http://www.zerohedge.com/news/spot-similarity

A problem with increased difficulty*

* For the BLS that is. Somehow all of the above has to be spun as deflationary.

and Fed heads quelling new QE talk.... Bullard on thursday....

http://www.zerohedge.com/news/bullard-says-fomc-minutes-are-stale

Bullard Says FOMC Minutes Are Stale

Submitted by Tyler Durden on 08/23/2012 07:41 -0400

Following yesterday's FOMC minutes we suggested that the minutes are, all facts considered, extremely stale, especially when one considers the surge in all economic indicators since the last FOMC meeting. Moments ago, on CNBC, non-voting St Louis Fed president confirmed just that.

St. Louis Fed President Bullard says FOMC minutes “are a bit stale”.
Says some data stronger since FOMC minutes
Doesn’t know where FOMC will come out on easing
Says “different constellation” of data vs 2011
Says “not sure” data warrant big FOMC action
Says U.S. unemployment “very high”
Says “we’re not going to react” directly to stock market

In other words, the FOMC minutes do not reflect the economy, but the Fed does not care about the market which just happens to be at 2012 highs, as it does not reflect the economy either, but instead reflects merely what the FOMC thinks, which in turn reacts solely to the market.

Get it?

and...

http://headlines.ransquawk.com/headlines/fed-s-bullard-says-fomc-being-vague-on-possible-easing-while-speaking-on-cnbc-23-08-2012

(Fed)

Fed's Bullard says FOMC being vague on possible easing while speaking on CNBC

Bullard says;

- Not sure data warrants big FOMC action.
- Doesn't know where FOMC will come out on easing.
- Conditions in US economy, financial markets, better now than a year ago.
- We are not going to react directly to the stock market.
- Should not use monetary policy to achieve specific unemployment level.
- Sees 80% chance congress will reach financing deal to avert fiscal cliff.
- Worried that fed unintentionally facilitating build up in debt.
- Further QE would make exit strategy more difficult.
- Pessimistic on Europe's ability to tackle debt crisis, best hope is they can muddle through.
- Europe should buy debt across the board.

Lockhart from Wednesday....

http://www.zerohedge.com/news/feds-lockhart-kills-hopes-further-qeasing

Fed's Lockhart Kills Hopes Of Further QEasing

Submitted by Tyler Durden on 08/21/2012 10:15 -0400

Dennis Lockhart

Unemployment

As the S&P 500 makes new multi-year highs, the USD dumps, commodities surge, and AAPL just does what it does best; The Fed's Dennis Lockhart has just 'subtly' announced the walking-back of expectations of QE3 happening anytime soon, via Bloomberg:

*LOCKHART SAYS `MONETARY POLICY IS NOT A PANACEA'
*LOCKHART SAYS ECONOMIC DATA HAVE BEEN `FIRM' IN LAST MONTH
*LOCKHART SAYS HOUSING IS STABILIZING AND `ENCOURAGING'
*LOCKHART: MONTHLY UNEMPLOYMENT RISE SHOULDN'T BE EXAGGERATED
*LOCKHART SEES `MORE APPETITE FOR RISK'

and critically:

*LOCKHART SAYS DISINFLATION, DEFLATION NOT NOW A CONCERN

and....

http://www.zerohedge.com/news/guest-post-spain-%E2%80%93-ecb-vaudeville-show

Guest Post: The Spain – ECB Vaudeville Show

Submitted by Tyler Durden on 08/21/2012 15:03 -0400

Bond

China

Commercial Real Estate

Credit Crisis

European Central Bank

Germany

Gross Domestic Product

Submitted by Acting Man

The Spain – ECB Vaudeville Show

Spain Tries To Preempt the Conditionality Debate

Many observers agree that Spain has the rest of the euro area, specifically paymaster Germany, over a barrel: if it were to leave the common currency in order to inflate itself back to prosperity, as ruinous as such a decision would likely prove to be, it would probably precipitate the end of the euro.

This is apparently also the opinion of Spain's government. After having dawdled since the GFC and having failed to seriously deal with its insolvent banks and the implementation of a rigorous economic reform program, the Rajoy government now is trying to preempt the ECB by issuing demands regarding the shape and form of its upcoming bailout.

As Reuters reports:

“The European Central Bank must take forceful and unlimited steps to buy sovereign debt to help Spain reduce its refinancing costs and eliminate doubts over the euro zone's future, Spain's economy minister said in comments published on Saturday.

"There can be no limit set or at least (the ECB) can't say how much they will use or for how long," when it buys bonds in the secondary markets, Luis de Guindos told Spanish news agency EFE.The Spanish government will study the details of the ECB's debt-buying program,

which are likely to be outlined before the Eurogroup meeting mid-September, before making a decision on applying for more European aid, de Guindos said.

[...]

In response to a renewed intensification of the debt crisis, ECB President Mario Draghi said on August 2 the ECB may buy more government bonds, but only once countries had turned to the bloc's rescue funds for help and agreed to strict conditions.

"I believe Spain has presented its budget adjustment program and its structural reforms, which from a general point of view, have been accepted as sufficient and appropriate," de Guindos said.”

(emphasis added)

In other words, what they want is an unlimited bailout in the form of central bank buying of their bonds (naturally this is will be done with money created ex nihilo), with absolutely no conditions attached, on the grounds that the steps taken thus far are already more than enough. This is obviously an opening gambit to the upcoming talks in mid September, designed to make it perfectly clear to those insisting on conditionality that Spain doesn't intend to give up control over its fiscal policy in exchange for the bailout.

