| Luxembourg PM Jean-Claude Juncker to Resign Over Spy Scandal; Obama Should Do the Same Posted: 10 Jul 2013 02:53 PM PDT The spy scandal has now hit Luxembourg. Jean-Claude Juncker, the prime minister of Luxembourg, and also the head of eurogroup finance ministers will resign over spy scandal. Luxembourg will hold new elections after Prime Minister Jean-Claude Juncker announced he would resign following a secret service scandal. Mr Juncker, Europe's longest-serving head of government, told parliament he would step down on Thursday.
The move came as his junior coalition partner called for the dissolution of parliament and early elections.
It follows claims he failed to stop illegal security agency activity such as phone-taps and corruption.
Mr Juncker has been prime minister since 1995 and was head of the eurozone finance ministers group between 2005 and January 2013.
"I will convene the government tomorrow morning at 10:00 (08:00 GMT) and will go to the Palace to suggest snap elections to the Grand Duke," he said on Wednesday.
Luxembourg's parliament had reviewed a report alleging a series of cases of misconduct by the country's SREL security agency, which the prime minister oversees.
It included claims of illegal bugging of politicians, the purchase of cars for private use and payments in exchange for access to local officials. Juncker Denies Wrongdoing Juncker told parliament "the intelligence service was not my top priority," while denying he personally did anything wrong. When it Becomes Serious, You Have to Lie In case your memory needs refreshing, please recall that in the midst of the eurozone crisis, Jean-Claude Juncker openly stated "When it becomes serious, you have to lie". It seems to me these charges are pretty serious. If Obama and every other head of state involved in such scandals would resign as well, we would all be better off. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| FOMC Minutes and Economic Projections: Dissent in Both Directions; Confused? Posted: 10 Jul 2013 12:41 PM PDT Following is a snip from the June 18-19, 2013 Minutes of the Federal Open Market Committee, released today. Highlighting is mine. In their discussion of monetary policy for the period ahead, all members but one judged that the outlook for economic activity and inflation warranted the continuation of the Committee's current highly accommodative stance of monetary policy in order to foster a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
In the view of one member [Esther L. George], the improvement in the outlook for the labor market warranted a more deliberate statement from the Committee that asset purchases would be reduced in the very near future.
At the conclusion of its discussion, the Committee decided to continue adding policy accommodation by purchasing additional MBS at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month and to maintain its existing reinvestment policies. In addition, the Committee reaffirmed its intention to keep the target federal funds rate at 0 to 1/4 percent and retained its forward guidance that it anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.
Regarding the outlook for policy, members agreed that monetary policy in coming quarters would depend on the evolution of the economic outlook and progress toward the Committee's longer-run objectives of maximum employment and inflation of 2 percent. While recognizing the improvement in a number of indicators of economic activity and labor market conditions since the fall, many members indicated that further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of asset purchases.
Some added that they would, as well, need to see more evidence that the projected acceleration in economic activity would occur, before reducing the pace of asset purchases. For one member [James Bullard], such a decision would also depend importantly on evidence that inflation was moving back toward the Committee's 2 percent objective; that member urged the Committee to modify its postmeeting statement to say explicitly that the Committee will act to move inflation back toward its goal.
A couple of other members also worried that the downside risks to inflation had increased, with one of them suggesting that the statement more explicitly reflect this increased risk.
However, several members judged that a reduction in asset purchases would likely soon be warranted, in light of the cumulative decline in unemployment since the September meeting and ongoing increases in private payrolls, which had increased their confidence in the outlook for sustained improvement in labor market conditions. Two of these members also indicated that the Committee should begin curtailing its purchases relatively soon in order to prevent the potential negative consequences of the program from exceeding its anticipated benefits.
Another member pointed out that if the program were ended because of concerns about such consequences, the Committee would need to explore other options for providing appropriate monetary accommodation. Many members indicated that decisions about the pace and composition of asset purchases were distinct from decisions about the appropriate level of the federal funds rate, which would continue to be guided by the thresholds in the Committee's statement. In general, members continued to anticipate that maintaining the current exceptionally low level of the federal funds rate was likely to remain appropriate for a considerable period after asset purchases are concluded. Dissents Voting against this action: James Bullard and Esther L. George.
