Diving Into the GDP Report - Some Ominous Trends - Yellen Yap - Decoupling or Not?

Yellen Yap

On Thursday, Fed Chair Janet Yellen met with Senate Democrats at a private luncheon. She told the Democrats that the U.S. Economy is Strong.

My first thought was "what the heck is Yellen doing holding a private lunch with Democrats only?" Had she met with Senate Republicans, I would have asked the same question.

Apparently this is common procedure for Yellen, so perhaps I am reading too much into it.

Yet, I cannot help wondering if the real purpose of the meeting was to persuade Democrats to block any "Audit the Fed" Initiatives.

Glowing Report

Regardless of the reason, Yellen had some pretty glowing things to say.

“She went through the issues of unemployment and inflation. Very positive. And economic growth numbers were good, have been good. There’s work to be done,” Sen. Richard Durbin (D-Ill.) said after the luncheon.

No Rate Hike Soon

Bloomberg reported Yellen Tells Senators No Rate Rise Soon Amid Concerns Abroad.

“Her message is that the economy’s getting better but there’s still a ways to go in terms of job creation,” New York Senator Charles Schumer said today in an interview on Capitol Hill. “That worry seems, in her mind, to be paramount and that’s why she is not going to raise rates immediately.”

The Fed upgraded its assessment of the U.S. economy in a statement on Wednesday after a meeting of its policy-setting committee, while adding a reference to “international developments” which investors took as a sign of mounting worry about weakness overseas.

Yellen shared “some concern about the foreign situation,” said Virginia Senator Tim Kaine, who said her comments were “pretty positive about the fundamentals here.”

Economists said the confident tone of the statement from the Federal Open Market Committee signals it is on track to raise interest rates this year, while making the point it is not ignoring the weaker performance of the global economy.

GDP Expectations Fall Short

On Friday 4th quarter GDP estimates came in below economist expectations. Bloomberg reported "The advance estimate for fourth quarter GDP growth disappointed with a 2.6 percent figure versus analysts' estimate of 3.2 percent and following 5.0 percent for the third quarter. Final sales of domestic product slowed to 1.8 percent, following a 5.0 percent jump in the third quarter. Final sales to domestic purchasers eased to 2.8 percent from 4.1 percent in the third quarter."

Diving Into the GDP Report

With that backdrop, lets dive into the BEA Fourth Quarter and Annual 2014 Advance GDP Estimate.

Change in Real GDP - Personal Consumption Expenditures



click on chart for sharper image

Several PCE items stand out. Is the 2.87% increase sustainable?

And what about health care? In the last three quarters, health care expenditures added 0.45, 0.52, and 0.51 percentage points to GDP. Wasn't Obamacare supposed to reduce costs?

Curiously, gasoline added 0.25 percentage points to GDP in spite of rapidly falling prices.

Motor vehicles and parts show rapidly slowing growth since second quarter. That's a trend I expect to continue.

I discussed autos on January 6 in Economists Upbeat Despite 4th Consecutive Decline in Factory Orders; Auto Orders vs. Expectations.

Autos are slowing and so will auto-related jobs. Yet economists believe "Auto sales are expected to reach their highest level in a decade this year, bolstered by strong job gains and cheap gas."

My take: Autos will soon subtract from GDP.

Change in Real GDP - Gross Private Investment, Exports



Growth in fixed investment is falling rapidly. Equipment, industrial equipment, and transportation equipment are already in contraction.

Inventories added 0.82 percentage points to fourth quarter GDP. Over time, this series trends to zero, so expect a pull back next quarter.

Rising imports subtract from GDP. Imports actually took 1.39 percentage points from GDP. If oil prices head back up, even modestly, this number could get worse.

Exports added 0.37 percentage points to fourth quarter GDP. But note the trend.

Because of the rising US dollar, export growth is dwindling. Will exports add or subtract to GDP next quarter?

All things considered, this GDP report is far more than a simple snapback from the rapid expansion last quarter.

Canada in Recession, US Will Follow in 2015

Earlier today in Canada in Recession, US Will Follow in 2015, I stated "A Canadian recession is underway. US will follow."

Decoupling or Not?

I remain amused by all the pundits who think the US has "decoupled" from the global economy and will grow stronger in 2015.

Let's return to a question I asked above: Will exports add or subtract to GDP next quarter?

I suggest the answer is subtract. Not only are US exports getting more expensive relative to Europe and Japan, the entire rest of the global economy is slowing rapidly. Our biggest trading partner is Canada and Canada is in recession, with a rapidly sinking loonie (Canadian dollar) on top of it.

US Recession

The US won't decouple, just as China did not decouple from the global economy in 2008-2009 (a widely-held thesis I also knocked at the time).

Indeed, now that virtually no economist expects a US recession, I believe we are finally on the cusp of one, just as the Fed seems committed to hike.

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

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Canada in Recession, US Will Follow in 2015

On January 21 when the Canadian Central Bank unexpected slashed interest rates, I wrote Canadian Recession Coming Up.

Following the rate cut, the yield curve in Canada inverted out to three years. Inversion means near-term interest rates are higher than long-term rates.

I saw no other person mention the inversion at the time. An inverted yield curve generally portends recession.

Nine days later, the Canadian yield curve is still inverted. Let's compare what I posted about the curve on January 21 vs. January 30.

Canadian Yield Curve January 21

• 30-year: 2.044% (Today's Low 1.998%)
• 10-Year: 1.426% (Today's Low 1.366%)
• 05-Year: 0.791% (Down 19 basis points, an 18% decline)
• 03-Year: 0.590% (Down 27 basis points, a 31% decline)
• 02-Year: 0.560% (Down 29 basis points, a 34% decline)
• 01-Year: 0.580% (Down 34 basis points, a 37% decline)
• 01-Month: 0.640% (Down 22 basis points, a 26% decline)

Canadian Yield Curve January 30

• 30-year: 1.834% (Down 21.0 basis points)
• 10-Year: 1.250% (Down 17.6 basis points)
• 05-Year: 0.603% (Down 18.8 basis points)
• 03-Year: 0.386% (Down 20.4 basis points)
• 02-Year: 0.392% (Down 16.8 basis points)
• 01-Year: 0.490% (Down 9.0 basis points)
• 01-Month: 0.580% (Down 6.0 basis points)

Not only did yields plunge across the board since then, the yield curve is still inverted all the way out to three years.

Recession Has Arrived

There is no point in waiting for further data. The Canadian recession has already arrived.

On Friday, the Financial Post reported Canada GDP Shrinks on Biggest Factory Drop in Six Years.

The Canadian dollar plunged below 79 cents US today after data showed Canada’s gross domestic product contracted in November as manufacturing dropped the most since January 2009 and on declines in mining and oil and gas extraction.

Output shrank by 0.2%, the most in 11 months, to an annualized $1.65 trillion, Statistics Canada said Friday in Ottawa. The median forecast in a Bloomberg economist survey was for output to be little changed.

Manufacturing declined by 1.9% in November, with losses ranging from machinery and equipment to plastics and rubber.

The Bank of Canada unexpectedly lowered borrowing costs last week for the first time since 2009, saying the move was meant to provide insurance as the slump in crude oil, the nation’s biggest export, weighed on the economy.

"Insurance"

The Bank of Canada called the rate cut "insurance". Insurance from what? If they think it will halt a recession, it won't. The recession is here. There is no need to wait for another quarter of declining GDP to confirm. A Canadian recession is underway.

US Will Follow

I remain amused by all the pundits who think the US has "decoupled" from the global economy and will grow stronger in 2015.

Here's news: "It won't", just as China did not decouple from the global economy in 2008-2009 (a widely-held thesis I also knocked at the time).

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

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Greece Will Not Accept Bailout Extension or Deal With "Rottenly Constructed" Troika; Mish's Game Theory Math

Greece Will No Longer Deal with ‘Troika’

It now strongly appears as if Greece, Germany, and the nannycrats in Brussels are all on one hell of a collision course. Both sides have dug in, and the war of words has escalated in all corners.

