Around the Globe 09.04.2013

New India central bank chief raises hopes with action plan | Reuters.

Exclusive: IMF sees emerging economies vulnerable to U.S. tapering | Reuters.

From Yahoo Finance

From Yahoo Finance

India’s problem is its outsized reliance on foreign capital for growth.  This capital is now fleeing causing the rupee to lose value, which creates even more capital flight.  Indians do not stand idly by while their rupees plummet in value.  Rather, they have been purchasing gold to preserve their savings, and this is also adding to the rupee rout.

In response to this cycle, the new head of the Reserve Bank of India announces a series of palliative measures.  While these measures will do little or nothing to break the vicious circle the subcontinent finds itself in, at least someone is doing something ceasing the downward march of the rupee, for now.

U.S. Trade Deficit Widens 13.3% –

U.S. trade deficit widens, little impact seen on third-quarter growth | Reuters.

Widening Trade Deficit Signals Improving U.S. Demand: Economy – Bloomberg.

U.S. Balance of Trade 08.2013

When the trade deficit widens, economic growth suffers.  The formula for GDP is Consumption + Investment + Government + Balance of Trade.  A negative balance of trade reduces GDP, but rising imports generally indicate a strengthening economy.  However, this “recovery” is different as strengthening economic numbers of every stripe seem unable to increase the demand for labor in this country.  While imports have risen, export growth has leveled off.  You can see for yourself what happens when exports stop growing:

U.S. Exports


GM to Ford Sales Climb in Best Month for U.S. Since 2007 – Bloomberg.

U.S. auto sales on pace for best month since November 2007 | Reuters.

GM, Ford, Toyota and Chrysler Log Strong Sales –

Light Vehicle Sales Pace 1976-2013

Cheap money is being used to paper over the problems in the economy.  Light vehicle sales have rebounded to pre-GFC levels, and at first glance, this is a positive development.  However, the information is being presented without context.  Placing August’s sales results into context places a giant gap in the mainstream media narrative.

First, a sales pace from 2007 isn’t that great.  The red line illustrates that from 1997 to 2007, auto sales surpassed this month’s pace in all but two months while the country’s population was lower, 267 million to 302 million in those years compared to 316 million today.  Since 1998, the country has added six New York Cities, but auto sales have basically remained flat during this time.

Second, in light of this chart showing declining incomes for Americans

US Household Income Performance Since 2000

you may wonder where people are getting all of this money to purchase shiny, new cars.  Wonder no more:

Subprime deja vu: Bank car loan lending standards ease:

  • A record 84.5 percent of people acquiring cars in the second quarter financed the deals with loans or leases, Experian said on Tuesday. That is up from 79.7 percent in 2008.
  • The shifts came as average credit scores for new car loans from all lenders fell for the fourth consecutive year.
  • U.S. banks made 36 percent of their car loans to subprime borrowers in the second quarter, up from 34 percent a year earlier, according to data from Experian.
  • On nearly 20 percent of new car loans, lenders take the additional risks of allowing borrowers six to seven years to repay.
  • Total U.S. outstanding auto loans rose to nearly $751 billion, up 10 percent from a year earlier.

Credit fueled expansions are never sustainable.  In addition to the various bubbles created courtesy of your Federal Reserve, please add the “New Car Bubble” to the list.




Greece Requires 4th Bailout

IMF to suspend aid payments to Greece unless bailout hole plugged –

Greece Now, Too? Dow Down 300 on Reports of IMF Threat – MoneyBeat – WSJ.

GGB 06.20.2013

Greece will require even more money by July, and you read it here first.  Astute readers of Dareconomics knew in December that the troika’s numbers simply did not add up, and Greece would have a funding gap opening prior to German elections:

Risks Remain in Greek Bailout | DARECONOMICS.

The 3rd Greek bailout was not designed to place Greek finances on a sustainable path; rather, the troika was primarily concerned with kicking the can down the road past German elections.  Once Angie was safely seated in the Chancellor’s throne, she could return to the Bundestag with a request for more German money to throw down the Hellenic Hole.

