by ilene - February 28th, 2015 6:00 pm
Courtesy of Mish.
On Friday, the German Bundestag Backed the Greek Bailout Extension. Ahead of the vote, many commented that Greece collapsed.
It’s not all that simple as I have explained.
The likely explanation for the alleged collapse of Syriza is Greece did not have a primary account surplus. Had it left now, it would have been forced off the euro, violating a campaign promise of Syriza.
Caving in required temporary caving in of other campaign promises.
Both Sides Got Something
The four-month extension gives Greece a better chance to prepare for default while allowing Greece to stay on the euro. The extension also give the ECB four more months to prepare for Grexit or default.
Properly analyzed, both sides got something. Isn’t that what usually happens in complex negotiations?
Third Bailout Needed
Meanwhile, it’s pretty clear that Greece needs yet another bailout.
I wrote about the bailout issues and the primary surplus issues on February 11 in Third Greek Bailout? Another €53.8 Billion Needed? Primary Account Surplus Revisited.
“Real” Negotiations Begin
by ilene - February 28th, 2015 10:47 am
Courtesy of Marc To Market.
The US dollar traded higher against most of the major currencies over the past week. No thanks to Yellen's testimony before Congress. Market participants took away from her a reduced chance of a mid-year rate hike.
We disagree with the interpretation, seeing her comments as 1) playing down lowflation as transitory and 2) seeing the global influence being overall balanced as the decline in oil prices and interest rates offset the dollar's appreciation. We continue to expect the FOMC to drop its "patient" forward guidance at its mid-March meeting.
The main impetus for the dollar appeared to come from the sharp drop in European interest rates. Germany auctioned five- and seven-year bonds with a negative yield. Record low 10-year yields were recorded in at least eight eurozone members. This includes Ireland's 10-year benchmark yield falling below 1% and Portugal's 10-year yield falling below 2%. Spread compression continues. It is being driven by anticipation of the ECB's sovereign bond purchases.
The ECB's bond buying program is expected to be launched after next week's policy making meeting (in Cyprus). It still appears to be some necessary technical and legal details to be worked out before the Eurosystem can begin implementing the new program.
The Dollar Index held support seen near 94.00 and moved within spitting distance of the high set in late-January just above 95.50. The MACDs are poised to cross higher, as are the slow Stochastics, but the RSI is neutral. On balance, we view the consoldiative phase in recent weeks as building a base for a new leg up.
Over the past month, the market tried several times to push the euro through the $1.15 level. It failed. Previous support in the $1.1265 area may now offer resistance. It is difficult to talk about strong support. The push below $1.1l in late-January was brief. That area remains the next immediate target, but we suspect the $1.10 area may be more important psychologically.
by ilene - February 27th, 2015 9:30 pm
Courtesy of Charles Hugh-Smith of OfTwoMinds
The dragon tail of Marx's end-game of overcapacity and finance capital is about to shred China's fantasy that the state can micro-manage both capitalism and financialization with no contradictions or consequences.
1. the predicted final crisis and implosion of capitalism did not occur2. the vaguely outlined post-capitalist incarnation of a stateless worker's paradise not only failed to materialize, but was used to justify destructive, murderous totalitarian regimes.
by ilene - February 27th, 2015 9:27 pm
Courtesy of Mish.
Here’s a brief update from “Ellen” who lives in Lviv, a city in Western Ukraine.
We have quite a panic over the collapse of currency. People buy any food product that can be stored. Everyone wants to rid of Hryvnia. We haven’t seen anything like this since 1991 when the Soviet Union collapsed. Stores are empty.
It is hard to say what exchange rate this days, somewhere between 34 and 42
There were riots in downtown today. A group of protesters was beaten up by police. They marched through downtown and gave a last warning to government officials. Next time they said they will shoot some officials.
Ukraine is on a brink, but the West is not in a hurry to give us money. Perhaps they want something. Maybe they know the money will end up with corrupt officials who will steal it.
Either way, the few billion dollars they promised in March won’t save our economy, not after this panic started.
Strategic Food Reserve Empty
A curious thing happened today. To quiet protests over food, president Petro Poroshenko ordered the minister of the food reserve to fill the shelves of stores with flour, sugar, canned meat, and buckwheat from the reserve.
Well guess what? There was no food in the reserve. It has either been looted (like the vanishing gold), or it was fed to the army.
Here is a nice translation from Russian by J. Hawk: Ukraine’s Strategic Food Reserve…Runs Out Of Food.
Ukrainian food prices are rising at a rate faster than in the ‘90s. But the Yatsenyuk government is still blaming the situation on the ignorance of the population and speculation by supermarket chains….
by ilene - February 27th, 2015 9:22 pm
Courtesy of Pater Tenebrarum, Acting Man
We want to focus on a specific aspect of the current money supply expansion in this part. Price inflation, as well as investment and production will be discussed in a follow-up post shortly.