For example, please consider Greece Will No Longer Deal with ‘Troika’, Yanis Varoufakis Says

Greece will no longer co-operate with the “troika” of international lenders that has overseen its four-year bailout programme, the country’s finance minister said.

Yanis Varoufakis also said Greece would not accept an extension of its EU bailout, which expires at the end of February, and without which Greek banks could be shut off from European Central Bank funding.

“This position enabled us to win the trust of the Greek people,” Mr Varoufakis said during a joint news conference with Jeroen Dijsselbloem, chairman of the eurogroup of eurozone finance ministers, who was visiting Athens for the first time since a leftwing government came to power this week.

He also blasted the deeply unpopular bailout monitors from the European Commission, IMF and ECB, also known as “ the troika”, saying: “We are not going to co-operate with a rottenly constructed committee.”

Germany Prepared for Negotiation But Won't Negotiate

The position of Germany and Jeroen Dijsselbloem, chairman of the eurogroup of eurozone finance ministers, is equally one-sided.

Mr Dijsselbloem warned the new government against taking unilateral steps or ignoring arrangements with lenders, saying “the problems of the Greek economy have not disappeared overnight with the elections.”

Wolfgang Schäuble, German finance minister, warned Athens on Friday against trying to “blackmail” Germany with its financial demands.

Mr Schäuble said Germany was ready to co-operate but only on the basis of current agreements. “We’re prepared for any discussions at any time but the basis can’t be changed,” he said. “Beyond that, it is hard to blackmail us.” 

Martin Jäger, the German finance ministry spokesman, said any request for an extension of the existing financing programme would only be acceptable when it was “tied with a clear readiness of Greece to implement the agreed reforms”.

Gaming Theory

Everyone is willing to negotiate, but only on their terms. Realistically, no one is willing to negotiate. Moreover, the Troika has its hands full with Yanis Varoufakis, an expert who wrote a Book on Game Theory.

I suspect prime minister Alexis Tsipras picked Varoufakis precisely because of his skills at game theory.

New Game to Play

Please consider a few snips from Yanis Varoufakis: From Accidental Economist to Finance Minister by  Tony Aspromourgos, Professor at University of Sydney.

Varoufakis was a gifted and popular university teacher in Sydney. I know because I taught side-by-side with him for a number of years. He was also a thoughtful and productive researcher.

His research was first focused primarily upon game theory. But he also developed an expansive intellectual reach across what may be called “political economy” in the generic sense, particularly focused on the evolution of capitalism as a global system.

Hesitant politician

Varoufakis has described himself as an “accidental economist”. He is perhaps even more an accidental finance minister.

There is no reason to doubt the sincerity of his earlier expressed ambivalence about entering politics and the party-political fray. It is the vacuum created by the failure of the mainstream parties of the centre-left and centre-right that calls forth this participation.

The media’s referring to the new Greek government as “far left” or “radical left” is just an intellectually lazy acquiescence in the language of the European political and policy establishment.

In truth, the position of Syriza is not so way out. Syriza is merely left-wing, whereas the mainstream European parties supposedly of the centre-left are no longer left-wing at all.

New Game to Play

I mentioned above that Varoufakis’s earliest academic research was concerned with game theory, albeit from a rather critical standpoint. He has already broken down the realities of one Greek election using game analogies.

Game theory as a method of research in the social sciences is first and foremost about the logic of strategic interaction between players. The situation that is being played out now, between Greece (as well as others of the “south”) and the political establishment in Europe, is without doubt a strategic situation. It is a game of high-stakes policy poker with the players on both sides, perhaps engaged in an element of bluff.

It is interesting that a game theory expert should find himself, now, at the centre of this situation. There is a great deal at stake, for the welfare of the people of Greece, the other high-debt States and Europe as a whole, as well as for the viability of the European Union and the euro.

Nobody's Right If Everybody's Wrong

What if they are all wrong?

While pondering that philosophical question I offer another musical tribute.



link if video does not play: Buffalo Springfield - For What It's Worth 1967

There's battle lines being drawn
Nobody's right if everybody's wrong
Young people speakin' their minds
A gettin' so much resistance from behind
Time we stop, hey, what's that sound?
Everybody look what's going down

Olive Branch Smashed

Greece's refusal of a bailout extension puts a time limit on matters. The existing bailout agreement expires late-February, less than a month from now.

Interesting, the refusal to accept an extension comes on this olive branch just a few hours ago: Europe Hints at Greek Bailout Extension.

Grexit in the Cards?

Unless cooler heads prevail, Grexit is in the cards.

Right now it appears as if neither side will back down. Calling the Troika "Rottenly Constructed" surely sets the tone for Greece.

"We’re prepared for any discussions at any time but the basis can’t be changed" sets the tone for Germany.

I wonder if the Greek position is on purpose.

Tsipras' claim that he wants Greece to stay on the euro. That helped get him elected. Is that how he really feels?

If not, then unless he gets nearly everything he wants, Grexit is all but assured. And if no agreement is reached, Tsipras has an easy fallback plan: Blame it on Germany and the much hated Troika.

Mish's Game Theory Math

• Greece will be severely disadvantaged in the short term if it exits. But it will also recover faster.
• If Greece stays in the eurozone, on Germany's terms, it will bleed to death for another decade or more.
• Germany and the Eurozone have more to lose than Greece.
• If Greece exits, the entire eurozone will blow sky high simply because of "exit math"

Exit Math

I wrote about exit math twice recently.

• January 22: Revised Greek Default Scenario: Liabilities Shifted to German and French Taxpayers; Bluff of the Day Revisited
 
• January 27: Greek Payback Math at 0% Interest

If Germany and the eurozone does not bend significantly, Greece may very well come to the conclusion it has little to lose and everything to gain in the long haul by telling the Troika to go to hell.

And that is a position I endorse even though I disagree with many of the overall policies of SYRIZA.

In the end, my analysis says the eurozone has far more to lose than Greece if a Grexit occurs. However, I highly doubt Germany realizes that.

Even if Germany does, it takes unanimous agreement from all 19 eurozone countries to revise the agreement. That's part of the math.

Place your bets.

In the meantime I once again repeat my warning to Greek citizens: Another Run on Greek Banks Begins; Get Out While You Still Can; Buy Gold

Addendum:

In regards to "rottenly constructed", reader Lefteris emailed ... The minute I heard Varoufakis say “σαθρή”, I figured it would be badly translated. It’s not a very common word. In context, this word correctly translates as “weak”, “not cohesive”. A more negative translation is “flimsy”, but that’s not what Vafourakis meant.

I made a correction above, changing the word "ruined" to "severely damaged" in this sentence:  Greece will be severely disadvantaged in the short term if it exits. But it will also recover faster. That said, hyperinflation is a possibility, and if that happens, the currency would indeed be ruined. The country itself wouldn't.

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

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Financial Blogger Profile of "Mish" on Equities.Com

Daniel Banas at Equities.Com interviewed me last week via phone for their profile series on "the most distinct and noteworthy voices in the world of financial blogging."

The interview transcript follows. First a few words ...

I am honored to be on that list.

The interview kicked off with a question on how I got started. I have commented on this before, but the short story is I was out of work, hanging around stock message boards, and Bill McBride (Calculated Risk) created the first template to my blog. Bill had just started his own blog and within a few years we became two of the top three economic blogs in the US.   

Somewhere along the line Barry Rithotz at the Big Picture Blog discovered me, frequently linking back to my blog. I like to mention those who have helped me out, even if we have recent differences of opinion on various issues.

Of the three top bloggers (not counting syndicates like Paul Krugman, or multiperson sites), Calculated Risk or Ritholtz typically held the top spot, but on a few occasions, I did.

Tweet From Barry

Today, Barry was nice enough to tweet "Nice Profile of Mike Shedlock (@MishGEA) at Equities.com Global Financial Community shar.es/1omVEm".

Thanks Barry. Appreciated. Here is a link to Mish Profile on Equities.Com.

Interview with Daniel Banas

EQ: What inspired you to start Mish’s Global Economic Trend Analysis?

