Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Saturday, September 15, 2012
Global Financial Crisis - first some humor , then some news and views ( Greece foibles , strikes , EU subsidies going bye bye , MS subject to criminal charges ) , Dave Rosenberg and Ray Dalio give their views on what's happening today.... /
Abbott & Costello meet the Global Financial Crisis.
Administrative court judges to strike over pay cuts
Judges at Greece’s administrative courts decided on Friday to go on strike until the end of the month to protests further cuts to their wages.
Court of Audit judges opted earlier this week for a 20-day protest for the same reason.
The judges at first instance and administrative courts will walk off the job for two weeks from Monday.
Council of State judges have decided to appeal against reductions to their wages.
By Evgenia Tzortzi
The immediate revision of the subsidies program of the National Strategic Reference Framework (ESPA) is the only way to avert a loss of funds for projects that have been delayed, as the targets set by the bailout agreement are unlikely to be met.
The annual target for fund absorption this year is a European Union contribution of 3.7 billion euros and state spending of 4 billion euros, but the payments to date, three-and-a-half months before the end of the year, amount to just about 1 billion.
The delay is attributed to corruption cases connected to the Private Investments General Directorate regarding projects that benefited from investment incentives legislation passed in 2004 and led to a freeze of payments from Brussels. The twin general elections this spring also contributed toward the delays.
The Development Ministry is now working feverishly on the revision of ESPA, focusing on the transfer of funds between projects that have funding needs and on the streamlining of the whole framework by excluding projects that are unlikely to be completed in time.
The government estimates that out of the total 24 billion euros in available ESPA subsidies, some 7.5 billion concerns projects that are at serious risk of not being executed by the end of 2015. This represents about one-third of the ESPA projects, and if they are not completed in time, the state will be expected to foot the entire funding bill. The application period of ESPA is until 2013, but community regulations allow for a two-year extension.
Projects related to the environmental sector are viewed as the most problematic, especially in terms of overpricing, according to a report by the Development Ministry. Provided that the value of the contracts signed, reaching up to 394.7 million euros, has to be paid in full, the target set by the country’s bailout agreement with its creditors is considered “impossible to meet” by the ministry.
A Greek prosecutor filed criminal charges against Morgan Stanley over alleged insider trading during National Bank of Greece SA’s attempt to acquire Alpha Bank SA, Athens News Agency reported Friday.
The charges include the dissemination of false information with the aim of manipulating share prices and insider trading, state-run ANA reported.
The case will be handed to an investigating magistrate, ANA said. The prosecutor’s office in Athens declined to comment.
A Morgan Stanley official did not have an immediate comment when contacted by telephone by Bloomberg News. [Bloomberg]
ekathimerini.com , Friday September 14, 2012 (21:36)
http://www.athensnews.gr/portal/1/58194
Yannis Stournaras speaks to Christine Lagarde and Olli Rehn during an informal Eurogroup meeting in Nicosia, September 14
1. EUROGROUP In statements after the end of an informal Eurogroup finance ministers' meeting held in Nicosia on Friday, Finance Minister Yannis Stournaras told reporters that there had been a generally more positive mood during the discussion on the Greek economy. "There is significant acceptance that major progress has been made. There was agreement that we are converging with the troika - though we have not yet agreed on everything, of course, but we are on a good path. We will make an effort so that everything is finished in the second fortnight of October,” he said.
2. BLOOD BANK Blood collected by Golden Dawn members on a square in central Athens on Friday will not be for the exclusive use of Greek patients, a hospital supervisor has told the Athens News. Press reports claimed that the blood would be delivered to Gennimatas General State Hospital in Athens. However, a supervisor at the hospital said that donors, be they individuals, associations or parties, cannot dictate where the blood goes. The party's website provided no details on where and how the blood would be used, but gave strong indications that it would go to Greeks only.