The troika is placing the blame at the feet of the countries of the Eurozone who are refusing to rollover Greek debt after initially promising to do as part of the 3rd Bailout.  This refusal to fund combined with the usual lack of privatization receipts and “surprise” shortfalls in government revenue means that the Greeks will require more money by the end of July.  The question is how will they get it.
Merkel will not be able to request more money in the Bundestag, because a vote on more PIIGS giveaways will not be scheduled prior to elections in September.  This leaves the ELA.  As we predicted months ago in the link above, the Greeks will have to rely on ELA cash for a few months until after German elections.  Will the IMF accept this fudge again?

Around the Globe 06.06.2013

Economist: Housing Will Thrive After Fed Exit.

US Housing Sales through 04.2013

The mainstream media loves promoting its housing recovery narrative.  In this article, the reporter writes, “Housing has experienced an incredible recovery.” Apparently, an incredible recovery means 2010 sales levels, which are less than one-third the pace at the market’s peak.

The chief economist for a sell-side firm bases her thriving housing market prediction on rising mortgage activity going forward.  We have a chart for that:

Mortgage Applications 06.2013

As you can see, mortgage activity is actually falling.  The truth is that the housing market will not revive until employment and income rise.  In other words, people who actually wish to live in houses must reenter a market overrun by exuberant flippers with their pockets stuffed full of Uncle Ben’s money.

The Aussie Dollar Just Can’t Catch a Break.

AUDUSD 06.06.2013


All you need to know about the Aussie can be summed up in this handy chart:

China HSBC PMI 06.02.2013

Chinese manufacturing is contracting, and in lockstep, China’s demand for raw materials.  China is purchasing less Aussies, and this shortfall in demand is driving the currency lower.  This trend will continue for the immediate future broken up by occasional rallies.

$1 Trillion Debt Crushes Business Dreams of U.S. Students – Bloomberg.

Credit Growth to 2013

Government intervention creates a vicious circle.  The purpose of offering cheap loans is to make higher education accessible to all, but this is not the end result of student loan programs.  The hot money created by government subsidies actually increases the cost of college, so in the long run the program runs counter to its purpose:

Tuition Inflation

The chart also details what hot money from government subsidies is doing to another popular economic sector that is subject to Beltway reforms (the orange line).

Draghi Sees Economy Recovering as ECB Rates Left on Hold – Bloomberg.

ECB holds rates, sees gradual recovery this year | Reuters.

ECB Sees Longer Wait for Recovery –

Eurozone Unemployment 05.31.2013

The ECB lowered its GDP performance estimate for the Eurozone from -0.5% to -0.6%, and Draghi forecasts a return to growth by the end of the year.  Of course, the return to growth keeps getting pushed back by ECB forecasters from their initial prediction of the 1st quarter in the fall, to the summer in their 1st quarter forecast and to year end today.  Notice a pattern? The ECB will continue to predict growth commencing six months from the date of the prediction until the day the euro breaks.  In the meantime, GDP will contract, unemployment will rise and prosperity will remain just around the corner.

EU Hits Back at IMF Report –

For hard-hit Greeks, IMF mea culpa comes too late | Reuters.

Bad IMF Predictions

Hanlon’s razor is, “Never attribute to malice that which is adequately explained by stupidity.” On the plus side, the IMF was not cooking the books and actually believed that it was issuing usable economic forecasts for the Greek bailouts.  On the minus side, IMF economists are dangerously incompetent.  Despite missing to the downside time after time, they continued to rely on the same defective models.  This mea culpa and change in philosophy is a day late and a drachma short for the people of Greece.

Merkel urged to come clean on Greek debt relief | Reuters.

Angela Merkel, courtesy of Armin Kübelbeck

Angela Merkel, courtesy of Armin Kübelbeck

The German opposition, the SPD, is attempting to make hay out of the fact that the Greeks will require debt forgiveness after German elections.  While this is true and German voters will be outraged when this goes down in the winter, the SPD supports this policy, too. In fact, the Socialists will be more than happy to expend even more money to keep the euro together.  This is the type of stupid move that the challenger makes on his way to losing an election to an incumbent.

