Mish's Global Economic Trend Analysis

Japan’s Economic Minister Wants Nikkei to Surge 17% to 13,000 by March; Contender for Bank of Japan Supports Additional Easing
Cyprus "Radical Rescue" Proposal Proves Greece Not Unique; Sovereign Haircuts Detailed in "Secret" EU Plans; Russian Connection
Krugman's Explicit Endorsement "Time to Kick the Can" Shows True Colors He Denies in "Despicable Me"

Japan’s Economic Minister Wants Nikkei to Surge 17% to 13,000 by March; Contender for Bank of Japan Supports Additional Easing

Posted: 11 Feb 2013 06:36 PM PST

Currency wars again took another leap forward this week as Japan's Economic Minister Wants Nikkei to Surge 17% to 13,000 by March.

Economic and fiscal policy minister Akira Amari said Saturday the government will step up economic recovery efforts so that the benchmark Nikkei index jumps an additional 17 percent to 13,000 points by the end of March.

"It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31)," Amari said in a speech.

"We want to continue taking (new) steps to help stock prices rise" further, Amari stressed, referring to the core policies of the Liberal Democratic Party administration — the promotion of bold monetary easing, fiscal spending and greater private sector investment.

The key index started rallying from around 8,600 points in mid-November when then-Prime Minister Yoshihiko Noda decided to hold a general election Dec. 16 that saw his ruling Democratic Party of Japan trounced by the LDP. Share prices have risen largely in response to the yen's depreciation against other major currencies on expectations for aggressive monetary easing measures by the Bank of Japan since the LDP's return to power.

Contender for Bank of Japan Supports Additional Easing

In addition to stock market cheerleading and targets from Japan's economy minister, Yen Weakens as Candidate for Bank of Japan Promotes Easing.

Japanese stock futures rose and the yen weakened after Haruhiko Kuroda, a potential contender for Bank of Japan chief, said additional monetary easing can be justified this year.

"If we do see a BOJ Governor of Kuroda's calibre, the dollar-yen could well punch through 95 and would head to 100 very quickly," said Evan Lucas, Melbourne-based market strategist at IG Markets Ltd., a provider of trading services. "It would also signal to Japanese consumers and investors alike that the government is finally taking action."

For the record, I have been in on a long Japanese equities, short the Yen play for quite some time.

Yet, I do not pretend to know whether or not the Nikkei will soar another 17% by March. However, I do know that it is economically foolish for politicians to hijack currencies and stock markets. Thus, my positioning is certainly not an endorsement of Japanese policy.

At some point, and perhaps we have crossed the point already, currency wars can and will get out of control. If and when that happens, the Yen will spiral downward out of control, with energy prices (in Yen) skyrocketing. Moreover, Japanese exports may not necessarily rise as everyone believes.

Sentiment is a powerful thing. Convincing everyone in Japan that a huge outburst of inflation is on the way, is not the brightest thing to do, to say the least. As I have stated many times, Japan better be careful or it may get (and then some in spades) more of what it seeks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Cyprus "Radical Rescue" Proposal Proves Greece Not Unique; Sovereign Haircuts Detailed in "Secret" EU Plans; Russian Connection

Posted: 11 Feb 2013 10:48 AM PST

Cyprus is about to prove what anyone with common sense already knew, that Greece will not be the only country requiring haircuts on sovereign bonds.

Today the Financial Times posted news of a Radical rescue proposal for Cyprus

A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the country's sovereign bonds, according to a confidential memorandum prepared ahead of Monday's meeting of eurozone finance ministers.

The proposal for a "bail-in" of investors and depositors, and drastic shrinking of the Cypriot banking sector, is one of three options put forward as alternatives to a full-scale bailout. The ministers are trying to agree a rescue plan by March, to follow the presidential elections in Cyprus later this month.

The new plan has not been endorsed by its authors in the European Commission or by individual eurozone members. The memo warns that "the risks associated with this option are significant", including a renewed danger of contagion in eurozone financial markets, and premature collapse in the Cypriot banking sector.

It would reduce Cyprus's outstanding debt to just 77 per cent of economic output, compared with 140 per cent in the current full bailout plan.

Labelled "strictly confidential" and distributed to eurozone officials last week, the memo says the radical version of the plan – including a "haircut" of 50 per cent on sovereign bonds – would shrink the Cypriot financial sector, now nearly eight times larger than the island's economy, by about one-third by 2015.

