One of the Best Libertarian Sites Closes Down
We are always pressed for time. As those who occasionally send us mail know, we even have frequently trouble keeping up with our mail – so much so that we might as well revert to snail mail. As a result, we have to carefully select what we read. In recent months, the 'Daily Bell' has made it to our list of 'must read' sites, so we are quite sad to learn that it will cease to publish new material as of July 16 (see the announcement of editor-in-chief Anthony Wile here).
Running a site like the Daily Bell is time consuming, and presumably has become a full time job, so we can understand Mr. Wile's decision. Still, it is a shame. Luckily though, at least the site's archive will remain online as an educational resource.
Barroso Admonishes France
EU Commission president Manuel Barroso let it be known that given the extension it has received with regard to reaching its 'fiscal target'. Good luck with that.
“European Commission President Jose Manuel Barroso said on Wednesday France needed to present a credible program of structural reforms as new data showed Europe's second largest economy slipping into a shallow recession.
Barroso, who was due later to meet President Francois Hollande in Brussels, said France must pursue reforms if the EU was to grant it two more years to bring its budget deficit down to 3 percent of economic output as promised. The extension would be approved "if France presents a credible reform program so that France can regain its competitiveness," Barroso told Europe 1 radio.
On Tuesday, the French parliament passed a landmark reform of the country's labor code, part of Hollande's efforts to convince European partners that he is committed to revamping the economy. But as preliminary data on Wednesday showed the French economy contracting by 0.2 percent in the first quarter, Barroso said that France needed to prove its commitment to pursue further structural reforms.
"The truth is that France has lost competitiveness over the past 20 years," he added.
Speculation of a cabinet reshuffle intensified on Tuesday after Foreign Minister Laurent Fabius, a former premier and finance minister, said France's giant Finance Ministry needed a "boss" to better coordinate economic policy. The remarks targeted Finance Minister Pierre Moscovici, whose left-wing firebrand junior minister Arnaud Montebourg has criticized budget cuts and had a series of run-ins with potential foreign investors in France.”
Credit Market Charts
Up until recently the reaction to the developments in Cyprus has been quite muted, however, the warning signs are now getting more obvious. We have therefore decided to present an update of a selection of our usual suspect charts: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different price scales in mind when assessing 4-in-1 charts). Where necessary we have provided a legend for the color coding below the charts. Prices are as of Monday's close.
The recent period of financial market calm, bought with massive monetary pumping and promises of more of the the same, has induced complacency in the eurocracy as well as in the financial markets.
A recent Bloomberg article takes stock of the situation. A few excerpts:
“European leaders declaring they’ve gained the upper hand in the three-year-old debt crisis are sharpening efforts to channel a rebound in financial markets to an economic recovery to chip away at soaring unemployment.
Even as euro-area chiefs call for more time to lock in a bailout package for Cyprus and elections loom next month in Italy, German Finance Minister Wolfgang Schaeuble said Jan. 11 that the single currency is “over the worst of the crisis.”
“Financial markets are starting to appear normal again,” Erik Nielsen, chief global economist at UniCredit SpA (UCG), wrote in a note to clients yesterday. He referred to European Central Bank President Mario Draghi’s Jan. 10 comments forecasting that the euro-area economy will climb out of recession this year.
Draghi’s six-month-old pledge to do whatever it takes to deliver the 17-member currency out of the crisis has been credited for declining yields and an easing in market turmoil. That’s given leaders more room to grapple with issues such as unemployment in Europe, which climbed to a record 11.8 percent in November, with every other Spanish youth out of work.
Draghi cited “positive contagion” in European markets after the ECB’s Governing Council left the central bank’s benchmark interest rate at 0.75 percent, holding its fire amid signs that the debt crisis is waning. Monetary policy makers have opted to rely on an unconventional policy arsenal such as the ECB’s pledge to buy unlimited amounts of sovereign debt.
