Monday, April 30, 2012

Ron Paul vs. Paul Krugman: Fed ‘Reckless’ to Allow High Jobless Rate, Say Krugman; "Mission Impossible" says Mish

I listened to the debate today on Bloomberg between Ron Paul and Paul Krugman.

Link if video does not play: Krugman Says Fed ‘Reckless’ to Allow High Jobless Rate

I do not feel Ron Paul did a very good job at making his points, and I certainly wish Ron Paul was a more charismatic speaker.

However, Paul Krugman made at least one preposterous statement. In contrast, Ron Paul simply failed to drive home his points clearly and precisely.

Said Krugman "The reckless thing is to allow mass unemployment to continue".

The statement is absurd. Although the Fed does have a dual mandate on employment and inflation, as I have pointed out on numerous occasions, the Fed's Dual Mandate Is Mission Impossible
Here's the deal.

1. The Fed can control money supply but it will have no control over interest rates (or anything else).

2. The Fed can control short-term interest rates, but then it would have no control over money supply (or anything else).

That is the full and complete extent of the Fed's "control". Note that neither price stability nor unemployment is in either equation. The reason is the Fed controls neither.

The result of all the recent Fed printing is a big yawn, otherwise known as excessive reserves as the following chart shows.

Excess Reserves of Depository Institutions

Does that chart look like the Fed is in control? If so, control of what?
Excess Reserves Then and Now

The above "Mission Impossible" snip was written August 27, 2009. Excess reserves now look like this.

Printing More Money Likely to Cost Jobs

The Fed could print another $trillion tomorrow and I highly doubt if it would do anything but cost jobs. Yes, that's right "cost jobs".

How so?

It would likely increase speculation in food and commodity futures, especially energy. It would drive down interest rates on CDs further robbing those on fixed income who would have less to spend.

If commodity prices rose  but demand did not (which is what I expect would happen), it would add to cost pressures at businesses which in turn would likely fire workers.

The idea that the Fed can create jobs is ludicrous (the housing bubble and subsequent crash are proof enough) but that does not stop fools from preaching the message.

For more silly debates involving Krugman, please see Bernanke Calls Krugman "Reckless"; Krugman and Bernanke Both in Academic Wonderland Somewhere Deep in Outer Space

Mike "Mish" Shedlock
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Ludicrous Proposal by Harvard Economics Professor to Force Taxpayers to Buy Spanish Bonds; Mish's Five-Point Alternative Proposal

As the economic crisis lingers on, the number of ludicrous proposals to deal with the crisis rises every month.

I have lost count by now of preposterous ideas and who made them (does anyone have the complete list?), but a proposal by Harvard Economics professor Martin Feldstein to force taxpayers to buy Spanish bonds surely makes the list of top-five ludicrous proposals.

Martin Feldstein, writing for the Financial Times says Taxpayers must backstop Spain’s budget
Spain is rapidly approaching a liquidity impasse. Markets are nervous because it’s not clear how the government will finance its budget deficit and the rollover of its maturing bonds. To meet its financing needs, the Spanish government needs the confidence of foreign and domestic investors.

Building investor confidence during this process requires a plan to avoid a Greek-style default.

One part of such a plan is to negotiate access to the European Stability Mechanism, the €700bn fund created to protect member governments from default. But if the refinancing shortfall from private sources is very large, Spain will need to supplement the funds from the ESM.

Raising those additional funds by increasing taxes would push the Spanish economy into a deeper recession and would weaken the supply-side incentives needed to stimulate long-term growth.

An alternative emergency approach would be to mandate, on a temporary basis, bond purchases by Spanish households and businesses. Here’s how such a plan might be implemented.

The Spanish government could use the income tax system to levy a temporary “lending surcharge” on individual incomes. In exchange for those surcharge payments, the households would receive an interest-bearing government bond with a maturity of five to 10 years. A similar surcharge could be levied on businesses based on corporate profits or the businesses’ value added.

The Spanish government should therefore move quickly to enact such a plan before it is overcome by its current liquidity problems.
Earth to Feldstein

For starters, Martin Feldstein correctly points out that "increasing taxes would push the Spanish economy into a deeper recession".

Unfortunately, Feldstein then left planet Earth with his proposal for "Spain use the income tax system to levy a temporary lending surcharge on individual incomes", as if that would not have precisely the same effect as a tax.

Highway Robbery

Feldstein's proposal would take money out of taxpayers' pockets to feed government programs just as a tax would, yet amusingly he warns against weakening "supply-side incentives needed to stimulate long-term growth".

Feldstein proposes giving taxpayers interest on their forced loans to the government. Let's assume 4%. Under Feldstein's proposal (highway robbery is a more apt description than a tax), taxpayers would have access to at most 4% of their money deposited into the scheme.

Somehow "using the income tax system" to take money away from consumers (with a promise to pay it back later) will not cause a drop in consumption, but a tax would. With that idea, Feldstein left planet Earth for some unknown, academic wonderland, alternate universe.

Unfit to Teach

Precisely why should taxpayers bail out banks that made stupid loans? Feldstein never bothers to say.

Are bondholders never, ever to take a loss?

Feldstein's proposal is so preposterous and so devoid of rudimentary thinking about taxes (by whatever name) that it should be clear that he is unfit to teach.

Mish's Five-Point Alternative Proposal

  1. Spain should plead for emergency funds from the ECB, IMF, EMU, wherever it can get them.
  2. Spain should declare a bank holiday and announce a return to the Spanish Peseta
  3. Spain should issue a statement to the ECB, IMF, EMU to the effect "anyone stupid enough to lend us money deserves to lose it at least two-thirds of it. All debts in Euros will be repaid 1-1 in Pesetas."
  4. Spain should then devalue the Peseta by 65%. Should Europe, the IMF, and EMU threaten sanctions, Spain would counter with a threat of 100% default on all external debt rather than 65% of it.
  5. Spain should lower the VAT, lower corporate income taxes, and make it easier to hire and fire workers.

Point number one is a bit tongue-in-cheek as it is tantamount to purposeful fraud. However, the rest of the points can easily stand on their own merits.

In regards to point number three, Spain can be much more diplomatic in its statement to the ECB, IMF, and EMU, but the bottom line would be the same regardless of how Spain phrases the statement.


  • Spain would immediately be relieved of 65% of its foreign debt obligations. 
  • The threat to not pay back any of its external debt if Europe of the IMF retaliates (perhaps coupled with a promise to pay back another 15% if everyone plays exceptionally nice) would prevent retaliation.
  • A lower VAT and lower corporate income taxes would encourage growth
  • At a huge discount to the Euro, Spain would become a tourist mecca
  • Spain's products would be far more competitive on the global economy

Effectively, I propose Spain do what Iceland did. The Icelandic economy is in recovery now, while Greece, Spain, Portugal, and Italy flounder.

In contrast, Feldstein proposes more bailouts of banks by taxpayers, while playing preposterous word games with the definition of  "tax".

Mike "Mish" Shedlock
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Illinois Borrowing Costs Rise by 22.5%, Expect Conditions to Worsen; Sideline Cash Nonsense From Nuveen

Illinois borrowing costs are poised to rise about 22.5%. The nominal increase is about .34 percentage points as reported by Bloomberg.
Illinois plans to sell $1.8 billion of general-obligation debt tomorrow as its relative borrowing costs may increase by almost a quarter.

The tax-exempt deal for the state, rated lowest by Moody’s Investors Service, includes a 10-year segment that underwriter Jefferies & Co. plans to offer to investors at 1.85 percentage points above benchmark AAA securities, according to a person familiar with the sale.

Illinois’s last general-obligation sale was on March 13 for $575 million, with 10-year securities priced to yield 1.51 percentage points above benchmark tax-exempts, according to data compiled by Bloomberg. That’s 0.34 percentage points below tomorrow’s tentative pricing plan, or a difference of 22.5 percent.

The state has the lowest-funded pension in the U.S., with assets equal to 45.5 percent of projected obligations, Bloomberg data show. Its backlog of unpaid bills to vendors and Medicaid obligations is more than $9 billion.

Investors should get more yield than 1.85 percentage points given those fiscal challenges, John Mousseau, a portfolio manager at Vineland, New Jersey-based Cumberland Advisors, which has $1.2 billion of municipal debt. It doesn’t own Illinois general-obligation bonds.

“The state’s debt should be trading even cheaper,” Mousseau wrote in a report released today. “At some point it is a buy. Not yet.”
More Sideline Cash Nonsense

I side with Mousseau expecting much higher yields.

However, Tom Spaulding at Nuveen Investments Inc. in Chicago says “With a lot of cash out there, I just don’t see it having a problem getting done at these levels, and can probably get done a little bit better,” he said.

Pray tell where is that cash that Spaulding speaks of? Certainly corporations like Apple have a lot of it, but most of that alleged "cash" is nothing but debt on the balance sheets of corporations.  Sorry Tom, but counting cash that is spoken for is simply wrong.

