Mish's Global Economic Trend Analysis |
- Draghi Rally Fizzles In Less Than One Day: Failure In Pictures
- Is Mario Draghi a Bare-Assed Emperor With No Clothes?
- All Bad Things Come to An End
- Run on Italy's Third Largest Bank? Capital Controls or Bail-Ins Next? Why Take Chances?
- "B" Word Hits Chicago: Illinois Governor Proposes Bankruptcy for Chicago Public School System
- Shell Fires Another 10,000; Energy Layoffs Top 250,000; Oil Breaks $28 Again; In Search of Jobs
- Parade of Weakness: Housing Starts and Permits Slump in December
| Draghi Rally Fizzles In Less Than One Day: Failure In Pictures Posted: 21 Jan 2016 04:25 PM PST ECB President Mario Draghi attempted to talk the Euro lower and the market higher today in a lengthy one hour press conference following his decision to not change interest rates. Markets are now closed, so let's put a spotlight on the results (or lack thereof) of Draghi's verbal intervention. click on any chart for sharper image Euro 15-Minute Chart  That is the key chart for someone who desperately desires the euro to sink vs. the US dollar. In 15 minutes, the Euro sank from 1.09 to 1.078. For the rest of the day, the Euro rallied right back where it started from. Five Year German Government Bond  Congratulations are in order. Draghi managed to drive the yield on the German bond from -0.20% to -0.24%. How that's supposed to cause inflation remains a mystery given that it's not done a damn thing yet. US 10-Year Government Note  Yield on the US 10-year treasury note reversed its freefall to close back above 2%. Will it stay there? Why should it? The New York Fed is now openly discussing negative interest rates in the US if there is another crisis. S&P 500 15-Minute Chart  The S&P 500 did a number of gyrations, but the key Draghi-sponsored effect is the largest green candle. A decent rally ensued off the lows, but that rally faded into the close. Brent Crude 15-Minute Chart  Brent crude did rally more than $2 off the lows. However, the rally stalled before hitting $30. Neither US West Texas Intermediate (WTI), nor Brent is above $30 as I type. Jawboning oil is not likely to work, even in the intermediate-term. As I said earlier today Mario Draghi a Bare-Assed Emperor With No Clothes. Mike "Mish" Shedlock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Is Mario Draghi a Bare-Assed Emperor With No Clothes? Posted: 21 Jan 2016 12:41 PM PST ECB Hints at March Stimulus ECB president Mario Draghi ignited the markets today with Hints at More Stimulus in March. Investors reacted positively to Mr. Draghi's comments Thursday, with eurozone equity markets moving higher in anticipation of further stimulus from the central bank. The euro fell against the U.S. dollar while government bond prices rose, another sign that investors expected Mr. Draghi to deliver fresh measures in March.Five Draghi Takeaways Heading into the market close, there's not much left of today's rally. Crude has not even held the $30 level, but a half hour remains. The Wall Street Journal offers 5 Takeaways from Mario Draghi's News Conference. My comments follow these takeaways. [Draghi warns] inflation is the currency area is likely to be "significantly weaker this year than had been expected, and that consumer prices may even fall again in coming months. That means further action may be required, and as early as the governing council's next gathering. "It will be necessary to review and therefore possibly reconsider our monetary policy stance at our next meeting in March," said Draghi.ECB Inflation Mandate Please note whose inflation mandate Draghi is desperate to meet: "our mandate". It's a self-imposed mandate, and a ridiculous one at that. I repeat my challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit". Draghi's torturous Press comment lasted over an hour. The final 4 minutes are worth a look. I position the video at that spot. Keynesian Inflation Nonsense The Wall Street Journal points out "The annual inflation rate in the 19-country currency area has been far below the central bank's medium-term target of just below 2% since late 2013. Central banks usually try to avoid deflation, or steadily falling prices, as it can lead to consumers holding off purchases and ultimately lower the standard of living of the entire economy." Consumer price inflation, called Harmonized Index of Consumer Prices (HICP) in Europe, is indeed lower than what the ECB wants. But the second half of the above paragraph which proclaims "falling prices cause consumers to hold of purchases thereby ultimately lowing standards of living is complete" Keynesian nonsense. Falling prices are a good thing. Money goes further. If falling prices caused people to delay purchases not a single computer would have been purchased for decades. Consider clothes. Someone who needs a coat will buy one even when prices fall. On the other hand, if prices were rising rapidly, consumers might have to choose between a coat or eating. There is absolutely no