Around the Globe 04.17.2013

IMF Sees 20% of Corporate Debt Unsustainable in Parts of Europe – Bloomberg.

Spanish Bankruptcies

This is exactly why low interest rates lead to bubbles and malinvestment.  When companies see these low interest rates, they just cannot help themselves.  They begin gorging on debt whether or not they have worthwhile projects to invest in.  The excess debt does not create as much revenue as is needed to service it despite the low rates.  Eventually, this leads to bankruptcies and defaults, as in Spain depicted in the chart above.

Not Concerned About Hard Landing in China: IMF.

The IMF has a poor economic forecasting record. According to the fund, Cyprus needs only €17.5bn, not €23bn and rising, while Greece should have returned to growth two years ago. Since the onset of the GFC, China has relied on a credit boom feeding unproductive projects such as ghost cities and roads to nowhere. This is unsustainable. Moreover, the implication of denying a hard landing is that China is not in the midst of a bubble. None of these entities, whether they be NGOs or central banks, ever spot a bubble forming until it bursts.

BOJ official: mulling increasing frequency of JGB purchases | Reuters.

JGB Volatility

For some reason, the BoJ clusters its bond purchases over five or six days of the month resulting in increasing volatility in the market (chart above). The Fed spreads its purchase out over the entire month (chart below).

POMO Schedule April 2013

Sliding Yen Could Herald New Asian Currency Crisis: Albert Edwards.


Mr. Edwards has come to the conclusion that the cheap yen will find its way to markets throughout the world as Japanese investors cash out of their JGBs and chase yield. Interestingly, the euro has appreciated nicely since the BoJ’s announcement, and periphery bond yields have fallen as exemplified by Spain.

Spanish 10yr SB 04.17.2013

Bundesbank Chief Weidmann Says Europe Recovery Could Take Decade –

The PIIGS have already endured a few years of misery and have a decade of more of the same to look forward to.  The euro will break up long before the promised recovery materializes in ten years.

Stock Surge Linked to Lobbyist –

XLV 04.02.2013

A former Congressional staffer receives tips from his former colleagues 180° away in the revolving door. Then, he passes them along to the people who pay him to lobby Congress. Healthcare stocks mysteriously rise shortly thereafter.

I predict that in a few months, when no one is looking, the SEC will quietly close their investigation without finding any wrongdoing.

HEARD ON THE STREET: This Trend Is No Friend to Goldman –

GS 04.17.2013

The main point to glean from this article is that Goldman’s profit rise is unsustainable in the face of falling revenue. An artificial bull market stoked by money printing is creating profits in underwriting and investing and lending that will end once the market turns. GS and its TBTF brethren will be in for a rough ride once this happens. Furthermore, expenses have already been cut to the bone, so profit gains from operational cuts will begin to wane as well.


Debunking Elements of Greek Deal

Factbox: Key elements of the Greek debt deal with the euro zone and IMF | Reuters.

As I discussed in previous posts, this deal is merely a cynical ploy to delay making a real decision on Greece until after German elections in the fall. Despite what European leaders are saying, this deal neither puts the Greek crisis behind Europe nor offers the Greek people a fresh start.  Reuters reported the elements of the deal in bold; my comments follow each point.

Greece will reach a primary surplus target of 4.55 percent of gross domestic product only in 2016, rather than 2014, to give the economy a better chance to start growing again.

This target is based on unrealistic assumptions of increases in Greek growth and in tax revenues. Greece will never achieve a primary surplus of 4.55% by 2016.

Greece will organize a debt buy-back of its bonds held by private investors. The buy-back will take place by Dec 12.

The bond buy-back is merely a way to cosmetically enhance Greece’s debt burden today at the expense of the future. The bonds have an excellent interest rate, and no financial adviser would ever suggest that Greece retire them.