3. PRESIDENTIAL SACRIFICE The monthly salary of the President of the Republic will be cut in half, translating to annual savings of 352,350 euros, according to an amendment included on Friday in a draft law on public sector spending cuts, tabled by Alternate Finance Minister Christos Staikouras. The president’s monthly salary will be reduced to twice the monthly salary of the MPs - standing at 11,561 euros. The monthly pension payments received by former presidents will also be cut in line with the pay reduction of the current president. The amendment also abolishes a 6,240-euro monthly allowance covering the president’s expenses, amounting to one third of his monthly salary.
4. SWISS REJECTION Swiss banks have rejected a request from Greek authorities to open the bank accounts of MPs in order to tackle tax evasion, newspaper To Vima reported on Friday. The Swiss response reads: "It is not the policy of Swiss banks to promote such requests to all our members. Members of parliament can directly contact their banks if they have accounts in Switzerland. In any case, Swiss banks are not obliged to confirm whether a particular person has an account with them."
5. GD IMMUNITY The Supreme Court prosecutor’s office has asked parliament to lift the immunity of Golden Dawn MPs Yiorgos Germenis and Panayiotis Iliopoulos. Last week the two MPs were checking foreign vendors' licences at an open-air market in Rafina. Video footage also showed party supporters later smashing immigrants' stalls, reportedly because the vendors lacked necessary permits. A case file against party MP Kostas Barbarousis, who led a similar raid on stallholders in Messolongi, has already been forwarded to parliament with the request that MPs remove his immunity so that he can prosecuted and tried.
looks like the French were waiting to see if Germany would blow up the ESM and Fiscal Pact , now that the Constitution Court bowed down , it's France's turn for drama - against the Fiscal Pact ....
When the German Constitutional Court nodded with a stern smile on the ESM bailout fund and the Fiscal Union treaty, the world, or at least the politicians at the top, breathed a sigh of relief. Those two treaties, designed to keep the Eurozone duct-taped together, transfer budgetary sovereignty from elected national parliaments to unelected bureaucrats in the bowels of the European government. The Court attached a laundry list of limits and conditions—not that limits and conditions have ever stopped anything in the Eurozone—and after months of verbal warfare, the revolt of the Germans was over.
But suddenly, steam is billowing once again from the rusty pipes of the Eurozone. This time in France, where the topic has been silenced to death—and it could blow apart the whole construct.
The only time the Fiscal Union treaty bubbled up was during the presidential campaign when François Hollande vowed to “renegotiate” the text that President Nicolas Sarkozy had already signed. He won the election. The dust settled. And then, not a word. He hasn’t explained the treaty to his compatriots, hasn’t outlined the sovereignty transfer to unelected bureaucrats, hasn’t indicated which parts he’d renegotiate. Nothing. Nor has he renegotiated one iota. Even during his speech last Sunday, he didn’t mention it. It no longer existed. Yet, on October 2, parliament is scheduled to ratify the exact treaty that Sarkozy had signed.
“European coup d’état and rape of democracy,” howled Marine Le Pen, president of the rightwing National Front, and third in the presidential election, at a press conference on Friday. She’d be “the tip of the spear” against the treaty, she said and called for a referendum. A dreadful word in the French political lexicon. No politician would ever forget the debacle of 2005. In parliament, the European Constitution passed with 93% of the votes. But in the subsequent referendum, the people, who loved their sovereignty, killed it by a margin of 55% to 45%.
She accused the two big parties—Hollande’s Socialists and Sarkozy’s UMP—of “perfect collusion” on topics that determine France’s “destiny as free nation.” With this treaty, the EU would become “the worst enemy of France and of all nations that aspire to prosperity and liberty.”
And the refusal by the Socialists and the UMP to debate the treaty? Well too bad, she said, “we will debate it with the people.” According to the polls, a clear majority demanded a referendum. National sovereignty and democracy were at stake. The treaty would put France “under budgetary guardianship”; and the policies of the nation would be guided by “dogmatic choices of the European Commissioners.” And so, she said, “the whole democratic edifice, which is already widely cracked, is threatened with collapse.”
