Mish's Global Economic Trend Analysis

Caution!
Germany Buckles on Greece Already; Advantage Syriza
Eurozone Falls Into Deflation; ECB About to Do Something Stupid
ECB Considering Three QE Options; Eight Reasons Why ECB's Plan Will Fail; Something Up Draghi's Sleeve?

Posted: 07 Jan 2015 06:01 PM PST

Reader Curt emailed the following image.

I typically do not post such images unless I know who to attribute. In this case, the image appears to be recent, has not gone viral, and is pertinent. If the owner steps up, I will gladly attribute the image to its owner.

"Caution. Floor Covered with Political Promises"

The message itself, although use before, is still timeless. It applies to everything from Obamacare to Greece, to statements from the Fed.

"Caution!" also applies to the stock market, junk bonds, the dollar, sovereign bonds, the Yen, GDP estimates, and in fact damn near everything.

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

Germany Buckles on Greece Already; Advantage Syriza

Posted: 07 Jan 2015 01:36 PM PST

Now that Germany's ridiculous bluff that "Greece does not matter any more" failed to produce the desired reaction, German Lawmakers Say Greek Debt Talks Possible After Vote.

Germany is leaving the door open to discussing debt relief with Greece's next government, lawmakers in Chancellor Angela Merkel's coalition said, signaling a more flexible stance than her administration has taken publicly.

While writing off Greek debt isn't on the table, talks on easing the repayment terms on aid that Greece received from European governments are possible after the country's parliamentary elections on Jan. 25, the lawmakers from Germany's two biggest governing parties said. The condition is that Greece sticks to its austerity commitments, they said.

"There should be talks with any government that emerges from the election," Ingrid Arndt-Brauer, a Social Democrat who chairs the lower house's finance committee, said in an interview. "You can talk about extending maturities and easing the interest rate on loans with a left-wing government, too."

A senior lawmaker from Merkel's Christian Democratic Union said Germany will talk with any elected Greek government, including about an easing of aid conditions, as long as Greece doesn't renege on its austerity commitments. The lawmaker asked not to be named because coalition discussions are private.

The comments by lawmakers suggest there's leeway in German policy even as CDU leaders publicly refuse to offer Greece concessions. Merkel's defense of the euro is under attack by Alternative for Germany, an anti-euro party founded in 2013 that's won seats in three state assemblies and the European Parliament. A Finance Ministry spokeswoman in Berlin declined to comment on possible Greek debt relief.

Merkel Displeased

Speculation about Greece's future in the euro area surged after Der Spiegel magazine reported this week that Merkel would be prepared to let the most-indebted country leave the bloc. Her comments today were her first on Greece since the report.

Merkel's spokesman, Steffen Seibert, says Germany's goal remains for Greece to pursue its economic overhaul and stay in the euro, and the chancellery's "political leadership" isn't working on blueprints for a Greek exit.

Merkel was displeased with the Spiegel report because market turmoil may drive more voters to Syriza, according to a person with direct knowledge of her views who asked not to be named citing internal discussions.

Advantage Syriza

The immediately preceding paragraph seems backwards.

I suggest those statements by German politicians will allow Alexis Tsipras, head of the Greek radical-left party Syriza, to make the claim "See... I was right. We can renegotiate the debt".

And if that is how Greek voters take it, those statements should all but seal the election for Syriza. In fact, if Tsipras plays his cards properly and avoids fatal gaffs in the coming days, I now expect him to win enough seats outright as opposed to him needing to reach out to coalition partners.

For coalition possibilities, please see Greek Polls Show Syriza on Cusp of Victory; Greek Political Party Analysis; Intentions Matter Not.

Grexit Likely?

The likelihood of Greece's leaving the euro is "very low," Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, said in an interview with Bloomberg Television yesterday. "The reality is that the vast majority of Greeks want to stay in the euro. I think they correctly realize that if they drop out, the situation is going to get much, much worse."

Questions of the Day

Since when do the opinions of citizens matter?

The US attacked Iraq against voter wishes. Obamacare was rammed through against voter wishes. Massive bank bailouts took place in the US and elsewhere against voter wishes. Voters wanted criminal prosecutions of bank fraud. Did that happen?

What voters wanted didn't happen. And what they did want, didn't happen. Why should voter opinions matter in Greece when they don't matter anywhere else?

Hardball

This is all about hardball and how much Tsipras wants to press the issue. If Germany agrees to cut interest to zero, delay the start of payments, and stretch out payments for decades, Tsipras is likely to say OK, even if he has to agree to more austerity for a while.

However, every financial improvement in Greece gives it more and more leverage down the line in further requests.

Let's return to a statement from the article "While writing off Greek debt isn't on the table, talks on easing the repayment terms on aid that Greece received from European governments are possible ... lawmakers from Germany's two biggest governing parties said."

Excuse me for pointing out that changing the terms are in fact bondholder haircuts. Thus, Tsipras already got some of what he promised, and that will strengthen his hand.

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

Eurozone Falls Into Deflation; ECB About to Do Something Stupid

Posted: 07 Jan 2015 11:29 AM PST

As expected, the Eurozone fell into deflation last month, but details show energy and unprocessed food are the only things in decline. Services are up 1.2%.