Mish: Actually, my first speech at Google was on that exact subject. My background is in Civil Engineering. I got a degree from the University of Illinois in ’76 and worked for two years as an engineer. I couldn’t stand it, so I started working for banks, on the computer programming side.

As an Assistant Vice President of Harris Bank, I’ve been through more bank mergers than anyone could imagine. I was at Chase when Chase and Chemical merged. I was at Harris Bank when the Bank of Montreal locked them out. I didn’t like the culture change when BMO came in. I left, went out on my own, and became a consultant.

But anyway, I lost my job after 9/11. Computer consulting contracts started really drying up after Y2K. There were just no jobs. If you had a job in banking, you kept it. But if you were a contractor, you couldn’t get one. At the time the economy was booming, and I was out of work for three years. All year round, I’d stalk message boards, and Silicon Investor happened to be one of them. I had the most popular message boards on Motley Fool and Silicon Investor, and one day, a guy named Calculated Risk, who was a poster on my board on Silicon Investor, contacted me.

EQ: Bill McBride at Calculate Risk?

Mish: Exactly. He said, “Hey, look at this. This is pretty cool. Google’s got these things out there called blogs. We can post our thoughts on them.” He actually created the first template for my blog, and a few years later, Calculated Risk and I were the #1 and #3 bloggers in the entire country. When he sent that email, he said, “Google has these things called blogs, and best of all, they’re free!”

When you’re out of work for three years, “free” is not a nicety, “free” is a requirement. That’s how it all started, and then things really took off for me with a series of extremely good calls that I made about the housing bust in 2005, 2006 and 2007.

Then, when oil hit $140/barrel, everyone thought interest rates were going to go to the freaking moon. They assumed we had this massive wave of inflation coming, but I said: Expect record low interest rates across the entire U.S. treasury yield curve. People thought I was out of my mind.

EQ: Wow. Was that a profitable call for you?

Mish: Actually, I didn’t make a cent off that call, because I still had a little money coming in as a result of being out of work for three years. Then, the housing bust hit and the next thing you know, Bernanke was slashing interest rates like mad. One could have bought hugely out of the money calls on interest rate futures, and made a million on a $10,000 bet. I didn’t even profit from my call, other than to gain notoriety. So, that was my start right there. I certainly have not gotten everything right with the stock market, but I think I’ve called the global economy better than anyone since 2005.

My proudest accolade in those regards – every year in December, The New York Times comes out with their top ten ideas of the year. It can be ten ideas on anything about healthcare, industry, education, finance, anything medical. Their #1 idea for 2010, called “Do-It-Yourself Macroeconomics” was about bloggers that called the global economy better than any economist did. They mentioned three people in the article: Calculated Risk, me, and Barry Ritholtz.

See New York Times 10th Annual Year in Ideas; #1 Idea: Do-It-Yourself Macroeconomics.

EQ: That’s rarefied air. When you called the housing bubble, and you called oil, what were you drawing upon to make those calls?

Mish: First off, I could see the housing crash. This was pretty easy. We had a bubble in housing, and then a crash. So I could see Bernanke lowering interest rates. To me, oil going up to $140 was just more icing on the cake.

We were shedding jobs like mad and the price of gas was going through the roof. Where was it going? To me, it was real simple. I was also one of the few that called deflation. Deflation is still my model, although I define it a little bit differently than other people. I had so many people mocking me, and now deflation is all everyone is talking about.

Yet, I’m still mocked for the call. All the hyperinflationists out there still think I’m a fool, but I don’t care. I called it right. One thing that I’ve gotten wrong – and it’s important to admit your mistakes – I absolutely thought there was close to no chance that the US stock market would get as high as it has in the last two years. I failed to see how much QE would benefit the US stock market, even if it didn’t in Europe and other places. That was my miss, but that’s actually more of a stock market miss than an economic miss. Regardless, my record is certainly far from perfect.

EQ: Where do you think the US stock market is heading now?

Mish: (laughs) I’ve been wrong for two years, but I’ll be happy to answer. I think we’re seeing the beginning of the end. One of the things I said was that the idea that Central Banks are in control is wildly wrong. I don’t think they’re in control of anything. The reaction from the European Central Bank is going to be interesting to watch. Everyone’s expecting this massive bazooka. Even if they deliver and actually shock the market with some announcement—which I don’t even think they’re going to do – it wouldn’t surprise me to see a knee-jerk reaction higher, and an immediate sell off all day once people realize the emperor has no clothes.

EQ: So you don’t think the ECB is going to do enough to pull Europe out of their funk?

Mish: No. Look at the market reaction when the Swiss National Bank removed the peg to everyone’s surprise. We saw it again with the action from the Bank of Canada. Europe is slowing – Germany’s going to go into recession and take all of Europe with it. Spain is sort of recovering, but Italy and France aren’t, so where is Europe headed once Germany goes down?

China is clearly slowing as well. That’s another thing that I got right. I picked up a lot of that from Michael Pettis. Some of the things I got right were just from reading – all these views are out there, and deciding who makes the most sense.

The Australian dollar collapsed. I’ve gotten that right, iron ore right, and the Canadian dollar right, all for the right reason (China was slowing far more than most thought). Still, sitting on the sidelines didn’t translate to any gains in the stock market. We lost clients, as did others like John Hussman, by trying to do the prudent thing.

EQ: What’s the lesson we can take away from all the contraction?

Mish: People are willing to forgive you when you lose money – when the stock markets are going down – but heaven forbid, don’t ever miss a rally! Of course, that philosophy encourages more speculation.

Here’s the key question: Do you not speculate and lose clients when overvalued markets soar for no fundamental reason, or do you speculate with the herds and lose on the way down? That’s the moral dilemma for investment managers. We saw that dilemma in 2000, in 2007, and again now. The problem compounds over time because the size of the bubbles (and the busts) have increased over time.

In a way, the central banks won. Bernanke won, for now. The cover of Time declared “We Saved the World,” but watch what happens when the U.S. stock market goes down again.

In regards to the strength of the economy, every economist that Bloomberg surveyed said US interest rates would rise in 2014. I said they’d fall, and so did Lacy Hunt at Van Hoisington, manager of a $4 billion dollar US treasury fund. We both got the economic call correctly, but stocks soared anyway.

A lot of what I do is just to sort through all the news and try to figure out “Who is it that I want to believe and who is it I don’t?”

Sometimes I disagree with all of them. I have a disagreement right now with Michael Pettis on the global glut savings thesis, although I agree with him on nearly everything else. At some point, you’ve got to be your own person.

EQ: With so many differing opinions, what differentiates Mish’s Global Economic Trend Analysis from other financial blogs out there?

Mish: That’s easy – unlike Zero Hedge, my blog is just me. One advantage of just being me, and not taking a lot of guest posts, is that I provide a consistent point-of-view. That doesn’t mean I’m incapable of changing my mind – sometimes I do, but not that often.

I don’t post a lot of conspiracy theories – I don’t believe in them. That would be something that Zero Hedge might do. One day he might be talking hyperinflation, and the next day deflation. Some of the opinions are his and some are guest posts, so you start trying to be everything to everyone and throwing conspiracy theories on top of all of it – there’s no consistent point-of-view.

Calculated Risk does provide a consistent point-of-view. But his focus is mainly on the U.S. and housing. I go far more into Europe and Asia than most do. I also exchange emails all the time with a number of globally prominent economists, so I would say that’s a differentiation.

EQ: What general theses can visitors to your blog expect to read about these days?

Mish: Readers can expect commentary on the slowing global economy, global interest rates, the potential breakup of the Eurozone and what that may mean, and valuations of equities and various bonds.

I like gold. I like the miners. I’ve been on the wrong side of that trade actually for a few years, although I really, really like the recent action. I like Japanese equities, but hedged for a plunge in the yen. I think that trade has tremendous potential. Unlike the US, there’s a very decent chance that Japan goes into hyperinflation.

If that happens, that long Japanese equities but short the yen could literally be the trade of the century. Whether it plays out that way or not, and what timeframe, I don’t know. It all depends on how insane Abenomics in Japan gets.

EQ: Where do you stand on gold?

