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Wednesday, February 5, 2014

Mish's Global Economic Trend Analysis

Voters in Bankrupt San Bernardino Sweep Pro-Union Guard from Office; Hard Line on CalPERS Coming
Latest EU Proposal: Let's Pretend for Another 50 Years! Why Now?
Questions of "Fairness"
Brazil, Russia Cancel Debt Auctions; Head-in-Sand Move Won't Work
"Situation Impossible"

Voters in Bankrupt San Bernardino Sweep Pro-Union Guard from Office; Hard Line on CalPERS Coming

Posted: 05 Feb 2014 06:27 PM PST

The inevitable shape-of-things-to-come has finally arrived in a major California city. I am pleased to report Voters in bankrupt San Bernardino sweep old guard from power.

Residents of bankrupt San Bernardino, California on Tuesday voted to complete a rout of the city's pro-union old guard, electing business-friendly pragmatists who have pledged to try to reduce pension costs and take on vested interests.

As San Bernardino enters into a fourth month of mediation with its creditors, the biggest of which is Calpers, California's giant retirement system, voters on Tuesday elected Carey Davis as the crisis-hit city's new mayor.

Davis, a businessman and political novice, ran in part on a campaign to reduce the city's pension obligations. In an interview in November, when he became one of two mayoral candidates, he said the city had to cut spending on police and fire departments, currently more than 70 percent of the budget.

"You have to roll the pensions back," Davis said in November. Davis did not return calls on Wednesday.

Davis will play a big role in how the city approaches negotiations with its creditors. He will be part of a small team of elected officials who represent the city as the debtor in the bankruptcy.

Along with Detroit, the biggest U.S. city to seek Chapter 9 protection, San Bernardino is likely to set precedent on whether retirees or Wall Street bondholders suffer the most when a city goes broke.

Davis defeated a San Bernardino political veteran, Wendy McCammack. She ran for mayor despite having been ousted by voters from her own council seat in a recall election in November.

Also on Tuesday, another political novice, Henry Nickel, became a new council member, saying he wanted to take on special interests. Nickel's biggest challenger was Randy Wilson, a police sergeant endorsed by the police union, the only candidate for that seat who did not support pension reform efforts.

Tuesday's results follow elections in November, when the balance of power in San Bernardino's seven-member council shifted dramatically away from an old guard reluctant to take on unions and reduce pension obligations.

After Tuesday night, six of seven council members are now on record as saying they want to explore reducing San Bernardino's pensions, along with Davis, the new mayor, and a new city attorney, Gary Saenz.

Expect a Hard Line On CalPERS

This kind of broad sweep eventually it had to happen. I am not sure why it took so long, but even Taxifornia is finally fed up with public unions and the damage they cause. One bankrupt city after another will go this route.

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

Latest EU Proposal: Let's Pretend for Another 50 Years! Why Now?

Posted: 05 Feb 2014 03:26 PM PST

What cannot be paid back won't, but that never stops officials from pretending it will. Please consider EU Said to Weigh Extending Greek Loans to 50 Years.

The next handout to Greece may include extending the maturity on rescue loans to 50 years and cutting the interest rate on some previous aid by 50 basis points, according to two officials with knowledge of discussions being held by European authorities.

The plan, which will be considered by policy makers by May or June, may also include a loan for a package worth between 13 billion euros ($17.6 billion) and 15 billion euros, another official said. Greece, which got 240 billion euros in two bailouts, has previously had its terms eased by the euro zone and International Monetary Fund amid a six-year recession.

New money would help Greece fill a financing gap that has vexed European Union and IMF authorities working to make sure the rescue programs stay on schedule. European Union President Herman Van Rompuy said last month that Greece must continue to tighten its belt even as "the people of Greece are still suffering from the consequences of the painful but nevertheless needed reforms that are taking place."

Under the eased terms, all the bailout-loan repayments would be extended from about 30 years and rates would be cut by 50 basis points on funds from the 80 billion-euro Greek Loan Facility, which was created for Greece's first bailout in 2010, said the officials, who requested anonymity because talks are still in preliminary stages.

Why Now?

Inquiring minds might be wondering why these concessions come now. Here is the answer: Greek leftist seeks negotiated debt write-off.

Greece would seek to negotiate an international write-off of about one-third of its debt if the leftist Syriza opposition party won a general election, its leader said on Tuesday.

Alexis Tsipras, who is leading a Communist-backed pan-European leftist list in European Parliament elections in May, said his country's problems could not be solved by more loans, which just went to service past debts and shore up the banks.

"The solution isn't more loans. The solution is fewer loans and less debt," Tsipras, whose party leads Prime Minister Antonis Samaras' conservative New Democracy in opinion polls, told the Europresse association on a visit to Paris.

Greece, which has already been bailed out twice with 240 billion euros ($324.44 billion) in euro zone and IMF funds, is due to hold its next general election in 2016, but voting may be brought forward if Samaras' fragile right-left coalition were to lose its narrow parliamentary majority.

