existence of ELA undermines the monetary union."

The key sentence is the last one. "The existence of ELA undermines the monetary union."

That explains why they want to keep it a secret.

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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