Mish's Global Economic Trend Analysis

European 10-Year Bond Yields Spike Higher; Contagion Already? Something Worse?
Chicago Board of Education to Default on Bonds? Rick Santelli and Mish Discuss on CNBC
JS-Kit / Echo Comments Defunct
First Quarter GDP Likely Negative as Trade Deficit Soars
Greece Talks on Hold; IMF Admits Haircuts Needed as Surplus Turns to Deficits
"Freedom philosophy vs. Empire of Lies": Authorized Documentary About Ron Paul's Career

European 10-Year Bond Yields Spike Higher; Contagion Already? Something Worse?

Posted: 05 May 2015 08:05 PM PDT

Those who claim there will be no Greece contagion need consider yields in other European bonds.

In spite of the fact the ECB is buying 60 billion euros of debt a month for 19 months, yields on many longer-dated bonds are rising.

Spain 10-Year Yield

Italy 10-Year Yield

Germany 10-Year Yield

Contagion Already?

Saxo Bank chief economist Steen Jakobsen sees contagion risk in bond yield breakouts.

Via email ...

A quick note as there has been a number of "break-outs" and risk warnings activated.

First, and most important.

I have long argued that Italian 2 yr vs. 10 yr is excellent predictor of contagion on Greece, and sure enough we have had massive spike!

2-10 if reflecting much higher short-end risk (higher yield) Italy because with France only countries who has done nothing to reign in fiscal deficit plus CLUB MED members.

Contagion or Something Else?

10-year bond yields are up. So are 2-10 spreads. And it isn't just Italy.

But is the reason contagion risk or erroneous belief that a eurozone recovery is underway? What about the chance the ECB has lost control?

ECB has lost control
Contagion
Recovery

Which is it?

Presuming this trend lasts, this will not be good for equities no matter the reason. But really look out if the reason is #1 or #2.

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

Chicago Board of Education to Default on Bonds? Rick Santelli and Mish Discuss on CNBC

Posted: 05 May 2015 12:29 PM PDT

I had a lot of fun this morning on CNBC.

Rick Santelli invited me on his show to discuss Beware, the Tax Man Has Eyes on You: Potential Hike for Illinoisans is Staggering and a few other recent posts of mine on the plight of Chicago.

If you have not read that post, please do so. Nuveen figures property taxes need to rise by 50% to bail out Chicago pensions in deep trouble. In the video below I explain why 50% will not be enough!

Link if video does not play: Chicago BOE to default?

Three minutes flies by fast. It's very difficult to get everything you intend to say in such a small time window. Actually, Rick went over by 20 seconds, telling the producer in advance he intended to do that.

In the video, Rick asked "How underfunded are Illinois pensions?"

My answer of $130 billion included Chicago and the main Illinois pensions. But it also assumed 7% returns that I am quite certain will not happen. Unfortunately, there was no time to get this all into the interview.

Mark Glennon at WirePoints says the number using new Government Accounting Standard Board (GASB) rules is closer to $220 billion. That number includes all Illinois pensions but also includes unfunded healthcare liabilities of about $57 billion.

I was invited back once a month to discuss the economy. Looking forward to that. This was a lot of fun.

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

JS-Kit / Echo Comments Defunct

Posted: 05 May 2015 12:21 PM PDT

The JS-Kit/Echo comment system I had on this blog is now defunct. The company recently dropped support across the board for everyone.

I am looking for a replacement comment system. In the meantime, thanks for your patience.

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

First Quarter GDP Likely Negative as Trade Deficit Soars

Posted: 05 May 2015 09:45 AM PDT

On April 29 in Real Q1 GDP 0.2% vs. Consensus 1.0%; Disaster in the Details I commented "The second estimate of Q1 GDP comes out on May 29. Any number of changes could send Q1 negative."

Here we are already. Imports subtract from GDP and March trade numbers were much worse than expected.

The Bloomberg Consensus trade estimate was -42.0 billion. The actual trade deficit was -51.4 billion. The deficit was outside the entire range of estimates of -45.0 billion to -37.8 billion.