economic benefit to rising prices. ECB Oil "Rally" In Pictures  ECB Bond Purchases  Draghi Has No Clothes If padding the central bank balance sheet causes inflation, then why the hell hasn't it? The answer is: it did, just not in the CPI or the HICP. Instead, central banks sponsored yet another asset bubble. This bubble is even more widespread than the housing bubble that preceded it. Another round of asset deflation is now baked in the cake. History proves it is asset deflation, not consumer price deflation that is economically damaging. The BIS (Bank of International Settlements), agrees with that statement. For further discussion, please see Historical Perspective on CPI Deflations: How Damaging are They? Meanwhile, please note that Mario Draghi was bare-assed naked at today's conference. Like the emperor with no clothes, no one seemed to notice. Mike "Mish" Shedlock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Posted: 21 Jan 2016 10:27 AM PST Eventually, all bad things come to an end. Here's a case in point: Christine Lagarde's 5-year term as head of the IMF is nearly over. A replacement search is underway. The Wall Street Journal reports the IMF Launches Selection Process for Managing Director. Upon reading the article, I was both shocked and outraged to discover that neither I nor ZeroHedge are in serious consideration for the job. Then again, the first thing I would do as head of that parasitic organization would be to fire everyone, then myself, effectively killing the parasite. Further investigation shows Lagarde is a shoo-in for a second term. So, although bad things will eventually come to an end, we will just have to wait longer. Mike "Mish" Shedlock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Run on Italy's Third Largest Bank? Capital Controls or Bail-Ins Next? Why Take Chances? Posted: 20 Jan 2016 11:11 PM PST Italian Bank Customers Pull Deposits The CEO of Monte dei Paschi, Italy's third largest bank, and the oldest surviving bank in the world, admits Customers Pulling Deposits as share prices sink. Some Monte dei Paschi customers have been pulling savings out of the Italian bank, its chief executive said on Wednesday, as it faces a crisis over a mountain of bad loans that has wiped nearly 60 percent off its market value this year.Believability Standards The problem with statements like "fall in deposits is limited" is that no one can possibly know if they are true. We can't expect Viola to admit the problem is serious. European Commission President Jean-Claude Juncker set the believability standard in 2011. Juncker admitted "When it becomes serious, you have to lie". At the time, he was Luxembourg prime minister. It's Serious! Share prices of Monte dei Paschi are down over 50%, the worst of any major Italian bank. Deposits are leaving, and the only statement we have is that withdrawals are "limited". Bail-ins have already hit other Italian banks. In December, bail-ins at smaller Italian banks wiped out subordinate bondholders. Sergio Picinotti, a 63-year-old unemployed man, lost his entire €40,000 nest egg in Banca Etruria. A friend at the bank said "Trust me, it will take the third world war to shut down Banca Etuuria," said Picinotti. Did a third world war just start? Bad Bank Plan Stalls On January 20, Bloomberg reported Italy's Lending Recovery at Risk as Renzi Bad Bank Plan Stalls With non-performing loans touching a record high of 201 billion euros ($219 billion) in November and delays in creating a bad bank even as the European Central Bank ups its scrutiny, lenders may be reluctant to make new loans.Europe Fears Bail-Ins On January 11, I commented Europe Fears Bail-Ins: Capital Flight Intensifies in Italy, France, Spain; Are German Banks Safe? Here's a table from that post, with Target2 Balances in billions of euros.
Lack of Trust Target2 is a measure of capital flight between eurozone countries. For example: A depositor in a Greek, Spanish, or Italian bank does not trust their bank so the depositor opens up a new account and transfers the balance to a bank in Germany, the Netherlands, or Luxembourg instead. The recipient banks then park the money at the ECB at negative interest rates instead of buying Greek, Spanish, or Italian bonds. Money parked at the ECB at a negative rate of 0.3% hit a new high at the beginning of 2016.  Brilliant Comeback Details Viola claims there was a crisis in February of 2013 that was "overcome brilliantly". How many times does one want to bet on that roll of the dice? Let's explore Viola's brilliant comeback idea from the perspective of Target2 balances for Italy (in billions of euros).
Between 2008 and 2010, Italian banks had capital inflows. Things went to hell in a hurry starting 2011. By the end of 2012, target2 liabilities of Italian banks hit €255.1 billion. By second quarter of 2014, those imbalances shrank to €149.4 billion. "Brilliance" Explained Did Viola do something to spur confidence in Italian banks? Nope. What caused the improvement?