The Debt-Slave Masters in Brussels are very fearful of a collapse in Antonis Samaras' conservative New Democracy which would lead to new Greek elections which undoubtedly Syriza would win. The New Democracy coalition hangs by a thread with a 2-seat majority in Greek parliament.

Hoping to stave off a parliamentary collapse, the EU is prepared to let Greece pay back 30-year commitments in 50 years. That in and of itself is nothing more than a form of default. It is also willing to commit another 15 billion euros to the debacle.

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

Questions of "Fairness"

Posted: 05 Feb 2014 11:17 AM PST

In response to Controversy in Detroit: What's a Fair Settlement of Bondholder and Pension Obligation Claims? reader Ken suggests my proposal to have Detroit bondholders and pensioners be treated with the same percentage haircuts is not fair.

Ken asked "Which of the two would suffer more: pensioners or bondholders?"

The answer is irrelevant. By definition, "fair" implies equal treatment and equal opportunity, whether black or white, rich or poor.

Is it "fair" the poor have to pay the same for a loaf of bread as the rich? Heck on a percentage-of-wage basis, the poor pay thousands of percent more. Should Bill Gates have to pay $1,000 for a loaf of bread as an act of "fairness"?

I suggest, it's clearly "fair" for everyone who walks into a grocery store to pay the same price for a loaf of bread. Imagine having to prove how much you make and be charged accordingly every time you bought something.

In cases where bargaining happens (auto sales for instance), everyone gets the same chance to bargain, not just the poor or the rich. Some people bargain better than others, but the chance to bargain does not discriminate.

Equal Protection

Equal treatment is fair. There is no other way.

By the way, the "equal protection clause" of the 14th amendment reads:

"No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws."

Does "equal protection" sound "fair" to you? It does to me.

Are the rights of Detroit pensioners higher than the rights of bondholders? Clearly not, given both are unsecured creditors. Whether or not pensioners would suffer more than bondholders is irrelevant.

"Screw the Bondholders" has a nice "Robin Hood" ring to it, but it is blatantly unfair, as well as unconstitutional.

Addendum

Reader John offered an interesting as well as accurate assessment. Paraphrasing John ... Detroit bonds are assets in the retirement plans of other. Ken essentially argues it's fair if Detroit pensioners' retirement prospects are enhanced at the expense of others' retirement plans.

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

Brazil, Russia Cancel Debt Auctions; Head-in-Sand Move Won't Work

Posted: 05 Feb 2014 09:55 AM PST

Russia and Brazil don't like escalating interest rates. Their "solution"? Cancel government debt auctions.

Russia Cancels Debt Auctions Second Week

Yesterday, Reuters reported Russia cancels domestic bond auction citing market conditions

Russia's finance ministry cancelled its weekly domestic bond auctions for the second week in a row on Tuesday, saying in a statement the decision was "based on an analysis of current market conditions".

Yields on so-called OFZ bonds have risen by 70-80 basis points since the start of the year. A new ministry sale could have potentially pushed the rates higher, analysts said.

Brazil Cancels Debt Auctions

Today, Bloomberg reports Brazil Government Yields Fall After Auctions Canceled.

Brazilian government bond yields extended their drop from a four-year high after the Treasury canceled auctions of fixed-rate and zero-coupon bonds amid a selloff in emerging-market assets.

Yields on local bonds maturing in 2017 declined 18 basis points, or 0.18 percentage point, to 12.80 percent at 3:20 p.m. in Sao Paulo after increasing Feb. 3 to 13.14 percent, the highest since January 2010.

The Treasury cited market conditions for its decision and said the last time it canceled auctions to sell zero-coupon LTNs and fixed-rate NTN-Fs was in July. The government had planned to sell zero-coupon bonds maturing in 2014, 2016 and 2018 and fixed-rate bonds maturing in 2021 and 2025.

Head-in-Sand Move Won't Work

This kind of head-in-the sand move won't work long. In fact, it did not work at all, it only created an illusion of working. Unless underlying conditions change quickly, and favorably (both doubtful), there is a strong likelihood of increased volatility when auctions resume.

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

"Situation Impossible"

Posted: 04 Feb 2014 11:52 PM PST

Greek economist Costas Lapavitsas says "The Euro has Already Failed" and it's "Situation Impossible" for France.

Via translation from La Vanguardia here is the complete interview ....

LV: When I interviewed you for the first time in late 2011, you said that the ECB was not the magic solution to the eurozone crisis. Then in July 2012 Mario Draghi stated "The ECB is ready to do whatever it takes to preserve the euro and believe me, it will be enough." Do you still believe that the ECB is not the solution?

CL: The ECB is not the solution. What happened in 2011 and 2012 is that the peripheral countries accepted the austerity demanded by Berlin and Brussels. They accepted wage cuts and unemployment. Their economies are headed for a recession. Have stabilized public finances and external deficit has stabilized. The fundamental answer is recession.

LV: Is that what the ECB wanted?