She’s a bit of a firecracker. But the rebellion on the far right is coagulating with a rebellion on the left. They’re hoping to pull another 2005. Opposition to government by unelected European bureaucrats transcends party lines. The referendum in 2005 divided the Socialists (in the opposition at the time). Hollande led the YESside, and ironically, current Foreign Minister Laurent Fabius led the victorious NO side. But Fabius, expediently, has changed sides.
Yet Hollande is in trouble. In a poll taken after his nationally televised spiel on Sunday—the one that was supposed to turn around his presidency—53% of the French didn’t think he’d be able to deal with the country’s problems, 57% didn’t think he could improve the situation, and 58% didn’t think he’d be able to make a dent into unemployment. An equal opportunity disaster: among workers, confidence dropped 21 points; among managers and professionals, 12 points; among leftwing sympathizers, 15 points; and among rightwing sympathizers 21 points. From one month to the next! And now the confidence barometer of small and medium-sized businesses—the ones that are supposed to create most of the jobs—crashed 12 points in September to 84, the lowest level since its launch in 1992. It was at 129 in April during the campaign. Practically a defenestration.
The French are frustrated. If they were handed a referendum, they’d kill the Fiscal Union treaty. But in parliament, the treaty has rock-solid support from the UMP, the party that negotiated it, and from Socialists who have circled their wagons around Hollande. Enough to ratify it. Hence Hollande’s silence. He doesn’t need to persuade the people.
Unless there’s a referendum. Opposition on the left is mounting. Even the fringes of the Socialists oppose it. So do the Greens, the Communists, the Front of the Left, of which firebrand Jean-Luc Mélenchon is co-president. He called for a referendum, just like Marine Le Pen. They butted heads during the election for third place, but now his big battle is no longer Le Pen, he said, but the Fiscal Union treaty that would “condemn Europe to austerity for life.”
An uphill battle. No referendum is scheduled. And without that common cause, it will be tough to mobilize the masses in three weeks to oppose a parliamentary vote on a topic that the rulers arestill trying to silence to death. But Le Pen and Mélenchon are at least forcing the topic into the open. A petition drive for a referendum is next. And just maybe, they’ll succeed in keeping the unelected bureaucrats at bay—though it would require a miracle.
The referendum in 2005 was an unforgettable lesson for European politicians: don’t let the riffraff decide. Such matters are best handled by the elite—politicians, bankers, and unelected bureaucrats. And in Germany, they were busy handling such matters. Read.... Power Grab: The Noose Tightens On National Sovereignty in Europe.
In two weeks the Greek economy will once again suffer the consequences of European indentured servitude when it two main labor unions will grind the system to a halt with a general strike against planned austerity measures on September 26. Spain, however, can't wait, and is already out in the streets (video of today's protest can be found at BBC). From Al Jazeera: "Thousands of Spanish anti-austerity protesters have taken to the streets of Madrid to rally against government cuts aimed at cutting the public deficit. The demonstrators assembled in groups at noon on Saturday along the central streets of the capital city in a protest against spending cuts and tax rises. The developments came as Luis de Guindos, economy minister, said that Spain's borrowing costs still do not reflect the country's economic and fiscal adjustment, despite their recent easing." The key word uttered that makes this whole protest a moot point: "referendum" - silly Europeans don't seem to get quite yet that Democracy has been dead for decades, supplanted by kleptofascist globalization with just enough handouts for the lower and middle classes (usually in terms of welfare promises) to keep everyone happy. Actually make that silly Americans and Asians too.