Once the buy-back yields a positive outcome, the IMF will join the program and the euro zone will consider the following…

That statement means exactly what you think it does. We can be back at this point two weeks from now. The buy back is contemplated at 35 cents on the euro, so all should go well. However, this is Greece we’re talking about.

A cut by 100 basis points in the interest rate on bilateral loans to Greece under the first bailout, reducing the rate to 50 basis points above financing costs or Euribor. Ireland and Portugal do not have to cut the interest because they themselves receive aid.

This action really does reduce Greece’s indebtedness.

The euro zone’s temporary bailout fund, the EFSF, will cut its fees charged on loans to Greece by 10 basis points.

So does this one. The Eurozone is finally taking rational steps to solve the Greek debt crisis rather than making cosmetic improvement that reek of cynicism.

Maturities of loans to Greece, both bilateral and from the EFSF, will be extended by 15 years.

Oops, I spoke too soon.  Extending the maturity of the loans ensures that the Greeks will spend an entire generation in debt hell.

Greece will not have to pay interest on loans received from the EFSF for 10 years.

The interest will still accrue and be capitalized over the 10 years. See my comment above.

Profits from the European Central Bank’s Greek bond portfolio, acquired during the bank’s Securities Market Programme (SMP) will be handed over to Greece for debt servicing from the budget year 2013 onwards. No amount was given in the statement of the Eurogroup, but a euro zone source said this amounted to 11 billion euros.

This action will help Greece; however, the ECB has paper profits on its Greek debt. It will have to sell these holdings to realize the profits, and the assumption is that Greek debt prices will remain stable during this process. If Greek debt falls in value, less than €11bn will be realized.

Euro zone countries will consider further measures and assistance, including a further interest rate reduction on bilateral loans to Greece to help Athens reach debt sustainability when Greece reaches a primary surplus and meets all the conditions in the reform program.

As you can see, Germany still has its foot on Greece’s throat. These considerations should not matter, because Greece will have defaulted on its debts by 2016.

Greece’s debt-to-GDP ratio is to fall to 175 percent in 2016, to 124 percent in 2020 and substantially below 110 percent in 2022.

Any Greek goal is based on unrealistic troika assumptions regarding future economic growth. According to their forecasts, Greece will average over 4% economic growth from 2015 to 2024. Good luck.

Euro zone countries will continue to finance Greece until it regains market access, if Greece sticks to the agreed reform program.

Even if they do not stick to the reform program, the Eurozone countries will continue to finance Greece through German elections. As we speak, the ECB continues to allow Greece to finance itself through the ELA program.

Greece will get a tranche of aid of 34.4 billion euros in December, of which 10.6 billion will be for budget financing and 23.8 billion for the recapitalization of banks. A further 9.3 billion euros will be disbursed to Greece in three sub-tranches in the first quarter of 2013 if Athens meets reform milestones set by the lenders.

Since there are three sub tranches in the first quarter, expect three exercises in political brinkmanship in the coming months.

This plan merely delays the inevitable Greek default. Merkel hopes that the deal will hold everything together until after she stands for reelection.

Do not discount the Greeks. They are very resourceful, and there is no reason why they can’t run out of money before then. At the very latest, we will be back to the bargaining table for a fourth Greek bailout one year from now.










Greek Can Kicked Past German Elections

Greece’s Creditors Reach Deal on New Aid –

Euro zone, IMF reach deal to cut long-term Greek debt | Reuters.

Greek Aid Deal Reached by EU, Debt Relief Ruled Out – Bloomberg.

The chart above from ZeroHedge helps to show what is really driving the Greek bailout deal. If you thought it was the welfare of the Greek people , then you have not been paying enough attention to the Eurocrisis.

In the chart above, GDP continues its descent until after German elections in the fall of 2013. Then, the number begins rising dramatically. This is no coincidence. The purpose of the this deal is to avoid problems for a few more months to enable Merkel’s reelection. The GDP numbers are realistically poor until the fall, because Germany needs them to be. Actual money is needed to plug funding holes until the election.