There is also $1.5 trillion of excess reserves at the Fed. However, those reserves, have an associated liability as well. Even if that was not the case there would be a problem of duration match. Do investors want to load up on Illinois debt at 1.85% for 10 years.

Nuveen might, but that does not make it an intelligent thing to do. I see no value here at all.

Mike "Mish" Shedlock
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Sunday, April 29, 2012

Spain's Latest Bad-Bank, Non-Bank, Shell-Game Proposal; Can One-Winged Pigs Fly?

Spain has floated a number of bad-bank proposals recently, all of which were fundamentally flawed and doomed from the start.

The latest shell-game proposal will supposedly take bank assets, put them in a non-bank, while forcing the banks to come up with sufficient capital to cover losses.

Please consider Spain in Talks Over ‘Bad Bank’ Scheme
Spain’s government and its banks are discussing a new scheme to segregate problematic property loans into one or more asset management companies to relieve the burden on struggling lenders, according to officials and bankers.

The “bad bank” scheme is the latest attempt by the centre-right government of Mariano Rajoy, prime minister, to avoid an international rescue programme of the sort required by Greece, Ireland and Portugal.

Ministers had decided they had no need of an Irish-style bad bank. But economists say the crisis is so dire that weak banks will need further recapitalisation of about €100bn.

Government officials insist that the scheme should not be called a bad bank, because it will not be a bank and participating lenders will be able to park assets in it only if they have set aside sufficient bad loan provisions, independently valued.

The scheme is being developed by Luis de Guindos, economy minister, and is in line with a recommendation by the International Monetary Fund.
Can One-Winged Pigs Fly?

If banks have sufficient loan-loss reserves then why don't they simply take the losses now? If they can raise capital now, then why don't they? If they cannot raise capital now, how will will they be able to do so in the process of moving the assets to a non-bank bank?

This ludicrous plan has the flight capability of a one-winged pig.

Mike "Mish" Shedlock
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Showdown in Europe: Hollande Takes on Merkel and Draghi, Insists on Renegotiation of Merkozy Treaty; Does It Matter Whether France Signs?

German chancellor Angela Merkel says the Merkozy treaty is not renegotiable.

There is just one "slight" hitch: France has not signed the treaty and will not sign the treaty unless it is reworked says François Hollande who on May 6 will in all likelihood replace Nicolas Sarkozy as president of France.

Moreover, Hollande's demands have gotten steeper and steeper as he inches closer to election.

Please consider Hollande rebukes Berlin over crisis role
François Hollande, the Socialist candidate for the French presidency, has claimed support from across Europe for his demand for a growth plan, saying it was not up to Germany to decide what action should be taken in the face of the eurozone crisis.

With opinion polls predicting he will beat President Nicolas Sarkozy in the run-off vote a week on Sunday, Mr Hollande has stepped up his insistence that he would not ratify the European fiscal discipline treaty without a renegotiation to add a package of growth measures.

In a television appearance on Thursday night, Mr Hollande said: “It is not for Germany to decide for the rest of Europe. I’m getting lots of signals, direct and indirect, from other governments, even if they are conservative.”

Mr Hollande was delighted on Wednesday when Mario Draghi, governor of the European Central Bank, also called for a growth pact to accompany the austerity measures being implemented across Europe, including in France.

But he has made it clear that his growth prescription differs markedly from the market-oriented structural reforms envisaged by Mr Draghi – and endorsed by Ms Merkel.

His immediate demands are for common European project bonds, an increase in investment by the European Investment Bank, better targeting of underused European structural funds and the introduction of a financial transaction tax, all measures Mr Hollande’s camp believes can win widespread backing, including from Germany.
Election Posturing?

Many think this Hollande's antics are nothing but election posturing. I am not so sure. After all, what does Hollande have to lose by holding out?

One thing is for sure, and that is eurobonds are not going to fly.  Germany will not approve. Will Hollande settle for some meaningless "growth package"?

Does it Matter What France Does?

Short-term, the squabbles and finger-pointing will be far more entertaining if France refuses to sign the treaty. However, given the pathetic state of affairs in Greece, Spain, and Portugal, I fail to see why it really matters in the long-term whether France signs or not. The Eurozone will not last as-is in either case.

That said, the bigger and deeper the squabbles, the sooner Germany many do the right thing for all involved: exit the Eurozone before it splinters led by the Club-Med countries.

Mike "Mish" Shedlock
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"Flying Piano" Costs Pentagon $1.5 Trillion

The Pentagon is about to waste $1.5 trillion, 38% of entire defense budget for a "virtual flying piano". That may sound preposterous, and it is. Unfortunately, it is also true.

Foreign Policy Magazine discusses the sad saga of The Jet That Ate the Pentagon.
This month, we learned that the Pentagon has increased the price tag for the F-35 by another $289 million -- just the latest in a long string of cost increases -- and that the program is expected to account for a whopping 38 percent of Pentagon procurement for defense programs, assuming its cost will grow no more.

How bad is it? A review of the F-35's cost, schedule, and performance -- three essential measures of any Pentagon program -- shows the problems are fundamental and still growing.

Although the plane was originally billed as a low-cost solution, major cost increases have plagued the program throughout the last decade. Last year, Pentagon leadership told Congress the acquisition price had increased another 16 percent, from $328.3 billion to $379.4 billion for the 2,457 aircraft to be bought. Not to worry, however -- they pledged to finally reverse the growth.

The result? This February, the price increased another 4 percent to $395.7 billion and then even further in April. Don't expect the cost overruns to end there: The test program is only 20 percent complete, the Government Accountability Office has reported, and the toughest tests are yet to come. Overall, the program's cost has grown 75 percent from its original 2001 estimate of $226.5 billion -- and that was for a larger buy of 2,866 aircraft.

The total program unit cost for each individual F-35, now at $161 million, is only a temporary plateau. Expect yet another increase in early 2013, when a new round of budget restrictions is sure to hit the Pentagon, and the F-35 will take more hits in the form of reducing the numbers to be bought, thereby increasing the unit cost of each plane.

A final note on expense: The F-35 will actually cost multiples of the $395.7 billion cited above. That is the current estimate only to acquire it, not the full life-cycle cost to operate it. The current appraisal for operations and support is $1.1 trillion -- making for a grand total of $1.5 trillion, or more than the annual GDP of Spain. And that estimate is wildly optimistic: It assumes the F-35 will only be 42 percent more expensive to operate than an F-16, but the F-35 is much more complex.

The F-35 isn't only expensive -- it's way behind schedule. The first plan was to have an initial batch of F-35s available for combat in 2010. Then first deployment was to be 2012. More recently, the military services have said the deployment date is "to be determined." A new target date of 2019 has been informally suggested in testimony -- almost 10 years late.
What Happened?

You can actually blame president Clinton for this debacle. You can also blame every president since Clinton for stupid decisions upon stupid decisions and for not scrapping the program. The sad saga continues ...
The design was born in the late 1980s in the Defense Advanced Research Projects Agency (DARPA), the Pentagon agency that has earned an undeserved reputation for astute innovation. It emerged as a proposal for a very short takeoff and vertical-landing aircraft (known as "STOVL") that would also be supersonic. This required an airframe design that -- simultaneously -- wanted to be short, even stumpy, and single-engine (STOVL), and also sleek, long, and with lots of excess power, usually with twin engines.

President Bill Clinton's Pentagon bogged down the already compromised design concept further by adding the requirement that it should be a multirole aircraft -- both an air-to-air fighter and a bomber. This required more difficult tradeoffs between agility and low weight, and the characteristics of an airframe optimized to carry heavy loads. Clinton-era officials also layered on "stealth," imposing additional aerodynamic shape requirements and maintenance-intensive skin coatings to reduce radar reflections. They also added two separate weapons bays, which increase permanent weight and drag, to hide onboard missiles and bombs from radars. On top of all that, they made it multiservice, requiring still more tradeoffs to accommodate more differing, but exacting, needs of the Air Force, Marine Corps, and Navy.

Finally, again during the Clinton administration, the advocates composed a highly "concurrent" acquisition strategy. That meant hundreds of copies of the F-35 would be produced, and the financial and political commitments would be made, before the test results showed just what was being bought.

This grotesquely unpromising plan has already resulted in multitudes of problems -- and 80 percent of the flight testing remains. A virtual flying piano, the F-35 lacks the F-16's agility in the air-to-air mode and the F-15E's range and payload in the bombing mode, and it can't even begin to compare to the A-10 at low-altitude close air support for troops engaged in combat. Worse yet, it won't be able to get into the air as often to perform any mission -- or just as importantly, to train pilots -- because its complexity prolongs maintenance and limits availability.
The Dustbin Awaits

Foreign Policy Magazine arrives at a rational conclusion: "There is only one thing to do with the F-35: Junk it. America's air forces deserve a much better aircraft, and the taxpayers deserve a much cheaper one. The dustbin awaits."

Who supports the program?

