Mish's Global Economic Trend Analysis

Fulfilled Mission; You Can't Always Get What You Want; Watching Ice Melt at 33 Degrees
Patience is a Virtue, Unless It's Not
Greece Has Less Than One Week of Cash; Another DOA Proposal Discussed Thursday; Exceptional Game Playing

Fulfilled Mission; You Can't Always Get What You Want; Watching Ice Melt at 33 Degrees

Posted: 18 Feb 2015 09:08 PM PST

Reader Comments

Reader Bradley writes ...

"Why are you wasting time with Ukraine? It does not matter from an economic standpoint one way or another. Is your family from Ukraine? Citibank is advising that oil will go down to $20 a barrel. That is pertinent. The Baltic Dry Collapse continues. That is pertinent. And, no, this has nothing to do with the longshoremen slow down at West Coast ports."

In contrast, reader Al writes ...

"Thank you very much Mish for your continued excellent coverage and opinions regarding Ukraine especially, but also Greece! It's very difficult to find good information on Ukraine and I think it's one of the most important issues happening today. Of course Greece is pivotal too. I live in Calgary, Canada and work as an Investment Advisor with CIBC Wood Gundy. I tend to think like you and Paul Craig Roberts, but I'm hopeful that the bad guys in the Washington-London-Israel triangle are on their way out."

You Cannot Please Everyone

File this one in the "You cannot please everyone" category.

Reader Al will be pleased with this update, reader Bradley won't.

Separatists Raise Flag Over Debaltseve

Seven hours ago, the Wall Street Journal reported Ukraine Pulls Out of Strategic Town in East.

Ukraine withdrew troops from the embattled strategic railway hub of Debaltseve early Wednesday after pro-Russia rebels overran the town in what Kiev and Western officials called a violation of a fragile, European-brokered cease-fire.

Dozens of vehicles from tanks to trucks rumbled along the road to the nearest large town, Artemivsk, and Russian state television showed what it said was footage of separatists raising their flag over Debaltseve.

Ukrainian soldiers described battling to get out, at times under fire from two directions. Ukrainian military data showed 22 soldiers had been killed there and more than 150 wounded over the last three days, the Interfax news agency reported. Nearly 2,500 troops escaped, the report said.

Ukrainian commanders had vowed to hold the rail hub, a vital link between the separatist capitals of Luhansk and Donetsk, but their forces appeared overwhelmed by a rebel advance on Tuesday. President Petro Poroshenko said the retreat had been "orderly and preplanned" and that his forces had fulfilled their mission.

Orderly Not! Preplanned Questionable!

Mish readers knew the above would happen many days ago, before the ceasefire began (which we knew would collapse as soon as it started).

Other than spreading Kiev propaganda (not on purpose, but via quotes), the Journal article is at least reasonably accurate albeit many hours if not days late.

The notion that Petro Poroshenko has any idea what he is doing militarily should have been in question many months ago, not days ago.

I prefer to get my news from credible sources.

Banal Attempt to Save What Can be Saved

Looking for a more accurate description of the "orderly retreat"? Then once again Colonel Cassad has a map and an answer in his latest post "About the Current Situation"

Since February, the DNR has begun preparatory work to collect humanitarian aid for the spring-summer campaign, primarily on clothing and footwear. I remind you that in a winter campaign we started training although in August many were convinced that the fighting would end in September.

There is still a boiler in Debaltseve from which you can attempt to escape by the field and byways. Of course, such sporadic attempts to break free are not an organized withdrawal of troops. Rather, they are a banal attempt to save what can be saved. Many who were lucky enough to jump out of the boiler are now prisoners. Their equipment was abandoned or burned in the boiler.

The remaining part of the boiler is unlikely to survive until March and I think that pretty soon we will see the area stabilize near the Svetlodarsk-Mironovsky front. In this regard, Poroshenko's statement about "organized withdrawal" on the background of hysteria is eloquent but laughable testimony to the actual stage of agony of Ukrainian forces.

We may soon see apocalyptic pictures of attempted escape and death. Naturally, this situation is unlikely to suit the US, so in the coming weeks we can expect some bloody mischief.

Map of Current Situation

Fulfilled Mission

Cassad did not say this, but I will: If the trend continues, more Ukrainian troops are about to be surrounded.

Will Poroshenko once again idiotically proclaim "forces had fulfilled their mission"?

Jacob Dreizin Chimes In

Earlier today, reader Jacob Dreizin chimed in with this analysis.

The cauldron is down to an estimated 3500 Ukrainians. 1000 escaped without their weapons (overnight or this morning) and up to another 1000 were either killed or taken prisoner over the last two days.

Recall that the entire Ukrainian "first line" forces in the Donbass were estimated at around 40,000 as of early January, with another 35,000 (mostly semi-organized trash) in the second line, further back (mostly garrisoning occupied towns, manning checkpoints, and generally making civilian lives miserable.)