Please consider the Eurostat Flash Inflation Estimate for December 2014.

Euro area annual inflation is expected to be -0.2% in December 2014, down from 0.3% in November, according to a flash estimate from Eurostat, the statistical office of the European Union. This negative rate for euro area annual inflation in December is driven by a fall in energy prices (-6.3%, compared with -2.6% in November), while prices remain stable for food, alcohol & tobacco (0.0%, compared with 0.5% in November) and non-energy industrial goods (0.0%, compared with -0.1% in November). The only annual increase is expected for services (1.2%, stable compared with November).

click on chart for sharper image

Economists Howl Over Welcome Event

Economists are in shock over what should be a welcome event. Deflation is exactly what consumers need. Some say this increases the likelihood the ECB will act on January 22.

Actually, it does nothing of the kind. The ECB is already 100% certain to do something counterproductive, and odds cannot exceed 100%.

Please consider three statements in today's Financial Times article Eurozone falls into deflation for first time since October 2009.

"It's impossible for the ECB to not pull the trigger later this month," said Carsten Brzeski, an economist at ING-DiBa. "It is more a question of how vague policy makers can be without disappointing markets."
Anatoli Annenkov, of Société Générale, said: "The figure feeds into the game plan of launching new measures very soon. There's no real point in waiting — inflation will fall further in the months ahead."
James Ashley, economist at RBC Capital Markets, said that while oil prices were a factor, "the far more important question is why inflation is anywhere near 0 per cent in the first place". "The inconvenient truth for policy makers is that, in large part, that is a reflection of the failure of policy (both fiscal and monetary)," he added.

Challenge to Keynesians

Here's my take on why whatever the ECB does cannot and will not work: ECB Considering Three QE Options; Eight Reasons Why ECB's Plan Will Fail; Something Up Draghi's Sleeve?

As for inflation, I am still waiting for economists to respond to this: Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit".

What central bankers "ought" to fear is asset-price deflation, not routine price deflation. And the irony is that by fighting routine price-deflation that should be welcome, they create destructive asset bubbles guaranteed to pop, eventually sinking all the loans made based on inflated assets, and jeopardizing banks in the process.

It's so obvious, yet Keynesian-trained fools cannot see it.

Saying Something Stupid

In honor of the ECB about to say (and do) something stupid, I present ...

Link if video does not play: Saying Something Stupid

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

ECB Considering Three QE Options; Eight Reasons Why ECB's Plan Will Fail; Something Up Draghi's Sleeve?

Posted: 07 Jan 2015 12:58 AM PST

On January 22, ECB president Mario Draghi is expected to announce a plan of action to stimulate Europe via a QE policy of purchasing government bonds. Details were supposed to be hush-hush but the options are out of the bag in bright daylight.

Reuters reports ECB is Considering Three Options according to a Dutch paper.

Buy government bonds in a quantity proportionate to the given member state's shareholding in the central bank.
Buy triple-A rated government bonds, driving their yields down to zero or into negative territory. The hope is that this would push investors into buying riskier sovereign and corporate debt.
Have national central banks do the buying, so that the risk would "in principle" remain with the country in question.

Every one of those options looks ridiculous. German bond yields are already negative out to 5 years and barely above zero out to 10 years.

Yield on the German 10-year bond is 0.454% while the 10-year French bond yield is 0.738% and the 10-year Spanish bond yield is 1.64%. For comparison purposes, the 10-year US treasury note yields 1.96%.

These bonds already are hugely overpriced given the risk of a messy eurozone breakup. Option three is the most ludicrous because the peripheral countries are already overloaded in their own bonds.

Race to Negative 10-Year Yields

In a previous post, I stated Japan leads Germany in race for a negative yield on 10-year bonds. However, I overlooked first-place Switzerland. Japan is actually in second place and Germany third.

Both Germany and Switzerland have negative yields all the way out to 5 years.

For further discussion and charts, please see In Race to Negative Rates on 10-Year Bonds, Switzerland Leads Japan.

As for ECB president Mario Draghi's plan to fix the eurozone via QE, I see eight major reasons whatever he does won't work.

Eight Major Problems

There are widely differing fiscal policies between eurozone member states.
There are widely differing work rules and productivity between member states.
There are widely differing social agendas between member states.
As a result of 1-3 above, a one size fits all interest rate policy cannot and will not work.
Regardless of what Draghi says, there is no fiscal or banking union between member states, and no monetary union has ever survived without such unions.
Numerous European banks are undercapitalized and massively leveraged in sovereign bonds that are priced well beyond perfection.
European peripheral countries have debts that cannot and will not be paid back.
When peripheral debt defaults or is restructured, reverberations will hit the core.

The idea that all those structural issues can be fixed with monetary policy is ludicrous. Yet, that is the plan, even though driving yields lower will add more risk to the system.

Something Up Draghi's Sleeve?

I am highly suspicious of the leak highlighting three options Draghi is allegedly considering. I suspect he will try to surprise the market with some other details.

It matters not. There is nothing Draghi can possibly do to fix all the eurozone structural issues mentioned above.

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

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