Defense Contractors

Defense contractors are at the top of the list. For example, Lockheed Martin, Northrop Grumman, BAE Systems, and Pratt & Whitney support the F-35.

Please consider this Lockheed Martin Propaganda.
Establishing air superiority in today’s complex global security climate requires the unprecedented capabilities and versatility that only the F-35 Lightning II can offer.

And the F-35’s strong global partnership and broad industrial base ensures affordability through economies of scale while delivering thousands of technology sector jobs around the world.

Visit our partners

Northrop Grumman

BAE Systems

Pratt & Whitney
To show you what incredible liars the defense industry has, Lockheed Martin has the gall to claim "economies of scale".

 Senator John McCain Supports the Boondoggle

Senator John McCain wants F-35 training in Arizona at Luke Air Force Base.
McCain was presented with the Wing Coin and Chairman’s Award by Brig. Gen. Kurt Neubauer, 56th Fighter Wing Commander, and Charley Freericks, Chairman of Fighter Country Partnership’s board of directors. The award was given in recognition of McCain being a champion of Luke during his years of public service.

Neubauer thanked McCain for speaking at the gathering of more than 250 Fighter Country Partnership members and guests at the annual meeting. He noted the 27,000 sorties, 35,000 hours of flight, the training of 350 new pilots and 400 crew chiefs that took place at Luke in 2009. He told the crowd that Luke trains 95 percent of all the fighter pilots for the Air Force, and has deployed 600 down range to 17 different countries.
Spirit of Idaho

The Spirit of Idaho organization hopes for training mission in Idaho.
Idaho citizens are second to none in their enthusiastic support for the men and women of our Armed Forces and for their military missions. Hosting the F-35 Lightning II Joint Strike Fighter would be a great way to continue that tradition while helping to secure the future of Mountain Home Air Force Base and Gowen Field. That’s to say nothing of the thousands of great jobs and economic opportunities that having the F-35s here would create. C.L. "BUTCH" OTTER, GOVERNOR
Greed, Graft, Public Unions

In general, states where defense contractors are located, states that will house or train the pilots want the jobs support the F-35. Those states, and politicians in those states do not give a rat's ass about how inept or costly the program is.

The greed, graft, and waste are bad enough as it is. However, no amount of greed, gall, and waste is so great that unions will be satisfied with it.

Please consider Lockheed F-35 workers ready for long strike, union says
Unionized workers on strike against Lockheed Martin Corp (LMT.N) over healthcare benefits and pensions are prepared for a long work stoppage, a top union official said on Tuesday as the company said it would be able to keep operations running.

Nearly 3,650 union workers walked off the job on Monday at the Fort Worth, Texas, plant where Lockheed builds the new F-35 fighter plane and at two military bases where it is tested.

Paul Black, president of the local chapter of the International Association of Machinists and Aerospace Workers (IAM), said three earlier strikes in 1984, 2000 and 2003 lasted from two to three weeks, and union leaders have warned workers the current dispute could take longer to settle.

Workers in the union voted overwhelmingly on Sunday to hit the picket line rather than accept the company's "best and final offer," which called for an end to the defined benefits pension that current workers receive and a switch to a retirement account similar to a 401(k).
The F-35 program deserves to be scrapped because of cost overruns, inept design specs, and poor test results. Yet 3,650 union ingrates were arrogant enough to walk off the job demanding still more money to build this boondoggle.

Every last one of them deserves to lose their job permanently. Let's hope this is the final straw that kills the program.

Mike "Mish" Shedlock
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Saturday, April 28, 2012

Giant Sucking Sound; Demand for Credit in Europe Collapses; Pritchard Misses the Boat

In a report on fixed income, David Owen, Chief European Financial Economist at Jefferies, notes that demand for credit in Europe has plunged.

Owen asks Is it the supply or demand for credit that matters?
25 April 2012

Perhaps the most memorable comment Mario Draghi made to the European Parliament today was the need for a euro area Growth Pact, but he did draw comfort from the results of the ECB’s latest Bank Lending survey.

Draghi made reference to the fact that the balance of firms tightening credit conditions had fallen (from 35% in January to 9%). However, that it is not to say that credit conditions are actually easing, just that they are no longer tightening at the same rate as in January.

Not only are credit conditions still tightening, albeit at a slower rate, but importantly the ECB’s latest Bank Lending survey shows credit demand collapsing. This is not something that Mario Draghi mentioned to the European Parliament at all.
Europe Faces Japan Syndrome

In reference to the above chart, Ambrose Evans-Pritchard at The Telegraph says Europe faces Japan syndrome as credit demand implodes
Europe (minus Germany) looks more like post-bubble Japan each month.

The long-feared credit crunch has mutated instead into a collapse in DEMAND for loans. Households and firms are comatose, or scared stiff, in a string of countries.

Demand for housing loans fell 70pc in Portugal, 44pc in Italy, and 42pc in the Netherlands in the first quarter of 2012. Enterprise loans fell 38pc in Italy. The survey took place in late March and early April, and therefore includes the second of Mario Draghi’s €1 trillion liquidity infusion (LTRO).

The ECB said net demand for loans had fallen "to a significantly lower level than had been expected in the fourth quarter of 2011, with the decline driven in particular by a further sharp drop in financing needs for fixed investment." Demand fell 43pc for household loans, and 30pc for non-bank firms.

This slump in loan demand is more or less what happened during Japan’s Lost Decade as Mr and Mrs Watanabe shunned debt. Zero interest rates did nothing. The Bank of Japan was "pushing on a string" (though it never really launched bond purchases with any serious determination).

The credit squeeze is entirely predictable – and was widely predicted – given that banks must raise their core Tier 1 capital ratios to 9pc by July to meet EU rules, or face nationalisation. (The pro-cyclical folly of this beggars belief: by all means impose higher buffers, but not during a recession, and not by letting banks slash their balance sheets. The US at least forced its banks to raise capital, an entirely different policy since it does not lead to a lending crunch.)

The IMF said last week that Europe’s banks would slash their balance sheets by €2 trillion – or 7pc – by next year. This amounts to an economic shock. The Fund said deleveraging on this scale at a time of sharp fiscal tightening risks a "bad equilibrium".

Or one analyst said, the LTRO lets northern banks dump their bond holdings onto Club Med banks. The renationalisation of the eurozone financial system goes a step further.

The LTRO "carry trade" is already revealing the sting in its tail in any case since the banks are by now underwater on a lot of bonds. What happens if and when they need to sell those bonds to cover debts falling due over the next year?

Until the ECB conducts monetary policy with proper energy, calls for "Growth Compacts" from governments amount to humbug. The ECB needs to do its own work.

We all know why it will not do so: because Hayekian romantics at the Bundesbank hold sway, and none of the other governors dare say boo. Live with the consequences.
Live with the Consequences Indeed

Pritchard conveniently ignores the fact that Japan is struggling right now to "live with the consequences" of numerous misguided monetary and fiscal stimulus efforts over 20 years. Japan has debt-to-GDP exceeding 200% and little to show for it. And Japan now has to live with the consequences of numerous misguided QE and stimulus proposals.

Pritchard apparently wants more QE for Europe as if that would increase demand for credit.

Note that two rounds of QE did not increase the demand for credit in the US as per my post The Real Consumer Credit Story: Virtually No Recovery in Revolving Credit, No Recovery in Non-Revolving Credit.

Moreover, QE did not succeed in increasing the demand for credit in Japan over 20 years. So pray tell why would QE increase the demand for credit in Europe? More importantly, even if it did, would that be a good thing?

European banks are already over-leveraged and under-capitalized so how the hell is providing cheap credit going to possibly do anything good?

Would 0% interest rates help when that did not help Japan?

Pritchard Misses the Boat

Clearly Pritchard missed the boat on QE as well as the desirability of attempting to cram more credit down banks' throats when banks are over-leveraged and under-capitalized.

Everyone wants to do something "but not now". While there is immense merit to not hiking taxes in a recession as Brussels forced on Greece, Spain, and Portugal, work rule and pension changes are badly needed.

Pritchard's idea of raising capital instead of selling assets seems reasonable enough. However, nothing stops banks from doing that, at least in theory. Is practice another matter?

Giant Sucking Sound

William Wright discusses Tier-1 Capital requirements in A rough guide to surviving the great deleveraging of 2012
As if Basel III weren’t enough of a headache, big European banks face a deadline of June 30 from the European Banking Authority to increase their core Tier-1 capital ratios to 9%, equivalent to raising €115bn in equity.

In theory, banks can meet this by retaining profits, raising equity or shrinking assets. But with equity markets all but closed to banks and earnings falling, a crash diet to reduce their bloated balance sheets is the only realistic option.

Analysts expect that the great bank deleveraging of 2012 could see as much as $2 trillion to $3 trillion of assets trimmed from European banks’ balance sheets – or about 5% of total assets – with damaging consequences not only for the banking industry but for the fragile European economy.