The irony in all this of course is that this makes the circle of chaos in Spain is complete. On one hand people are protesting wage cuts; on the other Spain itself is insolvent as priced in by the market which anticipates Spain will eventually request a rescue by the ECB in turn sending its bonds lower; on the third hand Rajoy has now made it clear as long as Spanish bonds are cheap he will not request a bailout; on the fourth hand, the recent action by the Fed appears to have finally broken the hope trade with Spanish bonds sliding even as the IBEX ripped meaning very soon not only will Spain run out of cash, but even assuming Rajoy requests a bailout which he will once SPGBs hit 8%, rates will likely resume rising.
Over 1,000 buses ferried people to Madrid for the protest, which was co-ordinated by two of Spain's leading trade unions, CCOO and UGT, along with roughly 150 smaller organisations.
The head of the UGT, Candido Mendez, said Spanish people should be given the chance "to clearly say whether they are in agreement or not" with the spending cuts.
"It is not inevitable that that the markets govern us, that Spain gets a bailout for its economy," he said.
Demonstrators vented their frustrations by holding aloft banners with slogans such as "Let's go! They are ruining the country and will have to pay for it."
Many wore different coloured T-shirts to represent their profession: teachers wore green; health-care workers were in white; public administration workers in black.
By mid-morning several major roads had been blocked as buses unloaded protesters at 10 rendezvous points from which marches began.
The government said it expected more than half a million people to reach Christopher Columbus Square where union leaders are to deliver speeches.
Tying it all together is the recent revelation that despite protests,
Europe, Spain included, never really experienced "austerity" - Spanish
demonstrators may well be angry at sliding wages, at a collapsing housing market, and other inevitable outcomes of mean reversion, but it is not due
to a slower pace of debt accumulation (and certainly not due to a decline in debt). If protestors want to voice their displeasure with politician ineptitude, and the pervasive government sector, which is the
true cause for their plight, go ahead and do so, best in election format, but don't for a minute
think it has anything to do with austerity and prudent fiscal behavior.
David Rosenberg, Gluskin Sheff: BernanQE Plays With A New Deck
It would be glib to ask "well, wasn't QE3 priced in?"
What the Fed did was actually much more than QE3. Call it QE3-plus... a gift that will now keep on giving. No maximum. No time limit. The Fed also lowered the bar on what it will take, going forward, for even more intervention.
The Fed announced that it will buy $40 billion per month in MBS (together with the on-going Operation Twist program, this brings total asset purchases to around $85 billion monthly through year-end), but the press statement contained an open-ended commitment to QE until labour market conditions not only improve, but do so 'substantially". This is a radical shift.
Before, the QEs had an explicit maximum limit in magnitude duration. That is no longer the case — $40 billion in MBS buying month in, month out, perhaps until such time that the Fed owns the entire market (the Fed already has $843 trillion of Agency MRS on its balance sheet as it is — if this is truly Japan and it takes another ten years for the economy to improve "substantially", the Fed will end up owning the entire market).
Prior QEs seemed predicated on relapses in economic growth (or at least no follow-through). This was the case with QE1 in March 2009, QE2 in November 2010 and Operation Twist just over a year ago. Now the economy has to strengthen dramatically and if it doesn't - the Fed is clearly targeting the jobs market and specifically on the unemployment rate here - then the spectre of even more balance sheet expansion will remain fully intact. We could soon be attaching Roman numerals to future QE actions (January 31st 2014 is Bernanke's last day as Fed Chairman and that is a loooong way away).
The payroll data always move the market but now more than ever and the Fed's explicit goal of generating "substantial" improvement in the jobs market will ensure that this 'bad news is good news'psychology will remain fully intact (why the stock market so easily managed to shrug off last week's data - this new normal of bad news being good news is now going to be more fully entrenched for the market). And with the Fed targeting mortgages, it is clear that it views housing as the transmission mechanism for its objective of strengthening the jobs market. So each housing indicator going forward is also going to very likely elicit a stronger market reaction than normal - remember, because the stock market is addicted to QE, weak data can still be expected to be supportive. A notable improvement in the data will be even more supportive because the Fed will still keep the hope alive of more QE even if economic conditions get better.