First-quarter GDP, barely above zero at plus 0.2 percent, may move into the negative column on revision following a much higher-than-expected March trade deficit of $51.4 billion, the largest since October 2008. The unwinding of the port strike on the West Coast, which was resolved mid-month March, played a major role in the data especially evident in imports which surged $17.1 billion in the month as backlogs at the ports were cleared. Imports of consumer goods, especially cell phones, were especially heavy. Exports, led by aircraft, also rose but only $1.6 billion. The total goods gap in the month was $70.6 billion which is the highest since August 2008.

The gap in petroleum trade, at $7.7 billion vs February's $8.2 billion, wasn't a major factor in the March data as the drop in prices was offset by a rise in volumes. By country, the gap with China widened to $31.2 vs $22.5 billion in February and to $7.1 billion vs $4.2 billion for Japan. The OPEC gap widened slightly to $1.2 billion vs $0.7 billion.

Today's report offers stark evidence of how much the port strike really did impact the economy and was likely one of the major "transitory" factors, as the Fed puts it, that slowed down first-quarter growth. These effects are likely to unwind in the second quarter and become a footnote for first-quarter data.

Transitory Nonsense

Economists still cling to the notion this is transitory.

For my take, please see Fed Cites Weather, "Transitory" Factors in FOMC Statement; No Hat Tricks; What About Consumer Sentiment?

GDP Now

In light of the today's trade report the Atlanta Fed lowered its GDPNow Estimate for second quarter GDP to 0.8%.

Note how economists still cling to optimism no matter how bad the economic numbers.

If the Atlanta Fed still modeled 1st quarter, I would now expect it to be negative.

On April 17, I commented Déjà Vu Weather? No, It's a Recession!

There's no need to change that forecast no matter what fantasies the blue-chip economists have for 3.5% growth.

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

Greece Talks on Hold; IMF Admits Haircuts Needed as Surplus Turns to Deficits

Posted: 05 May 2015 09:07 AM PDT

Greece Talks on Hold

Pierre Moscovici, the European commissioner for economic affairs, warns Debt Talks on Hold Until Greece Agrees Reforms.

Greece's eurozone creditors will not discuss how to get the country's sovereign debt back on a sustainable path until Athens agrees to a new economic reform programme that would release €7.2bn in desperately needed bailout funds, the EU's economic chief said on Tuesday.

Pierre Moscovici, the European commissioner for economic affairs, said debt issues "can only be discussed after we have agreed a reform programme". His statement reflects resistance in eurozone capitals to any form of "haircut" on Greek sovereign debt, which is now mostly held by EU governments and institutions.

Without a return to sustainable debt levels — or a larger bailout from the eurozone to ensure Athens can continue to pay its bills — the IMF may be forced under its rules to withhold its share of the current bailout tranche, which amounts to about half of the €7.2bn being negotiated.

Under a November 2012 agreement between Athens and its international creditors, Greece is scheduled to cut its debt levels to 120 per cent of gross domestic product by 2020 and "substantially lower" than 110 per cent by 2022. Debt relief was agreed as a possible way to reach the targets if Greece was able to run a primary budget surplus.

In February, Brussels forecast Greek debt would fall from 176.2 per cent of GDP in 2014 to 170.2 per cent this year; the new forecasts predict it will rise to 180.2 per cent this year.

Greece Debt Forecast

Surplus Turns to Deficits

Please consider IMF Takes Hard Line on Aid as Greek Surplus Turns to Deficit

Greece is so far off course on its €172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens' eurozone creditors.

The warning, delivered to eurozone finance ministers by Poul Thomsen, head of the IMF's European department, raises the prospect that it may hold back its portion of a €7.2bn tranche of bailout aid that Greece is desperately attempting to secure to avoid bankruptcy.

Half of the €7.2bn, which is the subject of intense negotiations between Athens and its creditors in Brussels-based talks that resumed on Monday, is due to come from the IMF. Without the funds, Greece is expected to run out of cash this month.