Mr. Bullard dissented because he believed that, in light of recent low readings on inflation, the Committee should signal more strongly its willingness to defend its goal of 2 percent inflation. He pointed out that inflation had trended down since the beginning of 2012 and was now well below target. Going forward, he viewed it as particularly important for the Committee to monitor price developments closely and to adapt its policy in response to incoming economic information.
Ms. George dissented because she viewed the ongoing improvement in labor market conditions and in the outlook as warranting a deliberate statement from the Committee at this meeting that the pace of its asset purchases would be reduced in the very near future. She continued to have concerns about maintaining aggressive monetary stimulus in the face of a growing economy and pointed to the potential for financial imbalances to emerge as a result of the high level of monetary accommodation. Economic Projections Here are a few snips from the related Summary of Economic Projections. Overall, FOMC participants projected that, under appropriate monetary policy, the pace of economic recovery would gradually pick up over the 2013-15 period, and inflation would move up from recent very low readings but remain subdued.
Most participants judged that highly accommodative monetary policy was likely to be warranted over the next few years to support continued progress toward maximum employment and a gradual return toward 2 percent inflation. Moreover, all participants but one judged that it would be appropriate to continue purchasing both agency mortgage-backed securities (MBS) and longer-term Treasury securities at least until later this year.
The Outlook for Economic Activity
The central tendency of participants' projections for real GDP growth was 2.3 to 2.6 percent for 2013, 3.0 to 3.5 percent for 2014, and 2.9 to 3.6 percent for 2015. Most participants noted that their projections were little changed since March, with the downward revisions to growth in 2013 reflecting the somewhat slower-than-anticipated growth in the first half. The central tendency for the longer-run rate of growth of real GDP was 2.3 to 2.5 percent, unchanged from March.
All participants saw the appropriate target for the federal funds rate at the end of 2015 as still well below their assessments of its expected longer-run value. Estimates of the longer-run target federal funds rate ranged from 3-1/4 to 4-1/2 percent, reflecting the Committee's inflation objective of 2 percent and participants' individual judgments about the appropriate longer-run level of the real federal funds rate in the absence of further shocks to the economy.
Participants also described their views regarding the appropriate path of the Federal Reserve's balance sheet. Given their respective economic outlooks, all participants but one judged that it would be appropriate to continue purchasing both agency MBS and longer-term Treasury securities. About half of these participants indicated that it likely would be appropriate to end asset purchases late this year. Many other participants anticipated that it likely would be appropriate to continue purchases into 2014. Several participants emphasized that the asset purchase program was effective in supporting the economic expansion, that the benefits continued to exceed the costs, or that continuing purchases would be necessary to achieve a substantial improvement in the outlook for the labor market. A few participants, however, indicated that the Committee could best foster its dual objectives and limit the potential costs of the program by slowing, or stopping, its purchases at the June meeting.
Unemployment
Participants anticipated a gradual decline in the unemployment rate over the forecast period; a large majority projected that the unemployment rate would not reach their estimates of its longer-run level before 2016. The central tendencies of participants' forecasts for the unemployment rate were 7.2 to 7.3 percent at the end of 2013, 6.5 to 6.8 percent at the end of 2014, and 5.8 to 6.2 percent at the end of 2015.