The ECB and the financial markets liked that power grab by Matteo Renzi who then became Italy's prime minister. Money that had fled Italian banks, poured back in, for a while. That honeymoon is clearly over. Care to bet on another "brilliant" comeback? Not a single fundamental problem with Italy, the ECB, the euro, or Europe in general has been fixed. Capital Controls or Bail-Ins Next? In December, only bondholders were at risk. Starting 2016, depositors are at risk, but allegedly only on amounts that exceed €100,000. Don't kid yourself into believing smaller deposits are safe. There are other problems, like capital controls. Greece and Cyprus both have them. Capital Controls in Greece In 2015, the ECB imposed Capital Controls on Bank Accounts limiting withdrawals to €1,800 a month. On October 19, 2015, Bloomberg proclaimed A Quick End to Greek Capital Controls? Economists Don't Think So. Even if your money is not stolen, you may not have access to it for quite some time. Why Take Chances? Viola said the fall in deposits was "limited". I ask "Why Take Chances?" Renzi wants to create a "bad bank". Under new rules, effective 2016, bondholders and depositors are liable for any losses transferred to the "bad bank". Why is the ECB reluctant to approve a bad bank for Italy? Could it be the losses will be massive? Get Out Now! Don't be seen Standing in Line hoping for your money when withdrawals are 'limited' via capital controls or outright confiscated by bail-ins. Avoid the rush. Get out now. Where? Think carefully. For further discussion, please see Europe Fears Bail-Ins: Capital Flight Intensifies in Italy, France, Spain; Are German Banks Safe? Mike "Mish" Shedlock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| "B" Word Hits Chicago: Illinois Governor Proposes Bankruptcy for Chicago Public School System Posted: 20 Jan 2016 06:16 PM PST "B" Word Hits Chicago At long last, Illinois has a sensible proposal to help Chicago schools: Bankruptcy. The cause of Chicago's problem is untenable pension promises, ridiculous union contracts, and bloated administration payrolls. As a direct result of those problems, the Chicago Board of Education, the nation's third-largest district, is under fiscal siege. The CBOE operating deficit is projected to reach $1 billion a year through 2020. Yet, union arrogance abounds. The Chicago's teachers union is threatening to strike, demanding still more benefits. Republicans Propose Takeover The solution, proposed by Governor Bruce Rauner and key Republican leaders on January 20, is a State Takeover and Bankruptcy for Chicago Schools. Christine Radogno and Jim Durkin, the state's top Republicans in the legislature, outlined a proposal Wednesday that would allow the state to take control and even push the system, charged with educating almost 400,000 students, into Chapter 9.Tax Hikes and More Tax Hikes Mayor Rahm Emanuel's solution to this mess was to make the biggest tax hike in history. On October 28, 2015 I commented Chicago's Sheep Dogs Approve Mayor's Tax on Sheep; Quote of the Day "It's Not a Piece of Art". The "sheep" in question are Chicago taxpayers who will need to pony up a historic property tax hike of $589 million to fund the city's police and fire department pensions. Chicago Curbed notes "some aldermen and activists have warned that the historic tax hike will hit renters the hardest." The report added "There have already been some neighborhood skirmishes in Logan Square, Humboldt Park and notably in Pilsen regarding runaway gentrification, and some activists say that the property tax increase will only exacerbate the effects." Did Emanuel's Tax Hike Solve Anything? Of course not. The school system is still broke. And instead of admitting the problem, mayor Emanuel wants the rest of Illinois taxpayers to "save the system". The system is bankrupt. It cannot be saved. Any rational person would not want to save a corrupt, taxpayer-milking machine that does a horrendous job at its primary goal: teaching. Does that make Emanuel an idiot? Here's my polite answer: When a politician's job depends on not understanding a problem, there's no way in hell the problem will be understood. Governor Rauner needs to stand his ground for as long as it takes, no matter what the interim consequences. Mike "Mish" Shedlock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shell Fires Another 10,000; Energy Layoffs Top 250,000; Oil Breaks $28 Again; In Search of Jobs Posted: 20 Jan 2016 11:41 AM PST Shell Fires Another 10,000 As reflective of trends in the industry Shell Fires 10,000 Workers As its fortunes collapse due to falling oil prices, Royal Dutch Shell PLC will fire 10,000 people in an effort to bolster margins.Did Shell Overpay for BG? The "BG combination" mention above but not explained (emphasis mine) refers to the Shell Takeover of BG announced in December. Royal Dutch Shell is pressing ahead with its $60bn (£40bn) takeover of BG Group despite doubts among some shareholders about the deal's viability given the falling oil price.Merger Rule Number One Management is never fired for questionable, even outright bad, corporate decisions. Employees, not management takes the hit. In this case, chalk up another 10,000 employee synergies. Energy Layoffs Pile Up