I have to stress this but anything less than "substantial" is just not going to cut it for the Fed - I don't know how that is defined numerically, but if the economy and specifically the jobs market does not go gangbusters, more QE can be expected. And it won't always be in MBS - the Fed came right out and said that it will also "undertake additional asset purchases and employ other tools as appropriate until such improvement is achieved in the context of price stability".
That reference to "price stability" is a bit comical because in the prior rounds of unconventional stimulus: market-based inflation expectations (from the TIPS market) were sub-2% and falling. Going into today's meeting, they were 2.6% and rising. This, for a central bank that spent an inordinate amount of time talking about how important it was to prevent inflation expectations from becoming unhinged when it was busy tightening policy in the 2004-2006 rate-hiking cycle. The times, they are a changin' (in other words, the price stability objective has a big fat R.I.P. on its tombstone). This is why gold swung from a moderate decline to a huge gain yesterday afternoon, and the DXY is breaking. It is clear that out of its dual mandate, a lower unemployment rate right now clearly trumps any concern over higher inflation expectations (whether justified or not).
Equities have ripped to the upside. Commodities are bid. Gold has broken out. The U.S. dollar is sliding. Yet the bond market refuses to buy in. The yield on the 10-year note has remained stable through this entire dramatic response to QE3 (and pledges for more). The Fed announced that it was buying mortgage-backed securities, not Treasuries, so it is curious as to why the bond market is not selling off dramatically. I can count numerous Fed meeting days when the stock market rallied sizably and bonds sold off alongside the reflationary view. I recall all too well the June 26, 2003 FOMC meeting when the Fed cut rates for the last time in that cycle and told the market it was on its own because the economic clouds had finally parted. The Dow ran up more than 100 points from the intra-day low that session and the 10-year note yield jumped 17 basis points, basically ratifying the view of the equity market at the time.But this time around, the Treasury market remains the odd man out on this new pro-growth view evident in the pricing of other asset classes. For any perma-bull out there, Mr. Bond is like having a mosquito in your ear on the putting green.
So from a markets standpoint, let's talk about what all this means.
The Fed is setting us up for more risk-on/risk-off volatility. Long-short strategies or relative value strategies are perfectly appropriate.
The Fed extended the period of ultra low policy rates through to mid-2015 (one FOMC member is at 20161) from the end of 2014, which will nurture a low yield environment even further. Not only that, but the Fed said that "a highly accommodative stance of monetary policy will remain appropriate fora considerable time after the economic recovery strengthens" which means that even if growth miraculously manages to accelerate earlier than expected, the Fed is not going to begin raising rates. The age of "pre-emptive" tightening is long gone. This nurturing of a low policy rate environment for years to come will continue to underpin the income (dividend) theme in the stock market.
The fact that the Fed is embarking on an even more aggressive course with inflation expectations on the rise should be viewed constructively for gold and other precious metals (and gold mining stocks).
The Treasury market is like the brake lights on a car - we need to acknowledge that it is not signalling better growth ahead. Screen for earnings visibility and less cyclicality. Bonds usually have the economy right.
Corporate bonds should be a beneficiary as the Fed continues to anchor a low interest cost environment and as such, correspondingly keep debt- servicing charges and default risks at bay.
I don't think this latest Fed action does anything more for the economy than the previous rounds did. It's just an added reminder of how screwed up the economy really is and that the U.S. is much closer to resembling Japan of the past two decades than is generally recognized. Maybe in the central bank world of the "counterfactual" these QEs prevent a worse outcome but the most radical easing in monetary policy ever recorded has not stopped this post-bubble-bust American economy from posting its weakest recovery ever whether measured in real, nominal or per capita terms.