The defeat of an encircled force initially numbering 8000 means that 20% of Ukraine's first line has been liquidated. This does not include significant losses to the forces based at Artemovsk, who had tried to break through to the cauldron over the last week. Nor does it include January losses at the Donetsk airport (DNR forces still finding bodies there.)

Of course not all in the cauldron have been killed. Some will return to battle, but not right away.

Nonetheless, their equipment is almost all either destroyed or else now in rebel hands (or will be very soon.)

This amounts to hundreds of pieces of equipment including tanks, BMP/BTRs, rocket launchers, cannon, mortars, heavy machine guns, etc., not to mention hundreds of trucks and mountains of ammunition. Enough to equip 8000 soldiers. The forces "allowed" to evacuate without surrendering would be on trucks mostly; anyone trying to make it out on armor would be a priority target.

It's maybe not quite on the scale of the losses from the Ilovaisk cauldron last year, but it's close.

It's both a huge material loss and a huge embarrassment for Kiev.

Also, let's be clear: Any U.S. weapons to Ukraine would require at least 6 months of training of Ukrainian forces to be effectively deployed. The war will probably have been decided by then.

Finally, keep in mind that Russia is next door and will one-up the U.S. at every step. So far, the equipment coming across from Russia has been mostly along the lines of what the rebels were able to capture from the Ukrainians themselves. That is to say, mostly surplus items of 1960s or 1970s vintage. But if the U.S. started sending modern weapons to Ukraine (beyond what little has been covertly sent already), suddenly you would see rebels driving around with the most modern post-Soviet hardware. And "somehow" they would acquire an air force. It's very unlikely that Washington will go through with its insane arm Ukraine scheme, especially with Germany opposed.

Watching Ice Melt at 33 Degrees

Every day I look at hundreds of articles in a couple dozen places, to comment on. I try to balance things out. I am quite sure I miss some things that are relevant. But I am equally sure I cover topics that are important that others miss.

Ukraine, Greece, and Spain are all very important. And it is increasingly difficult to separate politics from the economy, in Greece, in Spain, in Ukraine, and even the US.

Contrary to popular belief, Ukraine is relevant. Its currency is collapsing. The US is propping up a regime and proposing to send weapons. An all-out war with Russia is not out of the question.

A collapse of the Ruble is also not out of the question.

In contrast, watching the Baltic Dry index is like watching ice melt at 33 degrees. Moreover, it is widely covered. And I have commented on the setup numerous times.

Demand for iron, copper, coal, and other dry goods has collapsed, and as predicted in this corner. Meanwhile new ships come online. There is nothing more to say until the story changes. Baltic dry is not much of a story in my book.

In Greece, in Ukraine, and in Spain the story changes nearly every day. So I follow, Greece, Ukraine, Spain, the Fed, and many other things that change everyday.

You Can't Always Get What You Want

For those unhappy with what I write, I offer a musical tribute.

Link if video does not play: Rolling Stones - You Can't Always Get What You Want (The David Frost Show 1969).

Many bloggers stay away from politics, from war, from unions, from pensions, from anything and everything controversial for fear it will cost them traffic. I prefer to say what I think needs to be said.

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

Patience is a Virtue, Unless It's Not

Posted: 18 Feb 2015 01:51 PM PST

Amusing Headlines

It's amusing watching headlines of expectations and how things actually pan out.

Yesterday MarketWatch reported Fed Minutes Could Show Growing Impatience With 'Patient'.
Today MarketWatch reports U.S. Dollar Sinks as Fed Minutes Surprise.
Today MarketWatch also reports Treasury Yields Drop as Fed Says It's in No Rush to Hike Rates.

Fed Minutes of January 27-28 Meeting

Lets dive into the Minutes of the Federal Open Market Committee, January 27-28 2015, released today.

Participants discussed the communications challenges associated with signaling, when it becomes appropriate to do so, that policy normalization is likely to begin relatively soon while remaining clear that the Committee's actions would depend on incoming data. Many participants regarded dropping the "patient" language in the statement, whenever that might occur, as risking a shift in market expectations for the beginning of policy firming toward an unduly narrow range of dates. As a result, some expressed the concern that financial markets might overreact, resulting in undesirably tight financial conditions.

Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

Odds of Rate Hike Drop in June

Bloomberg reports Futures Show Traders Lower Odds for Fed Raising Rates in June.

Federal fund futures give a 20.7 percent probability the central bank will lift borrowing costs at the June gathering, according to data compiled by Bloomberg. That is down from 25 percent yesterday.

Policy makers judged that risks facing the U.S. economy argued for keeping interest rates near record lows for longer, the minutes from the Jan. 27-28 meeting showed. Expectations for a possible June increase had been growing since a government report showed payroll gains in January capped the biggest three-month increase in 17 years.