Mish: In regards to gold, it’s the same way. Most people don’t realize this, but gold traditionally does poorly in periods of disinflation. It does very well in periods of credit stress. It does well in periods of stagflation. It does very well in periods of deflation.

What I sense happening now is the global economy is shifting from disinflation to a deflationary bias.

People think that gold is some kind of inflation hedge, but it’s really not. Gold fell from $800 in 1980 to $250 in 2000 with inflation every step of the way. What happened in that period? The answer is falling interest rates, all along the way. That’s an environment in which gold does pretty badly.

In 2001 we started to see gold react to Fed deflation fighting moves. Gold soared along with everything else. Then, starting in 2011 or so, with ECB president Mario Draghi’s “Whatever it takes” statement we had this renewed and unfounded faith in central banks. Gold plunged as it normally does, when people have great faith in central banks.

Since early November, the thesis that central banks are in control is coming into question once again. Gold has been rising in every major currency, including the dollar, and especially the Euro.

When Jim Grant was once asked 'how should one value gold?', he proposed that the value of gold probably is '1/N', with 'N' standing for the faith people have in the monetary authority. The more this faith declines, the higher the price of gold will go.

My prediction for this year was that gold would rise with the U.S. dollar in the beginning of the year, and then soar in the latter half of this year, when all of these bets that the U.S. will hike because of a strengthening US economy go down the drain. Perhaps they get in a hike or two, then what?

EQ: That would go against common wisdom, but it does seem to make sense. Do you have one specific, overarching philosophy to investing?

Mish: Here’s some general advice: Don’t leverage. Be prepared to lose your job. Have six months, preferably a year’s worth, of money in cash in case you do lose your job. Once again everyone thinks “cash is trash”. When everyone or nearly everyone takes that view, look out below. 

Wait for better investment opportunities. It’s far easier to make up for lost opportunities than to recover from huge stock market losses. And finally, consider having 10 to 25% of your assets in gold (but no more than you can sleep with). Some people have higher tolerances than others.

That’s my whole thesis here right now. People don’t have to like shorts. They don’t need to do short. Even if they think the market’s going to go down, a lot of times, bears lose in bear markets. Sometimes the winner is he who loses least, so take some chips off the table and reduce your risk.

End Interview

Thanks to Bill McBride, Barry Ritholtz, Minyanville, Heinz Blasnik (the person who taught me Austrian economics), Michael Pettis (who taught me everything I know about trade), Steve Keen (for debt deflation theories), Daniel Banas, and everyone else who helped me along the way.

If you think I missed your name, I probably did. Apologies offered and mentally add you to the list cited.

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

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Eurozone, Including Germany, in Deflation; Strange Times for Denmark, Deutschland and EU

Eurostat released HICP Harmonized Index of Consumer Prices statistics today.

In spite of promising that deflation would not hit again, here we are, and for the second month too.

Euro area annual inflation is expected to be -0.6% in January 2015, down from -0.2% in December 2014 according to a flash estimate from Eurostat, the statistical office of the European Union. This negative rate for euro area annual inflation in January is driven by the fall in energy prices (-8.9%, compared with -6.3% in December). Prices are also expected to fall for food, alcohol & tobacco (-0.1%, compared with 0.0% in December) and non-energy industrial goods (-0.1%, compared with 0.0% in December). Only prices for services are expected to increase (1.0%, compared with 1.2% in December).

HICP vs. Year Ago



click on any chart for sharper image

HICP Components by Month



HIPC 2005 to 2015 History



Even Germany in Deflation

The BBC reports Denmark, Deutschland and deflation: strange times for EU.

New official figures from Germany show that prices have fallen, by 0.5%, over the previous 12 months.

Meanwhile the Danish Central Bank has cut one of its main interest rates for the second time in a week.

It is a rate paid to commercial banks for excess funds parked at the central bank. It was already below zero. Now it is even lower - minus 0.5%.

It means banks have to pay to leave money at the central bank, above certain specified limits.

Negative interest rates are another example of the strange financial world that has emerged in the aftermath of the financial crisis.

What is the connection between falling prices - or deflation - in Germany and the Danish central bank? It is about Denmark's 35-year policy of tying its currency, the krone, to the euro, and before that to the German mark.

That peg has come under increasing strain as the European Central Bank, the ECB, has taken steps to combat deflation.

Denmark Peg

How long will Denmark be able to keep its peg to the euro?

The BBC says "Denmark is a smaller financial system and it is not an established magnet for internationally mobile money in the way that Switzerland is." The presumption is Denmark can keep its peg because its not an international player.

I say watch what happens if hedge funds start monkeying around with the Danish krone in size. We could easily see another Swiss-style event, albeit with smaller repercussions given that the krone is not the same hotbed of foreign mortgage obligations as Switzerland.

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

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Marine Le Pen Soars Into Lead in French Presidential Polls for 2017; Don't Worry, Nothing Can Possibly Go Wrong

In spite of the Charlie Hebdo murders that raised the popularity of French president Francois Hollande and his staff, Les Echos reports than in the 2017 presidential election anti-euro candidate Marine Le Pen in the 1st Round Lead With Nearly 30% of the Vote.

According to an IFOP 2017 presidential poll released Thursday, Marine Le Pen would come out clearly in the lead if the first round of presidential elections was held on Sunday.

Le Pen would get 29 to 31% of the vote. No rival would exceed 23%. Nicolas Sarkozy, Manuel Valls, and Alain Juppé, each have around 23%. François Hollande would get 21%.

Francois Bayrou would obtain 7 to 9%, Mélenchon 8%, Cécile Duflot and Nicolas Dupont-Aignan between 3 and 4% and the far left between 2 and 3%.

Prime Minister Valls would do better than Francois Hollande, with 23% of the vote.

Too Early Too Worry

Don't worry about 2017 until December 31, 2016. Instead worry about Greece and especially Spain. Spanish elections are scheduled for November of 2015.

On January 12, in Zugzwang! I noted the Spanish radical left party Podemos surges into lead. That surge adds another contagion wrinkle given the Podemos "Economic Manifesto" Calls for Debt Restructuring, Spain to Abandon the "Euro Trap".

"Spaniards should be aware that it is physically impossible that they can pursue policies that meet the national interest, within the euro as it is designed. The euro was conceived as a real trap, but nowhere is it written that people have to accept it ."

Inquiring minds may also wish to consider the Incredible Populist Positions in Podemos' "Economic Manifesto".

Don't Worry, Everything Under Control

In retrospect, it appears there may be too many things to worry about. So instead, sit back and relax. Repeat after me ... Nothing can possibly go wrong because central bankers are in complete control.

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

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Conscription of People, Cars, Businesses in Ukraine for Mindless Slaughter; Entire Villages Leave to Avoid Servitude; Hop on the Bus Gus

Ukrainians Fighting Ukrainians

Forced military conscription (slavery is a better word) imposed on citizens of Ukraine has reached new heights recently.

The government in Kiev now demands those forced into slavery to hand over their cars for military use. As one might expect, avoidance of needless military slaughter has also reached new heights.

Before we get to those stories, I have a video to share. It is in Russian, but with English subtitles. I am told by reader Jacob Dreizin the translation is essentially correct, but a couple things were translated too literally.

I do offer this warning. The video is graphic and it does contain a lot of harsh language. The video is about captured Ukrainian POWs on a fool's mission to retake the Donetsk airport. After about 12 minutes or so it gets gruesome, the beginning is not so bad.

Warning aside, I recommend watching the video, entirely. Watch the scenes where locals confront the Ukrainian POWs. The video accurately portrays Ukrainians fighting Ukrainians, not Ukrainians fighting Russians.

Ukrainian POW's Face NAF Commander Givi and the Fury of Donetsk Residents



Link if Video Does not Play: UAF Storms Donetsk Airport and Gets Asses Handed to them by NAF.

Want a translation to Spanish, German, Dutch, Danish, or French? Go to Information Clearing House. That is where I picked up the Video.