CL: The announcement of Mario Draghi pacified the financial markets but only because recession was accepted by the population in the peripheral countries. The ECB did not solve the crisis in the real economy.

LV: Are we far from a stable eurozone crisis solution?

CL: The ECB stabilized the fiscal deficit and the trade deficit and hence financial markets. But the crisis has become a crisis in the real economy. There is foul growth and impoverishment.

LV: Has the crisis moved from the periphery crisis to other countries?

CL: Yes. The euro crisis has moved to the heart of the eurozone. France and Italy are now facing the same problems as the periphery in 2010 and 2011. The crisis is now in France and Italy.

LV: Is there more inequality now than at the beginning of the crisis?

CL: Of course. Here's how the situation has stabilized: recession, austerity without growth, more impoverishment and huge social problems for most of the working class.

LV: Can we forget the idea introduced a couple of years ago regarding a two-speed euro?

CL: I do not think it's going to be a two-speed euro. I think the policy that comes from Berlin and Brussels is the austerity of all European countries. France is now in a situation impossible. The real problem in the eurozone is now France. It has great competitiveness gap with Germany.

LV: Why?

CL: The competitiveness gap that the periphery had in 2010-11 is now in France. Wages in Germany have gone up a bit or frozen, wages in France have grown in line with inflation. This gap makes it difficult for the French economy to grow significantly. If France is moving towards austerity, as the periphery, Europe faces serious problems. Depression. And France is facing huge social and political problems. The eurozone crisis has moved to the heart of the euro.

LV: How does situation look in five years?

CL: It is difficult to say precisely. The eurozone will continue to be unstable as in recent years. It will be even worse than now because of tension between France and Germany. The currency is not sustainable. If the common currency fails, the EU is facing a huge crisis.

LV: Do you think that the euro will fail?

CL: The euro has already failed. It was a project that was supposed to create convergence, growth and solidarity between the peoples of Europe, it was supposed to create a commonality among Europeans. The euro has created divergences, recession, poverty, it is like a straitjacket for Europe, increases the national and the social tensions in Europe. It succeeds now only because it instills fear. I do not think this is sustainable for long.

LV: How is the situation in Greece?

CL: Greece is a mess. In 2010 Greece should have left the euro and put its economy in another direction. The economic and social catastrophe in Greece is worse than what happened in Argentina in the late 90s and early 2000. This is what happens when you're within this monetary structure that is the euro.

LV: This is your first trip to Barcelona. How do you assess issues such as the independence of Catalunya?

CL: The situation in Barcelona is very interesting. I am very surprised by the strength of the independence movement in Catalonia. I'm amazed by the vitality of social movements. Yet, I think the level of understanding of the economic problems of Spain and Catalunya are not as high as they should be.

LV: Why?

CL: I think there should be more understanding of the implications of would happen if there was eventual independence in the Catalan economy. There is a lot of complexity that is not completely understood. Social movements in Catalonia need to further discuss these issues.

Mish Comments

I have little to add other than I agree with Costas Lapavitsas on major points. The euro has already failed. The question is: when will that be politically recognized?

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

Tuesday, February 4, 2014

Mish's Global Economic Trend Analysis

Obamacare Creates Incentive to Work Less; CBO Estimates Obamacare Will Cost 2 Million Full-Time Equivalent Jobs by 2017
Treasury Debate: Gundlach (Bull) vs. Rosenberg (Bear); Price Inflation on Hold; What About Gold?
Controversy in Detroit: What's a Fair Settlement of Bondholder and Pension Obligation Claims?

Obamacare Creates Incentive to Work Less; CBO Estimates Obamacare Will Cost 2 Million Full-Time Equivalent Jobs by 2017

Posted: 04 Feb 2014 02:11 PM PST

MarketWatch reports Obamacare plans to exceed $1 trillion, create reluctant workers.

The CBO projects that insurance subsidies and related spending will account for increasing chunks of deficit spending, starting at $20 billion this year and steadily increasing to $159 billion in 2024, for a collective cost of just under $1.2 trillion. The cumulative total from the ACA for the next decade could reach $1.35 trillion.

In several charts in its report, the CBO calls these "effects on the cumulative federal deficit." But in footnotes and other portions of the 175-page report, the CBO points out there are other sources of revenue generated under the ACA that are expected to make it deficit neutral.

Labor Market Effects of the Affordable Care Act

Inquiring minds are also in interested in labor force projections. For that let's dive into the massive 182 page PDF CBO Budget and Economic Outlook 2014 to 2024 report.

Incentive to Work Less

On PDF page 44 (Report page 38) a curious footnote reads "By providing subsidies that decline with rising income (and increase with falling income) and by making some people financially better off, the ACA will create an incentive for some people to work less."

A detailed explanation is found in Appendix C on PDF page 123.

How Much Will the ACA Reduce Employment in the Longer Term?