After the election, it makes no difference what happens, so unrealistic projections may be used instead of real money to plug financing holes. The next time Greece needs to be bailed out, Merkel will try to get a longer term deal to keep Greece in the euro. If the political calculus does not favor another bailout for Greece, she will allow it to default. It’s that simple.

While the deal expertly defers the Greek problem for another few months, it will do nothing to arrest the descent of the economy. The Greek people receive nothing for their suffering except malaria and more suicides. The Greek politicians receive money to hand out to their cronies at the banks.

The IMF did well. It conceded to allow the Eurozone to raise the sustainability goal to 124% Debt to GDP in exchange for an agreement to reduce Greece’s debt to under 110% by 2022. The only way to reduce the debt ratio that low by 2022 is for the Eurozone to forgive Greek loans. I am skeptical that this will  happen, but we will have to wait until 2016 to see if I am correct. In politics, that is a lifetime, and Schaeuble’s language is vague enough so that he can claim that nothing was promised.

The German led Eurozone did very well in this deal. In exchange for maintaining the status quo for a few more months, they gave up peanuts:

  • Lower interest rate on bilateral loans
  • Relinquishing profits an ECB held debt
  • Extending the maturity of the loans
  • Deferring interest payments for 10 years
  • Loaning the money to Greece to buy back its outstanding debt

The first two points actually help Greece, but the last three are mere window dressing. Extending the maturity of the loans and deferring interest payments for 10  years ensures that the Greeks will be debt slaves long after Samaras, Merkel and Juncker have retired to their summer homes.

The Greek buy back is actually bad for Greece, because it will not be able to obtain replacement financing on such generous terms:

At least it makes the numbers look good today.

While the whole deal is a scam whereby Petros is being robbed to pay Pavlos, the biggest lie comes to us courtesy of the biggest liar in the Eurozone. Ladies and gentlemen, Mr. Jean-Paul Juncker:

“This is not just about the money. This is the promise of a better future for the Greek people and for the euro area as a whole, a break from the era of missed targets and loose implementation towards a new paradigm of steadfast reform momentum, declining debt ratios and a return to growth,” he told a 2 a.m. new conference.

He’s right about one thing. It isn’t just about the money. It’s about German elections. See you at the next Greek bailout summit, J.P.

IMF Caves

Greece says lenders closer to compromise on debt viability | Reuters.

Just when we thought that the IMF would remain the voice of reason on Greece, Lagarde caved in to eurozone demands that the debt sustainability figure be raised to 124%.

The IMF’s capitulation paves the way for a deal on additional Greek aid and releasing the next tranche of bailout loans. This new compromise comes at a high price to the IMF. It is slowly losing credibility as its europhile, French leader puts the interests of the continent ahead of those of the organization she heads.

Greek Bond Exchange is a Bad Idea

Greece’s lenders fail again to clinch debt deal | Reuters.

Germany is hinging the current plan to get Greece’s debt under 120% on a poorly conceived bond exchange. Essentially, Germany wants Greece to borrow €10bn to buy back its own bonds at a steep discount to face value.

There are two reasons why this is a bad idea. First, Greece will eventually default anyway, so it should not buy back bonds that will never be repaid.

Second, if you do not believe that Greece will default (note that I used the word “believe” not “think”), then it is still a bad idea because the bonds have really generous terms, which Greece will never be able to replicate on further issues.

As part of the Greece’s March 2012 bailout, in exchange for €1000 of old bonds investors received 20 news bond for €15.75 in principal, maturing one per year from 2023 to 2042 paying

  • 2% through 2015
  • 3% from 2016 to 2020
  • 3.65% in 2021
  • 4.3% from 2022 through 2042

Each investor also received EFSF notes and GDP based warrants, but these will not be bought back.

The interest rates on the new bonds are lower than the rates that Italy and Spain are currently receiving. If Greece ever returns to the bond markets, it will  not be able to sell debt at these prices. No independent adviser would recommend to Greece to buy back these bonds. They are just too cheap and will not really save the country much money.