Translation Corrections

• Around 4:41, "And if we dropped on Kiev such mines?" should be, "And if we dropped such mortar rounds on Kiev?"
• At 5:22, a more accurate translation would be "You'll rebuild our city."
• Around 8:30 to 8:57,  "trucks" should be "armored vehicles (BMPs or BTRs)."
• At 12:11, "respected" should be translated as "my good fellow."
• At 19:31, should be more like "...his hands go lame", not his "...hands dry out."  They are translating too literally.
• At the end, the security guy is just joking about hanging him, obviously that's out of the question. These POWs will be traded for NAF POWs.

Rebel Propaganda?

Is that video rebel propaganda? You bet. Is it effective? Yep. And it's also the truth. Kiev routinely sends soldiers on fool's missions hoping for a miracle. Instead it's been slaughter after slaughter. 

"No Regular Units of the Russian Army in Ukraine"

An important admission came today from Ukrainian military chief of staff, General Viktor Muzhenko, at a press briefing: "No Regular Units of the Russian Army in Ukraine".

Read link above for that statement. The title is different.

The admission was repeated by another Ukrainian news agency as well. Please consider Involvement of Russian Army in Illegal Armed Formation in Donbas.

Here's an exact (unedited) translation. Meaning is crystal clear.

Armed Forces General Staff has information about the participation of soldiers of the army of the Russian Federation in the conflict in eastern Ukraine.

This was announced during a briefing Armed Forces Chief of Staff Lieutenant General Victor Muzhenko.

"To date, we have only the involvement of some members of the Armed Forces of the Russian Federation, Russian citizens as part of illegal armed groups in the fighting. Fighting units of the regular Russian army today we're also not. We have enough forces and means in order to inflict a final defeat even illegal armed formation "- he said.

Video Translation

Jacob Dreizin offers a better translation of the video in the first link.

"At this time, we have only proof of participation of individual members of the Russian Federation armed forces and Russian Federation citizens in the illegal armed formations (and) in military operations. Also, at this time we are not engaged in military operations against regular Russian army units."

By "illegal armed formations", he is referring to the DNR/LNR.

Even if one believes there are "Russian Regulars" in Ukraine, its probably a number of "trainers" not the alleged 15,000.

For further discussion, please see Attack on Mariupol Begins; 7,000-8,000 Ukrainian Forces Nearly Encircled in Northern Cauldron; US Sends Army Trainers.

Conscription of People, Cars in Ukraine for Mindless Slaughter

The mindless slaughter should be obvious from previous videos I have posted. So let's move on to a another topic: new slavery (conscription) requirements.

Odessa Region "Recruits" Ordered to Quit Jobs and Turn Over Cars

Via translation please consider Odessa Region Recruits Ordered to Quit Jobs and Turn Over Cars.

In the Belgorod-Dniester district of Odessa region reserve servicemen were banned from leaving the area. The ban applies even to those who have not yet received a summons.

Businesses commissar requires organizations to dismiss employees receiving a summons and to ensure the attendance of recruits at the points specified in the mobilization orders.

In addition, citizens, businesses and organizations required to hand over to the military conscription office all serviceable vehicles.

Mobilization 2015: In Transcarpathia Entire Villages Go Abroad

Here's another story on the same subject: Mobilization 2015: In Transcarpathia Entire Villages Go Abroad

In 2015, only 6% of persons subject to mobilization, are volunteers according to Oleg Boyko, Main Directorate of Mobilization. This compares to 20% in the first wave of mobilization in 2014.

"The biggest problem in mobilization activities in the Transcarpathian region," - he said.

According to Boyko, sometimes whole villages leave the country. "There is a report of the Chairman of the Kosovo village of the district, according to which the local population has hired two buses and drove them to the Russian Federation."

In the Ternopil region, there continues a mass escape of the male population abroad. "Strange as this may seem, people flee to the Russian Federation", said Boyko.

Mindless!

"Strange as this may seem, people flee to the Russian Federation", said Boyko. It's only strange if you are a mindless idiot.

Military Servicemen Massively Flee Abroad

Also via translation, please consider Military Servicemen Massively Flee Abroad

The article relates to what Oleg Boyko, chief of the Draft Directorate of the Main Directorate for Defense and Mobilization Planning of the Ukrainian General Staff, said at a meeting with President Poroshenko's office yesterday:

A representative of the General Staff of the Armed Forces of Ukraine appealed to the government to formulate a bill to prevent citizens of Ukraine from leaving the country.

In particular, he suggested that the Government develop a change in the law "On the departure of Ukrainian citizens abroad, subject to conscription in a special period."

A representative of the General Staff proposed to revise downward the list of enterprises, institutions and organizations that are exempt from equipment mobilization for the needs of the army.

He noted the need to amend border crossing rules due to the fact that during the current mobilization phase, entire villages go abroad to avoid conscription. In particular, they head to the territory of the Russian Federation.

According to the Ternopil military commissariat (draft board) "the population of Ternopol province is quitting their jobs en masse, with the goal of avoiding the draft. Draft eligibles are also leaving the country en masse. In the Ternopil region, two buses of the local population went to the Russian Federation."

There are also problems with the mobilization of equipment for the needs of the army.

My Advice

Here's my belated advice to those living in Ukraine: "Get the F* out of Ukraine. Now!"

Small Price Theory Revisited

I wrote about the "small price theory" on August 8, 2014, in "Small Price to Pay".

It seems the "small price" keeps getting bigger, and bigger, and bigger.

Jacob Dreizin wrote today ... Maybe your "Small Price to Pay" friend would like to come to Ukraine and take the place of all these draft dodgers? Surely his life would be a small price to pay to keep the world safe for democracy. Instead, does he have any kids to spare?

That's the problem isn't it? As reader Bran from Spain once emailed, "Proponents of the small price theory never really have much at stake. Everyone else does."

It's pretty damn clear those in Ukraine whose sons and daughters are forced to fight a stupid war have decided "this ain't no small price!" Meanwhile, those in the US who manufacture weapons and hope to send more of them to Ukraine for a profit are the biggest proponents of the "small price" theory.

My friend is not in the latter category, and he was staunchly against the Vietnam war. Rather, he simply is not thinking clearly now, idealistically hoping for some of global "UN-sponsored united world peace concept" (my phrasing not his), that must be defended at all costs, presumably even nuclear war with Russia.

Hop on the Bus Gus

In honor of Ukrainians citizens smart enough to disavow the "small price" theory and willing to tell their government to F* off, I offer this musical tribute.



Link if Video does not Play: 50-Ways Paul Simon

Hop on the bus Guss
Don't need to discuss much
Just drop off the keys Lee
And get yourself free!

No one has the right to own you. No one. No government. Ever!

To disagree with the above is to support forced slavery.

This War is Over

The Vietnam war ended when public support turned against it, even though fighting continued long after.

The same applies here. The war is over. Hearts and minds have been lost along with the will to fight. Ukraine is split in two, barring a major military intervention by the US.

Even though the war is over, the fighting can continue. How much longer the battles go on now depends on the US and IMF.

1. The US can fund the bloodshed for a while longer and so can the IMF. US war-mongers may decide no price is too high to pay, even to the absurd point of engaging Russia directly.
2. The US and IMF can force true peace negotiations on Kiev with a partition or federation of the country. But, what may have been acceptable to the separatists and Russia six months ago may no longer be so.

Either way, Ukraine is never going to be a single country again. Such is the madness of arbitrarily drawing borders with no regard to cultural, political, or religious beliefs.

The war is over. Kiev lost, even with the backing of the US. Let the peace process begin before more lives are lost and more needless destruction occurs.

I authorize translation and republication of this individual article, to any language, on any site, as long as it contains a link back to this article.
 
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Alexis Tsipras "Open Letter" to German Citizens Regarding Extend-and-Pretend Unserviceable Debt

Here's a story from January 13 that just came my way today thanks to a reader wootendw who posted a link as a comment to one of my articles.

The background to this story is SYRIZA leader Alexis Tsipras' "Open Letter" to German Citizens, published on Jan.13 in Handelsblatt, a leading German language business newspaper.