Joachim Fels, chief economist at Morgan Stanley in London, warned that market improvement is inducing complacency among European policy makers as it has in the past, slowing efforts to overhaul the euro-area institutions. “Now we’re in the complacency phase,” Fels said in an interview on Bloomberg Radio on Jan. 11. “I worry that you always need a renewed crisis to push both government and the ECB to take the next step.”
A Slightly Orwellian Moment
It started with a surprising diplomatic (or rather not very diplomatic) verbal intervention delivered by a representative of the Empire to the UK's leadership: “Don't you dare leave the EU!”
“An outspoken intervention by a senior U.S. official who said Britain should not leave the European Union opened up a new rift between Prime Minister David Cameron and his deputy on Thursday.
Cameron played down any suggestion of a disagreement with Washington over Britain's EU membership, but Deputy Prime Minister Nick Clegg, his junior coalition partner, said U.S. concerns over Europe were spot on.
Both men were reacting after Philip H. Gordon, the U.S. assistant secretary of state for European and Eurasian Affairs, told a media briefing in London the previous day that Washington feared a British exit from the EU would run counter to U.S. interests.
Gordon's intervention, a rare foray into an emotive domestic debate, made front-page news in Britain, where Cameron is preparing to deliver a speech setting out his plans to try to renegotiate the country's relationship with the EU and then put the deal to a vote.
Cameron faces a dilemma. Many MPs in his own ruling Conservative Party are pressuring him to call a fully fledged referendum on whether Britain should remain in the EU, a demand backed by opinion polls which show a majority of Britons would, if given the chance, vote to leave the 27-nation bloc.”
The World is Still Turning…Surprisingly Enough
In mid December we issued a warning that the EU's chief living contrary indicator had piped up again – normally a sign that it is high time to batten down the hatches. We referred to him as the 'harbinger of doom' – EU economic and monetary affairs commissioner Olli Rehn, so to speak the chief central planning bureaucrat in Brussels.
Of course the economy needs neither a 'commissioner' nor a 'minister' to function smoothly. In fact, as a general rule, economies tend to function better without such people.
Hence, when Ludwig von Mises was once asked what his first offical act would consist of if he were appointed 'economics minister', his reply was:
It Is Not All Bad Actually, But …
Markit has just released the final PMI data for the , , (all files in pdf format) and others, and they essentially confirm the message from the 'Flash PMI' data discussed here. Things continue to look bleak and the euro area remains mired in recession. However, we would point out that not everything is bad. For instance, with the exception of Italy, most euro area peripherals (most notably Spain) have managed to narrow their 'competitiveness gap' with Germany considerably. Bank borrowings from the ECB have declined slightly even in Spain, bond yields and CDS spreads remain tame in the wake of the ECB's 'OMT' announcement. We would note to this that given how late the ECB was to the party every time, its interventions may have merely reinforced what the markets were about to do on their own anyway. There is of course no way of ascertaining to what extent the move lower in peripheral sovereign bond yields was due to the interventions and promises of the ECB and to what extent the previously very high yields attracted buyers motivated by the apparent opportunity. However, given the vast expansion in government bond holdings of e.g. Spain's banks, we are inclined to mostly blame the intervention effect.
The US Stock Market
There can be no doubt that the US stock market continues to be mainly supported by strong money supply growth as detailed in our previous missive. However, from a technical perspective, the entire rise from the 2009 low continues to look corrective in nature. On a long term chart the action in the market is strongly reminiscent of the 1970s bear market, even though the fundamental backdrop seems quite different. One question is of course whether it really is all that different: after all, the government has tweaked its calculation of CPI numerous times, with the goal of lowering it in order to slow down entitlement spending that is indexed to 'inflation'. Originally this goal was kept secret – it was maintained that what was needed was a 'more accurate inflation gauge'. Today, in the course of the recent budget debates, this fiction has been discarded and it is openly discussed that lowering the government's expenses should be the goal of once again altering the CPI calculation (this requires a certain degree of chutzpa, which we have noticed has become quite pervasive, as people have generally become more and more used to an environment reeking of growing authoritarianism). Naturally this makes what is already (and always has been) a useless number even more useless. According to the Shadowstats web site, if one were to employ the calculation method of 1980, CPI would today stand at a level comparable to what was seen in the inflationary 1970s.
