Mish's Global Economic Trend Analysis

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Greek "Bank Rescue Fund" Details; Zero Bids on Greek Bank Shares; Payback Math Posted: 05 Aug 2015 12:07 PM PDT No Bids on Bank Shares Greek bank shares were down the 30% limit again today, with some bank stocks not fetching any bids at all. The Plunge in Bank Shares Drag Down Broader Market. Greek bank shares sold off sharply for the third day in a row on Wednesday with buyers yet to emerge on a scale large enough to counter continued dumping of the stocks. The Athens bourse's banking index .FTATBNK ended 27 percent lower, bringing the three-day plunge since Monday's open to 63 percent. The rout dragged the wider market .ATG down 2.5 percent although non-financials generally outperformed banks. Alpha (ACBr.AT) and Piraeus Bank (BOPr.AT) both closed 29.6 percent lower, effectively at the 30 percent daily loss limit. The former has 1.06 million shares on offer and the latter 2.8 million shares. There were no buyers for either. Peers Eurobank (EURBr.AT) and National Bank (NBGr.AT), which also fell sharply, attracted buyers towards the close, ending down 26.7 and 24.3 percent, respectively. The new price levels mean big losses for bank shareholders, including the Greek bank rescue fund HFSF, which holds majority stakes in three of the four big lenders, hedge funds and other long-term foreign investors. Diving Into Greek Bank Rescue Fund Details Inquiring minds may be interested in the HFSF Rescue Fund. The Hellenic Financial Stability Fund (Greek: Ταμείο Χρηματοπιστωτικής Σταθερότητας), or HFSF is a Greek special purpose vehicle created to help stabilizing the Greek banking sector in midst the Greek government-debt crisis. Based in Athens, the HFSF was founded in July 2010 under Law 3864/2010 as a state-owned private legal entity with the purpose to "contribute to the maintenance of the stability of the Greek banking system, for the sake of public interest." It began its operation on 30 September 2010 with the appointment of the members of the fund's Board of Directors. The fund has been seeded by the European Financial Stability Facility (EFSF) with 50 billion euros to recapitalize Greece's banks. Greek Bailout Math The HFSF allegedly "recapitalized" Greek banks by buying bank shares. Those shares are now practically worthless. The HFSF fund could have made a ton on money shorting them instead. That €50 billion wasted bailout is a small part of what Greek taxpayers have to pay back. The new grand total is now €326 billion. The €326 billion figure includes a third €86 billion bailout (yet to be negotiated), but does not count any additional funds needed to recapitalize banks. The €326 billion also does not count €120 billion or so in Target2 liabilities. But let's ignore all of that and assume €326 billion will the final grand total. Greek GDP in 2014 is about €216 billion. That's going to drop as well, and likely for years to come, but let's also assume that won't decline. Let's further assume an interest rate of 0% on the €326 billion. And finally, let's assume Greece can magically achieve a surplus of 3% of GDP forever into the future, long enough to pay back the "bailout". Payback Assumptions €326 billion total bailout No additional money needed to bailout banks Target2 Imbalance of €120 billion and rising does not matter Greek GDP will remain at €216 billion Interest rate on the bailout will be 0% Greece can immediately achieve a surplus of 3% of GDP Greece will hold that 3% surplus for as long as it takes to pay back €326 billion Every penny of Greek debt surplus will go to pay back creditors Payback Math 3% of €216 billion is €6.48 billion. At €6.48 billion per year, it would take Greece 50 years to pay back €326 billion. But none of those assumptions is true. The interest rate will be small, but it likely won't be zero. Greece won't come close to 3% surplus. 100% of the surplus won't go to the creditors. The only possible favorable condition in the mix is GDP. Greek GDP will eventually rise above €216 billion, but that will take years. In the meantime, interest expense accrues, adding to the total amount that needs to be paid back. At 2% of GDP rate of payback (€4.32 billion per year), again assuming 0% interest, it would take Greece 75 years to pay back the "bailout". At 1% of GDP (€2.16 billion per year), it would take 150 years. And rest assured Greece will not hold a surplus for 50 years or 100 years. Years to Payback €326 Billion at 0% Interest 3% of GDP - 50 Years  2% of GDP - 75 Years  1% of GDP - 150 Years Bailout Will Fail If Germany insists on the terms they just crammed down Greece's throat, there is zero chance of success even at an interest rate of 0%. Rescue Me In honor of the rescue fund needing to be rescued, I present ... Link if video does not play: Rescue Me - Fontella Bass 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.