The economy is saddled with too much debt, a shortage of skills, bloated government, an uncertain tax rate outlook, the costs associated with Obamacare, banking sector re-regulation and a spreading European recession. Home prices may have revived of late, but there are still an amazing 22% of debt-ridden homeowners who are upside-down on their mortgage. Monetary policy is best equipped to deal with the vagaries of the business cycle but is a blunt way to deal with deep structural, fiscal and regulatory hurdles. QE has done squat for the economy and I don't expect that to change. Even the Fed cut its 2012 real GDP growth projection for this year to 1.85% from 2.15% - for a year when typically growth is closer to 4% - and so the bump-up in 2013 to 2.75% from 2.5% has to be viewed in that context (in fact, it would seem as though for all the bluster, the level of real GDP is actually lower now at the end of next year compared to the pre-QE3 forecast... maybe this is what the Treasury market has latched on to).
It would seem as though the Fed's macro models have a massive coefficient for the 'wealth effect' factor. The wealth effect may well stimulate economic activity at the bottom of an inventory or a normal business cycle. But this factor is really irrelevant at the trough of a balance sheet/delivering recession. The economy is suffering from a shortage of aggregate demand. Full stop. Perhaps most importantly, in order for the Fed's action to have a lasting impact on the direction of the equity market, it must foster at least some significant belief that the action will lead to self-sustaining economic expansion. The scars of real family median income declining for two years in a row - the Fed's action in a perverse way perpetuates this by forcing essential basic material prices higher - and an unprecedented five-year decline in household net worth are lingering, and exerting far more powerful dampening effect on spending and confidence than the Fed's repeated attempts to generate risk-taking behaviour.
To the extent that the Fed is at least temporarily successful in nurturing a risk-on trade for portfolio managers, the reality is thatchanging the relative prices of assets does not create demand.
It just perpetuates the inequality that is building up in the country, and while this is not a headline maker, it is a real long term risk for the health of the country, from a social stability perspective as well.
and from Ray Dalio....
Ray Dalio On How The Economic Machine Works
Submitted by Tyler Durden on 09/14/2012 20:11 -0400
"It's never different this time." Ray Dalio's recent discussion at the Council for Foreign Relations is probably the most in-depth access to his 'model' explanation of the way the world works we have encountered. From bubbles to deleveragings and how the inter-relationships of various cycles bring about consistent trends and corrections, the clip below and full readings are perhaps useful as we tread Wile E. Coyote-like off the edge of traditional monetary policy and encounter apparently different environments that in fact have occurred in perhaps alternate ways again and again over time. Great weekend viewing/reading on the three ways out of the current crisis that the Fed clearly believes we are in and the inevitability of his findings that "in all deleveragings, in the end they print money."
The most significant market adjustment since Bernanke used the "Unlimited" word is not in stocks, bonds or PMs. It's in inflation expectations. Have a look at this chart. Focus on the incredible spike in the past 24-hours.
The sick part of this is that if Bernanke saw this graph, he would cry with tears of happiness. This is exactly what he was praying for. Ben thinks that inflation is a good thing. That it will cause demand to be pulled forward as people realize that things are going to cost more tomorrow than they do today.
I suspect Ben is right. Higher inflation expectations in the US will filter around the globe. Post the extraordinary steps Ben took yesterday, people will be stocking up on "stuff". Things like rice, flour, cooking oil, soy, wheat and sugar. If you can eat it, buy it now. It will be more expensive in a month. While your at it, fill up the gas tank, the price is going up next week and every week for the next few months.
Ben doesn't care about that stuff. He ignores this altogether. Maybe he's right, after all, food and energy are really not so important to the 7Bn folks who happen to be passing through this decade, right?
Some day the history books will study this period of time and ponder how so many people gave up control of key elements in their lives without ever having a say in the outcome. How could one person have gotten so powerful? Somehow we have anointed Ben as the new God. An omnipotent decider that is nether elected or whose power is somehow checked. Don't think for a minute that he's one of those benevolent gods, he's not.
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