Euro Area Carry Trade – From Disbelief to Consensus?
When we noted about a year ago that the ECB's LTROs were likely to give banks and incentive to initiate carry trades in the bonds of euro area peripherals, it was an opinion very few people shared. We wrote at the time:
“Is is clear from the above that Spain's banks – and this goes of course for the banks in all the other 'PIIGS' nations too, even though the details of their problems differ from case to case – should be more concerned with getting their leverage down and generally getting their house in order rather than embarking on yet another carry trade. And yet, from the point of view of the banks, things may look a bit different. As noted before, the fate of banks and their sovereigns is in any event closely intertwined. A bank that may one day require a government bailout will go under anyway if the government debt crisis worsens further. So it has actually nothing to lose by adding to its holdings of bonds issued by said government. They will both sink or swim together no matter what.
A new story has emerged yesterday that illustrates what actions governments and banks in the euro area are taking behind the scenes to ease the bank funding crisis. It should be clear that one of the unstated objectives of these activities is to free up money for the purpose of banks adding to their sovereign debt holdings.”
Pork-Barrel Spending Expert Becomes Finance Minister
It appears it is not enough for Shinzo Abe to attempt to wrest control over the nominally independent Bank of Japan from its board with the aim of getting it to “inflate Japan to prosperity”. The erroneous belief that one can get something for nothing by cranking up the printing presses is of course deeply ingrained all over the world, but as policy options go, it is an especially bad one for Japan with its graying and society and declining population. As we have mentioned before, inflation is about as useful to Japan's citizens as a hole in the head.
Now Abe also wants to add to the debtberg of his government, already the by far biggest in the industrialized world relative to the size of the economy, but more importantly, the most costly relative to the size of the government's tax revenues, even while interest rates are at generational lows.
“Surprise” – Over the Cliff We Go …
We rarely talk about the so-called 'fiscal cliff' here. The main reason for refraining from discussing it is that nothing of fundamental importance is likely to happen. One needs to keep in mind here that no-one is seriously considering to cut spending or to stop the debtberg from growing. The former lacks political support as it were. As Barry Ritholtz points out here, the public is actually against cutting government spending. This is because most people erroneously believe in a fictitious concept. As Frederic Bastiat once pointed out: “Government is the great fiction through which everybody endeavors to live at the expense of everybody else.”
Regarding the debtberg, it doesn't worry (most) politicians as long as there is demand for treasury bonds and interest rates remain very low. It will only become a problem from their point of view once the market balks – which one day, it will.
Most market observers have held that the 'fiscal cliff' will be avoided by a last-minute deal. We have argued otherwise. On November 30 we wrote:
“Our point here is: there is no compromise ahead of the deadline that can be truly to the liking of the politicians concerned, regardless of which party they belong to. The solution to this conundrum is to let the deadline pass without a deal.
It seems to us the markets are not really expecting that. If something happens that the markets don't expect, things could get ugly very quickly – just recall the most recent debt ceiling wrangle.”
We see little reason to revise that assessment. On Thursday evening it became known that House speaker John Boehner could not get enough votes from his own party to support his so-called 'Plan B', a compromise in which limited tax hikes would have been combined with various spending cuts. This was the stock market's immediate reaction:
In overnight trading on GLOBEX, March S&P futures (the e-mini is depicted above) quickly lost 50 points on news of the rejection of 'Plan B' – click for better resolution.
The market was surprised by what should surprise no-one. It spent the time after the initial shock regaining a great deal of the initially lost ground, but it appears to us that there is still a lot of complacency about the issue.