Fed Yap vs. Futures; Bloomberg vs. CME; Eighth-Point Baby Hikes! Posted: 04 Aug 2015 11:51 PM PDT Odds Rise as Fed Governor Lockhart Speaks The Financial Times reports September Rate Rise Odds Improve as Lockhart Speaks. Expectations that the Federal Reserve will lift interest rates in September popped on Tuesday after Dennis Lockhart, president of the Atlanta Fed, said there would need to be a "significant deterioration" in economic activity to prevent the central bank from moving after its next monetary policy meeting. Federal funds futures imply a 48 per cent probability that the Fed will lift rates in September, up from just 38 per cent on Monday, according to data and calculations from Bloomberg. The same calculations imply that a move will have already taken place by October, while federal funds futures signal a 28 per cent likelihood that the central bank will have lifted rates twice by December (up from 21 per cent on Monday). Odds Over Time Note that 80% odds in February are still under 50% today, according to Bloomberg's calculation. Over 50% Says St. Louis Fed Chief James Bullard On July 21, USA Today reported Odds of Fed Rate Hike in September are Rising. St. Louis Fed chief James Bullard told FOXBusiness news on Monday there's "more than a 50% probability right now." that Fed policymakers will boost the central bank's benchmark rate at a September 16-17 meeting. And 82% of 70 economists surveyed by the Wall Street Journal said last week they expect the Fed to act in September. It would be its first rate increase in nearly a decade. Yapping Away This Fed-Yap has a clear purpose: To get the market to expect, even front-run a hike. After all, the Fed does not want to surprise the market in any way shape or form. CME FedWatch Says September Hike 0% Likely In contrast to the 48% chance noted by Bloomberg, CME's Fed Watch Probability says there's a 0% chance of a hike. click on link to refresh CME vs. Bloomberg A moment ago the CME stated there was a 2% change. It's now back to 0%. Yesterday it was 12%. What's going on? I suspect the answer can be found in the following bullet points on the CME site. FOMC meetings are matched with the corresponding 30-Day Fed Funds Futures contract. Probabilities of possible Fed Funds Target Rates are calculated based on the post-meeting Fed Fund Futures contract price. Probability of Rate Hike is calculated by adding the probabilities of all target rate levels of 0.50 or higher. The FedWatch tool is based on the assumption that the Federal Reserve Bank will target a single number and not a range for the federal funds target rate. Therefore, while the fed is targeting a range, one should use implied probabilities as a reasonable guide The key point is the last one. The current range is 0 to 0.25%. If the Fed were to hike to a flat .25%, a baby first step, it appears the CME tool may not call that a "hike". Bloomberg Chimes In My assumption seems correct as per a phone conversation with a managing director of fixed income at Raymond James with whom I was discussing the above charts. He commented ... I just got off the phone with a contact at Bloomberg. They actually used to do it the way the CME is doing it. They received so many calls, they looked into it, and decided to make a change. Basically they are calculating the probabilities of all points within the range, rather than just probabilities of 0 and 25,or 25 and 50. This makes sense because futures rarely trade right at those rates. Right now it's at 13 basis points. And given futures are a "market", the 50/50 more or less would make sense because that's what I gather from all the people I read or get funneled through financial media. Zero percentage change next meeting simply makes no sense at all. Confusing for sure, but pretty sure Bloomberg has this right. Eighth-Point Baby Hikes! The current Futures price is 99.81. The implied interest rate is 0.19%. The Fed Funds Future currently sits at 0.13%. Note that 0.19% just happens to be the precise mid-point between 0.13% and 0.25%, with Bloomberg eying a roughly 50% chance of a hike. Will the first hike will be to a flat 0.25%? Up from 0.13% that would be a hike of 1/8 point. In the October or December meeting, the Fed could easily hike another eighth, or it could alternate between small ranges and fixed numbers. Fed's "Mother May I" Tool Is the Fed's next tool the eighth-point baby hike, possibly within ranges, but only if the Fed has "Mother Market's" approval, worked out in advance via Fed-Yap? That's my "Mother May I" take a baby-step prediction. 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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