Mish's Global Economic Trend Analysis |
- Ruble Slide Continues; Russia Forced to Abandon Currency Intervention as Reserves Dwindle
- Eurozone Target2 Imbalances Rise Again, Led by Italy
- Worst Election Performance by Sitting President's Party Since Truman; Republicans Take Senate, Increase Lead in House and Governorships
| Ruble Slide Continues; Russia Forced to Abandon Currency Intervention as Reserves Dwindle Posted: 05 Nov 2014 05:13 PM PST In the wake of falling oil prices, tensions in Ukraine, and sanction madness that hurts both Russia and the Eurozone, the ruble has been on a huge slide. Ruble Daily Chart  Since June the Ruble has slid from about 34 to the US dollar to 44.9 to the US dollar. That is a decline of 24 percent. A long-term chart shows an even bigger decline. Ruble Weekly Chart  Since the beginning of 2011 the Ruble has gone from 28 to the US dollar to 44.9 to the US dollar. That's a decline of 37.6 percent. Russia's Attempts to Stabilize the Ruble Fail The decline has been pretty orderly until about June of this year. To halt recent decline, Russia hiked interest rates on October 31 to 9.5% from 8.5%. As the first chart shows, that huge rate hike did not halt the slide. Russia had also been intervening in the currency markets to the tune of about $2.5bn a day, but that's not a sustainable action. Indeed, declining reserves forced the Russian Central Bank to Abandon Ruble Support. The Central Bank of Russia announced an effective free float of the rouble on Wednesday, a step which triggered a fresh plunge in the currency but is intended to eventually stabilise it.Floating the ruble is the right thing to do. The Ruble will eventually find the right level. Some seriously misguided economists suggested capital controls, but that is more likely to cause panic than stabilization. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Eurozone Target2 Imbalances Rise Again, Led by Italy Posted: 05 Nov 2014 10:27 AM PST Eurozone Target2 imbalances are on the rise again, led by Italy. Target2 Refresher Course Before showing the latest Target2 numbers, inquiring minds may need a refresher course as to what Target2 is, as well as the problems associated with rising imbalances. Target2 stands for Trans-European Automated Real-time Gross Settlement System. It is a reflection of capital flight from the "Club-Med" countries in Southern Europe (Greece, Spain, and Italy) to banks in Northern Europe. Pater Tenebrarum at Acting Man provided this easy to follow 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." Also, if people in one country (Cyprus, Greece, Italy, Spain, anywhere) no longer trust their banks, they may pull their deposits and park them elsewhere. Please see Reader From Europe Asks "Can You Please Explain Target2?" for a more compete discussion including responsibility percentages (i.e. if Greece leaves the eurozone, what percentage of the liability falls on Germany, France, Spain, etc.) If Greece, Spain, or Italy elects to abandon the Euro, euro-based claims in those countries would receive an immediate haircut. Watch Italy The recent rise in imbalances is not that large, but it primarily rests on the shoulders of Italy. With that backdrop, Variant Perception says Target2 Imbalances Widen Again – Watch Italy. Target2 – the payment system used for intra-eurozone transfers – has widened again, with the largest two-month move since mid 2012. A look into its breakdown reveals that it is Italy that is almost completely responsible for the increase in liabilities. Ceteris paribus, an increase in the Target2 liabilities of a central bank means capital leaving the country in question, eg through the importing of goods.Target2 Assets vs. Liabilities  The above blip in the last two months does not seem that significant, but it looks more important if you see it all comes from one place. Target 2 Italy  Charts from Variant Perception. I added the trendline arrows in the second chart. In this context, Italy, which had been on the mend since July 2012, has reversed course strongly in the last two months. Italy liabilities are 200 billion euros, and that poses a big theoretical risk. Target2 Imbalances January 2007 - April 2014 Wikipedia has some good information (but also some fluff about how Target2 makes things more stable). Here is a long-term chart from Wikipedia.  Target2 imbalances dramatically improved after ECB president Mario Draghi came out with his "Whatever it takes ... And believe me, it will be enough" statement in July of 2012. In response, Jens Weidman, German economist and president of the Deutsche Bundesbank (Germany's Central Bank), nearly resigned. Weidman said in a Spiegel interview that "bond buying made it look as if ECB was financing governments directly — and shouldn't go ahead". Target2 treats all assets and liabilities equal, regardless of country. The mechanism is one of the huge structural flaws in the euro system itself. Ultimately, what cannot be paid back, won't. Alternatively, the ECB will make up the difference via printing press. Either way, German banks on the surplus side will take a hit. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Posted: 04 Nov 2014 11:09 PM PST I watched the returns all evening from Start to finish, not that anything was much in doubt. I expected the Republicans would finish stronger than the polls suggested, and they did by a huge margin. Senate Results
It could have been much worse. In Virginia, Republican Ed Gillespie nearly pulled off an amazing victory over Democrat Mark Warner. In New Hampshire, Republican Scott Brown nearly pulled off a huge upset over Jeanne Shaheen. Governors
The Gubernatorial score as I type is 31-15 and will likely get worse for Democrats. House
What's It Mean? The key question is "what does it all mean?" The short answer is this vote is an anti-Obama vote as much as anything else. I watched Senator Ted Cruz on CNN Tuesday evening. Wolf Blitzer asked Cruz twice if he would back Mitch McConnell as majority leader. Cruz twice refused to answer. Expect Cruz to mount a challenge to McConnell for Senate majority leader. Cruz told Blitzer we need "much more legislation". Good grief. How about dismantling rules and regulations? And how about dropping no-win divisive issues like abortion and focusing on things the country needs? Without a doubt Hillary will distance herself from president Obama further and further. She will also do everything she can to get the majority of female votes. Ron Paul Chimes In On Tuesday Ron Paul Tweeted "Republican control of the Senate = expanded neocon wars in Syria and Iraq. Boots on the ground are coming!" Senator Rand Paul is going to have to take a stand, and hopefully the right one. You cannot disenfranchise 65% of the women in the country and expect to get elected. If Republicans nominate another Neanderthal determined to wage more wars while taking away freedom of choice, expect to see Hillary in the White House in 2016. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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