The ACA's largest impact on labor markets will probably occur after 2016, once its major provisions have taken full effect and overall economic output nears its maximum sustainable level. CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor — given the new taxes and other incentives they will face and the financial benefits some will receive. Because the largest declines in labor supply will probably occur among lower-wage workers, the reduction in aggregate compensation (wages, salaries, and fringe benefits) and the impact on the overall economy will be proportionally smaller than the reduction in hours worked. Specifically, CBO estimates that the ACA will cause a reduction of roughly 1 percent in aggregate labor compensation over the 2017–2024 period, compared with what it would have been otherwise. Although such effects are likely to continue after 2024 (the end of the current 10-year budget window), CBO has not estimated their magnitude or duration over a longer period.

The reduction in CBO's projections of hours worked represents a decline in the number of full-time-equivalent workers of about 2.0 million in 2017, rising to about 2.5 million in 2024. Although CBO projects that total employment (and compensation) will increase over the coming decade, that increase will be smaller than it would have been in the absence of the ACA. The decline in full-time-equivalent employment stemming from the ACA will consist of some people not being employed at all and other people working fewer hours.

Why Does CBO Estimate Larger Reductions Than It Did in 2010?

In 2010, CBO estimated that the ACA, on net, would reduce the amount of labor used in the economy by roughly half a percent—primarily by reducing the amount of labor that workers choose to supply. 2 That measure of labor use was calculated in dollar terms, representing the approximate change in aggregate labor compensation that would result. Hence, that estimate can be compared with the roughly 1 percent reduction in aggregate compensation that CBO now estimates to result from the act. There are several reasons for that difference: CBO has now incorporated into its analysis additional channels through which the ACA will affect labor supply, reviewed new research about those effects, and revised upward its estimates of the responsiveness of labor supply to changes in tax rates.

Don't worry. This won't cost 2 million jobs, only 2 million equivalent full-time jobs. Perhaps a many as 6 million work fewer hours each week. The CBO did not estimate the breakdown.

Regardless, that cannot possibly happen, can it? Didn't Obama claim ACA would create jobs? Hmm. What else did he promise?

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

Treasury Debate: Gundlach (Bull) vs. Rosenberg (Bear); Price Inflation on Hold; What About Gold?

Posted: 04 Feb 2014 12:11 PM PST

I happen to like 10-year US treasuries here, and have since rates got near 3%. I believe job growth is way overstated due to double-counting of part-time jobs, the global economy is slowing more than economists expect, and the US economy is slowing more than economists expect.

Betting Against Treasuries a Fool's Game?

Jeffrey Gundlach CEO of DoubleLine Capital goes even further. Gundlatch claims Betting Against Treasuries a Fool's Game.

The market was "entering 2014 struck by a greater consensus entering any year that I can remember, that the dollar has to do well, gold is for losers and bond yields will rise," said Jeffrey Gundlach, chief executive officer of DoubleLine Capital, which manages $49 billion. "Things were so lopsided in terms of that positioning. That was late in that way of thinking."

The amount of bets against 10-year Treasuries by hedge funds and other large speculators shrunk to as low as 58,000 contracts last month from a 19-month high of about 189,000 in November, data from the Commodities Futures Trading Association show.

Mr. Gundlach predicts yields will fall in 2014, with demand rising from investors such as banks seeking high-quality collateral to meet new regulatory requirements and as a haven for others from political and economic turbulence in nations ranging from Turkey to Argentina.

Gundlach (Bull) vs. Rosenberg (Bear)

One long-time bond bull recently turned bearish, and he sees no reason to change course. Yields will reverse and end the year at 3.5% to 3.75% as the economy improves, according to David Rosenberg, the chief economist at Gluskin Sheff & Associates.

"The economy is on a moderate accelerating trend," Mr. Rosenberg said. "We're coming out of a flight to quality on emerging markets. This is a blip rather than a long-term trend. The yield decline is temporary."

Will the US Economy Accelerate?

David Rosenberg thinks the economy is going to accelerate. If the economy does accelerate, the Fed will increase tapering, not reduce it.

Looking for another opinion?

Marc Faber Bullish on Treasuries and Gold

Taken from a Barron's roundtable discussion, ZeroHedge reports Marc Faber Warns "Insiders Are Selling Like Crazy... Short US Stocks, Buy Treasuries Gold".

Faber: What I recommend to clients and what I do with my own portfolio aren't always the same. That said, my first recommendation is to short the Russell 2000. You can use the iShares Russell 2000 exchange-traded fund [IWM]. Small stocks have outperformed large stocks significantly in the past few years.

Next, I would buy 10-year Treasury notes, because I don't believe in this magnificent U.S. economic recovery. The U.S. is going to turn down, and bond yields are going to fall. Abby just gave me a good idea. She is long the iShares MSCI Mexico Capped ETF, so I will go short.

Q: What are you doing with your own money?

Faber: I have a lot of cash, and I bought Treasury bonds. ... I have no faith in paper money, period. Insider buying is also high in gold shares. Gold has massively underperformed relative to the S&P 500 and the Russell 2000. Maybe the price will go down some from here, but individual investors and my fellow panelists and Barron's editors ought to own some gold. About 20% of my net worth is in gold. I don't even value it in my portfolio. What goes down, I don't value.

