Mish's Global Economic Trend Analysis

New Meaning of the Word Voluntary; Bond Buyback Balancing Act
ECRI Sticks With Recession Call
French Unemployment Highest in 14 Years (And It's Going to Get Much Worse)

New Meaning of the Word Voluntary; Bond Buyback Balancing Act

Posted: 29 Nov 2012 02:16 PM PST

It is a deep stretch of the imagination to twist arms and appeal to "patriotic duty" in an effort to coerce someone to do something they really do not want to, then call the action "voluntary".

It is yet another thing to claim something is voluntary yet tell them it is "required". The latter has happened (again), when it comes to Greek debt.

The Financial Times reports Athens banks told of debt buyback 'duty'

Yiannis Stournaras made clear the country's four largest banks, which together hold about €17bn of government bonds, would be required to sell their entire holdings even though the buyback is billed as "voluntary".

It was the "patriotic duty" of Greek bankers to ensure the success of the buyback, due to be launched next week by the country's debt management agency with up to €14bn of additional European funding, Mr Stournaras said on Wednesday.

Yet Athens bankers appeared reluctant to be forced into a sale that would weaken their balance sheets and discourage local investors from participating in rights issues expected early next year as part of a €24bn recapitalisation of the sector.

"The banks stand to lose some €4bn by having to sell their bonds at around 33 cents on the euro," said one Athens banker.

About half the €62bn of bonds issued in a partial restructuring of Greek debt last February are held Greek banks, pension funds, state entities and individual investors.

The debt management agency is set to announce details next week of the buyback scheme, which would be completed by December 12, the day before eurozone finance ministers are due to give the green light for disbursing the Greek aid payment.

"Voluntarily Forced"

Whereas Greek banks may be "voluntarily forced" (as if such a ludicrous idea even exists) into steep losses, anyone else holding such debt sure will not be.

Once again this whole notion of "voluntary" rests on arbitrary decisions as to what will trigger credit default swaps.

In that regard, please recall that in October 2011, the labeling of labeling 50% haircuts on Greek debt as "voluntary" proved many "Standard" Credit Default Swaps on Greece Are a Sham.

Thus, nothing really "new" is happening here. "Voluntary" means whatever the biggest players want it to mean (always to their advantage of course).

Bond Buyback Balancing Act

Bloomberg discusses this setup in Greek Bond Buyback Hostage to Below-Market Prices.

Greek efforts to ease indebtedness by repurchasing its own bonds at less than their face value depend on investors accepting below-market prices rather than holding out for an improved offer.

Balancing Act

The new bonds have collective action clauses, which in a second restructuring would allow a preset majority -- typically at least 66 percent -- to force holdouts to take part, according to Gabriel Sterne, an economist at Exotix Ltd. in London. Still, enforcing the CACs risks triggering credit-default swaps and being put into default by the ratings firms to deal with a rump of bondholders, he said.

"Would it be worth the fight with the hedge funds?" he said. "I just don't think they would want to go there yet again."

"If the buyback price is forced up too high, it will be unpalatable to Greece and the European authorities, and the buyback will fail," Sterne said. "The incentive not to participate is likely to be strong. The average value of the bonds for those that do not participate could rise sharply if there is very high participation."

Sterne, a former IMF official, estimates that the strip might go as high as 50 cents on the euro assuming there is broad participation, compared with 24 cents if the buyback fails.

Bondholders probably will call the finance ministers' bluff, said Peter Tchir, the founder of New York-based TF Market Advisors.

"Now that the Eurogroup has made a condition out of the bond repurchase, it is almost the obligation of the bondholders to hold their feet to the fire," he said. "I can't see bondholders accepting last week's prices without trying for more."

CACs and the Balancing Act

Got that? No one wants to trigger Collective-Action-Clauses thereby "forcing participation" because it would trigger CDS contracts. Yet participation must be high enough so the Troika can pretend the results help Greece.

Given the incentive to not participate in the offer is huge, Greek banks were told their participation in the voluntary offer was required.

Thus, we see these preposterous games yet again as to what is "voluntary" and what isn't. Moreover, forcing Greek banks to take more losses means they will again need to raise capital (a perpetual state of affairs for Greek banks).

Of course any sensible person realizes none of this will actually help Greece. Instead, it will enable huge pretending games go on a bit longer, perhaps long enough to get German Chancellor Merkel reelected, which seems to be the real issue in play, not the well-being of Greece.

Side Note on Comment System

Many people have been unable to login and leave comments. I believe the problem has been rectified.

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

ECRI Sticks With Recession Call

Posted: 29 Nov 2012 10:58 AM PST

The ECRI is sticking with its "US is already in recession" call based on four coincident indicators. Very few agree, but for what it's worth (perhaps nothing) I am one of those in agreement.

Here is a Bloomberg video to consider.

Also consider The Tell-Tale Chart by the ECRI.

Following our September 2011 recession call, we clarified its likely timing in December 2011. Based on the historical lead times of ECRI's leading indexes, we concluded that, if it didn't start in the first quarter of 2012, it was very likely to begin by mid-year.