Alexis Tsipras, now prime minister of Greece, sent this letter to Handelsblatt:

Most of you, dear Handesblatt readers, will have formed a preconception of what this article is about before you actually read it. I am imploring you not to succumb to such preconceptions. Prejudice was never a good guide, especially during periods when an economic crisis reinforces stereotypes and breeds bigotry, nationalism, even violence.

In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.

In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future. Nothing more than common sense was required to see that the application of the 'extend and pretend' tactic would lead my country to a tragic state. That instead of Greece's stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself.

My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to. Money that would, in any case, neither help the people of Greece (as it was being thrown into the black hole of an unsustainable debt) nor prevent the ballooning of Greek government debt, at great expense to the Greek and German taxpayer.

Indeed, even before a full year had gone by, from 2011 onwards, our predictions were confirmed. The combination of gigantic new loans and stringent government spending cuts that depressed incomes not only failed to rein the debt in but, also, punished the weakest of citizens turning people who had hitherto been living a measured, modest life into paupers and beggars, denying them above all else their dignity. The collapse of incomes pushed thousands of firms into bankruptcy boosting the oligopolistic power of surviving large firms. Thus, prices have been falling but more slowly than wages and salaries, pushing down overall demand for goods and services and crushing nominal incomes while debts continue their inexorable rise. In this setting, the deficit of hope accelerated uncontrollably and, before we knew it, the 'serpent's egg' hatched – the result being neo-Nazis patrolling our neighbourhoods, spreading their message of hatred.

Despite the evident failure of the 'extend and pretend' logic, it is still being implemented to this day. The second Greek 'bailout', enacted in the Spring of 2012, added another huge loan on the weakened shoulders of the Greek taxpayers, "haircut" our social security funds, and financed a ruthless new cleptocracy.

Respected commentators have been referring of recent to Greece's stabilization, even of signs of growth. Alas, 'Greek-recovery' is but a mirage which we must put to rest as soon as possible. The recent modest rise of real GDP, to the tune of 0.7%, signals not the end of recession (as has been proclaimed) but, rather, its continuation. Think about it: The same official sources report, for the same quarter, an inflation rate of -1.80%, i.e. deflation. Which means that the 0.7% rise in real GDP was due to a negative growth rate of nominal GDP! In other words, all that happened is that prices declined faster than nominal national income. Not exactly a cause for proclaiming the end of six years of recession!

Allow me to submit to you that this sorry attempt to recruit a new version of 'Greek statistics', in order to declare the ongoing Greek crisis over, is an insult to all Europeans who, at long last, deserve the truth about Greece and about Europe. So, let me be frank: Greece's debt is currently unsustainable and will never be serviced, especially while Greece is being subjected to continuous fiscal waterboarding. The insistence in these dead-end policies, and in the denial of simple arithmetic, costs the German taxpayer dearly while, at once, condemning to a proud European nation to permanent indignity. What is even worse: In this manner, before long the Germans turn against the Greeks, the Greeks against the Germans and, unsurprisingly, the European Ideal suffers catastrophic losses.

Germany, and in particular the hard-working German workers, have nothing to fear from a SYRIZA victory. The opposite holds. Our task is not to confront our partners. It is not to secure larger loans or, equivalently, the right to higher deficits. Our target is, rather, the country's stabilization, balanced budgets and, of course, the end of the grand squeeze of the weaker Greek taxpayers in the context of a loan agreement that is simply unenforceable. We are committed to end 'extend and pretend' logic not against German citizens but with a view to the mutual advantages for all Europeans.

Dear readers, I understand that, behind your 'demand' that our government fulfills all of its 'contractual obligations' hides the fear that, if you let us Greeks some breathing space, we shall return to our bad, old ways. I acknowledge this anxiety. However, let me say that it was not SYRIZA that incubated the cleptocracy which today pretends to strive for 'reforms', as long as these 'reforms' do not affect their ill-gotten privileges. We are ready and willing to introduce major reforms for which we are now seeking a mandate to implement from the Greek electorate, naturally in collaboration with our European partners.

Our task is to bring about a European New Deal within which our people can breathe, create and live in dignity.

A great opportunity for Europe is about to be born in Greece on 25th January. An opportunity Europe can ill afford to miss.

Emphasis in italics is mine.

Interest Rate Math

Regardless of how one views his other policies, that particular letter is not the work of an economic madman. Tsipras' position is entirely accurate. And although I disagree with many SYRIZA economic views, there is not a single thing in the "open letter" that I can find fault with.

A simple economic truism is that what cannot be paid back, won't be paid back. I posted the math recently in Greek Payback Math at 0% Interest.

Unfortunately, Greece has to convince 17 other Eurozone countries to renegotiate the terms. Germany and Finland have both said no.  Eurozone rules are such that every country must agree.

Sanction Math

Interest rate math is not the only problem for Greece.  Other clashes have developed.

I discussed that development in Clash Over Sanctions: Syriza Opposes Sanctions on Russia, Calls Them "Neocolonial Bulimia"; Negotiation Rules.

Greece opposes sanction on Russia, a position I fundamentally agree with. Sanctions inevitably harm both sides.

However, as with eurozone rules,  EU sanction rules require unanimous agreement. With sanctions, 1 vote out of 28 (more countries in EU than eurozone) can kill the deal.

That's a lot of leverage, especially when 27 on the other side want something from you. What are they willing to offer in return?

Will these situations resolve via common sense or wreckage?

If there were two parties in the room, those parties might easily come to terms. Can 19 or 28 parties in Europe all agree to do the right thing?

Color me skeptical.

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

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Asset Price Deflation Coming Up? Food Prices About to Drop? CPI About to Go Negative? Credit Deflation?

When inflation alarmists want to convince everyone the dollar is about to become worthless, they post this chart of the CPI.

CPI - Urban Consumers - All Items - Index



Inflationists claim that is a trend to oblivion. And actually it is. But it's a slow trend towards oblivion with intermittent disruptions as the following chart shows.

CPI - Urban Consumers - All Items - Percent Change From Year Ago



As measured by consumer prices, inflation went negative from December 2008 until October 2009.

CPI - Urban Consumers - All Items - Percent Change Detail



The CPI hit a record low of -1.959 in July of 2009.

My prediction made in 2005 or so, was and still is "The US would go in and out of deflation a number of times over a long period of time".

I was speaking in terms of "credit deflation", but that occurred as well. Either way, I was correct and the inflationists who predicted hyperinflation before deflation were simply dead wrong.

Oil vs. CPI

I got to thinking about this again recently given the plunge in oil. Let's take a look at oil prices in relation to the overall CPI.



Clearly there is a correlation over longer periods of time but the amplitude of oil in both directions is much greater. That makes sense because housing is the largest component of the CPI, not energy.

Food

An article on Yahoo Finance on January 16 caught my eye and I bookmarked it: Yes, you ARE paying more for food.



I am not here to dispute that chart. In fact I agree with it. Worse yet it has been persistent, especially with beef, and for more than a year.

Mish Food Shopping Experience

From approximately 2000 until 2010 or perhaps 2011, the sale price of prime rib was $4.99 a pound. Now the sale price is $7.99 a pound, if you are lucky.

Pork is different though. I picked up center cut pork chops on sale last week for $2.49 a pound. That is roughly the same sale price for 10 years.

I have written about this many times. For example, on April 26, 2006 in A Look At Hyperinflation, I stated "Center cut pork chops not on sale are $5.49 lb. Phooey. Who needs that? At least once a month they are on sale for $2.29 lb or less. Seriously, we are talking 1970's prices [on chicken]. I know because I worked as assistant manager in a grocery store back then. Heck I have no idea how they can even raise chickens at .49 lb. If you know then please tell me!"

Chickens were a loss leader at $0.21 a pound in 1970. They were $0.49 when I wrote that.

In regards to pork chops, I have made similar claims in 2007, 2008, and 2011. And here we are again, back at $2.49. But what about beef?

Live Cattle



Beef prices are high because cattle prices are high. But, for the first time since the beginning of 2013, prices are down two consecutive months, and there is plenty of room to drop.

Why are pork chops back to $2.49 again?

Lean Hogs



Here we are once again. From 2011 until the beginning of 2014, center cut pork chops sale prices were higher, in the range of $2.79 to $3.29 a pound.