Curious Position

US treasuries are a curious position for someone frequently in the hyperinflation camp, which brings up this humorous conversation from Barron's.

Faber: I recommend the Market Vectors Junior Gold Miners ETF [GDXJ], although I don't own it. I own physical gold because the old system will implode. Those who own paper assets are doomed.

Zulauf: Can you put the time frame on the implosion? Faber: Let's enjoy dinner tonight. Maybe it will happen tomorrow.

Price Inflation on Hold

If the economy implodes (or even modestly declines) US Treasuries will benefit. Even a frequent hyperinflationist and firm disbeliever in paper assets gets it!

Here's my claim: Deflation Will Return: Europe First, Then US

Strong consumer price inflation, is on hold for a long time. US hyperinflation in this environment is next to impossible.

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

Controversy in Detroit: What's a Fair Settlement of Bondholder and Pension Obligation Claims?

Posted: 04 Feb 2014 09:49 AM PST

A huge battle between pensioners and bondholders is on. Last week, a Bond rating agency blasted Governor Rick Snyder's $350-million Detroit pension rescue plan as being too favorable to creditors at the expense of bondholders.

Today, the New York Times reports Detroit Turns Bankruptcy Into Challenge of Banks.

Amy Laskey,a managing director at Fitch Ratings, said in a recent report that she sensed an "us versus them" orientation toward debt repayment. And in the view of bondholders, bond insurers and other financial institutions, it only grew worse last week after the city circulated its plan to emerge from bankruptcy and filed a lawsuit on Friday.

The suit, brought by the city's emergency manager, Kevyn D. Orr, seeks to invalidate complex transactions that helped finance Detroit's pension system in 2005. In a not-so-veiled criticism, the city said the deal was done "at the prompting of investment banks that would profit handsomely from the transaction."

Of even greater concern to creditors is the city's 99-page "plan of adjustment," the all-important document that details how Detroit proposes to resolve its bankruptcy and finance its operations in the future. Banks, bond insurers and other corporate creditors think they are being asked to share a disproportionate amount of pain under the plan, still in draft form and not yet filed with the bankruptcy court.

"The essential issue is the near-total wipeout of the bondholders," said Matt Fabian, a managing director of Municipal Market Advisors. He said Detroit's case appeared to be heading toward a "cramdown," or court-ordered infliction of losses on unwilling creditors.

The plan calls for the city to give pensioners up to 50 cents on the dollar for their claims, while other unsecured creditors, like those that bought Detroit's general-obligation bonds, would end up with about 20 cents on the dollar. The pensioners' claims would be paid with cash, while general-obligation bondholders would receive notes that Detroit proposes to issue.

The debt that raised $1.4 billion for the city pension system in 2005 would suffer bigger losses still. The plan of adjustment does not accept the entire $1.4 billion as a valid claim, only about half of it. So the investors who bought that debt, called "certificates of participation," often called COPs, would end up with about 10 cents on the dollar. It would come in the form of a different series of notes, which has lags built into the payment schedules.

What's a Fair Settlement?

Last summer, Gov. Rick Snyder of Michigan said the intent was to "determine the best path forward that respects, and is fair to, pensioners and all parties."

In bankruptcy, the court has an obligation of fairness. However, it's not unprecedented for judges to take one side or another. Until now, the article claims "municipal bondholders have not had losses of principal forced on them by a court."

Here is a key point: Both the pension obligations and bondholder debt are unsecured debt.

Why not treat both pensioners and bondholders equally? The proposal currently on the table is for pensions to get 50 cents on the dollar (a 50% haircut) and bondholders 20 cents on the dollar (an 80% haircut).

I have a simple proposal. Give everyone 35 cents on the dollar (a 65% haircut). Neither side would be happy, but the ruling would be fair.

I also recommend the court trash the city's defined benefit plan entirely, or Detroit will be back in bankruptcy in a number of years.

Finally, if bondholders do not think they got a fair shake, they will demand higher interest rates going forward. Regardless of what the judge decides, the Detroit bankruptcy settlement will affect municipal bond interest rates going forward, not just in Michigan, but nationally.

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

Monday, February 3, 2014

Mish's Global Economic Trend Analysis

Portuguese Debt About to Implode? What About Spain?
Huge Miss in ISM; Largest Decline in New Orders in 4 Years; Weather to Blame?
Loan Rates in Argentina Reach 65% Annually; Is 65% a Good Rate?
Why are Taxpayers Subsidizing Big Mac Buyers?

Portuguese Debt About to Implode? What About Spain?

Posted: 03 Feb 2014 07:22 PM PST

Is Portugal about ready to implode?

That's what one hedge fund manager believes. For now, interest rate action suggests otherwise.

We will explore the case for implosion but first consider this chart of 10-year sovereign bonds.

Portugal 10-Year Sovereign Debt Yield

One certainly could have made a fortune plowing into 10-year Portuguese bonds. Does that mean Portugal is out of the woods?