The real reason Germany is suggesting this ploy is because it will shave a paltry 2 or 3 points off Greece’s  debt to GDP ratio to cosmetically enhance it for the benefit of the IMF.

The closer the German government gets to elections, the more cynical it becomes.

If you do not think the deal could actually look worse think again. Guess who owns the majority of these bonds? Try Greek banks owned by the tax-dodging Greek elite and hedge funds.

To summarize, the Greek taxpayer is being screwed so that banks and hedge funds can make excessive profits speculating in its debts while the Germans get to avoid another Greek bailout prior to elections.


ADDENDUM: Germany’s Position on More Greek Aid

German doubts force EU rethink on Greece –

Germany’s Position on More Greek Aid « DARECONOMICS.

This is an addition to my piece above. Germany always has to be the buzzkill. During the eurocrisis whenever it doesn’t get its way, it begins claiming that the compromise is “illegal.”

Germany trots this term out to suit itself. Remember that the ECB purchased over €200bn in PIIGS bonds to support the market amounting to illegal fiscal transfers and stands ready to do so with OMT. While the Bundesbank pointed out that these actions are illegal, Merkel approved of them wholeheartedly.

The two ideas that Germany has declared illegal are cutting Greece’s interest rate and returning ECB Greek bond profits to Greece.

For the former, Schaeuble’s position is that giving Greece lower than cost financing amounts to a fiscal transfer. For the latter, since the Bundesbank has half the profits from the Greek bonds rather than the German treasury, this would again amount to a fiscal transfer.

This whole episode is following the 4th Iron Law of the Eurocrisis. Merkel has her crisis. Let’s see if she can get something done.

One important thing to remember is that Greece will not run out of money for quite some time, so this may drag on for a few more weeks.


3rd Greek Bailout Next, Default Afterwards

Greek debt can only become sustainable by 2022 if all steps taken – document | Reuters.

Greece is heading for a 3rd bailout that entails eurozone write-downs of its holdings of Greek debt whether  Germany, Finland, Austria and the Netherlands like it or not.

In March’s second bailout of Greece, the troika agreed to designate  a sustainable debt ratio 120% of GDP by 2020.  This number is problematic for two reasons.

First, assumptions for Greek economic growth are much higher than warranted; Greece will never grow enough to reduce the debt to 120% of GDP. If Greece’s economy is merely 10% smaller than projected by 2020, the ratio will be 133%. Recall that all economic forecasts for Greece have been much rosier than reality since the start of the crisis, and you will see that this is a reasonable assumption to make.

Second, the ratio is unrealistic anyway. Spain currently has a debt ratio of 90%, and it’s in a lot of trouble. Italy is both wealthier and more economically developed than Greece, and it is having problems with a 120% ratio. Even if Greece somehow manages to attain this number, it will still be choking on too much debt.

The politicians wish to delay the day of reckoning as long as possible to stay in office, and these are their ideas:

  1. Reduce interest rates on bilateral loans to Greece to 25 bp saving 5.1% of GDP by 2020.
  2. Have the ECB return profits on its Greek debt holdings to the eurozone members who will give them to Greece for a savings of 4.6% of GDP.
  3. Another default on private debt holdings in the guise of a buyback for 2.4% of GDP.

I have omitted one idea from the list. The eurozone also wishes to merely defer interest payments on Greece EFSF loans to 2022 and claims a savings of 16.9% of GDP. This savings is illusory, because the debt is not being saved but rather being pushed past the sustainability date meaning the debt will rise again after meeting the target. This fudge is as cynical as it looks.

Adding numbers one through three, we arrive at a savings of 12.1% of GDP when subtracted from 144% gives us a number of 129.9% of GDP. The bottom line is that the eurozone will have to forgive some of its loans to Greece in order to achieve the magic number, but Greece will still default despite this assistance.

The eurozone will eventually write-down some of the loans. If Greece is going to default anyway, forgiving loans that will never be paid back does not matter. Eventually, the can will be kicked right off the road, but in the meantime the politicians maintain the status quo. A default somewhere in the future is better than a default today.