Mish's Global Economic Trend Analysis

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Fed Lift-Off or Crawl-Off? Posted: 17 Jun 2015 12:37 PM PDT Nothing much changed as a result of today's FOMC meeting. If you are having trouble falling to sleep, I have the cure. Read today's FOMC Statement as it's sure to do the trick. The Financial Times reports Fed Sets Course for 2015 Rate Rise. The Federal Reserve set course for an increase in short-term interest rates as soon as September, as it expressed cautious optimism about the US economy following a sharp slowdown that struck in the first quarter. However interest-rate projections from the Federal Open Market Committee signalled that the pace of tightening will be gradual, as officials seek to quell fears of a spike in borrowing costs. A chart of interest-rate predictions from Fed officials pointed to two increases later this year, but the committee appeared to be heavily divided over whether that many rises would be merited, with an increased number of policy makers advocating only one move. The Fed is treading a precarious line as it attempts to signal a rate rise while damping the risk of a market tantrum that could derail global growth. Top officials have repeatedly insisted policy will only be tightened modestly, and today's forecasts from officials put the longer-run rate at just 3.75 per cent. Stanley Fischer, Fed vice-chairman, said this month that "lift-off" was the wrong word for rate rises when they came, insisting that the central bank would instead be "crawling" as it pursued incremental increases. Even so, some analysts argue that any move this year would be premature and choke off the recovery. Among them is the International Monetary Fund, which recently made a prominent call for the Fed to wait until 2016. Some officials within the Federal Open Market Committee have also been voicing caution. Lael Brainard, a Fed governor, this month said the recent economic weakness may not be transitory and that more optimistic growth predictions were underestimating the negative investment implications from the oil price drop and the hit to growth from the higher dollar. Gradual Pace The Wall Street Journal reports Fed Signals Rate Hikes at a Gradual Pace The Federal Reserve signaled it was moving toward interest-rate increases later this year now that signs of a slowdown in economic activity are waning, but the path of rate increases could be less steep than officials anticipated. The last time the Fed made such projections, its consensus appeared to be building around two rate increases this year. Fed officials also nudged down their rate projections for 2016 and 2017 by a quarter percentage point. The shifts suggested officials have become less certain about the longer-run vigor of the U.S. economy and its capacity to withstand much higher rates. Expansion of output is on track again in 2015 to undershoot the Fed's expectations. In a press conference following the meeting, Chairwoman Janet Yellen said the importance of the initial rate increase "should not be overstated." She emphasized that even after the first move higher, the Fed's policy will still be broadly accommodative. Ms. Yellen added the committee will decide when to first raise the federal funds rate "on a meeting-by-meeting basis" depending on its assessment of "incoming economic information and its implications for the economic outlook." Crawl-Off Analysis The Fed can and will do whatever it wants, within reason. If the economy is muddling along with weak growth, and the Fed still wants to hike anyway, it can make up any statements about the economic data that it needs to justify its decision. If the economy relapses at any point between now and the September 16-17 meeting, hikes will likely be put off. Today's meeting and follow-up Yellen yap conference did not clarify anything. I suggest December seems more likely than September unless data is strong between now and the September meeting. I am still not convinced there is a hike this year at all, but it does seem more likely than a month ago. Dollar Not Impressed The US dollar was clearly unimpressed with today's announcement. The US dollar index opened at 95.27, rose to 95.59, but now sits 94.46, down .80 on the day. Had the Fed signaled strong action, the dollar would have soared. Key to Decision The key to the September rate hike decision will likely be the next set of reports on retail spending, housing, and wages. Fed Statements at the July 28-29 meeting will set the tone for September. Statements at the October 27-28 meeting will set the tone for December. Here is the FOMC Schedule for 2015. 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.

