Mish's Global Economic Trend Analysis

Lacy Hunt on Financial Repression; Deleveraging Not
Bailout Blueprint: Deal or Capitulation? ECB Prepares for a Greece Exit from Euro Zone
Spotlight Japan: Inflation Barely Positive, Consumer Spending Down, Exports Up, Growth Slowing; Record Streak of Bad Weather

Lacy Hunt on Financial Repression; Deleveraging Not

Posted: 20 Feb 2015 12:30 PM PST

In another of his series on Financial Repression, Gordon Long of Market Research and Analytics interviewed Dr. Lacy Hunt, Executive Vice President of Hoisington Investment Management Company.

Previously Lacy Hunt was with the Federal Reserve in Dallas. He was also the chief economist for the largest bank in Philadelphia, and the chief economist for HSBC (at the time the largest bank in the world).

Hoisington manages over $5 billion for pension funds, endowments, insurance companies and others. Hunt has been with Hoisington for 19 years.

link if video does not play: Lacy Hunt on Financial Repression

Lacy describes financial repression as "a superficial attempt to deal with the excessive indebtedness that grips the global economy, not just the US, but Europe, Japan, the United Kingdom, and even now China and the emerging markets."

"In my opinion will not work," says Hunt.

"Monetary Policy is not the solution here. There are Fiscal Policy solutions but they require shared sacrifice, strong leadership (something we don't have in the US or Europe - no one has).

"Basically what we are trying to do is to solve an extremely over-indebted situation domestically and globally by taking on more debt and aggravating the problem. Rather than bringing us closer to the return of the normal business cycle, they are pushing it all further and further into the future."

2015 Parallels to Currency Wars of 1920s and 1930s

First, there is a global problem with debt and slow growth, and no country is immune.
Second, the economic problems now, like then, are more serious and are more apparent outside the United States. However, due to negative income and price effects on our trade balance, foreign problems are transmitting into the U.S. and interacting with underlying structural problems.
Third, over- indebtedness is rampant today as it was in the 1920s and 1930s.
Fourth, competitive currency devaluations are taking place today as they did in the earlier period. These are a combination of monetary and/or fiscal policy actions and also, with floating exchange rates, a consequence of shifting assessments of private participants in the markets.

Interest Rates

Regarding interest rates, Lacy says "The downward pressure on global economic growth rates will remain in place in 2015. Therefore record low inflation and interest rates will continue to be made around the world in the new year, as governments utilize policies to spur growth at the expense of other regions."

Three Problem Types of Debt

Borrowing to finance daily living needs
Debt that leads to bankruptcy
Worst type of debt is where excess debt creation inflates asset prices. And that only leads to economic instability.

"Good debt" to Lacy is debt that yields an income stream sufficient to pay back principal and interest.

Deleveraging Not

"The world now has $35 trillion more debt today than in 2007. We are not in the age of deleveraging; We're still in the age of leveraging up. Unfortunately, the overleveraged condition is virtually everywhere in the world."

Thanks to Lacy Hunt for taking the time to share his thoughts.

Mish on Financial Repression

Gordon Long interviewed me on the subject of financial repression in October of 2014.

I describe financial repression as "a set of fiscal and monetary policies for the expressed benefit of the ruling class: politicians, banks, and the already wealthy, at the expense of everyone else."

You can find a synopsis and play the interview here: Gordon Long Video Interview of Mish: Topic - Financial Repression (and How to Defend Yourself From It)

Long also interviewed Dr. Marc Faber. On Long's Financial Repression Website, you can see all the interviews in this series.

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

Bailout Blueprint: Deal or Capitulation? ECB Prepares for a Greece Exit from Euro Zone

Posted: 20 Feb 2015 11:11 AM PST

Bailout Blueprint: Deal, Capitulation, or Neither?

At the 12th hour Finance Chiefs Draw Up Greek Bailout Blueprint.

Negotiations led by Jeroen Dijsselbloem, the Dutch finance minister who chairs the eurogroup of 19 eurozone finance ministers, have produced a common communiqué on the extension of Greece's €172bn bailout, according to a eurozone official.

The text was produced after nearly five hours of bilateral talks between Mr Dijsselbloem and key ministers, including Yanis Varoufakis, Greek finance minister, and Wolfgang Schäuble, his German counterpart. The eurozone official also said Mr Dijsselbloem was in direct contact with Alexis Tsipras, Greek prime minister, during the talks.

The text must now be presented to all 19 eurozone ministers for approval. "It will be fast," said the official.

According to a Greek government official, the new text was also agreed by the three institutions that monitor the country's bailout: the European Commission, the European Central Bank and the International Monetary Fund.

Mr Varoufakis had earlier insisted that Greece had made sufficient concessions to reach a deal to extend the bailout for six months after it expires next week and predicted that he and his 18 eurozone counterparts would reach an agreement.

He said Athens had "gone not an extra mile [but] an extra 10 miles" in its proposal for the extension, submitted to eurozone leaders on Thursday, adding it was now the turn of other ministers to meet Greece "not half way, but one-fifth of the way" to reach a deal.

Mr Varoufakis and a group of German-led eurozone countries are locked in a stand-off over the conditions of a bailout extension, with Berlin insisting the new Greek government agree to the terms of the existing bailout before it engages in negotiations over any changes in the programme.

Mr Tsipras's government has refused, saying it was elected to end the current bailout, but has made significant concessions, agreeing to ask for an extension with some loopholes that would give it some leeway to negotiate terms.