Let us consider the mechanics of past boom-bust cycles in the US. In “normal” booms, banks expand credit to companies and households, with the former employing the funds mainly for investment and the latter for consumption. Banks that don’t have sufficient reserves will borrow them in the interbank market (Federal Funds market), where the Fed stands ready to satisfy any excess demand for reserves that threatens to push the overnight Federal Funds rate above its administered target rate. In short, monetary inflation is driven by bank credit expansion and accommodated by the central bank. To the extent that the Fed-administered target rate manipulates market interest rates below the natural rate dictated by society-wide time preferences, this seemingly “harmonious” inflationary process will promote ever more malinvestment of scarce capital as well as overconsumption. Eventually the central bank becomes worried that the credit expansion may push consumer prices above its arbitrary target for CPI and begins to hike rates – then the artificial boom falters with a lag and a bust ensues. The central bank thereupon lowers rates again. Lather, rinse, repeat.
Image credit: mevans
As a rule, the impoverishment caused by this boom-bust cycle doesn’t leave society worse off at the end of the bust than it was on the eve of the boom. Instead, the outcome is simply a lot less satisfactory than it would have been without central bank intervention. During the boom, the stock market will attract a lot of investment as well. Stocks are titles to capital, and capital tends to become mispriced when interest rates are artificially lowered. These price distortions are then rectified during the bust. Falling stock prices don’t “cause” economic depressions. They merely mirror and/or anticipate changing economic and monetary conditions.
A Modified Boom
by ilene - February 27th, 2015 8:50 pm
Courtesy of Bronte Capital
Martin Shkreli was formerly a biotech short-seller. I know those people. I am one.
They have their eye out for the inflated claim re. the efficacy of a drug and the wheeling and dealing in stock.
Unusually Martin became CEO of a biotech (Retrophin) and became a wheeler-and-dealer himself. Martin also kept a twitter account where he recommended Retrophin stock and suggested (often correctly) that other biotechs were worth shorting.
He is a 31 year old – but all the photos make him look 17. The joke about his hyperactive twitter account was that he would tweet if he had a date.
Anyway eventually – and after a saga you can look up if you want – he was ousted as CEO of his own company.
Today the company released an 8-K explaining what the board found after his ouster – and it is already being described as an epic. Here goes for some of it.
Consulting Agreements. Between September 2013 and March 2014, the Company entered into several consulting agreements and releases with individuals or entities that had been investors in investment funds previously managed by Mr. Shkreli (the “MSMB Entities”), or that otherwise had financial dealings with Mr. Shkreli. The agreements provided for the issuance of a total of 612,500 shares of common stock of the Company, and a total of $400,000 in cash payments by the Company. The Oversight Committee concluded that the Company should not continue to treat these agreements as consulting agreements because their predominant purpose appears to have been to settle and release claims against the MSMB Entities or Mr. Shkreli personally, and not to provide meaningful and sustained consulting services to the Company.
Litigation Settlements. In the second quarter of 2014, the Company settled two lawsuits involving individuals who had formerly performed services for both the Company and the MSMB Entities. The Oversight Committee concluded that approximately $200,000 in cash payments made by the Company as part of these settlements appear to have been made to cause these individuals to transfer 176,388 shares of the Company’s common stock directly to Mr. Shkreli.
by ilene - February 27th, 2015 6:46 pm
By John Mauldin
There is an obsession in the marketplace over the date when the Fed will once again begin to raise rates. As if another 25 basis points is going to change the economics on tens of trillions of dollars of investments. But as we reflect on the issue more deeply, it becomes obvious that a minor bump in the fed funds rate will indeed change a great deal of economics all over the world.
No, it won’t do much to the cap rate on your latest real estate purchase, but it is likely to greatly affect the pricing of the currency and commodity markets. And those markets will affect corporate profits, which will affect the stock market. It’s all connected.
And what if the Fed has lost control? What if they are in a no-win situation where raising rates will cause reactions they don’t want, but not raising rates will result in equally unpleasant reactions?
A big part of the problem lies in what we analysts call divergent and convergent monetary policies. With Japan mounting an unprecedented quantitative easing attack on currencies everywhere and Europe getting ready to join in, with smaller nations all over the world lowering their interest rates, if the US were to raise rates, that move would strengthen the dollar even more. But that would mean even more deflation imported into the US.
Today we find that the headline CPI was -0.7% for January, coming on the heels of two previous months at -0.3%. The year-over-year rate slipped into negative numbers for the first time since October 2009, when we were still reeling from a deep recession.