But the authors warn such drastic action could restart contagion in eurozone financial markets, and put forward two more cautious alternatives.

Curious Thing About That "Full Bailout"

Notice how the existing "Full Bailout" still leaves Cyprus with a debt-to-GDP ratio of 140%. To get to an also unsustainable ratio of 77% requires a radical new plan.

Of course when that fails as well, there will be still more radical plans.

Russian Connection

Steen Jakobsen, chief economist for Saxo Bank in Denmark has some additional thoughts via email, as follows:

This morning hot topic has been a Financial Times article: Radical rescue proposed for Cyprus which indicates that depositors as well as investors in the country sovereign bonds stand to lose up to 2/3.
Cyprus is in need of approximately 17 bln. EUR - and how to reduce the overall burden which will reach 140 percent by 2015 without a hair-cut.- EU Finance minister meets tonight and need to secure deal before March 1st, 2013.

These are the leaked three options on the table:

Bail-in (the radical version) - Reducing outstanding debt to 75-ish percent via hair-cut which will hit foreign depositors and bond holders. This will hard on the big investor Russia.
Bail-in (Light version) - Only junior debt holders will be hurt, not bank depositors - this would however prolong the reduction of the banking sector by ten years - the suggestion will include increase corporate tax from 10.0% to 12.5% and withholding tax on capital income to 28%
A classic ESM structure - selling the 'nationalized' Cypriot banks to the ESM and secure funding. Problem being ESM is not allowed, yet, to do direct funding of banks.

The political decision is really down to how big a reduction Cyprus need. Some people argues for 100 percent by end of 2015, others say it should be by 2020.

The deep irony of course being, that when we had the hair-cut on Greece, we were told Greece was a one-off and it will never be repeated - Well, Dr. Watson, It's elementary: Other people money is always easy to spend.

Making things complicated is two issues: Cyprus goes to the polls on February 17 and 24th - As we have seen across Europe it looks like a change guard: Cyprus opposition leads extends lead week before vote.

Cyprus is seen by many countries as tax heaven for Russian money, so bailing out Cyprus equates to "helping Russia investors" - We have no view on the issue but note how Asmussen, ECB Board member, is taking the high road in German press: ECB's Asmussen sees Cyprus bailout by end-March.

Conclusion

It's clearly a concern for market that Greece was not, after all, a one-off. The radical version could reignite fundamentals issue in Europe and as we have written in our Stress Indicators recently: Risk off looks more and more likely.

We suggest securing profit and to reduce overall risk- mainly in EUR, JPY and major European indices. The deal will probably only be done at last minute, but it leaves us "hanging" for another two-three weeks, and one thing the market does not like is increased political tail-risk.

Safe travels,
Steen

Cyprus Debt

Curiously, "Government bonds from Cyprus seems unaware of any potential hair-cut" notes Jakobsen.

Thus for now, it appears the intent is to bail out Russia at the expense of Cyprus businesses and taxpayers on the misguided notion that will prevent "contagion".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Krugman's Explicit Endorsement "Time to Kick the Can" Shows True Colors He Denies in "Despicable Me"

Posted: 11 Feb 2013 01:13 AM PST

Angry Bear's column How To Debate Paul Krugman in response to my January 26 column How to Debate Paul Krugman: "Ask Questions Like a Child" was rather humorous for what it did not say.

Three-fourths of the Angry Bear article was a rebuttal of nothing I said, but rather a rebuttal of something stated by Austrian school economist Detlev Schlichter.

"Despicable Me"

Following the cue of Angry Bear, Krugman got into the act with Despicable Me, flattering himself with the notion that he is "History's Greatest Monster".

For the record, I never said, nor implied as Krugman claims in Despicable Me that "liberals must support any and all government interventions."

The irony in that ridiculous assertion is Krugman and Angry Bear both paint a straw man picture that does not exist, while hypocritically accusing me of doing just that!

Furthermore, I have never said Paul Krugman is always wrong, nor have I ever said that I am always right.

I happen to agree with Krugman's original stance on free trade as noted in Fair Trade is Unfair; Are Paul Krugman and Mitt Romney On the Same Page? It just so happens that Krugman was right then, and he is wrong now.

On the monetary front, I have stated numerous times that the Austrian economists and commentators in general were wrong that Fed printing was going to cause hyperinflation.