Speaking after a meeting in Paris, the leaders of both France and Germany said they remained committed to keeping Greece in the EU's common currency, but Angela Merkel, the German chancellor, added that Mr Varoufakis' request needed to be changed before it would be acceptable.

"There is a need for significant improvements in the substance of what is being discussed so that we can vote on it in the German Bundestag, for example next week," Ms Merkel said, standing next to her French counterpart, François Hollande.

Is there a deal? Does it need to be changed?

ZeroHedge reports according to Capital.gr, the preliminary agreement covers the following points:

4 not 6-month extension
no completion of current program
no new austerity measures
no unilateral actions

If that's really the deal, then Greece bought time to speed up tax collections. In turn, that would strengthen its hand four months from now when this process starts all over.

As I pointed out previously, as long as Greece has a primary account surplus, it can stay on the euro.

I have wondered if tax collections had shrunk so much ahead of Syriza's victory that it no longer has a primary account surplus.

ECB Prepares for a Greece Exit from Euro Zone

Meanwhile, Spiegel reports ECB Prepares for a Greece Exit from Euro Zone

The European Central Bank is preparing for the event that Greece leaves the euro zone and its staff are readying contingency plans for how the rest of the bloc could be kept intact, German news magazine Spiegel reported in a preview of its magazine.

The ECB declined to comment on the report, Reuters reported.

The German magazine also reported that the ECB was pushing Athens to introduce controls on the movement of capital.

Earlier this week, the European Central Bank denied a report in a German newspaper that it wanted Greece to introduce capital controls to stem the outflow of deposits from its banks.

Germany΄s finance minister was hostile to Athens΄ proposal this week although the government softened its tone on Friday as euro zone finance ministers raced to break the deadlock.

I suspect the ECB has been preparing for Grexit for months, and that helps explain the hard stance of Germany.

Deal or not? Capitulation by Greece or not? More negotiations in 4 months? If the latter, Greece bought some time to get back to (or strengthen) its primary account surplus.

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

Spotlight Japan: Inflation Barely Positive, Consumer Spending Down, Exports Up, Growth Slowing; Record Streak of Bad Weather

Posted: 20 Feb 2015 01:18 AM PST

Inquiring minds are looking at the latest inflation reports from Japan for clues in the success or failure of Abenomics and prime minister Shinzu Abe's stated goal of two percent inflation.

In December, Japanese inflation fell to 0.5% despite massive economic loosening, a 1% rise in industrial production, and a dip in the unemployment rate to 3.4%, the lowest since 1997.

Today Reuters reports Japan January Inflation Seen Easing, Factory Output Up.

Japan's core inflation is seen slowing for a sixth month in January while factory output is expected to rise, underlining the policy challenge facing the Bank of Japan as it strives to speed up economic growth and achieve its 2 percent price target.

Stripping out the effects of a sale tax hike, the nation's core consumer price index (CPI) - excluding volatile fresh food but includes oil products - is forecast to have increased 0.3 percent year-on-year last month, a Reuters poll showed.

The Bank of Japan is counting on exports to help offset the still-weak private consumption, and for weak oil prices to spur companies to spend more, helping the economy gather speed after last April's sales tax hike tipped it into recession.

The nation's factory output is seen jumping 2.7 percent in January from the previous month, the poll showed. In December, output increased 0.8 percent on-month, after a 0.5 percent fall in November.

Household spending is expected to have fallen 4.1 percent in January from a year earlier partly due to bad weather, down for a tenth straight month, the poll showed. And retail sales are set to fall an annual 1.3 percent last month, down for the first time in seven months.

Record Streak of Bad Weather

Household spending is down 10 straight months, partially die to bad weather. Is that a record streak of bad weather or what?

Those are forecasts of course, but with expectations of a 4.1% decline in spending, I will go out on a limb and guess the report is at least in the ballpark.

Markit Manufacturing PMI Suggests Growth Slowing

Markit claims the Japan Manufacturing PMI shows "solid production growth" but that is not my takeaway from looking at the data.

The February "Flash" Manufacturing PMI is 51.5, down from 52.2 last month and is the slowest since July 2014.

Manufacturing output is at 52.7, the same as last month, supposedly "solid" growth. Check out the summary.

Slower Growth

PMI
New Orders
Employment
Output Prices - In Actual Decline
Input Prices - Increase Slower

The big positive is an increase in export orders but the chart does not look too impressive.

GDP and Export Discussion

Every country wants a weaker currency to boost exports relative to imports. It's mathematically impossible. If Japan succeeds dramatically, it will be at the expense of some other country. Take your pick: USA, Germany, China.

Recall that exports add to GDP while imports subtract from GDP. If Japan is once again exporting more cars and technology to the US, and if the US is exporting less due to the rising value of the US dollar, where does that put US GDP?

And what about the possibility China enters a beggar-thy-neighbor scheme to lower the yuan to compete with Japan.

None of this sits very pretty for upcoming US GDP reports or for various trade retaliations.

I wonder if this is what's really on the Fed's mind when the Fed minutes surprised the markets with statements on being patient (See Patience is a Virtue, Unless It's Not)

More than likely, such thoughts give the Fed too much credit because history shows they are totally clueless.

Regardless, Japan is once again on the verge of price deflation in spite of Abenomics. That's a good thing actually for the Japanese consumer, but few see it that way.

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

Home Refinance Calculator

Friday, February 20, 2015

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

No comments:

Post a Comment