The Fed typically raises rates when it wants to lean into inflation, not when inflation is falling. Yes, I know that Yellen in her testimony and in recent Fed releases has said the Fed is confident that inflation will once again rise to 2%. And that, even if you take out food and energy, inflation has still risen at 1.6% over the last 12 months.
by ilene - February 27th, 2015 4:30 pm
Note: This article is excerpted from "The State of the Global Markets 2015 Edition," a recent report by Elliott Wave International.
In its November issue, published on Oct. 31, EWI's European Financial Forecast discussed the plunging 5-year/5-year forward swap, a market-based gauge that measures inflation expectations from five years to 10 years out, and stated, "Even the central bank's preferred inflation metric shows nothing but flat or falling prices over the foreseeable future."
In November, a "sharp deterioration in sentiment" (WSJ, 11/17/14) popped up in the economic surveys.
According to a poll conducted by Germany's IW Economic Institute, nearly one quarter of the 2,900 companies surveyed (almost double the percentage from last spring) plan to cut investments in 2015. Likewise, the percentage of companies planning to increase spending fell from 44.1% to 29.8%.
In fact, the more officials seem to push the story of a great global recovery, the harder the deflationary evidence seems to push back.
Notice that the balance of companies expecting to increase business activity in the next 12 months just fell to its lowest level since the survey began five years ago.
Markit's accompanying analysis presents many more lowlights (emphasis added):
- Expectation of business activity weakened among both manufacturers and service providers.
- Hiring and investment plans rest at post-crisis lows.
- Price expectations deteriorated further.
- Optimism in manufacturing fell to its lowest since mid-2013, while optimism in services slumped to the lowest in the survey's five-year history.
In the United States
- "The most striking development was the extent of the downturn in the U.S., where optimism hit a new survey low, with the service sector seeing a particularly dramatic decline."
In Europe and Emerging Markets
- Business confidence in Spain and Italy was the lowest recorded since this time last year.
- In Germany and France, confidence was far lower … with both 'core' countries seeing the lowest levels of optimism since June of last year.
- Business expectations across the main emerging markets fell on average to the lowest seen in the
by ilene - February 27th, 2015 2:42 pm
Courtesy of Mish.
In the wake of existing home sales reports on Monday, and new home sales yesterday, GDP and residential investment forecasts came tumbling down.
Check out the latest “GDP Nowcast” from the Atlanta Fed.
“The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2015 was 1.7 percent on February 26, down from 1.9 percent on February 18. The first-quarter nowcast for real residential investment growth fell from 11.1 percent to 2.3 percent following Monday’s existing-home sales release from the National Association of Realtors and yesterday morning’s releases on sales and construction costs of single-family homes by the U.S. Census Bureau.”
Please note that the “NowCast” does not factor in this: Chicago PMI Crashes to 5 1/2 Year Low: Production, New Orders, Backlogs Suffer Double Digit Declines.
Expect another revision soon.
Mike “Mish” Shedlock
Chicago PMI Crashes to 5 1/2 Year Low: Production, New Orders, Backlogs Suffer Double Digit Declines
by ilene - February 27th, 2015 11:22 am
Courtesy of Mish.
Fourth quarter GDP was revised lower today to 2.2 percent from 2.6 percent previously estimated.
Looking ahead, I think we are going to see some shocking downward estimates in the months to come. Meanwhile, a shocking PMI report came out today.
Chicago PMI Crashes to 5 1/2 Year Low
ISM Chicago reports Chicago Business Barometer At 5½-Year Low
The Chicago Business Barometer plunged 13.6 points to 45.8 in February, the lowest level since July 2009 and the first time in contraction since April 2013. The sharp fall in business activity in February came as Production, New Orders, Order Backlogs and Employment all suffered double digit losses, leaving them below the 50 level which separates contraction from expansion.
New Orders suffered the largest monthly decline on record, leaving them at the lowest since June 2009. Lower order intake and output levels led to a double digit decline in Employment which last month increased markedly to a 14-month high.
Disinflationary pressures were still in evidence in February, although the slight bounceback in energy costs pushed Prices Paid to the highest since December – although still below the breakeven 50 level. Some purchasers cited weakness in some metals prices including copper and brass, but others said suppliers were slow to pass along lower prices to customers.
Commenting on the Chicago Report, Philip Uglow, Chief Economist of MNI Indicators said, “It’s difficult to reconcile the very sharp drop in the Barometer with the recent firm tone of the survey. There’s some evidence to point to special factors such as the port strike and the weather, although we’ll need to see the March data to get a better picture of underlying growth.“
Blame it on the Ports
Everyone was quick to blame this on the ports and bad weather.
But the LA port issue has been festering for months. Weren’t economists aware of the ports? Of bad weather?