Welcome back $2.49. We missed you.

Not on sale? Don't buy them, or buy them sparingly.

Wheat



Wheat is back to where it was in late 2006.

Soybeans



Soybeans are back to where they were in late 2007. There's considerable room for prices to drop to 2006 levels like the other food commodities.

Advice

Buy a freezer and use it! It is crazy to pay $5.49 for chops when you can get them for $2.49. It is equally crazy to pay $10.99 for prime rib when you can get it for $7.99. Butter, bacon, and cheese all freeze well. Cheese is often half-price, so is bacon. If you are a vegetarian you have a harder time, but I hazard a guess a freezer or pantry can still come in very handy. Learn to shop!

Where To From Here?

No one can say, but it is pretty clear that food commodity prices are falling and food prices should drop with a lag.

If rent prices drop as well (I do not expect that, but it easily could happen), then the CPI could turn negative once again, even if oil prices head back up.

HPI-CPI

My preferred consumer price measure is HPI-CPI a self-designed index that includes actual home prices instead of rent. By that measure, we will be soon back in price deflation if housing prices drop, and I believe we are on the cusp of another housing decline.

I last wrote about HPI-CPI on September 24, 2014 in Housing Prices, "Real" Interest Rates, and the "Real" CPI

Here's the chart. See the article for discussion.



Credit Deflation?

The important thing is credit deflation, not the myopic central bank focus on consumer prices. I do expect credit deflation and a tightening of lending standards once elevated asset prices plunge.

The plunge in US treasury yields in the face of expected Fed hikes lends credence for the above analysis.

One more point: Please don't tell me about shadowstats CPI. It's a thoroughly discredited model.

For analysis, please see Wading Through Molasses: "Did the Real Economy, Not Counting Government, Expand in Last 20 Years?"

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

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Slope of Hope vs. Reality: Greek Assets Hammered, 3-Year Yield Near 17%; Worst Day Ever for Greek Bank Stocks

Investors who plowed into Greek assets ahead of Mario Draghi's QE €60 billion a month bond-buying spree figuring the ECB could paper over this mess have been pounded almost nonstop recently.

Today alone, Greek bank shares plunged 22-29%, and yield on the 3-year Greek treasury hit 16.97%.

Worst Day in History for Greek Bank Shares

Bloomberg reports Greek Markets Hammered as Fears Grow Over New Government.

Greek bank shares suffered their worst one day loss on record on Wednesday, as anxiety grew over the new government’s plan to renegotiate Greece’s €240bn bailout.

The country’s four biggest lenders saw their stock prices plummet by an average of more than 25 per cent just two days after Alexis Tsipras, leader of leftwing party Syriza, was sworn in as prime minister. It was the third day of double-digit share slides for the banks.

In the space of a few hours, the yield on three-year Greek bonds jumped 2 percentage points to almost 17 per cent, as investors wondered whether Greece would honour its debts in the near term.

Shares in Piraeus, Greece’s largest bank by assets, whose stock price has halved over the past month, plunged 29 per cent. National Bank of Greece and Eurobank each fell 25 per cent and Alpha Bank 26 per cent.

Greek banks have been tapping the European Central Bank’s “emergency liquidity assistance” facility to replenish funds in the face of withdrawals by depositors and foreign banks’ reluctance to lend.

A few charts will confirm the above picture.

Greek 3-Year Bond



Greek 3-Month Bond Yield



Greek Yield Curve

• 3-Month: 4.530%
• 3-Year: 16.970%
• 5-Year: 13.666%
• 10-Year: 10.865%
• 15-Year: 10.342%
• 30-Year: 8.635%

The yield curve may look strange to some, but here's the three-part explanation:

1. Mid-range bonds will be hammered the most in any haircut deal. 
2. Yield on the 3-month bond spiked since the end of December. 
3. The market is pricing in the possibility of a default, but not within 3 months.

National Bank of Greece 15-Minute Chart



Shares of National Bank of Greece closed about 22% lower today. At one point they were down about 28%. Let's investigate the broader picture for this fine company.

National Bank of Greece Monthly Chart



NBG has plunged from 67.60 in September of 2007 to 1.03 today. That's a plunge of 98.5% 

Greece FTSE 20 Index



Slope of Hope vs. Slope of Reality

In June of 2012 the Greek-20 hit a low of 8.77. It hit a high of 25.76 in March of 2014. It was downhill from there, much faster than it went up. Today's decline was a modest 11.61%.

Run on the Banks

From Bloomberg (link above):

Deposits have declined by an estimated €12bn since December from a private-sector deposit base of about €164bn in November, according to Moody’s.

Those deposit declines looks like the start of a run on Greek banks. If so, it is necessary to get out before Greece imposes capital controls or the ECB shuts down the ELA (Emergency Liquidity Assistance) program for Greece.

Repeat Warning

Once again I repeat my January 9 warning regarding Greece: Another Run on Greek Banks Begins; Get Out While You Still Can; Buy Gold

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

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MarketWatch Infomercial: Can Millennials Finally Afford a Home?

The Outside the Box MarketWatch Opinion of Damian Maldonado is Millennials Can Finally Afford Homes with New Mortgage Rules.

Let's start with a look at the new rules.

New Rules

1. The administration earlier this month cut the premium that borrowers with a Federal Housing Administration loan must pay for mortgage insurance to 0.85% from 1.35%. The half a percentage point reduction will reduce the cost of the average FHA loan by about $1,000 per year.
2. Fannie Mae and Freddie Mac last month dropped the minimum down payment to 3% from 5% on some of its mortgages. FHA requires a 3.5% down payment.
3. Grant programs, such as CHFA in Colorado, allow home buyers to purchase a home with as low as a $1,000 down payment.

Hoop Jumping

Maldonado jumps through all sorts of hoops to justify the new rules, pretending that "new regulations, should stop the problems that led to the subprime mortgage crisis".

He concludes "Perhaps this will be the year this generation will leave their expensive rentals, or their parents’ basements, and move into their own homes and live the American Dream."

I propose that after this relentless rally in home prices, the above "new rules" are too risky. Low down payments would have made more sense actually at the bottom of the market, when standards tightened.

This is typical regulatory BS, lowering lending standards when they should be tightened, and tightening them when arguably they could be lowered.

The cure in this case is to get rid of Fannnie Mae, Freddie Mac, and the FHA, all useless organizations that have done nothing but raise the cost of housing by promoting houses as the "American Dream".

Nonetheless, I offer this musical tribute.


Link if above video does not play: Andy Williams - The Impossible Dream (The Quest)

Questions

Before you get too teary-eyed over the American dream, let's investigate two questions.

Question Number 1: Who is Damian Maldonado?

Answer Number 1: Damian Maldonado is CEO and co-founder of national mortgage lender American Financing.

Question Number 2: Why the hell is MarketWatch running infomercials for American Financing?

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

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Clash Over Sanctions: Syriza Opposes Sanctions on Russia, Calls Them "Neocolonial Bulimia"; Negotiation Rules

The Blowout Victory of Syriza has taken on some new meaning outside of Grexit possibilities.

Please consider Greeks Rebuff EU Call for More Russia Sanctions.

A spokesman for the ruling coalition of Alexis Tsipras, prime minister, said Greece had not approved a statement from EU heads of government that asked their foreign ministers to review further sanctions in response to the latest flare-up of violence in eastern Ukraine, blamed by the US and most European nations on Russian-backed separatists.

The Greek statement raised questions over whether the new government, led by the radical leftist Syriza party, would support a continuation of existing EU sanctions, including visa bans and asset freezes on Russian officials and Moscow-supported separatists, when they come up for renewal in March.

German chancellor Angela Merkel warned last month that Moscow was trying to make some Balkan states “politically and economically dependent”.

[Mish comment: But hey - political and economic dependence on Germany and the Troika is of course perfectly acceptable]

Nikolai Fyodorov, Russia’s agriculture minister, suggested on January 16 that, if Greece’s debt woes forced it to leave the EU, the Kremlin would help Athens by lifting a ban on Greek food exports that forms part of the measures adopted by Moscow in retaliation for western sanctions.