I don't think so, and neither does Tortus Capital hedge fund manager David Salanic.

The New York times describes the setup in A Lonely Bet Against Portugal's Debt, but I am more interested in Tortus Capital's thesis.

Salanic maintains the status quo is not sustainable. Here is his overall thesis.

Portugal Debt Implosion Thesis

The Troika Program is off track. Portuguese bondholders are at the mercy of that market.
Portugal has excessive public and private debt financed from abroad. Portugal can neither grow nor devalue that debt.
Austerity fatigue has set in as the people carry the full burden of the adjustment.
Corporates are defaulting en masse and cannot sustain their debt burdens, leading to a vicious cycle of deleveraging.
The long-term outlook is bleak.
Debt-to-GDP is very high and growing one percent per month. Portugal is the third most leveraged country in the Eurozone.
Accounting for growth and interest expense, Portugal's debt is the highest in the Eurozone and is not sustainable.
Portugal can neither raise taxes nor cut expenditures, leaving little room to improve debt-servicing capacity.
40 consecutive years of deficit and 18 years without a primary surplus confirm that Portugal cannot sustain so much debt.
In the most optimistic case, the Portuguese sovereign has at least 30% too much debt.

Salanic does a fantastic job presenting his case in a 62 page document, Rehabilitating Portugal.

I recommend reading the presentation in entirety, but here are a few charts.

click on any chart for a sharper image

Solidarity

Missed Deficit Targets

Missed GDP Targets

Wishful Thinking

Subordination

Debt Financing

Credit Ratings

Inability to Outgrow or Devalue Debt

Corporate Debt Levels

Debt to GDP

Debt to Revenue

Interest Expense vs. Revenue

Target 2 Liabilities

ECB Liabilities

Mish Comments

That was a lot of charts, but there are another 40 or more in the article. I didn't count.

Other than target 2 imbalances (debt owed to other countries), Spain appeared at least as bad in most of the comparison charts.

Portugal alone is enough to sink the Eurozone given ECB leverage.

I have said repeatedly there is absolutely no way the Eurozone can stay intact and the above analysis strongly supports my claim.

That bond yields are so low in spite of the fundamentals is not an indication things are getting better. Rather, it is a strong sign of a bubble-supportive speculative mentality that central banks have fostered.

I do not know what the catalyst for a breakup will be, or when it happens, but Portugal is clearly back on my radar of things to watch.

Sincere thanks to Tortus Capital fund manager David Salanic for an outstanding report.

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

Huge Miss in ISM; Largest Decline in New Orders in 4 Years; Weather to Blame?

Posted: 03 Feb 2014 10:10 AM PST

Expectations for continued growth in the US remain overoptimistic.

For example Bloomberg reports the median forecast of 85 economists surveyed by Bloomberg called for a decrease in ISM to 56 from a December reading of 56.5.

Instead, the index plunged to 51.3, a number marginally above the expansion-contraction reading of 50.

Here are the numbers from the January 2014 Manufacturing ISM Report On Business®

ISM at a Glance

Series Data	Jan Index	Dec Index	Percentage Point Change	Direction	Rate of Change	Trend (Months)
PMI™	51.3	56.5	-5.2	Growing	Slower	8
New Orders	51.2	64.4	-13.2	Growing	Slower	8
Production	54.8	61.7	-6.9	Growing	Slower	17
Employment	52.3	55.8	-3.5	Growing	Slower	7
Supplier Deliveries	54.3	53.7	+0.6	Slowing	Faster	8
Inventories	44.0	47.0	-3.0	Contracting	Faster	2
Customers' Inventories	44.0	47.5	-3.5	Too Low	Faster	26
Prices	60.5	53.5	+7.0	Increasing	Faster	6
Backlog of Orders	48.0	51.5	-3.5	Contracting	From Growing	1
Exports	54.5	55.0	-0.5	Growing	Slower	14
Imports	53.5	55.0	-1.5	Growing	Slower	12

ISM Report Snips

PMI

Manufacturing expanded in January as the PMI® registered 51.3 percent, a decrease of 5.2 percentage points when compared to December's seasonally adjusted reading of 56.5 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

New Orders

ISM's New Orders Index registered 51.2 percent in January, a significant decrease of 13.2 percentage points when compared to the December seasonally adjusted reading of 64.4 percent. This represents growth in new orders for the eighth consecutive month, but is also the largest decline in new orders in the last four years. A New Orders Index above 52.1 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars).

Production

ISM's Production Index registered 54.8 percent in January, which is a decrease of 6.9 percentage points when compared to the seasonally adjusted 61.7 percent reported in December. This month's reading indicates growth in production for the 17th consecutive month, but at a significantly slower rate than in December. An index above 51.1 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures.

Employment

ISM's Employment Index registered 52.3 percent in January, which is 3.5 percentage points lower than the seasonally adjusted 55.8 percent reported in December, and represents the seventh consecutive month of growth in employment, but at a slower rate than in December. An Employment Index above 50.6 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

Weather to Blame?