Here is a rough guide to some of the inevitable consequences – some deliberate, some unintended and some obscure – of this deleveraging on the investment banking industry.

Death of profits, jobs and banks

The most obvious impact of deleveraging will be the devastation it will wreak on the profits of investment banks. In 2006, Goldman Sachs posted a return on equity of 33% and its core leverage – assets divided by equity – was 29 times. Fast forward to the first nine months of this year, and its return on equity was 3.7% with leverage of 14 times. Not because it has radically shrunk its balance sheet (yet) but because it has more than doubled its equity.

The same process will play out across the industry, where the combination of an increase in the cost of business driven by regulation is colliding with a downturn in activity. This will choke off profits, with JP Morgan forecasting that average ROE for the industry will fall to just 8% next year. That’s in line with research by Financial News that shows average pretax ROE in the first nine months of this year was 12% (or about 8% net).

Structurally lower profitability has already prompted banks such as Credit Suisse and UBS to slash their fixed income trading activities. While the thousands of job cuts seem harsh, they are often in the low single digits in terms of overall headcount. As more banks grasp the nettle in 2012, they will pull out of entire business lines, cutting 10% or 20% of their staff – or pull out of investment banking altogether.
Is That All Bad News?

Wright concludes that is not all bad news. I agree, but for some different reasons.

First Wright ...
The Promised Land

In all of this, there is some good news. For those banks that can survive the rigours of deleveraging without having to pull out of entire regions or businesses while retaining a profitable operation, there is a Promised Land on the other side. Overcapacity in the investment banking industry will be whittled away to leave a smaller number of bigger and (relatively) more profitable global banks whose scale will increasingly play to their advantage.

Bankers talk of JP Morgan, Deutsche Bank, Goldman Sachs and perhaps one other – maybe Bank of America Merrill Lynch, Barclays Capital or Citi – emerging stronger than ever. At the same time there will be a larger number of product and sector specialists, which will drop the “me-too” approach of the past decade.

In this new world, with a realistic price for risk and credit and less competition, margins can only go one way: up.
Banks Should Be Banks, Not Hedge Funds

I do not believe that bigger is better and I am sick of the notion "too big to fail". Indeed, it most often means two things:

  1. Too Big To Succeed
  2. Taxpayer Bailouts

Banks should be banks, not hedge funds. To the extent that Basel III forces banks to shed trading activities and other non-traditional activities that banks now find themselves in, I view that as a good thing.

I certainly agree with Wright regarding the need for "a realistic price for risk and credit", but "less competition" is certainly not the essence of well-formed free markets.

My conclusion is that Wright does not understand the Fed's role in the creation of this mess or sound Austrian economic principles needed to fix it. 

We will indeed see a "a realistic price for risk and credit" if and only if we get rid of the Fed and end fractional reserve lending. Bigger banks are not the answer.

By the way, Wright is not quite correct when he says "equity markets all but closed to banks".

Let's phrase the idea properly: "equity markets all but closed to banks, on terms that banks want". Banks do not want shareholder dilution that comes with raising equity now.

Bondholders do not want to take a hit either. Both should have happened already. However, Bush, Obama, Congress, and the Fed acted in unison to prevent what desperately needed to happen.

If Not Now, When?

Pritchard thinks the time to raise Tier-1 Capital requirements is not now. OK, when is it? 10 years from now? Or will Spain, Greece, and Italy still be too fragile?

Japan shows the folly of depending on QE and fiscal stimulus to spawn inflation, then waiting for it to happen.

Japan's Four-Pronged Approach 

  1. Fiscal Stimulus
  2. Monetary Stimulus (QE)
  3. Misguided Hope
  4. Ignore Capital Impairments of Banks Waiting for Things to Get Better

Did Japan succeed?

In the case of Europe, there is also this "not-so-little" problem that Pritchard is extremely aware of yet mysteriously avoids every time he rails about the ECB not doing enough. I am obviously talking about the Euro.

The LTRO increased leverage and risk on Spanish and Italian banks. QE is useless, something Pritchard should see. Reducing interest rates will shift imbalances to other countries, and may send oil and food prices higher, but it sure will not increase lending.

Pritchard says "The ECB needs to do its own work, with proper energy." What "work" is that? Does any "work" make any sense?

The first irony is Pritchard compares Europe to Japan, while essentially proposing the same four-pronged policy of failure followed by Japan.

The second irony of Pritchard's column is that if Basel III moves forward the date of the inevitable breakup of the eurozone, that would be a good thing. A eurozone breakup would place Europe on a faster pace of ending the very "Japan Syndrome" that Pritchard rails against.

Proper Energy

Not only do I want to raise tier-1 capital requirements, I want to see a 100% gold-backed dollar, the end of fractional reserve lending, and the end of duration-mismatched lending (e.g. selling 5-year CDs and making mortgage loans for 30 years).

Finally, lending of money that is supposed to be available on demand is fraudulent and must be stopped.  I would be more than willing to phase those ideas in, but the time to start is now, not 10 years from now under the misguided notion things will be better if only banks would lend more.

Mike "Mish" Shedlock
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The No Retirement Plan: 25% Expect to Work Till 80 (Greater than Life Expectancy); What About the Expected Retirement of Nuclear Power Plants?

Given major delays in retirement plans, 80 is the new 65 says CNN Money.
A quarter of middle-class Americans are now so pessimistic about their savings that they are planning to delay retirement until they are at least 80 years old -- two years longer than the average person is even expected to live.

It sounds depressing, but for many it's a necessity. On average, Americans have only saved a mere 7% of the retirement nest egg they were hoping to build, according to Wells Fargo's latest retirement survey that polled 1,500 middle-class Americans.

While respondents (whose ages ranged from 20 to 80) had median savings of only $25,000, their median retirement savings goal was $350,000. And 30% of people in their 60s -- right around the traditional retirement age of 65 -- that were surveyed had saved less than $25,000 for retirement.
As a result, many people aren't in a hurry to quit their day jobs.

Three-fourths of middle-class Americans expect to work throughout retirement. And this includes the 25% of Americans who say they will "need to work until at least age 80" before being able to retire comfortably.
Job Insecurity, Debt Weigh on Retirement Confidence, Savings

The Employee Benefit Research Institute (EBRI) reports Job Insecurity, Debt Weigh on Retirement Confidence, Savings

Executive Summary Points
  • Americans’ confidence in their ability to retire comfortably is stagnant at historically low levels. Just 14 percent are very confident they will have enough money to live comfortably in retirement (statistically equivalent to the low of 13 percent measured in 2011 and 2009).
  • Employment insecurity looms large: Forty-two percent identify job uncertainty as the most pressing financial issue facing most Americans today.
  • Worker confidence about having enough money to pay for medical expenses and long-term care expenses in retirement remains well below their confidence levels for paying basic expenses.
  • Many workers report they have virtually no savings and investments. In total, 60 percent of workers report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000.
  • Retirees report they are significantly more reliant on Social Security as a major source of their retirement income than current workers expect to be.
  • Although 56 percent of workers expect to receive benefits from a defined benefit plan in retirement, only 33 percent report that they and/or their spouse currently have such a benefit with a current or previous employer.
  • More than half of workers (56 percent) report they and/or their spouse have not tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement.

What About the Expected Retirement of Nuclear Power Plants?

I picked up links to the above articles in a surprising place. Dawn Stover, writing for the Bulletin of the Atomic Scientists compared the retirement of workers to the "The new retirement" for nuclear power plants
Today, only 14 percent of Americans age 25 and older are confident that they will have enough money to retire comfortably, according to a recent survey by the Employee Benefit Research Institute (EBRI). Another recent survey, by Wells Fargo, reported that a quarter of middle-class Americans now plan to postpone retirement until they are at least 80 years old -- longer than many of them are expected to live. For Americans facing an uncertain financial future, 80 is the new 65.

Some are calling it "the new retirement." But it really should be called "the no retirement."

And senior citizens aren't alone. Nuclear reactors are experiencing some of the same woes: Retirement age is fast approaching or already in the rearview mirror, but there is a lot less money in the nest egg than anticipated.

At the 44 US nuclear reactors that have already received license extensions, 60 is the new 40. And even when those reactors reach the end of their working lives, they may not be able to move on to the final stage. According to a recent article in The New York Times, the operators of 20 US nuclear reactors -- including some with licenses that expire soon -- do not have sufficient funding for prompt dismantling. If these reactors can't keep working, their owners "intend to let them sit like industrial relics for 20 to 60 years or even longer while interest accrues in the reactors' retirement accounts."

Is it crazy for someone to delay his retirement past the age he can expect to live? Sure, but that's essentially what the nuclear industry plans to do with many of its reactors. And it should not come as a surprise that the NRC has no problem with this plan. After all, we're talking about a regulatory agency that issues 40-year licenses for a process that creates a radioactive waste problem lasting tens of thousands of years.
Crazy to Plan Retirement Past Life Expectancy?