Eurozone creditors, who hold the vast bulk of Greek debt, are adamantly opposed to debt relief. But IMF support is crucial both for its funds and to sustain political backing for the Greece bailout, particularly in Germany.

According to two officials present at a contentious meeting of eurozone finance ministers in Riga last month, Mr Thomsen said initial data the IMF had received from Greek authorities showed Athens was on track to run a primary budget deficit of as much as 1.5 per cent of gross domestic product this year.

Under existing bailout targets, Athens was supposed to run a primary surplus — government receipts net of spending, excluding interest payments on sovereign debt — of 3 per cent of GDP in 2015.

A stand-off between the IMF and eurozone creditors over Greece is not unprecedented. Three years ago, the IMF refused to disburse its portion of the aid tranche because of similar fears Greek debt was not falling fast enough.

The IMF only signed off after eurozone ministers agreed to consider, but never implemented, writing down their bailout loans to reduce Greece's debt to "substantially lower" than 110 per cent of GDP by 2022. It currently stands at 176 per cent.

The forecast of a rising Greek deficit after achieving a 1.7 per cent surplus last year — and overly optimistic projections of similar surpluses into the future — would also increase the size of a third Greek bailout, which most officials believe is necessary once the €7.2bn left in the current programme is paid out. Senior officials have initially projected a new programme at €30bn-€50bn, but rising deficits could change that calculation.

IMF Takes Hard Line

That was a curious title. Before I read the article, I expected the headline to mean IMF takes hard line towards Greece. Having now read the article, the phrase seems more applicable to the creditors.

So here we are. The creditors insist no more haircuts, but the IMF will not approve its half of the next bailout tranche without them.

Looking ahead, the fact that Greece's primary account surplus vanished means a third bailout program will be larger than previously discussed. And Greece refuses to take another bailout.

For further discussion please see Third Greek Bailout? Another €53.8 Billion Needed? Primary Account Surplus Revisited.

However big the third bailout was expected to be, it's now larger.

I fail to see how this can all be resolved.

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

"Freedom philosophy vs. Empire of Lies": Authorized Documentary About Ron Paul's Career

Posted: 05 May 2015 06:46 AM PDT

Many producers have approached Ron Paul about doing a documentary regarding Paul's philosophical views.

Until now, Ron Paul has turned down all such overtures.

Empire of Lies

I am pleased to report that Ron Paul just now authorized a long-time friend, Charles Goyette, to make that documentary. Goyette asked me to break the news.

The Ron Paul Documentary project is underway today with the launch of a Kickstarter crowd-funding campaign.

"I feel flattered to be an important part of this," said Paul. "I think some big things are happening. Libertarianism and freedom – as bad as things look on the surface - I believe the rumblings are just wonderful there and in my relationship with young people."

"I felt it was absolutely essential to fund this film at the grassroots level," said Goyette. "The integrity of the project demands that it be independent."

Goyette helped raise contributions in the 2008 and 2012 Ron Paul Presidential Money Bomb fundraisers that set new records for political fundraising.

Goyette is the New York Times bestselling author of The Dollar Meltdown. See my review The Dollar Meltdown: Book Review.

His latest book is Red and Blue and Broke All Over - Restoring America's Free Economy.

Goyette is an award-winning radio personality. He has often been called upon to share his views with national televisions audiences on Fox News, CNN, MSNBC, PBS, CNBC and Fox Business Channel.

In 2013 – 2014 Goyette arranged the national syndication of twice-daily radio commentaries by Ron Paul, which he also produced and co-hosted. Ron Paul's America was broadcast on 125 radio stations across the nation.

Goyette also joined with Ron Paul for the sponsored program Ron Paul and Charles Goyette – The Weekly Podcast, long-form conversations about news and political philosophy. The Weekly Podcast is available on iTunes.

The Ron Paul Documentary will be released in the first half of 2016.

Empire of Lies Video Clip

Link if video does not play: Empire of Lies

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

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Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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