The median forecast was for an index reading 56. It came in at 51.3, an enormous miss.

A number of ISM respondents and economists blamed the weather. Cold weather certainly did not help auto sales any, but didn't the economists know the weather was cold when they made their forecasts?

I think the economy is slowing more than economists realize, even if weather is partially responsible for this.

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

Loan Rates in Argentina Reach 65% Annually; Is 65% a Good Rate?

Posted: 03 Feb 2014 09:25 AM PST

Emerging markets continue to crumble, and the spillover on major economies is obvious. Problems always start somewhere, usually at the periphery.

Via translation from Lanacion, please consider Credit Is More Expensive.

Following the peso devaluation and sharp hike in interest rates by the central bank, interest rates on loans increased as much as 11 percentage points.

For a personal loan, private banks now charging at least 44% per year. Factoring in fees and other administrative expenses (up to 11 percentage points), the total financial cost exceeds 65% annually.

Public banks have with nominal rates for personal loans in pesos that range from 32% to 44%, with a total financial cost up to 55% annually.

Banks also shortened their terms and revised installments on credit cards

Is 65% a Good Rate?

If Argentina is in the midst of full-blown hyperinflation, then any loan rate is a good rate, because the peso will soon become worthless.

If banks believe that is likely, they may publish rates, but credit will completely dry up.

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

Why are Taxpayers Subsidizing Big Mac Buyers?

Posted: 03 Feb 2014 01:17 AM PST

A friend of mine who wishes to remain anonymous claims the following:

Walmart employees (as a group) are often the biggest recipients of federal and state aid within each state.
McDonalds employees are up there as well.

Specifically, my friend asks "Why are Taxpayers Subsidizing Big Mac buyers?"

His proposed solution is to raise the minimum wage to the poverty level, about $23,550 for a family of four.

My friend claims the employer, not the taxpayer will pick up the tab.

Seen and Unseen

My otherwise bright friend is not bright enough to examine the seen and the unseen costs and benefits of his proposal.

It's a given that those who are employed by McDonalds and WalMart will be better off, provided they retain their jobs.

That's a pretty big "provided". But it's far worse than that. Here are 10 things I came up with (and it only took a few minutes to do so). I am sure my list is incomplete.

There are no proposals to reduce food stamps or any other government subsidies if minimum wages rise. Money allocated on food stamps and other subsidies will still be spent unless Democrats agree to cuts.
Prices at WalMart and McDonalds will rise
The higher the wages, the more pressure there will be on businesses to reduce the overall number of employees by other methods, including hardware and software robots
The higher the overall costs (of which wages are a huge component), the fewer the number of store that will be built
When corporations don't open stores they otherwise would have, construction jobs are lost, shipping jobs are lost, merchandising jobs are lost, corporate income taxes do not rise as they would have, and property tax collection does not rise as it would have.
Marginal stores will be shut.
Employees at those marginal stores will be laid off .
Shut stores pay no corporate income taxes or property taxes.
Vacant stores are a form of blight. They reduce property tax collection and lower rent prices.
Marginal store closings and refusal to open new marginal stores will most likely happen in the very neighborhoods most desperately in need of jobs and services.

Moreover, for all the bashing of WalMart, please note that it pays one of the highest corporate tax rates in the country.

Other Problems With Minimum Wage Laws

Minimum wages impair the liberty of workers and employers to freely enter into voluntary contracts. They are extremely unfair to unskilled and low-skilled workers, many of whom will either lose their jobs or no longer find any.

Young entrants into the labor force won't even have a chance to improve their lot by gaining job experience because they won't be allowed to offer their labor for less than the minimum wage, even if they want to. Instead they will become dependent on handouts.

Issue of Fairness

The government cannot wave its hand and order nature around. Economic laws will remain valid regardless of legislation and regulations. And that means that all those whose labor is simply too expensive at the new minimum wage will be priced out of the market, typically the lowest skilled and poorest workers. It matters not if anyone thinks that is 'fair'. It is simply what is going to happen.

Please consider points number five, nine, and ten one more time:

When corporations don't open stores they otherwise would have, construction jobs are lost, shipping jobs are lost, merchandising jobs are lost, corporate income taxes do not rise as they would have, and property tax collection does not rise as it would have.

Vacant stores are a form of blight. They reduce property tax collection and lower rent prices.

Marginal store closings and refusal to open new marginal stores will most likely happen in the very neighborhoods most desperately in need of jobs and services.

The above points should be so obvious, my friend should be embarrassed with his simplistic "hike the minimum wage" solution.

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

Sunday, February 2, 2014

Mish's Global Economic Trend Analysis

Gold and Silver Derivatives in Chart Form: What Market Makers Have Controlling Interests?

Posted: 02 Feb 2014 08:11 PM PST

Here are a few charts from Sharelynx Gold regarding precious metal derivative holdings. The charts are as September 30, the latest data available. Click on any chart for sharper image.