Dawn says "Is it crazy for someone to delay his retirement past the age he can expect to live". Sorry Dawn, that's not crazy at all. If you have insufficient money, you need to work. Some want to work because they like what they are doing.

If you are seeking crazy, try these:

  1. What is crazy is to expect social security to take care of all your retirement needs.
  2. It's also crazy to expect to receive defined benefits even if you are not in a defined benefit plan. 
  3. Finally, it's crazy for public unions to think they are going to get all of their promised benefits when it will bankrupt cities and states to do so.

Economic Craziness

If you are looking for more craziness, Dawn wants a "carbon tax to lift job prospects".

Here is another crazy idea: Dawn talks of  "forcing people to save more and protect retirement savings from the vagaries of the financial markets".


Nuclear Craziness

One point I happen to agree with Dawn on.  It's crazy to issue "40-year licenses for a process that creates a radioactive waste problem lasting tens of thousands of years" and have no plans for anything but the first 40 years.

Mike "Mish" Shedlock
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Friday, April 27, 2012

GDP Miss Far Bigger Than Announced; Real GDP is 0% Using More Reasonable Deflator

The Advance Estimate for Q1 GDP came in at 2.2%, down from 3.0% in the previous quarter, and below most mainstream media estimates of 2.5%.

However, my friend BC notes ....

The GDP deflator is reported to have averaged 1.2% annualized in the past 2 qtrs. Had the trend rate from '11 persisted, the deflator would have subtracted 2.6% annualized from real GDP, resulting in a 2-qtr. growth of real GDP of 0%. 

ECRI's Achuthan would appear correct that a recession were imminent instead of looking like a dummy.

Rick Davis at the Consumer Metric Institutes makes a similar calculation.
In their "advanced" estimate of the first quarter 2012 GDP, the Bureau of Economic Analysis (BEA) found that the annualized rate of U.S. domestic economic growth was 2.20%, down more than three-quarters of a percent from the fourth quarter of 2011. The vast bulk of the downturn was in commercial activities, with both fixed investments and inventories lowering the headline number substantially. Consumer spending on both goods and services improved slightly, and the ongoing contraction in governmental spending moderated somewhat. The BEA's bottom-line "real final sales" improved about a half-percent to an annualized growth rate of 1.61% -- hardly robust and certainly not the kind of numbers we would expect to see nearly three years into a recovery.

Once again the BEA has used "deflaters" that will strain the credibility of the public, especially if they buy gasoline. To correct the "nominal" data into "real" numbers the BEA assumed that the annualized inflation rate during 1Q-2012 was 1.54%. As a reminder, lower "deflaters" cause the reported "real" growth rates to increase -- and once again very low seasonally adjusted BEA inflation "deflaters" have been the headline number's best friend. If the raw "nominal" numbers were instead "deflated" by using the seasonally corrected CPI-U calculated by the Bureau of Labor Statistics (BLS) for the same time period, nearly the entire headline growth rate vanishes -- and the resulting growth rate would have been a minuscule 0.08% with "real final sales" contracting.

And real per capita disposable income actually shrank during the quarter shrank at an annualized -0.27% rate (from $32,699 per capita to $32,677 per capita) -- and it remains lower than it was 5 quarters ago. -- even using the BEA's optimistic "deflaters." Real-world households likely felt the pinch even more.
Doug Short at Advisor Perspectives has some interesting charts in his post GDP Q1 Advance Estimate Disappoints at 2.2%.

This chart shows the disturbing trends.

click on chart for sharper image

GDP Trends

  • Average growth since 1945 is 3.3%
  • Linear regression says growth is trending lower at 2.1%
  • Over the last 10 years, growth averages a mere 1.7%

Take a good look at the last decade. The US only managed 1.7% growth in the biggest housing boom in history followed by the biggest multi-trillion dollar global stimulus effort in world history.

Three years into a recovery, growth (if you believe preposterous deflators) is a mere 2.2% but only 0% if you don't.  Moreover, with parts of Europe in an outright depression, with even Germany and the UK in recession, and with China slowing significantly, the odds the US economy decouples for too much longer is now approaching zero.

I think the ECRI has its recession forecast reasonably correct. However, it may take a well-deserved GDP revision (likely after the next election) to prove it.

Mike "Mish" Shedlock
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Depression in Spain: Unemployment Rate Up .5 Percentage Points to 23.6%; Expect Much Higher Rates Later This Year; When is the Breaking Point?

Via email from Barclays Capital, Spain: Q1 unemployment rate rises; trend likely to continue into H1 2013.
This morning Spain released labour market statistics for Q1. Seasonally adjusted, the unemployment rate rose to 23.6% from 23.1% in Q4 last year (Figure 1). We think that the labour market's deterioration is likely to continue over the next 3-4 quarters. We look for unemployment to peak at nearly 26% in H1 2013, before slowly starting to decline.

Beyond cyclical lags, the Spanish labour market trend, to a large extent, is a reflection of the hangover from a boom-bust in the construction sector, which for many years has been an important source of employment growth (Figure 2). It seems that the adjustment in the construction sector's employment is close to an end: it now contributes c.10% to total employment, in line with the long-term average pre the housing sector boom.

However, we think that the unemployment rate is likely to stay elevated for a while and that it will decline only slowly as the economy likely starts to grow in H2 2013. There are at least two reasons for our view: 1) fiscal consolidation will negatively affect consumers' spending, economic activity and consequently employment; 2) As we pointed out in Spain: Assessing the fiscal and labour market reforms, we think that Spain needs better "active labour market policies" that can address long-term unemployment (Figure 3) and the retraining of young (in some cases) low-skilled unemployed workers (Figure 4).

click on chart for sharper image
Depression in Spain

It is difficult to know precisely when Spanish unemployment stops going up. I see no reason it cannot hit 28% or even 30%.

Spanish politicians (for now) remain insanely committed to the Euro. How long the citizens remain committed to the Eurozone is another matter.

When is the Breaking Point?

Will the general population of Spain put up with an unemployment rate of 28%? 30%? I think not, but I do not know the precise breaking point. Whatever it is, Spain has little chance for growth prospects for a decade as long as it remains in the eurozone.

Eventually will come a time when a politician will hold up a copy of the EMU treaty, declare it null and void, and the debt null and void right along with it. That politician will be elected.

Spain will be better off as soon as that happens.

Mike "Mish" Shedlock
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Eurozone Retail Sales Plunge at Strongest Pace Since Late-2008; German Retail Sales Plunge Into Contraction; French Retail Sales Plunge at Record Pace; Record Job Losses, Record Retail Plunge in Italy

The word of the day is plunge. Retail sales fell like a rock in Germany and fell at a record pace in France. Jobs and retail sales plunged at a record pace in Italy, and in general, did a nose-dive across the entire Eurozone

German Retail Sales Plunge Into Contraction

Please Consider the Markit Germany Retail PMI® Report.
Fastest drop in retail sales since April 2010 as year-and-a-half run of growth comes to an end.

Key points:

  • Retail PMI falls sharply in April
  • Steepest decline in margins for two years...
  • ...despite wholesale price inflation hitting 15-month low

Sharp squeeze on operating margins

Lower sales and strong market competition resulted in a sharp and accelerated decline in margins across the German retail sector. The latest fall in margins was seventeenth in consecutive month and also the steepest for two years.
French Retail Sales Plunge at Record Pace

Please Consider the Markit France Retail PMI® Report.
French retail sales fall at survey-record rate in April

Key points:

  • Sales hit by weak economy and presidential elections
  • Targets missed to greatest degree in 18 months
  • Margin squeeze continues amid widespread discounting

French retailers reported a sharp reduction in sales during April. The month-on-month fall was the most marked recorded by the survey since data collection started in January 2004. Sales were also down considerably on a year-on-year basis, while previously set plans were again missed. The weak sales performance occurred despite evidence of substantial discounting and promotions among retailers, which resulted in a further steep drop in gross margins.

The headline Retail PMI® plunged to a series-record low of 41.4 in the latest month, from 50.2 in March. The latest reading was below the neutral 50.0 mark for the first time since January and indicative of a steep month-on-month decline.

The extent of the latest failure to meet targets was the greatest for one-and-a-half years. Panelists are nevertheless optimistic that sales will exceed previously set plans in May.

Factors expected by retailers to boost sales over the coming three months include the end of the presidential election, summer weather, promotions and new products.
Note the absurd level of optimism by French retailers.

Eurozone Retail Sales Plunge at Strongest Pace Since Late-2008

Please Consider the Markit Eurozone Retail PMI® Report.
Key points:

  • Retail PMI plunges to 41.3, lowest since November 2008
  • All three countries surveyed post lower sales, with record decline in France
  • Cost pressures for retailers at 16-month low

Plunging to its second-lowest level on record in April, the PMI hit 41.3, down from 49.1 in March. The latest figure signaled the largest monthly fall in retail sales across the single currency area since the depths of the global financial crisis in November 2008 (40.6).