Greece Declares Troika Debt Illegitimate, Odious, Illegal; German Official Calls Greek Leaders "Clowns"; Expulsion From EU? Posted: 17 Jun 2015 10:39 AM PDT The war of words between Greece and its creditors took a leap in intensity today, with Greece declaring its debt illegal and odious, and Germany calling the Greek leaders "clowns". Debt Illegitimate, Odiousness, Illegal, Unsustainable Please consider a few snips from a translation of the Executive Report of the Hellenic Parliament's Debt Truth Committee. Several legal arguments permit a State to unilaterally repudiate its illegal, odious, and illegitimate debt. In the Greek case, such a unilateral act may be based on the following arguments: the bad faith of the creditors that pushed Greece to violate national law and international obligations related to human rights; preeminence of human rights over agreements such as those signed by previous governments with creditors or the Troika; coercion; unfair terms flagrantly violating Greek sovereignty and violating the Constitution; and finally, the right recognized in international law for a State to take countermeasures against illegal acts by its creditors, which purposefully damage its fiscal sovereignty, oblige it to assume odious, illegal and illegitimate debt, violate economic self-determination and fundamental human rights. People's dignity is worth more than illegal, illegitimate, odious and unsustainable debt Having concluded a preliminary investigation, the Committee considers that Greece has been and still is the victim of an attack premeditated and organized by the International Monetary Fund, the European Central Bank, and the European Commission. This violent, illegal, and immoral mission aimed exclusively at shifting private debt onto the public sector. CSU Secretary General Calls Greek Leaders "Clowns" Let's also take a peek at the Reuters story Greece's Future in EU in Doubt if Talks Fail, Central Bank Warns. A warning by Greece's central bank that the country risked being driven from the euro zone and, ultimately, the European Union failed to break a deadlock with creditors before a potentially decisive meeting of European finance ministers. "People are getting anxious on both sides. Athens expects Brussels to move. And Brussels expects Athens to move. And it's stuck," said a senior EU diplomat, who declined to be named. "It's very dangerous, and we may have an accident." Making clear the huge stakes at play, the Greek central bank said reaching an accord was "an historical imperative" that the country could not ignore. "Failure to reach an agreement would ... mark the beginning of a painful course that would lead initially to a Greek default and ultimately to the country's exit from the euro area and, most likely, from the European Union," the Bank of Greece said in a monetary policy report. Highlighting the fraying tempers, German Chancellor Angela Merkel's Bavarian allies accused Athens on Wednesday of not grasping the seriousness of the situation, with CSU Secretary-General Andreas Scheuer calling Greek rulers "clowns". Failure to Grasp Seriousness of the Situation It is Germany, not Greece that fails to grasp the seriousness of the situation. In fact, Germany fails to grasp the fundamental picture I outlined at least four years ago. What cannot be paid back, won't. European taxpayers, will foot the bill one way or another, either by debt forgiveness or default. German taxpayers will take the biggest hit because Germany has the largest percentage responsibility of any country in the eurozone. All along, I was pretty sure default was inevitable because at no stage of the way did Eurozone leaders admit point number one. Yesterday, I posted this approximate hit taxpayers will have to shoulder. Mish Calc 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 France 11.389 31.02 24.47 5.439 72.32 Germany 15.165 41.308 31.07 6.903 94.45 Italy 10.008 27.259 21.25 4.722 63.24 Spain 6.65 18.112 15.26 3.391 43.41 Total 52.9 141.8 118.0 27 339.7 I took the IESEG numbers and plugged in €118 billion as a total Target2 liability, split as shown. I heard from Eric Dor, Directeur des Etudes Economiques, IESEG School of Management, Université Catholique de Lille, today. He thinks my Target2 number is too high. He suggests that it's more like €100 billion now. If so, mentally lower the balances slightly. I have an email in to him for clarification. The main point stands, however. Liabilities are high and rising. Hollow Threats There is no provision by which the eurozone can expel Greece. Nor is it possible for Greece to be forced out of the EU. Foreign Policy answers the question Could Greece Get Kicked Out of the European Union? with a simple one word answer: "No". Here's the longer explanation: EU bylaws provide no mechanism for expelling a member state. Indeed, the EU's laws in spirit are integrative and unifying, "conciliatory" rather than "punitive." Therefore, in letter, they provide no option for kicking a country out, no matter how much other member countries might want to. Even if Greece invaded France — and it would take as much for Brussels to contemplate expulsion — the European Commission, a body of ministers that initiates EU laws, would have to craft new legislation to do it. Real Threats In contrast Greece has "real threats". Imposition of sanctions on another country requires unanimous consent by treaty. Greece can kill EU sanctions on Russia at a moment's notice. And as I have pointed out, Greek Prime Minister Alexis Tsipras Meets Russian President Vladimir Putin on Friday June 19. Unless there is a deal favorable to Greece, the sanctions will end in January. Curiously, Moscow Times reports just today that EU Agrees to Extend Economic Sanctions on Russia Until January. Did Greece really agree to that? Perhaps. Greece needs help from Russia and removing that bargaining chip now would reduce that leverage. It appears to me that Greece has played its cards very well every step of the way. Blame Game Finally, when this finally blows, and it appears now is the time, expect Greece to blame Germany and Germany to blame Greece. Assigning blame is much more complicated. The short answer is both are partially to blame but so is the fundamental nature of the eurozone itself. More importantly fiat currency issues and the trade policies of Germany come into play as does political arrogance. For the proper way to look at this pathetic mess, please consider From ZIRP to NIRP: Virtues of Germany vs. the Vices of Greece; What About "Speece"? 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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