OCC Gold Derivatives All Maturities

OCC Silver, Palladium, Plagtinum Derivatives All Maturities

Aggregate Precious Metal Derivatives

Some will point to these charts as "proof" of manipulation. I suggest it is proof of "possible" manipulation.

Is there manipulation? Of course there is. But there is no evidence to prove it is in one direction only, or that central banks are behind it all, as some maintain.

For further discussion, please see Gold Manipulation: Is it Illegal? Risk Free? What About JP Morgan?

As always, views expressed regarding charts created by other, are mine.

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

Real Life Obamacare Small Business, Benefit-Shifting Example

Posted: 02 Feb 2014 10:00 AM PST

Here is an interesting video regarding the effects of Obamacare on all the employees at at Simonetta's auto repair shop in Pennsylvania. The video was made by a local TV station.

A couple premiums dropped, but most went up, some by huge amounts. In every case deductibles soared. Every person involved is worse off than before.

Link if video does not play: Employees in Pennsylvania Company Learn of Increased Health Costs Due to Obamacare

Partial Transcript

Jeff and Dave used to have a $1,250 deductible. Since Obamacare went into effect, it's now jumped 60 percent to $2,000. That's nothing compared to Brian, Kristi, and Judy who have kids. they are going to pay twice that, four grand."

"I don't know how President Obama thinks he's helping us because we can't afford this, we can't afford to pay these co-pays, to pay these deductibles on what we're making," says one of the workers.

Another worker adds, "They call it the affordable health plan. There's nothing affordable about it. I can't afford it."

Winners and Losers

Obamacare shifted the winners and losers.

A small number of people gained big (those with no insurance, those with preexisting conditions, and those who get free Medicaid). To pay for that, a large number of people lost, to varying degrees.

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

Saturday, February 1, 2014

Mish's Global Economic Trend Analysis

Argentina Central Bank Bans Imports Due to Lack of Dollars; Argentina to Apply "Iron Fist" to Those Who Raise Prices

Posted: 01 Feb 2014 07:21 PM PST

As reserves run dry, demand for dollars soars in emerging market countries, prompting inane economic actions.

Via google translation from Libre Mercardo, please consider Argentina Cerntral Bank Bans Imports Due to Lack of Dollars.

The fourth day of falling reserves has the Argentine central reeling. This Wednesday reserves fell by 180 million and this month reserves declined by $2 billion. Due to demand and the low level of foreign exchange reserves, the central bank has stopped payment of imports, according to Argentine newspaper La Nacion.

"Almost all the customers who went to the bank did so to hoard dollars," claimed the cashier of a national bank to the southern newspaper.

"Today almost no imports were approved import" confided the head of the table of a major bank in the nation.

Argentina to Apply "Iron Fist" to Those Who Raise Prices

Via translation from El Economista, please consider Argentina Threatens to "Get Tough" on Businesses that Raise Prices.

Economic war has moved to Argentina. The Argentine government said it will apply an "iron fist" against the shops and businesses that raise prices following the sharp devaluation of the local currency last week, hoping to avoid tripping high inflation in the country.

Argentina has one of the highest inflation rates in the world, which in 2013 was around 25% according to private estimates.

Prices of products with imported components such as appliances and vehicles rose immediately after the devaluation. Moody's expects a devaluation of the Argentine peso 50% in 2014.

Before the devaluation, the Government launched a plan to fix maximum prices on about a hundred products sold in supermarkets. But the incentive is limited and includes products that are hard to find on the shelves.

Simple Rules

Fix prices too low and there will be no supply. Stores will not sell at a loss. Set prices too high and sellers will come out of the woodwork.

For an example of the latter, please see China Abandons Disastrous Cotton Stockpiling Program; Lessons Not Learned; What About Stockpiling Money?

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

Barcelona to Fine Owners of Empty Homes 100,000 Euros

Posted: 01 Feb 2014 11:11 AM PST

Via translation from Libre Mercado, the city council of Barcelona, Spain proposes €100,000 Fine on Owners of Empty Homes.

The City Council will fine owners of empty homes up to 100,000 euros. The proposal by the City Council commits the government to detect unused homes, starting with the banks.

The statement also reflects the Council's commitment to initiate disciplinary proceedings which could end up with three fines "of up to 100,000 euros" if homes remain empty. The municipality of Barcelona draw "Inspection Programs to detect, check and effects pointing this statement, in order to guarantee the right to housing of the population and to address the housing emergency."

With this measure, Barcelona joins other municipalities that have already approved the proposal of the PAH as Gerona, Tarrassa or Santa Coloma de Gramenet.

Scramble For Renters On

To get around this idiotic law, banks and other landlords will either have to tear down houses or quickly dump them at distressed prices. Both of those things will compound the difficulties of already stressed banks.

Alternatively, banks, other landlords, and owners of vacations homes will enter a mad scramble to find renters, at any price, to get around the occupancy restriction. An avoidance maneuver of that kind would stress rent prices and rental landlords.

Clearly, this is another one of those too stupid to make up ideas.

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