There have been several occasions when Spain has had its way in the past – recall for instance the EU's back-pedaling on the deficit targets. Very likely a lively debate took place behind closed doors, garnished with threats.

At the same time, German news magazine Der Spiegel reported on a putative ECB plan to set caps on peripheral interest rates (which once again would only work if the central bank threatened to engage in unlimited buying of the debt concerned). This was immediately denied by the ECB itself, with the somewhat cryptic remark that it was “absolutely misleading to report on decisions which have not yet been taken and also on individual views, which have not yet been discussed by the ECB’s governing council”.

The remark is cryptic because it is not a clear no - however the German government let it be known that it too was unaware of such a plan, with a finance ministry spokesman saying that “In purely theoretical, abstract terms, such an instrument would certainly be very problematic. But I know of no proposal along these lines”.

In 'purely theoretical, abstract terms'?

Then the German Bundesbank chimed in via its monthly report, reiterating its opposition to all kinds of sovereign bond buying by the ECB, regardless of 'conditionality' and whatnot. Some of the words from the Bundesbank's missive are worth quoting:

“Decisions on whether to share solvency risks much more widely should be taken by governments and parliaments."

“The Bundesbank holds to its opinion that government bond purchases by the Eurosystem in particular are to be seen critically and are linked to considerable risks to stability."

Moreover, “moves to create a single euro-zone banking regulator, as envisaged by the European Commission, shouldn't transfer solvency risks among member states via aid for banks.”

It couldn't be any clearer that Jens Weidmann is almost as implacably opposed to the central bank straying into the fiscal realm as his predecessor Axel Weber was. The big question is whether this means he will simply continue to be outvoted at the ECB, or whether Germany's political leadership is already sawing on the limb he has climbed out on. Although German ECB board member Jörg Asmusseninsists that “Nobody should try to create the impression that the Bundesbank or its president are isolated”, Weidmann sure does look isolated at this point.

The rumors and denials yanked both interest rates and stock markets to and fro in European trading on Monday – which is actually business as usual in the euro area.

Spain's 2 year note yield on Monday – yanked around by rumors and denials – click chart for better resolution

Spain's NPL's Soar, Banks Run Out of Collateral

Meanwhile, now that it has been decided that the euro area's bailout mechanisms will pay for the clean-up of the Spanish banking system, NPL's have begun to jump higher in a rather impressive increment and have finally reached the long expected all time high, clocking in at 9.42% of all outstanding loans as of June.

A long term chart of Spain's NPL's via Scott barber of Reuters. A new all time high of 9.42%, while 'doubtful' loans are approaching 25% –

A long term chart of Spain's NPL's via Scott barber of Reuters. A new all time high of 9.42%, while 'doubtful' loans are approaching 25% – click chart for better resolution.

Concurrently, the borrowings of Spain's banks from the ECB have soared to a new all time high of €411 billion as at the end of July – and the banks have now finally run out of collateral to pledge. Reuters reports that 'Spanish banks are next for a Greek-style ECB shakedown', in reference to the growing use of 'ELA' (emergency liquidity assistance) en lieu of normal ECB funding.

In this manner the ECB shifts the risks back to the Bank of Spain and ultimately the sovereign – in theory, anyway. One should not lose sight of the fact that what the Bank of Spain does when it extends ELA funding is that it prints euros and not pesetas. Therefore it would be more realistic to call this a risk borne by all users of the euro, as a future write-off of the assets the BoS gets in return for extending these funds could potentially leave the newly printed money stranded in the economy. These assets are little more than IOU's issued by the banks themselves, although sometimes imbued with a government guarantee. In Greece's case the guarantee is issued by an insolvent government. In Spain the same could soon be the case.

Something that is often overlooked when discussing Spain's NPL's as a percentage of outstanding loans is how big the credit bubble actually was and how much bigger therefore the amounts involved are compared to the 1994 peak in NPL's. This can give us an idea what the only just beginning deleveraging phase of the credit bubble will actually entail. Not to forget, NPL's remain a moving target, as both residential and commercial real estate prices continue to decline. As the FT reports, transaction volumes in commercial property markets in both Italy and Spain have collapsed by over 90% in just the past three months.

A long term chart of Spain's NPL's in billions of euros, via Querschüsse.de – click chart for better resolution.

Private Sector Credit Growth Goes into Reverse, Bank Balance Sheets Expand Anyway

The credit bubble in Spain has finally begun to deflate – private sector bank credit growth has turned negative in recent months. It may be a long and thorny road before the deleveraging process is finished.

As of June, the cumulative decline in private sector loans stood at €54.3 billion (via the WSJ)

To put this decline in private sector credit into perspective relative to the amount of credit extended during the boom, a look at a long term chart is once again instructive:

Total bank credit extended to the private sector in Spain – as can be seen, the 1993-1994 credit crisis did not lead to any deleveraging at all. This time, things are different and given the likelihood that up to a quarter of the credit outstanding is unsound, there may be a long way to go indeed (chart via Querschüsse.de) – click chart for better resolution.

Interestingly though, the balance sheets of Spain's banks have not shrunk – instead they have actually reached a new all time high in June. How can this be explained? The only reasonable explanation we can think of is that Spain's banks have bought so many government bonds this year that the extension of credit to the government has handily exceeded the negative growth in private sector credit.

Spain's bank assets in total now amount to over 400% of nominal GDP, having risen to €4.33 billion in total.

The balance sheets of all reporting MFI's in Spain have reached a new all time high – bank assets amount to over 400% of Spain's GDP – click chart for better resolution.