Syriza has already given a taste of its foreign policy outlook in the European Parliament, where, since last May’s elections, its MEPs have adopted a number of pro-Russian positions, including voting against a EU-Ukrainian association agreement.

Costas Isychos, a Syriza foreign affairs spokesman, last year derided western sanctions on Russia as “neocolonial bulimia” and praised the military efforts of the Kremlin-backed separatists in Donetsk and Lugansk in eastern Ukraine.

Syriza’s 2013 party manifesto demanded Greece’s exit from Nato and the closure of a US navy base on the island of Crete.

Though a Nato member, Greece in modern times has often enjoyed warm relations with Russia, and the Soviet Union before it, no matter what the political complexion of the government in Athens. The two countries are culturally close, with a shared Orthodox religion, and leftwing Greeks in the cold war used to have an anti-US, anti-imperialist outlook very close to the views of Moscow.

"Neocolonial Bulimia"

That's a good term. It applies to the Troika as well. The IMF is not out to save Greece, it's out to loot Greece for the benefit of external bondholders.

Greece's Coming Clash in Europe Starts With Russia Sanctions

Bloomberg reports Greece's Coming Clash in Europe Starts With Russia Sanctions.

Prime Minister Alexis Tsipras’s Syriza-led coalition said it opposed a European Union statement issued in Brussels Tuesday paving the way to additional curbs on the Kremlin over the conflict in Ukraine, and complained it hadn’t been consulted.

“Greece doesn’t consent,” the government said in a statement. It added that the announcement violated “proper procedure” by not first securing Greece’s agreement.

Greece’s new foreign minister, Nikos Kotzias, has the opportunity to block further sanctions at an EU meeting in Brussels on Thursday. 

Sanctions require unanimity among the 28 governments. A Greek veto would shatter the fragile European consensus over dealing with Russia, potentially robbing Syriza of early goodwill as it lobbies for easier terms for Greece’s bailout.

“Anyone who thinks that in the name of the debt, Greece will resign its sovereignty and its active counsel in European politics is mistaken,” Kotzias said at the ceremony to take over the Foreign Ministry. “We want to be Greeks, patriots, Europeanists, internationalists.” 

The new government also includes Yanis Varoufakis, an economist who has called Greece’s bailout agreement a destructive “trap,” as finance minister. He advocates defaulting on the country’s debt while remaining in the euro.

“Tsipras’s initial decisions, especially his coalition with a nationalist-hooligan party, point toward an exit from the euro,” Luis Garicano, an economics professor at the London School of Economics, said on Twitter. “If he wanted to negotiate, he’d have teamed up with To Potami, he wouldn’t have opposed sanctions against Russia.”

Negotiation Rules

The position of Economics professor Luis Garicano is laughable.

In regards to EU sanctions, 1 vote out of 28 can kill the deal. That's a lot of leverage, especially when 27 on the other side want something from you. What are they willing to offer in return?

In contrast, when it comes to bailouts, Greece is outvoted by a huge margin, perhaps 18-1 within the Eurozone block. In this case, Greece desperately wants something from the other 18 instead of the other 27 wanting something from Greece.
 
The only way to negotiate when it's 18-1 against you (and you are the one who needs something) is to have some leverage. If Syriza teamed up with To Potami and agreed to sanctions, Tsipras may as well put all his cards on the table saying "here, take the ones you like".

Brick in the Face

The way to get things serious in a hurry is to figuratively hit the Brussels nannycrats smack in the face with a brick. Letting Brussels know you will kill sanctions if you do not get what you want would do just that.

Of course, sanctions are pure idiocy in the first place. So hitting the nannycrats with a brick in the face is precisely what needs to happen. That brick will set the tone for better negotiations on other matters as well.

This is likely to get very interesting in a hurry.

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

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Greek Payback Math at 0% Interest

Payback of Greek Debt

Greece has something like €315 billion of public debt.

Forget about that. Instead focus on liabilities as presented in Revised Greek Default Scenario: Liabilities Shifted to German and French Taxpayers; Bluff of the Day Revisited.

The above total is a "modest" €256 billion to be paid back over time.

1. Assume 0% interest
2. Assume a Current Account Surplus of 3% of GDP
3. Assume Greek Debt-to-GDP is 176%
4. Assume Greek Debt €312 billion
5. Assume Greek GDP is €178 billion

Point 5 is derived from points 3 and 4. The numbers seem to vary a bit depending on the source, but they should be close enough for this exercise.

Payback Math at 0% Interest

Let's assume that Greece can run a 3% current account surplus for as long as it takes to pay back €256 billion.

3% of €178 billion is €5.35 billion. To pay back €256 billion it would take about 48 years. That assumes 0% interest and a 3% current account surplus every year for 48 years!

Those calculations ignore rising GDP. But they also ignore a huge burden on Greek citizens for 48 years.

Let's be honest: Greece is not going to run current account surpluses of 3% per year for perpetuity.

Unrealistic Debt

Syriza says Greece Debt Repayment in Full is 'Unrealistic'.

My math says Syriza is correct. But that math assumes debt is as stated above.

What is Greek Debt-to-GDP?

Financial Times writer Ferdinando Giugliano asks Is Greek government debt really 177% of GDP?

Economists tend to disagree over how sustainable this burden really is: some point to the sheer size of the liabilities, saying Athens will never be able to pay them back. Others emphasise the favourable conditions which the Greek government has secured on official sector loans in two rounds of restructuring: these include heavily subsidised interest rates and a lengthening of the average maturity of the debt, which now stands at 16.5 years, double Italy’s or Germany’s.

One figure on which everyone tends to agree, however, is that Greece’s public debt is 177 per cent of gross domestic product, the highest level in the eurozone. Well, everyone but a private equity group and a number of accountants, who think the relevant figure could be as low as 68 per cent.

The calculation is part of a large bet which private equity group Japonica Partners has made on Greek debt through the years. A year and a half ago, Japonica, led by former Goldman Sachs banker Paul Kazarian, offered to buy as much as €2.9bn of Greek government debt. The group has launched a campaign to prove that Greece’s liabilities are significantly more sustainable than the headline debt-to-GDP ratio suggest.

This could be easily dismissed as a private equity group talking its books. Except that it raises some interesting issues over how governments calculate their debts. The question is at the heart of a debate among the accounting community, with some thinking that the way states calculate their liabilities is out-dated and should be revamped to resemble more private sector practices.

Eurozone governments estimate their debt according to the so-called Maastricht definition”. The debt is taken at face value, meaning that a €100 liability is worth the same whether it needs to be repaid tomorrow or in 30 years time and regardless of the interest rate. Since the time-value-of-money and interest rates are ignored, Maastricht forces governments to book even a zero coupon bond at the principal amount due at maturity.

Why is this relevant to Greece? The reason is pretty simple. Eurozone governments have repeatedly agreed to lower the interest rate charged on their loans to Greece, as well as to extend their maturity. Conversely, they have insisted that the face value of the loans stayed the same. While these changes have undoubtedly made life easier for the Greek government, they do not show up in the Maastricht definition of Athens’ debt, which only considers face value.

Japonica’s estimates are based on a different system of accounting. This is the so-called International Public Sector Accounting Standards (IPSAS), the equivalent for governments of the International Finance Reporting Standards (IFRS) used by companies across the world. There are many ways in which IPSAS differs from the book-keeping rules used by governments across the EU: but for our purposes, it is worth noting that the calculation of debt moves beyond the simple face value of the liabilities, discounting it over time using market interest rates.

Wishful Thinking

I suggest it is pretty clear Greece cannot possibly pay back €256 billion even at 0% interest.

I admit I ignored potentially rising GDP. Yet, no matter how you slice it, Greece will not run current account surpluses for as long as it takes.

Moreover, government spending (debt) adds to GDP. How much is GDP supposed to rise in the absence of more government spending and more debt? For how long?

Japonica’s calculations appear to be a combination of wishful thinking and talking one's book. Japonica also presumes patience by Greek citizens the last election proves does not exist.

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

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