But we also made it clear at the time that you wouldn't know whether or not we were wrong until the end of 2012. And so it's interesting to note the rush to judgment by a number of analysts, already asserting that we were wrong.

So, with about a month to go before year-end, what do the hard data tell us about where we are in the business cycle? Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators – the broad measures of production, income, employment and sales – saw their high points in July (vertical red line in chart), with only employment still rising.

If you look at the size of the simultaneous declines in industrial production and personal income since July, that combination has never occurred outside a recessionary context in over half a century – but it's occurred in every recession. This leads us to conclude that we are most likely already in a recession that began around mid-2012.

Now, please remember that, following our recession call, central banks really ramped up their efforts, and have literally been pumping more money into the economy than at any time in the history of humanity – and this is the upshot. No wonder the Fed is now all in.

So how come hardly anybody recognizes the recession? Perhaps it's because of real-time data showing positive growth in GDP and jobs, and the lack of a recent salient shock.

Revisionist History

Some of that is revisionist history, notably the idea that in September 2011, the ECRI gave itself until December of 2012 to be proven correct. Rather, the ECRI kept changing dates waiting for data to match its call.

I have no problems with errors. I do have problems with revisionist history.

ECRI revisionist history wipes away an error in the other direction in 2007, claiming to predict a recession it clearly did not predict.

I presented an analysis at the time of the ECRI's September 2011 recession call in ECRI Calls Recession Based on "Contagion in Forward Indicators"; Just How Timely is the Call?

The revisionist history in regards to "no misses" is plain to see. The ECRI totally blew the call in 2007 and early 2008. That is not the galling part. Calls are easy to miss. The galling part is the ECRI's revisionist history related to the blown call.

The ECRI's integrity will remain in question as long as it continues to perpetuate the myth of a perfect record. The simple fact of the matter is no one has a perfect track record at calling recessions, interest rates, the stock market or anything else.

Flashback November 2007 ECRI Vol. XII, No. 11: Weakness In Leading Indicators Not Yet Recessionary

Please consider the following image snip. Highlighting is mine.

One month later the US was in recession, and in galling revisionist history the ECRI later referred to that highlight in yellow as "predicting" a recession, even though on Friday, January 25, 2008
ECRI Says There Is A Window of Opportunity for the US Economy

The U.S. economy is now in a clear window of vulnerability, given the plunge in ECRI's Weekly Leading Index (WLI) since last spring. Yet there is a brief window of opportunity within that window of vulnerability to avert a recession. That is why ECRI has not yet forecast a recession. ....

This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet.

Achuthan Winging It or Sticking to His Model?

Clearly the ECRI failed to predict the 2007 recession on time. I am now wondering "Did the 2007 miss influence an ECRI to jump the gun in the opposite direction this time?"

That line of questioning has me further wondering if Achuthan has been winging it based on coincident indicators and his personal opinion of what is likely, instead of simply following his own model (with a track record of claims based on leading indicators, not coincident ones).

Regardless, the ECRI claim to have never missed a recession is inaccurate twice (2007 and 2011) even if the ECRI has the call correct now.

Revisionist history aside, I do believe Lakshman Achuthan has the call correct. Today's GDP revision higher does little to change that belief. Contrary to popular belief, recessions frequently start with positive GDP typically revised lower much later.

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

French Unemployment Highest in 14 Years (And It's Going to Get Much Worse)

Posted: 29 Nov 2012 02:08 AM PST

According to Google translation from Le Monde, October marks the 18th consecutive month of rising unemployment. A second article from Le Monde discusses the Rise in Unemployment for October.

Unemployment has risen sharply again in October. According to statistics released Wednesday, November 27 by employment center and the Ministry of Labour, the number of applicants for employment who had no activity during the month (Class A) increased by 46,500 people, including DOM. In September, he had jumped nearly 47 000 people. Worse, counting the unemployed reduced activity (category B and C), the increase reached 73,600 people!

Such explosion had not been seen since March 2009. With 4,870,800 people registered at employment center, the number of job seekers Class A, B and C reached a level never seen before, as far back as statistics. For those in category A, the level was not as high for fourteen years, in May 1998. Since the accession of François Hollande at the Elysee Palace, very bad numbers keep on coming: nearly 230,000 people have registered at employment center and since May.

In detail, it is over 50 years old who suffer most from the increase in October, with nearly 2% increase in a month for this category. Rising long-term unemployment is still very high, with nearly 11.5% of registered job seekers concerned about one year.

French Unemployment vs. US Unemployment

Those outside France need a bit of perspective on various classes of unemployment cited above. This is my understanding, pieced together from two different sources.

Class A: Jobless people that have had no activity at all during the past month.
Class B: Jobless people having worked less than 78 hours during the past month ("short reduced activity")
Class C: Jobless people having worked more than 78 hours during the past month ("long reduced activity").
Class D: Looking for a job, but currently sick, or in internship, or in state-sponsored "professional development" courses, etc
Class E: Those in state-sponsored low-pay "community service" jobs

The official unemployment rate only comes out quarterly.