Eurozone retail PMI figures are based on responses from the three largest euro area economies. For the first time since September 2010, retail sales fell across Germany, France and Italy. The rate of contraction in Germany was the fastest since April 2010, while French retailers posted a survey-record drop as they reported disruption due to the presidential elections. Italy continued to see the steepest overall rate of decline, however, as the pace of contraction reaccelerated to approach the record level posted in January.

The annual rate of decline in Eurozone retail sales was also one of the strongest since the survey started in January 2004. Sales have fallen on an annual basis each month since last June.

Record Job Losses, Record Retail Plunge in Italy

Please Consider the Markit Italy Retail PMI® Report.
Sharp decrease in retail sales leads to survey-record job losses

Key points:

  • Sales fall at second-sharpest annual rate in series history
  • Confidence sinks to four-month low
  • Cost inflation slowest since December 2010

The seasonally adjusted Italian Retail PMI® – an indicator of month-on-month changes in total retail sales – fell to the greatest extent in survey history in April, dropping from 42.4 in March to 32.8. This sharp and accelerated decrease in high street spending was the second-fastest since December 2008, and extended the current sequence of contraction in the sector to 14 months.

Retailers in Italy sped up their rate of job shedding in April, with staffing levels falling at the fastest
pace since data were first compiled in January 2004. This latest reduction in employment was
primarily attributed by survey respondents to lower sales and rising input costs.

For months I have been reading the apologists at Markit (and elsewhere) predict a short, shallow Eurozone recession.

Check this snip from my April 4, 2012 post: Eurozone Composite PMI® Signals Recession Says Markit; France in Renewed Decline, German Growth Weakens, Italy and Spain Contract Further:
Chris Williamson, Chief Economist at Markit said:

“A slight easing in the rate of decline of the Eurozone service sector was insufficient to offset the first decline in manufacturing output for three months, causing the overall economy to contract again in March.

“With the exception of a marginal expansion seen in January, the economy has been in continual decline since last September. Although the average rate of decline seen over the first quarter eased compared with the final three months of last year, the survey data nevertheless indicate that the region has slipped back into a technical recession.

“The downturn is currently only very mild, however, with gross domestic product probably falling by just 0.2% in the first quarter. Furthermore, with business confidence in the service sector running at a far higher level than late last year, the recession may also be brief.”

I have been critical of Market analysis for months and this is the worst yet.

First they said Germany would prevent a recession, then Germany would decouple, now they suggest this is only a "technical" recession and  the "the recession may be mild and brief".

The European recession will be neither mild nor brief. Spain, Portugal, and Greece are in economic depressions with no end in sight. Spain and Italy (the 3rd and 4th largest eurozone markets) are poised for steeper slides. Germany will not be immune to this as I have stated for months on end.

German manufacturing contracted in March and services sector will soon follow. For some reason, Markit economists cannot figure this out.
This was extremely easy to predict, yet most blew it. 

Mike "Mish" Shedlock
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Thursday, April 26, 2012

Greece to Seize Money From Suspected Tax Evaders' Accounts, with Charges and Trials Later; More Capital Flight Coming Up

There can be little doubt of fraudulent tax avoidance in Greece. However, the Greek solution (seize money first, then place charges and hold trials later) leaves a lot to be desired.

Please consider Greece to seize money from suspected tax evaders' accounts
The Greek government is to begin seizing money from the bank accounts of suspected tax evaders, Finance Minister Filippos Sachinidis told Skai TV on Thursday.

Sachinidis said that the relevant authorities have been instructed to seize the amount that account holders are suspected of owing to the state. The minister said that this would happen before suspected tax evaders go on trial.

Banks, insurance companies and the stock market will have to submit the full details of transactions by taxpayers so that the ministry can draft a property profile for each person and compare it with the tax statement submitted.

Public and private hospitals to send information about the doctors they employ and their activity.

Private insurance companies as well as social security funds must supply in electronic form all the statements they issue to their clients or beneficiaries for tax purposes, showing the taxpayers’ payments and contributions, while utilities, including cell phone networks, must supply account data such as total annual bills.

Credit card companies will also have to submit data on transactions in Greece for cards issued not just in this country but also abroad.
More Capital Flight Coming Up

Anyone with any common sense has already pulled all of their money out of Greek banks. However, the unthinking masses probably have not. This move will without a doubt cause more than a few to worry about accusations, true or false, and in the case of the latter, the illegal confiscation of money.

Expect to see a further plunge in money kept at Greek banks. Also expect capital flight of another kind: human capital. With this kind of crackdown, anyone capable of leaving would be wise to leave Greece immediately.

Mike "Mish" Shedlock
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Spain Long-Term Debt Lowered to BBB+ from A, With Negative Outlook; 100% Certain Conditions in Spain Worsen

Why Spanish debt was Rated "A" for as long as it has been remains a mystery. Indeed BBB+ seems like a gift. Nonetheless, expect howls from Europe as Spain Cut by S&P for 2nd Time This Year on Banks, Economy.
Spain's sovereign credit rating was cut for the second time this year by Standard & Poor's on concern that the country will have to provide further fiscal support to banks as the economy contracts.

S&P lowered the long-term grade to BBB+ from A, with a negative outlook. Spain’s short-term rating was reduced to A-2 from A-1, New York-based S&P said in a statement yesterday.

“Spain’s budget trajectory will likely deteriorate against a background of economic contraction,” S&P wrote in the statement yesterday. “At the same time, we see an increasing likelihood that Spain’s government will need to provide further fiscal support to the banking sector. As a consequence, we believe there are heightened risks that Spain’s net general govern debt could rise further.”

“We could also consider a downgrade if political support for the current reform agenda were to wane,” the S&P statement said. “Moreover, we could lower the ratings if we see that Spain’s external position worsens or its competitiveness does not continue to approach that of its trading partners, a key factor for Spain to return to sustainable economic and employment growth.”
100% Certain Conditions in Spain Worsen

One has to wonder what the S&P is smoking with that last statement. The odds Spain's position worsens is 100% and the odds Spain's competitiveness rises to match productivity in Northern Europe is close to 0%.

The article continues ...
Spanish banks probably need 50 billion euros of additional capital, Morgan Stanley analysts estimate. The figure may rise to as much as 160 billion euros in a worst-case scenario, said Elaine Lin, a strategist at Morgan Stanley in London. The banks could try to raise the capital themselves or get it from either the Spanish government or the European Financial Stability Facility, she said.
How Much?

I propose the worst case scenario is likely to soon become the best case scenario. Spain is imploding and nothing can stop it but free money from Germany (not going to happen voluntarily), or a Spanish exit from the Eurozone. The latter is likely, but may not occur until Spain becomes the next Greece.

Mike "Mish" Shedlock
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Bernanke Calls Krugman "Reckless"; Krugman and Bernanke Both in Academic Wonderland Somewhere Deep in Outer Space

Paul Krugman is now so far into outer space with ridiculous economic proposals that even Helicopter Ben Bernanke recognizes Krugman's proposals as "reckless".

Bloomberg reports Bernanke Takes On Krugman’s Criticism Ignoring Own Advice
Federal Reserve Chairman Ben S. Bernanke took on Nobel prize-winning economist Paul Krugman yesterday and called his advice to reduce unemployment by boosting inflation “reckless.”

“The question is, does it make sense to actively seek a higher inflation rate in order to achieve” a slightly faster reduction in the unemployment rate, Bernanke said yesterday to reporters after a Federal Open Market Committee meeting. “The view of the committee is that that would be very reckless.”

Krugman, whom Bernanke hired at Princeton University in 2000 when he was chairman of the economics department, said in a New York Times Magazine article that the Fed should raise its 2 percent inflation target to cut unemployment. Such a policy shift would align with Bernanke’s comment in 2000 that the Bank of Japan (8301) should pursue faster inflation to escape deflation, he said. Japan’s consumer prices fell 0.2 percent that year.

“While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers,” Krugman wrote. “Higher expected inflation would aid an economy” because it would persuade investors and businesses “that sitting on cash is a bad idea,” Krugman said.

The chairman spoke in response to a reporter’s question referring to Krugman’s story, titled “Earth to Ben Bernanke,” published April 24. The article cited “the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.”

Bernanke said pushing the increase in prices above the Fed’s 2 percent goal would risk undermining inflation expectations and erode the central bank’s credibility as a force for stable prices.”

“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years,” Bernanke told reporters. “To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.”
Krugman and Bernanke Both in Outer Space

The irony in this bickering is that both Krugman and Bernanke are economic failures. The idea that more inflation will help those mired in debt is preposterous. Japan attempted to halt deflation for 20 years and has nothing to show for it but a mountain of debt.

On the other hand, Bernanke brags about "30 years building up credibility" that the Fed simply does not have. The US has seen bubble after bubble, each with increasing amplitude and troughs, so Bernanke has to be on some sort of mind-altering drugs to talk of either credibility or price stability.

Perhaps his mind was altered by gamma rays from being in "deep academic space" for so long.