The Outlook for Inflation
All participants marked down their projections for both PCE and core PCE inflation in 2013, reflecting the low readings on inflation so far this year. Participants generally judged that the recent slowing in inflation partly reflected transitory factors, and their projections for inflation under appropriate monetary policy over the period 2014-15 were only a little lower than in March. Participants projected that both headline and core inflation would move up but remain subdued, with nearly all projecting that inflation would be equal to, or somewhat below, the FOMC's longer-run objective of 2 percent in each year. This is all meaningless of course, but at least you know what they are thinking. I surmise the consensus opinion was arrived at by holding their fingers in the air, noting which way the wind was blowing, then predicting the wind direction will not change much. Confused? Only one member had enough common sense to want to end QE now, whereas (some, half, many, most, a few, etc.) seem to be damn confused as to what to say and how to say it. Zero Hedge noted Even The Experts Throw Up All Over The Fed Minutes GMP's Adrian Miller with the best roundup of the sheer indecipherable gibberish just excreted by the Fed:
- "We are not sure how you can go from 'many' needing to see labor gains before tapering begins to half seeing bond buying ending by year end. At the same time, 'many' other Fed officials saw bond buying into 2014"
- "We are pretty good at math, but we are having trouble adding up the 'many,' 'several' and 'about half' to equal 100%
- FOMC members appear to have ''decided to cover every possible scenario," and "left us with no clear picture as to what the group is thinking"
If you are confused about what the FOMC participants said or meant, it's probably because they do not know either. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Mortgage REITs Clobbered as Leverage Forces Sales Posted: 10 Jul 2013 09:54 AM PDT Curve Watchers Anonymous continues to follow the rise in treasury yields. Here are a couple of charts. $TNX: 10-Year Treasury Yield  Yield on the 10-year note has risen from 1.614% to 2.664% since the beginning of May. The following chart provides a better historical perspective. Yield Curve As Of 2013-07-20  click on chart for sharper image - $TYX 30-Year Treasury Bond Yield: Green
- $TNX 10-Year Treasury Note Yield: Orange
- $FVX 05-Year Treasury Note Yield: Blue
- $IRX 03-Month Treasury Bill Discount Rate: Brown
The rise in yields have wreaked havoc in the bond markets and even more so in mortgage-related Real Estate Investment Trusts (REITs). REITs Deepening Bond Losses as Leverage Forces Sales Bloomberg reports REITs Deepening Bond Losses as Leverage Forces Sales Annaly Capital Management Inc. (NLY)'s Wellington Denahan, head of the largest mortgage real-estate investment trust, told investors less than three months ago that reports REITs could threaten U.S. financial stability were as misleading as the media frenzy over shark attacks in 2001.
Since the May 2 comments, shares of the companies, which use borrowed money to make $400 billion in credit market bets, dropped about 19 percent through yesterday and the value of their assets has plunged after the Federal Reserve triggered a flight from bond funds by signaling plans to slow its debt-buying program.
REITs may have needed to sell about $30 billion of government-backed mortgage securities in just one week last month to maintain the amount of borrowing relative to their net worth, according to JPMorgan Chase & Co. Those types of sales deepened losses in the mortgage-bond market, which had the worst quarter since 1994, accelerated the exit from fixed-income funds and fueled a jump in home-loan rates to a two-year high.
Mortgage rates jumped to 4.46 percent at the end of June, up from a near-record low of 3.35 percent in early May, after the central bank indicated it will taper its monthly debt buying, including $40 billion of government-backed housing debt.
Firms including Annaly, American Capital Agency Corp. (AGNC), the second biggest of the companies, and Armour Residential REIT Inc. (ARR), sell shares to the public so the capital can't be redeemed. They also rely on leverage, typically using about six to eight times the amount of borrowed money compared with their capital.
That means they benefited from cheap financing as the Fed kept short-term interest rates near zero for more than four years. REITs more than tripled holdings of government-backed home-loan bonds since 2009 and their increased buying power helped push down mortgage rates. Leverage Sharks Bite Bloomberg reports " Annaly's Denahan presented her shark analogy after Fed Governor Jeremy Stein referenced mortgage REITs in a February speech on how credit markets were showing signs of potentially excessive risk-taking." Mortgage REITs Stumble Morningstar reports No Surprises Here: Mortgage REITs Stumble Mortgage REITs are a polarizing asset, either loved (for their yield) or despised (for their risk) by investors. The bears must be feeling vindicated now, as the market's emotional response to the Fed's recent announcements sent iShares Mortgage Real Estate Capped (REM) into a nosedive since the beginning of April. REM lost a stomach-churning 19% over the past three months, driven by instability in the yield curve and falling book values.
Not to be confused with equity REITs, which generate income by managing properties and collecting rent, mortgage REITs are financial firms that arbitrage the spread between the short-term interest rate and income from mortgage-backed securities. Mortgage REITs do not have access to deposit funding, so they rely on short-term loans like repurchase agreements. The largest firms purchase federally guaranteed securities from Freddie Mac and Fannie Mae.
Mortgage REITs are very susceptible to the risk of rising short-term rates. Until recently, mortgage REITs have benefited from the Fed's easy money policy. The Fed's historically low near-zero interest rate makes financing cheap, allowing mortgage REITs to use leverage to provide an attractive yield. However, because these firms are so extensively leveraged, they are very susceptible to interest-rate fluctuations. The majority of mortgage REIT financing is as short term as 30 days, so if the capital markets freeze, these firms could be forced to accept unfavorable terms. Lenders also can make margin calls following a market decline. Either situation could force mortgage REITs to raise capital through share issuance.