"Clearly, especially given the latest employment report, the market was expecting a little more hawkish tone to the minutes," said Brian Smedley, an interest-rate strategist at Bank of America Corp. in New York. "The market has pushed out the implied timing of Fed lift-off on the back of what is perceived to be more dovish minutes."

Is Patience is a Virtue?

The proverbial phrase, Patience is a Virtue, refers to one of the seven heavenly virtues said to date back to "Psychomachia," (battle of spirits) an epic Latin poem written in the fifth century.

If patience is a virtue, the Bernanke Fed followed by the Yellen Fed apparently are the most virtuous in history.

They follow the Greenspan Fed policy of "hiking at a pace that's likely to be measured".

Epitome of Impatience

By delaying rate hikes while ignoring housing prices, the Greenspan Fed sponsored the housing bubble. No one at the Fed saw the bubble until it burst wide open.

When the bubble finally did bust, the Fed cut rates at the fastest pace in economic history. It was the epitome of impatience.

Call it asymmetrical patience because Fed patience runs in one direction only. And that sponsors bubbles.

Problems for Yellen

The first problem for Yellen is the Bernanke Fed followed by the Yellen Fed created an even bigger bubble, this time in corporate bonds, junk bonds, student loans, and equities.

The second Yellen problem is the Fed Fund's rate is 0.0% to 0.25%. There's no room for asymmetrical responses.

Both Yellen and Bernanke are totally clueless about the bubbles they created. Things are about to get interesting.

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

Greece Has Less Than One Week of Cash; Another DOA Proposal Discussed Thursday; Exceptional Game Playing

Posted: 18 Feb 2015 12:14 PM PST

Another DOA Greek Proposal Discussed Thursday

It's likely make-or-break for Greece in the next two days.

Tomorrow the Eurozone to Weigh Greek Bailout Proposal, but it already appears it's no different from previous proposals.

There will be no meeting on Friday if Germany rejects this one up front.

Officials from 19 eurozone governments will meet in Brussels on Thursday to examine a request from Greece to extend its €172bn rescue programme but there were already signs the proposal would be rejected.

If Athens' eleventh-hour request is rejected, officials said it was hard to see how Greece could be kept in an EU bailout programme after it expires at the end of next week. That would leave the country without emergency EU funding for the first time since the start of the eurozone crisis in May 2010 and raise the possibility the Greek government could run out of cash as soon as next month.

Several officials said they still had to see the request before passing judgment; if Thursday's meeting of the so-called euro working group concludes the proposal is a step forward, a meeting of finance ministers would probably be held on Friday.

In Berlin, Martin Jäger, the finance ministry spokesman, said any request that did not include a commitment to complete the terms of the current bailout would likely be unacceptable, and other German officials said a proposal based on EU Economic Affairs Commissioner Pierre Moscovici's plan — which Greek ministers have indicated would be the framework for their request — would also fail to pass muster.

"We're prepared to discuss an extension, but only if the Greek side has the clear intention to complete the programme," said Mr Jäger.

Major Points of Disagreement

Greece accepted Moscovici's plan, but Germany rejected it. In fact, Germany has pretty much rejected every compromise to date.
Instead of running a primary surplus - a budget surplus before interest payments - of 3 per cent of economic output this year and 4.5 per cent in 2016 and 2017, the Athens proposals says it is committed to a surplus of 1.5 per cent. Germany will bend no further than 3 percent.
Instead of counting on the €2.2bn in privatisation receipts in 2015, Athens suggests using €1.9bn in Greek bond profits held by the European Central Bank to pay down debt instead. This is a no-go for Germany and the ECB.
Greece estimates a windfall of €5.5bn from tax reforms, including cracking down on evasion and raising taxes on the wealthy. However, a separate submission also suggests writing off about €70bn in unpaid penalties against taxpayers who have been late meeting their bills.

Less Than One Week of Cash

The Financial Times said the "Greek government could run out of cash as soon as next month." In contrast, Ekathimerini says "Feb. 24 to be the First Crunch Day for Greek State Coffers.

The state of cash reserves – not robust before – has deteriorated further in recent days due to a shortfall in revenues, as a 1-billion-euro hole in January revenues is putting the execution of the state budget in jeopardy and hampering the management of cash reserves.

According to figures released yesterday by the Bank of Greece, in January the net cash result of the central administration posted a deficit of 217 million euros, against a surplus of 603 million in January 2014. Budget revenues reached 3.1 billion euros, against 4.4 billion in January 2014, while expenditure dropped to 3.2 billion from 3.6 billion last year.