Price-wise, Bernanke is correct the US is in a state of inflation, and Japan not. I expect Krugman to counter with housing.

If one takes housing into consideration, inflation is well under the Fed's target as I pointed out in How Far Have Home Prices "Really" Fallen? HPI Upcoming Changes; HPI and the CPI
CPI Adjusted for Home Price Index (HPI)

The Fed kept interest rates at historic lows between 2002 and mid-2004. The last two rate cuts by Alan Greenspan were not justified at all, by any measure, and downright absurd considering the bubble brewing in housing prices vs. rent.
Allegedly the Fed held interest rates low to prevent "deflation". Instead it exacerbated "price deflation".

Clearly the Fed had no idea what it was doing, and still doesn't, (unless of course you believe this is a Fed conspiracy to deliberately screw the middle class). The result is bubbles and crashes of ever-increasing amplitude as the Fed chases its own tail. New bubbles have formed in the stock market and commodities right now.
Outer Space Policies

 Bernanke is trying like a madman to get banks to increase lending but Bernanke and Krugman both do not understand economic reality.

  1. Banks cannot lend because they are still capital impaired, hiding losses yet to come, and holding assets that are marked-to-fantasy instead of marked-to-market
  2. Consumers are busted and holding interest rates at 0% when prices of food and gasoline are soaring exacerbates the problem
  3. There are few credit-worthy businesses that want to borrow in this environment 
  4. The businesses that do want to borrow are not credit-worthy and banks would be foolish to lend to them
  5. Boomers are headed into retirement with too much debt, too little income, too few assets and they need to save not spend. 
  6. Real wages (discounting the decline in housing), are hugely negative, and forcing more inflation would be downright idiotic
  7. The Fed can inject liquidity but it cannot determine where it goes. 
  8. The Fed desperately wants home prices to rise and businesses to borrow, but instead food and energy prices have risen, and there is little hiring. Krugman wants Bernanke to do more of the same even though the same has already proven to be the problem.

Academic Wonderland, Somewhere Beyond Pluto

Quite frankly all eight points above are common sense ideas. However, neither Bernanke nor Krugman have real world experience. Both come from academic wonderland, well beyond the orbit of Pluto.

Clearly neither Krugman nor Bernanke have any solid grasp of the concept of debt-deflation. Neither understands boomer demographics. Neither understands why businesses are not hiring. Neither understands that debt eventually has to be dealt with, and it is the debt itself is the problem. Neither understands that inflation will destroy those without a job. Neither understands (but especially Krugman) that increased inflation will not guarantee more jobs.

Finally, I would like to point out that Krugman is totally clueless about the damage that public unions cause. We could get far more roads and bridges repaired, employing far more people for the same price,  while alleviating budget constraints at the same time if only we could get rid of Davis-Bacon and prevailing wage laws and end collective bargaining of public unions.

That my friends is the sad state of affairs.

Mike "Mish" Shedlock
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Swiss Politician Says "Too Many Germans in Switzerland", Seeks Stronger Immigration Controls; Word of the Day: "Backlash"

The European recession is starting to take its toll. Voters everywhere are fed up with austerity, fed up with high unemployment, fed up with immigration, and fed up with politicians currently in power.

On May 6, voter backlash will cost French President Nicolas Sarkozy his job.

Hollande Sustains Lead Over Sarkozy In Presidential Race-Poll
Francois Hollande, the socialist candidate in French elections, is maintaining his lead over incumbent President Nicolas Sarkozy with 12 days to go to the runoff for the French presidency, a poll showed Tuesday.

Hollande will take 54% of the vote in the second round and Sarkozy 46%, according to the poll of 1,145 people on the electoral register conducted by Opinionway Monday and Tuesday. The result of the Opinionway poll was unchanged from the previous comparable poll Sunday, when the French chose between 10 candidates in the first round.

The Opinionway poll shows 47% of Le Pen voters would switch to Sarkozy and 27% would go for Hollande in the runoff, with 26% abstaining from voting.

The poll also shows 41% of those who voted for centrist candidate Francois Bayrou--who took 9.13% of the vote in the first round--plan to vote for Sarkozy and 36% for Hollande.

However, Hollande benefits from a clear transfer of votes from far-left candidate Jean-Luc Melenchon, who took 11.1% of the first-round vote and has called for his supporters to vote for Hollande. Hollande would take 91% of Melenchon's voters and Sarkozy only 2%, according to the Opinionway poll.
Voters are so disgusted with Sarkozy that less than half of of those voting for extreme-right candidate Marine Le Pen plan on voting for center-right president Sarkozy. 53% will abstain or vote for the Socialist Hollande.

Backlash Against Eurozone Austerity

The Financial Times discusses Backlash Against Eurozone Austerity
A political backlash against fiscal austerity left mainstream French and Dutch politicians struggling on Monday to shore up support as a key economic indicator highlighted the eurozone’s slide into deeper recession.

In the Netherlands, one of the eurozone’s most fiscally disciplinarian governments collapsed as Mark Rutte, prime minister, tendered his government’s resignation at a meeting with Queen Beatrix, clearing the way for elections. In France, the Socialist Mr Hollande’s first-round victory was accompanied by a surge in support for the far-right National Front.
Backlash Against Germans

Der Spiegel Online reports Politician Sparks Uproar with Call to Limit German Workers
A Swiss politician has prompted a heated debate after suggesting that there are too many German immigrants in her country. "We really have too many Germans in the country," Natalie Rickli, a member of Switzerland's parliament with the right-wing populist Swiss People's Party (SVP), said during a television talk show on Sunday.

The actual topic of discussion on the talk show, broadcast on Zürich local television station TeleZüri, was supposed to be Switzerland's decision last week to curb immigration from eight central and eastern European countries. Last Wednesday, the Swiss cabinet, the Federal Council, announced it had decided to invoke the so-called "safeguard clause" in its agreement with the European Union on the free movement of persons. The move will significantly reduce the number of jobseekers from these countries allowed to enter Switzerland for a one-year period.

But that initiative apparently does not go far enough for Rickli. On the talk show, she argued that the safeguard clause should also apply to Germans. Many people shared her view that there were "too many Germans" in Switzerland, she said.

The other guests on the show reacted with shock, but Rickli kept going. "The parliament should have already activated the safeguard clause in 2009, when it would have also affected the Germans," she said, adding that Switzerland had a problem with the sheer scale of immigration. She said that she had already received a lot of mail from Swiss people saying that they had lost their jobs because cheaper Germans had been hired instead.

Rickli's comments reflect her SVP party's anti-EU and anti-immigration policies.

The verbal attack comes at a time of mutual tensions between Germany and Switzerland over a controversial bilateral tax treaty which is aimed at cracking down on wealthy Germans who commit tax evasion by stashing their money in Swiss banks.
Bear in mind the Swiss People's Party (SVP) is not a small fringe party. It is the leading political party in Switzerland for 32 years with about 25% of the vote in the last election.

So, not only is there a call to limit immigration from eastern European countries, the leading party in Switzerland is fed up with Germans willing to work in Switzerland for cheaper prices than the Swiss.

Wasn't one of the reasons behind the creation of the Eurozone to allow freedom of movement as a way to encourage growth?

Indeed it was. Switzerland is not in the Eurozone, but this really takes the cake.

Breakin' Up is Hard to Do

Note the increasing trade disputes between France and Spain, Between Southern Europe and Eastern Europe, between Northern Europe and Eastern Europe, between Northern Europe and Southern Europe, and now between Switzerland and Germany.

Also note that France and Southern Europe want Eurobonds. Northern Europe does not. Somehow there is supposed to be a fiscal union complete with numerous trade barriers and immigration controls on top of eurobond disputes and nannyzone bickering that will not be resolved soon.

Indeed, the only way eurobonds are likely to happen at all is if Germany, Finland, the Netherlands, and Austria get fed up enough with France and the Club Med countries and exit the treaty.

An extremely painful breakup is coming, but the sooner it happens, the better off Europe will be.

Mike "Mish" Shedlock
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Wednesday, April 25, 2012

Irish Support for Merkozy Treaty Drops to 30% with 39% Undecided; ESM Funds At Risk (But That's a Plus!)

Ireland was one of few countries to give its voters a say on passing the Merkozy referendum. A couple months ago, support for the treaty was close to 50%. Now, in spite of pro-treaty (and illegal) propaganda from the Irish government, support has fallen to a mere 30%.

The Financial times reports Ireland sees support for fiscal treaty wane.
With six weeks to go before Ireland votes on the European fiscal treaty there are signs the government’s campaign for a Yes vote is in danger of unravelling as public attitudes towards austerity harden and instability in Europe feeds into its referendum debate.

On Wednesday the Irish trade union movement said it could not support the treaty, which would tighten budget rules and introduce penalties for states that break the rules. Opponents of the treaty also threatened to take legal action against the government’s €2.2m information campaign, which they allege breaches a constitutional requirement in Ireland that all material paid for by public money should be impartial.

