Mish's Global Economic Trend Analysis

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Tale of Colours, All in Denial; Assessing Merkel's Chances Posted: 13 Aug 2013 02:14 PM PDT The German federal election is on September 22, just over a month away. Merkel's CDU/CSU party will without a doubt receive the most votes. However, winning is not what matters unless there is an outright majority and CDU/CSU is not close to a majority. The next chancellor will be the one who can put together a majority coalition. On that score, nearly every party is in denial about who they would be willing to form a coalition with. For more background on the German political parties and what they stand for, please see Understanding German Politics. Tale of Colours Currently, not only is every political party short of a majority of votes, every likely coalition is short of votes. I have commented on this before, with input from reader Bernd (not AfD party chairman Bernd Lucke). Today, the Financial Times has an update on that possibility in its report Germany's election campaign becomes tale of colour coalitions. Although Angela Merkel is the most popular politician in Germany, and her Christian Democratic Union is the front-running political party, it would be an extraordinary upset for the CDU – with its Bavarian sister party, the Christian Social Union – to win an outright majority. It is currently earning steady 40 per cent support in opinion polls, some 6-7 per cent short of the threshold required to gain outright control of the Bundestag. At this point in the election campaign, however, the game politicians play is to deny they have any intention of taking part in any coalition other than their first preference. So Ms Merkel is adamant that she wants to keep her present centre-right coalition with the liberal Free Democrats, although its record over the past four years has been very patchy. Constant bickering, especially between the FDP and the conservative CSU, has made the "black-yellow" coalition (named after the respective party colours) much less popular than its constituent parts. On the left, the Social Democratic party (SPD) and the environmentalist Greens insist that a "red-green" coalition remains their absolute ambition, even though they are currently polling a combined 40 per cent, well short of the majority threshold.  The man who has now put the cat among the pigeons is Gregor Gysi, the sharp-witted and silver-tongued former Communist lawyer who leads the radical Linke – the Left party – in the election campaign. He declared last week that he would happily take part in a "red-red-green" alliance to replace Ms Merkel. A "grand coalition" of CDU and SPD is the one most Germans (52 per cent in a recent poll) would favour – and most of the outside world. Mr Steinbrück admits it is what Washington, London and most of the rest of the EU would like to see. But he is flatly against it. From the start of the campaign, he has said he would not serve under Ms Merkel in such a "black-red" alliance, although he was finance minister in the grand coalition she headed from 2005-09. He also fears it would split the SPD. But if neither black-yellow nor red-green coalitions has a clear majority, what is the alternative? The only potential coalition that might see Mr Steinbrück as chancellor would be a so-called "traffic light" coalition of SPD, Greens and FDP (red, green and yellow). If a grand coalition is out, and so is black-green and red-red-green, it might be the one workable option. Wildcards There are two wildcards in the election. FDP - Merkel's current coalition partner AfD - Alternative für Deutschland (Alternative for Germany) a eurosceptic party Political parties need to garner 5% of the vote to be represented in parliament. FDP (Merkel's current coalition partner) is right on the bubble, polling close to 5%. AfD is polling only 2%. However, Bloomberg quotes AfD chairman Bernd Lucke who said "We believe that we're very close to the 5 percent hurdle". Of course no politician will ever deny hope. Perhaps more realistically, Bloomberg notes "Allensbach, the company that most accurately predicted the 2009 election outcome, had the party edging up 0.5 percentage point to 3.5 percent support in a July 12 survey." I have not seen a more recent poll other than unreliable online surveys, so it's hard to assess the chances. In April, reader Bernd said it was likely AfD would get over 10%. I hopped on that bandwagon myself. But unlike the surge for Beppe Grillo in Italy, AfD just never caught on. Still 5% is doable for AfD and less than 5% for FDP is also doable (if not likely). Should both happen, it will be even harder for any coalition to put together a majority. As I have noted before, the price for forming a coalition might easily be the ouster of Merkel or perhaps an agreement that she will step down in two more years. This election is a lot more open than Merkel supporters would have you believe. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Treasury Yields Rise Following .2% Rise in Retail Sales; Fed Tapering Begins in September? Posted: 13 Aug 2013 08:18 AM PDT The Census Bureau reports retail sales rose for a fourth consecutive month, up 0.2% in July. Retail sales missed economist expectations of a 0.3% rise, but June month was revised up. Retail Sales vs. Previous Months July 2013 Retail Sales vs. July 2012 I am not sure how much longer auto sales will lead retail sales, but sooner or later, a huge plunge is in store. With mortgage rates generally tied to the 10-year treasury yield, housing is already under pressure from the rise in treasury yields. Treasury Yields Overall, retail sales were strong enough to push treasury yields back towards the July high. The next three charts show treasury yields multiplied by 10. Shift the decimal point one digit to the left for an accurate read. $TNX 10-Year Treasury Yield $TYX 30-Year Treasury Yield $FVX 5-Year Treasury Yield Historical Perspective Curve Watchers Analysis captured the following chart this morning. click on chart for sharper image $TYX: 30-Year Treasury Yield - Green $TNX: 10-Year Treasury Yield - Orange $FVX: 05-Year Treasury Yield - Blue $IRX: 03-Mnth Treasury Yield - Brown Tapering Expectations Bloomberg reports Bernanke Seen Slowing QE to $65 Billion in September. Federal Reserve Chairman Ben S. Bernanke in September will trim the Fed's monthly bond buying to $65 billion from the current pace of $85 billion, according to a growing number of economists surveyed by Bloomberg News. Half of economists held that view in the July 18-22 survey, up from 44 percent in last month's poll. After today's rise in treasury yields, that number is likely more than 50% and/or the expected tapering amount greater than $20 billion. It will be interesting to watch the Fed's reaction when housing and autos slump, the stock market takes a hit, and treasury yields continue to rise in the next few months. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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