Given these figures, the Finance Ministry estimates that cash reserves will run out next Tuesday. It has the option, however, of using the reserves of general government entities kept in commercial banks in order to cover short-term needs next week. However, the problem that cannot be addressed as things stand concerns needs for the first week of March.

Unless something changes drastically to the country's funding, Greece will not be able to fulfill all of its March obligations.

Finance Minister Yanis Varoufakis had called on the European Central Bank to increase the limit of treasury bills to 23 billion euros from the current 15 billion in a bid to address this shortfall. The additional funds would have covered the state's short-term obligations while also providing a cushion until the Greek government is able to strike a deal with its eurozone partners.

The request, however, was rejected, as the ECB deemed it an act of direct monetary funding: In practical terms the European Central Bank would have been financing the obligations of a state, which contravenes its regulations.

Timeline

I discussed the debt timeline in Third Greek Bailout? Another €53.8 Billion Needed? Primary Account Surplus Revisited.

Key Dates

Where Can Greece Get €11 billion?

Between March and August, Greece needs to come up with €11 billion. From where?

Greek revenues have plunged badly because Greek citizens reacted in advance of Syriza's victory and Tsipras' pledge to cut some taxes.

The immediate concern is March. And if Ekathimerini is correct, there is a minor crunch on February 24.

Exceptional Game Playing

Unless Greece (or Germany) bends dramatically in the next 24 hours, there will not be a meeting on Friday.

Greece is playing its cards exceptionally well. Syriza has overwhelming support from its citizens on its handling of the crisis.

Assessing the Collateral Damage on Europe

Assume Greece intends to default. Here is a table that shows who will not get paid back.

IESEG	Bilateral loans	Guarantees on the borrowings of EFSF to fund its loans	Implicit share of TARGET2 claims of the Eurosystem	Implicit share in the SMP holdings of bonds by the Eurosystem	Total
Austria	1.555	4.235	1.198	0.574	7.562
Belgium	1.942	5.291	1.512	0.725	9.470
Cyprus	0.11	-	0.092	0.044	0.247
Estonia	-	0.39	0.118	0.056	0.564
Finland	1.004	2.735	0.767	0.368	4.873
France	11.389	31.02	8.651	4.148	55.209
Germany	15.165	41.308	10.981	5.266	72.72
Greece	-	-	-	-	-
Ireland	0.347	-	0.708	0.340	1.395
Italy	10.008	27.259	7.511	3.602	48.380
Latvia	-	-	0.172	0.083	0.255
Luxembourg	0.14	0.381	0.124	0.059	0.704
Malta	0.051	0.138	0.040	0.019	0.247
Netherlands	3.194	8.699	2.443	1.171	15.507
Portugal	1.102	-	1.064	0.510	2.676
Slovakia	-	1.503	0.471	0.226	2.200
Slovenia	0.243	0.717	0.211	0.101	1.272
Spain	6.65	18.113	5.394	2.587	32.744
Total	52.9	141.8	41.709	20	256.409

The above table from Exposure of European Countries to Greece by Dr. Eric Dor, IESEG School of management.

Exposure of European Banks

The exposure of European banks to Greek public and private debt is most interesting.

Nearly all the liabilities have been shifted from banks to the public. For example the exposure of German banks to the Greek public sector is now limited to $181 million.

German Bank Claims on Greek Public Sector

The exposure of French banks to the public sector of Greece is now limited to $102 million.

French Bank Claims on Greek Public Sector

The exposition of European banks to the private sector of Greece excluding banks is also very limited, even if it recently increased for German banks, for which it amounts to $7.885 billion.

The exposure of German banks to Greek banks amounts to $5.702 billion. Their other potential exposure to Greece amounts to $2.912 billion in the form of derivatives, guarantees extended and credit commitments.

German Bank Claims on Greek Private Sector

The exposure of the French banks to the private sector of Greece excluding banks is limited to $1.646 billion.

French and German banks dumped their exposure to Greece on to the public by dumping assets and also via the EFSF.

German taxpayers are responsible for $41.3 billion via the EFSF, with Target2 liabilities of another $11 billion.
German taxpayers are responsible for $31 billion via the EFSF, with Target2 liabilities of another $8.7 billion.

Bluff or Not

Germany says the eurozone is prepared for default. Is it? Banks may be, but what about the EFSF. Of course that money will trickle in for decades, at public expense.

But what if Italy or Spain decided to do the same?

100% of Blame on Germany

If negotiations fail, 100% of the blame will go to Germany. It has rejected every meaningful compromise.

I propose Greece is far better off defaulting than running a surplus of 4.5% of GDP for decades until it can pay back over €300 billion in debt.

The best case scenario for Greece is to default but stay on the euro. To do that, Greece will need to run a primary account surplus.

For now, Greece needs to do the right thing: tell Germany to go to hell, then default. If it succeeds, Spain will follow.

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

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Wednesday, February 18, 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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