In Search of Jobs On November 23, Houston Public Media reported Oil Workers Brace For Fresh Layoffs, As Industry Wrestles With 'Lower For Longer' Crude Prices "We're seeing declines in population across these towns in south Texas," says Ed Hirs, an energy economist at the University of Houston.Global Oil Layoffs Top 250,000 On November 20, Bloomberg noted Oil Jobs Cuts Top 250,000. The number of jobs gutted from oil and gas companies around the world has now passed the 250,000 mark, with still more to come, according to industry consultant Graves & Co.The winner of the blue ribbon award for accurate prediction in the month of November goes to Graves for his understatement "It's going to get worse before it gets better." 56,000 Layoffs in Texas Alone On November 12, FuelFix reported Oil crash job losses in Texas may be steeper than previously thought. The number of oil and gas job losses in Texas may be far worse than an industry group originally predicted, potentially reaching 56,000, according to the latest analysis by the Texas Alliance of Energy Producers.That 56,000 estimate was from early November. What is it now? Unambiguously Good The price of US and Brent crude both broke $28 to the downside today but remain hovering near that level. Don't fret. I have it on good authority this decline in oil prices is "Unambiguously Good" for the economy. In a CNBC video in November of 2014, Kudlow stated Drop in Oil Prices is Unambiguously Good. It was not just Kudlow making such statements. Various Fed officials believed the same thing. "We Got This Wrong" Let's now flash forward to a bit of reality. On January 9, 2016, San Francisco Fed president John Williams finally admitted "We Got This Wrong". Williams still does not realize precisely what is wrong. Oil prices in and of themselves are inherently neither good nor bad. It all depends on why. In this case, the Fed sent false economic signals with round after round of QE, and by once again keeping interest rates too low, too long. Effects were not seen in consumer prices as the Fed wanted. Rather, asset price bubbles developed in stocks, bonds, and junk bond borrowings of hundreds of billions of dollars to drill wells smack into a slumping global economy. The only "tools" the Fed knows are rates cuts and QE. But that's what created this mess. And here we sit with the Fed still insisting four more hikes are coming in 2016. The market now spits in the Fed's face. Mike "Mish" Shedlock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Parade of Weakness: Housing Starts and Permits Slump in December Posted: 20 Jan 2016 09:40 AM PST Housing starts, one of the presumed strengths in the economy, took a dive in December. The Econoday Consensus Estimate was for 1.200 million starts vs. the actual report of 1.14 Million. Housing starts and permits both fell back in December but follow large gains in November. Starts came in at an annualized 1.149 million rate in December for a 2.5 percent monthly dip while permits came in at 1.232 million for a 3.9 percent decline. Yet both of these readings for November surged more than 10 percent. Year-on-year, starts are up a healthy 6.4 percent with permits especially strong at 14.4 percent.Respectable Strength Questioned  The above chart calls into question alleged strength from a historical basis. However, when calculating GDP, what matters is near-term comparisons (month-over-month and year-over-year). Both of those can fluctuate strongly because of weather-related issues. Bloomberg smooths that out via a 5-month moving average.  Parade of Weakness Have housing starts now stalled? November might have one thinking "no", December might have one thinking "yes", and perhaps the 5-month average has one thinking "maybe". Year-over-year comparisons in February and March will be very easy to beat. Starting in April, year-over-year comparisons will be difficult to beat for a long stretch. That's when apparent strength likely starts to look like apparent weakness. Wasn't December supposed to be the warmest ever? Northern Illinois certainly was unusually mild. That should have added to December starts, but it didn't. One typically only hears about the weather when it makes matters worse. In this case, warm weather should have added to starts, but didn't. Regardless of weather-related effects, home prices are no longer affordable. Millennials are priced out. Manufacturing is in recession. Retail sales have stalled despite low gasoline prices. Autos sales were a disappointment. Inventory-to-sales numbers signal trouble, everywhere. My bet is housing joins the parade of weakness. Mike "Mish" Shedlock |
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