Reader Andrea offers these comments ...

For the sake of clarity, the official unemployement rate is given by the National Institut of Statistics (INSEE) each three months, not the ministry of labor class A-E activity. The distinction is similar to the weekly unemployment stats in the US vs. the official monthly unemployment and jobs report.

Moreover, and also similar to the US, many jobless people are not counted as unemployed because they have not been actively searching for a job.

Hollande Threatens to Nationalize Steel Plants Over Layoffs

Economic insanity in France continues at a steady pace. The latest bit of insanity is Hollande's Threat to Nationalize Steel-Maker Mittal.

French President Francois Hollande has met the owner of steel giant Arcelor Mittal, after saying he would discuss nationalising one of its plants.

Arcelor Mittal - which employs some 20,000 people across France - announced in October that it intended to shut down the Florange plant's already inactive furnaces, saying they were uncompetitive in such difficult trading times.

The company gave the government 60 days in which to find a buyer for the furnaces, a deadline which expires on Saturday.

The move provoked an angry reaction from the French government, which accused Arcelor Mittal of breaking a 2006 commitment to keep the blast furnaces running - a claim denied by the steel giant - and criticised the firm for refusing to sell off the site as a whole.

France's minister for industrial recovery, Arnaud Montebourg, accused the steelmaker on Monday of "lying" and "disrespecting" the country. He has since retracted a remark that Arcelor Mittal was no longer welcome in France.

Economic Ignorance Wins the Day

Pater Tenebrarun blasted the nationalization threat in his post Economic Ignorance Wins the Day Again in France.

France's minister of industrial insanity, Arnaud Montebourg (sometimes referred to as 'Mountebank' in these pages, for obvious reasons) once again proves that the leopard cannot change its spots. After wrangling incessantly with Arcelor-Mittal over its decision to close two long idled and evidently loss-making steel furnaces, he has now decided to openly declare war against the company.

Here is a brief summary of the economic facts of life for the hyperactive minister:

There is vast overcapacity for steel in the world. In China alone, some 200 million tons of production capacity appear to be the fruit of malinvested capital due to China's real estate and infrastructure bubble that has resulted from an unhealthy credit boom. This means that in China alone 200 million tons of production are likely loss making at present and will eventually have to be idled and/or liquidated.

It makes no sense to keep loss-making capacity going in Europe as well. That will only further misdirect scarce resources that are more urgently required elsewhere.

The very last thing the market economy needs in order to function smoothly is a 'minister of industrial renewal' (Montebourg's official job description), or any other type of 'economy minister'. The very best thing such ministers could do to help the economy would be to resign immediately.

Property Rights Thrown Under the Bus

Montebourg makes it sound as though Arcelor-Mittal, a private company, were deputized to the French government to help it fulfill whatever political aims it pursues – as though the government could simply draft private companies to aid it in attaining its socialist goals.

This case is going to have repercussions that go far beyond the fate of the loss-making furnaces and Mittal's continued presence in France. By threatening the company with nationalization if it doesn't comply with the government's wishes, Montebourg is signaling that his government has absolutely no respect for property rights.

If Mittal closes the two furnaces (which as noted above have been idled for many months already), then the people employed there will lose their jobs which is of course unfortunate. However, this is a typical case of the road to hell being paved with good intentions: by threatening the expropriation of Mittal, Montebourg ultimately risks far more jobs than merely those at the two furnaces.

There is a lesson that Mr. Montebourg has yet to absorb: No government can dispense with the laws of economics by decree. It might as well attempt to order the sun not to shine or issue an edict that gravity be abolished.

Expect Unemployment to Soar

Those looking for reasons French unemployment is going to soar, need only read Pater Tenebrarum's sterling rebuttal of France's plans to nationalize Mittal to save steel jobs when the world is awash in cheap steel.

What company wants to hire workers when they will be unable to fire them later if need be?

I talked about this many times before, but in case you missed it, please consider my June 8th article Hollande About to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It"

Industry Minister Arnaud Montebourg is also planning legislation that would force companies to sell plants they want to get rid of at market prices to avoid closures and job losses.

Four Things, All of Them Bad

Mass layoffs will occur before the law passes.

Companies will move any jobs they can overseas.

Ongoing, if it's difficult to fire people, companies will not hire them in the first place.

Corporate profits will collapse along with the stock market should the need to fire people arise.

The proposal to force companies to sell plants rather than fire workers as outlined by Industry Minister Arnaud Montebourg and Labour Minister Michel Sapin is nothing short of economic insanity.

Europe Going Downhill Fast

Many people doubted Hollande would be foolish enough to carry out his job threats. They were wrong. In addition, Hollande massively hiked various taxes and also seeks a financial transaction tax.

Such actions prompted my June 16 report, "France Has At Most Three Months Before Markets Make Their Mark" .

No one should at all be surprised to learn in early November that France suffered the sharpest fall in service sector business activity for a year. For details, please see Dreadful Economic Data in Germany, Italy, Spain, France.

Things are going downhill fast in all of Europe and the bottom is nowhere near in sight.

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

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