“Nobody within our ranks is in agreement with the fiscal treaty,” said David Begg, general secretary of the Irish Congress of Trade Unions, an umbrella body for Irish unions. “Everyone thinks it is a bad treaty. We don’t see any merit in it.”

“My own view on this is that we are damned if we do and we’re damned if we don’t,” Mr Begg said.

Opinion polls show a slim majority (30 per cent) in favour, with 23 per cent against. But with 39 per cent of the public undecided concern is rising in government circles that opinion could swing against the treaty during the campaign, as it did in 2008 when Ireland rejected the Lisbon treaty.

“The trade unions’ position shows the naysayers are growing. You can see from studying social media there is a higher degree of anti-European rhetoric for this referendum,” said David Farrell, professor of politics at University College Dublin.
ESM Funds At Risk (But That's a Plus!)

Begg's only concerned is access to European Stability Mechanism if the treaty is not passed. It if a concern no one in Ireland should have.

Ireland should leave the euro and default on the bailout money it has received. Accepting more and more bailout money from the banker parasites in Brussels and the IMF is exactly the wrong thing to do. Greece is proof enough.

Mike "Mish" Shedlock
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UK Back in Recession, Did it Really Ever Leave? Disappointing Details; Five Reasons the UK Recession Will Get Much Worse

It is amusing to watch economists toss around ridiculous terms like "technical recession" to justify their poor forecasts. The entire eurozone is now in recession and the UK was sure to follow because so much of its trade is with the eurozone. This was easy to predict, yet few did.

The Mail Online reports We ARE back in recession: Economy suffers double dip as GDP figures fall for second quarter in a row
  • Official figures today showed the economy shrank by 0.2 per cent in the first quarter of 2012
  • It follows a fall of 0.3 per cent in the final quarter of 2011
  • Cameron: 'I do not seek to explain away the figures'

Britain has suffered its first double-dip recession since the 1970s after a surprise contraction in the first three months of the year.

Official figures today showed the economy shrank by 0.2 per cent in the first quarter of 2012 having declined by 0.3 per cent in the final quarter of 2011.

It marked the first double-dip since 1975 and was a bitter blow to Chancellor George Osborne in the wake of last month’s 'omnishambles' Budget.

The decline in gross domestic product (GDP) was driven by the biggest fall in construction output for three years, while the manufacturing sector failed to return to growth, the Office for National Statistics (ONS) said.

Andrew Smith, chief economist at KPMG, said: 'It's official, we're in a double-dip.

'But worse, output remains broadly unchanged from its level in the third quarter of 2010 and, four years on from its pre-recession peak is still some 4 per cent down – making this slump longer than the 1930s Depression.

UK GDP In Perspective

The UK had five consecutive quarters of growth so I suppose one can make a claim the recession ended. However, look at how feeble that growth has been. Only one quarter exceeded 1% and then just barely.

Moreover, for the last six consecutive quarters, there has not been two consecutive quarters of growth.

I suggest the UK slid back into recession during the 4th quarter of 2010.

Disappointing Details

It's not just the headline numbers that are anemic, the details are also very poor. Via Email from Barclays ...
As expected, construction output declined over the quarter. However, the ONS has made some revisions to the weak January and February data, and assumed some further revisions and a strong March outturn in arriving at the Q1 estimate, so that the estimated 3.0% q/q decline in construction output was less than half the fall we had expected. As a result, construction's -0.2pp contribution to GDP growth was a lot less significant than we had anticipated.

Rather, much of the downside news came on the services side, where February's Index of Services, published alongside the GDP data, disappointed to the downside, and January's estimate was also revised down. Much of the weakness was concentrated in business services and finance, which accounts for almost 40% of total services output, and where activity declined by 0.1% q/q. As a result, overall services output grew by just 0.1% q/q in Q1, and the downside news on services more than offset the upside surprise on construction.

Like the MPC, we had thought that the weakness in the official construction data looked somewhat overdone, and had been prepared to look through downside news from this source. However, the disappointing outturn in services suggests that the economy's underlying growth momentum may be somewhat weaker than previously thought.

The weak GDP outturn, combined with more persistent than expected inflation, highlights the MPC's ongoing policy headache. April's minutes showed the committee increasingly focused on inflation and minded to look through weak official activity data, which it expected to be driven mainly by somewhat dubious construction data. Further QE in May seemed unlikely. The configuration of today's outturn, more than the headline number, may give the committee reason to reassess. We still expect no further QE in May, but this is now a less certain call; and even if QE is not extended then a continued stagnation in demand could yet lead the MPC to act later in the year.
Wishful Thinking

Barclays thinks the UK will "narrowly avoid  further GDP contraction in Q2".

I don't. Why should it?

Five Reasons the UK Recession Will Get Much Worse

  1. The eurozone is now an economic disaster, credit stress has returned to Spain and Italy
  2. The ECB abandoned the LTRO and is in the midst of huge infighting
  3. UK services took a huge hit and that trend will strengthen
  4. The Eurozone is the UK's largest trading partner and there is no reason for UK exports to the eurozone to rise. In fact, UK exports to the Eurozone, just may collapse.
  5. The better than expected (but still feeble construction numbers) will likely disappoint to the downside soon enough, if not immediately.

If you thought the euro would help Europe, you thought wrong. The Euro made a disaster in Spain, Portugal, Ireland, Greece, and Italy. It's time to abandon that failed idea.

Mike "Mish" Shedlock
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53% of New Graduates are Jobless or Underemployed; Rude Awakening for Class of 2012; Useless Degrees; Who Benefits From Student Aid?

The USA Today reports graduating class of 2012 is in for a rude awakening as Half of new graduates are jobless or underemployed.
A weak labor market already has left half of young college graduates either jobless or underemployed in positions that don't fully use their skills and knowledge.

Young adults with bachelor's degrees are increasingly scraping by in lower-wage jobs — waiter or waitress, bartender, retail clerk or receptionist, for example — and that's confounding their hopes a degree would pay off despite higher tuition and mounting student loans.

Median wages for those with bachelor's degrees are down from 2000, hit by technological changes that are eliminating midlevel jobs such as bank tellers. Most future job openings are projected to be in lower-skilled positions such as home health aides, who can provide personalized attention as the U.S. population ages.

Taking underemployment into consideration, the job prospects for bachelor's degree holders fell last year to the lowest level in more than a decade. "I don't even know what I'm looking for," says Michael Bledsoe, who described months of fruitless job searches as he served customers at a Seattle coffeehouse. The 23-year-old graduated in 2010 with a creative writing degree.

About 1.5 million, or 53.6%, of bachelor's degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years. In 2000, the share was at a low of 41%, before the dot-com bust erased job gains for college graduates in the telecommunications and IT fields.

Out of the 1.5 million who languished in the job market, about half were underemployed, an increase from the previous year. Broken down by occupation, young college graduates were heavily represented in jobs that require a high school diploma or less. In the last year, they were more likely to be employed as waiters, waitresses, bartenders and food-service helpers than as engineers, physicists, chemists and mathematicians combined (100,000 versus 90,000). There were more working in office-related jobs such as receptionist or payroll clerk than in all computer professional jobs (163,000 versus 100,000). More also were employed as cashiers, retail clerks and customer representatives than engineers (125,000 versus 80,000).

According to government projections released last month, only three of the 30 occupations with the largest projected number of job openings by 2020 will require a bachelor's degree or higher to fill the position — teachers, college professors and accountants. Most job openings are in professions such as retail sales, fast food and truck driving, jobs which aren't easily replaced by computers.
Useless Degrees

The USA Today talks about the "underemployed". Is that really what's going on?

Just what job does someone majoring in Political Science, English, History, Social Studies, Creative Writing, Art, etc., etc., etc., expect to get?

Arguably, graduates in those majors (and many more) should be thankful to get any job. Therefore, those who do land a job should therefore be considered fully employed, not underemployed.

In turn, this means a college education now has a negative payback for most degrees. 
Bledsoe, currently making just above minimum wage, says he has received financial help from his parents to help pay off student loans. He is now mulling whether to go to graduate school, seeing few other options to advance his career. "There is not much out there, it seems," he said.
There is nothing out there for many degrees which means that going to graduate school will do nothing but waste more money. Nurses are still in demand, but technology and engineering majors are crapshoots. If you can land a technology or engineering job it is likely to be high paying, but if not, the next step is retail sales.

Who Benefits From Student Aid?  

Students get no benefit from "student aid". Rather, teachers, administrators, and corrupt for-profit schools like the University of Phoenix do.

Obama wants to throw more money at education, and that is exactly the wrong thing to do. Instead, I propose stopping student aid programs and accrediting more online schools to lower the cost of education so that degrees do not have negative payback.
Sadly, there is a trillion dollar student loan bubble, and that debt overhang will negatively impact the economy for years to come. Let's not make the problem worse. It's time to kill the inappropriately named "student aid" program.

Mike "Mish" Shedlock
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