In Bizarro World Inflation; About that 2011 Hyperinflation Call ... I specifically mentioned: It pains me to see articles like On the Brink of Inflationary Disaster by Austrian economist Robert Murphy.

Moreover, I have explicitly stated on numerous occasions that Krugman was right on the inflation score (even though I do not agree with fiscal or monetary stimulus efforts for reasons explained below).

Thus, not all Austrians think alike, a point Krugman conveniently (and frequently) seems to forget.

Kick That Can

The story became even more amusing when Krugman flat out promoted Kick That Can on February 7.

In Kick That Can Krugman states "The key point is this: While it's true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we're in, it would be irresponsible and destructive not to kick that can down the road."

I certainly disagree with the last sentence above, but I am in agreement with Krugman's statement that "Republicans often seem to believe in "weaponized Keynesianism," a doctrine under which military spending, and only military spending, creates jobs."

Krugman then dove off the deep end into a pool of Keynesian silliness as follows:

But aren't we facing a fiscal crisis? No, not at all. The federal government can borrow more cheaply than at almost any point in history, and medium-term forecasts, like the 10-year projections released Tuesday by the Congressional Budget Office, are distinctly not alarming. Yes, there's a long-term fiscal problem, but it's not urgent that we resolve that long-term problem right now. The alleged fiscal crisis exists only in the minds of Beltway insiders.

So we should avoid that damage by kicking the can down the road. It's the responsible thing to do.

Reflections on a Fiscal Crisis

Of course we are facing a fiscal crisis (depending on the definition of facing) whether Krugman sees it or not. Similarly, in 2005 we were facing a housing crisis whether or not anyone saw that.

Indeed, the very reason we were facing a housing crisis is because the Greenspan Fed blew the biggest credit bubble in history in a can-kicking exercise to bail out the banks who were in trouble in 2000-2001 from the dot-com bust.

Now Krugman states that it would be irresponsible to not kick the can, ignoring the fact that can kicking is one of the reasons we are in this mess in the first place.

Although the Fed is not going to create hyperinflation (or even strong inflation) any time soon, Fed policies have indeed caused massive distortions. For example, Fed policy clobbers those on fixed income as detailed in Hello Ben Bernanke, Meet "Stephanie".

In addition to clobbering those on fixed income, the Fed has blown yet another bubble in the equity and corporate bond markets.

Thus, there are many costs to kicking the can. And for what?

Take a good look at Japan. Over 20 years of can-kicking via both Keynesian and Monetary stimulus did not buy Japan anything but a mountain of debt.

Japan has not blown up yet, but it will, and sooner than the US in my estimation (a statement I made in 2005 if not before).

Krugman points out that austerity did not work in Spain or Greece. Of course it didn't. Both countries increased taxes and neither country implemented what was really needed, and that is work rule and pension reform.

No respected Austrian on the planet would have raised taxes like the Troika demanded in Spain, Italy, Greece, and Portugal.

Yet that does not stop Krugman from blaming Austrian austerity for the collapse in Europe. Nor does it stop Krugman from ignoring Japan (on the basis Japan has not blown up yet).

In the meantime, we are force-fed the ridiculous Keynesian notion that the cure to a debt-mess is to pile still more debt upon debt as if debt will create a recovery.

More Debt Will Not Create a Recovery

More debt cannot be the answer for the simple reason I mentioned in "Libertarian Turned Keynesian": "Any person with a modicum of common sense, at any education level beyond 7th grade, should understand what happens to demand as soon as free money stopped."

It does not take a brilliant mind to understand that. Indeed, it takes someone living in an ivory tower of academic nonsense to not see it.

There is only an illusion that Keynesian stimulus ever worked, and that illusion is based on ability and willingness of consumers to take on more debt. If we have hit the end of the line on consumer attitudes towards debt (and I believe we have) further stimulus will be as useful as it was in Japan.

So, my original post was indeed correct after all. "It is very important in replies to people like Paul Krugman, that we don't get involved in technical details. Ask some questions almost like a child. ..."

What is the end-game? When does the stimulus stop?

The US has had trillion dollar deficits for years and faces them for years more to come. If's that not "stimulus" what is it?

Krugman wants stimulus measures to continue, with increasing doses until the stimulus works, but of course it never will (and all we will get for it is a massive pile of debt).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Monday, February 11, 2013

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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