Historical evidence is not encouraging: Mortgage REITs cut their distributions and performed poorly during past rising rate environments. REM's two major holdings, Annaly Capital Management (NLY) (17.5% of assets) and American Capital Agency (AGNC) (13%), unsurprisingly cut their distributions even further in June after continued sell-offs. Both companies reduced their dividends last year as well. Because REM's distributions (which are more volatile than payouts from equity REITs or the broad market) account for as much as 80% of the fund's total return, declines in payouts considerably reduce return. REM Daily Chart - Mortgage REITs  Investors and hedge funds plowed into REITs believing treasury and mortgage rates would stay low forever. And they are still low historically. But if the secular low in treasury and mortgage yields is in, these kind of losses will accumulate. Leverage runs both ways. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| D.C. City Council Proposes Super-Minimum "Living Wage" of $12.50 an Hour; Wal-Mart Threatens to Pull Out Posted: 09 Jul 2013 11:25 PM PDT D.C. is on the verge of passing a Living Wage" law mandating $12.50 an hour wages, but only for retailers with corporate sales of $1 billion or more. The response from the world's largest retailer is hardly unexpected. Wal-Mart Threatens to Pull Out of D.C. The Washington Post reports Wal-Mart says it will pull out of D.C. plans should city mandate 'living wage'. The world's largest retailer delivered an ultimatum to District lawmakers Tuesday, telling them less than 24 hours before a decisive vote that at least three planned Wal-Marts will not open in the city if a super-minimum-wage proposal becomes law.
The company's hardball tactics come out of a well-worn playbook that involves successfully using Wal-Mart's leverage in the form of jobs and low-priced goods to fend off legislation and regulation that could cut into its profits and set precedent in other potential markets. In the Wilson Building, elected officials have found their reliable liberal, pro-union political sentiments in conflict with their desire to bring amenities to underserved neighborhoods.
Mayor Vincent C. Gray (D) called Wal-Mart's move "immensely discouraging," indicating that he may consider vetoing the bill while pondering whether to seek reelection.
Alex Barron, a regional general manager for Wal-Mart U.S., wrote in a Washington Post op-ed piece that the proposed wage requirement "would clearly inject unforeseen costs into the equation that will create an uneven playing field and challenge the fiscal health of our planned D.C. stores."
As a result, Barron said, the company "will not pursue" stores at three locations where construction has yet to begin — two in Ward 7 and one in Ward 5. He added that the legislation, if passed, will also jeopardize the three stores underway, pending a review of the "financial and legal implications."
The bill, known as the Large Retailer Accountability Act, passed the council on an initial 8 to 5 vote last month. The council would need nine votes to override a potential veto from Gray, who lobbied Wal-Mart to open a store at the Skyland Town Center site, near his Hillcrest home. The Problem With "Living Wage" Laws In the chicken-and-egg game of "living wages", few have figured out it is government policies, not salaries that are the problem. Here are some easy to understand examples. - Hundreds of "affordable home" programs drove home prices higher until home prices eventually collapsed (at which time government bodies did everything they could to prop up prices). Conclusion: Government bureaucrats did not really want affordable homes, they just wanted to be on record as being in favor of the idea (while handing out programs in return for votes and campaign donations)
- Student loan programs (and of course education-related public unions) tell a similar story about out-of-control education costs.
- Those wishing that government would do something about health care costs need to consider that government is the primary reason health care costs are absurd.
The Real Problem The real problem is not low salaries but rather how far money goes. Blame the Fed and government policies for that problem, not Wal-Mart. Should the law pass, it will of course artificially make small mom-and-pop retail stores more competitive, but for whose benefit? The net effect will be higher prices for everyone, a net loss of jobs, subsidization of weak uncompetitive companies, and a big round of cheers from union sympathizers who will benefit at the expense of everyone else (with the real problem not remotely addressed). To top it off, living wage laws (coupled with preposterously low interest rates from the Fed) provide further incentives for companies to look at software and hardware solutions to get rid of marginal workers. Should this inane law pass, it will backfire immediately. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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