Banking System Clean-Up Gets Underway
As noted in the previous missive, the latest NPL numbers from Spain have seen yet another massive deterioration to 11,23% of all outstanding loans. Spain is trying to get its banking mess under control, by shifting toxic assets into Sareb, the new 'bad bank', while banks are at the same time busy restructuring distressed loans, shoring up their equity and increasing loan loss reserves.
In principle the way Spain is going about this is not different from how it was done in other cases of banking system blow-ups following burst bubbles.
The problem is that this particular exercise is more costly than most (on a relative basis) and that the problem keeps growing at astonishing speed (or perhaps it is not the problem as such, but recognition of it that is now growing faster). The only way to go about it all is to delever – and so both loans and deposits in the banking system are shrinking.
Year-on-year loan growth in Spain (chart via Exane/BNP Paribas) – click for better resolution.
While the markets were for a long time focused on the government's debt problems, the real debt problem in Spain is in the private sector.
A Reminder that the Crisis is Still Going Strong
Those analysts worth listening to are watching the 'clean-up' of Spain's banking system via the new 'bad bank' Sareb with increasing bewilderment - the very strong suspicion is that the prices for the toxic crap that is being shifted into the bad bank are still not quite what the market would pay for such assets. This is in spite of the heroic announcements by the Bank of Spain about 'realistic valuations' a while back, and the reason for the suspicion is the lack of foreign participation, and indeed also the curious reluctance on the part of BBVA to jump into the fray. Among the analysts worth listening to in this context is Exane's inimitable Santiago López Díaz, a.k.a. 'Santi', who has so far been depressingly correct about Spain's banks and whom we have to thank for the above deliberations.
These by the way represent a correction of our previous impressions to the contrary, which were mainly fueled by news that Santander was prepared to invest in Sareb. As Santi has made clear, BBVA is so to speak the 'smart money' in the Spanish banking system, which is proven by the fact that it successfully managed to avoid getting stuck in the black hole that goes by the name of Bankia.
Shinzo Abe Wins Decisively
The nationalistic, militaristic and pro-inflation leader of Japan's LDP, Shinzo Abe, has won the election in Japan over the weekend by a landslide. Due to the number of seats in Japan's Diet held by the LDP and its coalition partner New Komeito, Abe now enjoys a 'super-majority', which means he will have no problems pushing through whatever legislation he wants to see enacted. The super-majority allows him to overrule the upper house.
This raises serious questions, especially with regard to the Bank of Japan. As we have previously argued, we do not believe the BoJ's independence to be genuinely at risk, as it is part of the constitution. However, Abe can be expected to nominate candidates to the board of the BoJ who are willing to do his bidding, which according to his views uttered before the election include printing money until the cows come home (i.e., enough to weaken the purchasing power of the yen decisively).
The thing is though that Abe now owns the 'ministry of dreadful dreams' – Japan's finance ministry, which is getting its tenth finance minister in six years. Evidently the post is not particularly popular – which is no wonder, as it tends to produce nightmares, mostly nightmares involving rising interest rates.
Japan's Diet, before and after the election. The DPJ has been thoroughly trounced.
Dead Letter: “A law, directive, or factor still formally in effect but no longer valid or enforced”
This is what has become of the right to privacy. In fact, this is what has in the case of the US become of the 4th amendment of the constitution. Under the guise of providing 'security', the government has unilaterally decided that the right to privacy has ceased to exist, and with it the protection against unwarranted extra-judicial search and seizure. These depredations are now apparently taken to an entirely new level.
In effect, the government is now saying: “It has turned out upon reflection that we are too lazy and stupid to catch criminals the old-fashioned way. Therefore we now must now record and store, read and listen to every last shred of correspondence and conversation of every citizen so that we can continue to 'ensure their safety'. If in the course of this surveillance some faceless jack-booted thugs should e.g. become aware of a conversation you have with a friend or relative about the warts growing on your hemorrhoids, rest assured that they will treat the information with the required professional detachment.”