The Morning After: Jon Stewart Sticks Up for Invisible Man Ron Paul

Media Ignores Ron Paul So Blatantly, Even Time Magazine Recognizes It; "Why?" is Easy to Explain

The mainstream media continues to ignore Republican candidate Ron Paul to the point of absurdity, favoring candidates that no one has even heard of, such as John Huntman.

For an incredibly humorous take, please watch Jon Stewart give a well-deserved slap in the face to Fox News, and media in general.



Link if above video does not play: http://www.thedailyshow.com/watch/mon-august-15-2011/indecision-2012---corn-polled-edition---ron-paul---the-top-tier

Time Magazine Chimes In

Time Magazine chimes in with their take in The Morning After: Jon Stewart Sticks Up for Invisible Man Ron Paul

In a way, criticizing the political media for imbalanced coverage of the Iowa Straw Poll is like criticizing the sports media for imbalanced coverage of the Lingerie Bowl. It's a nonbinding, festival-like event in which candidates essentially buy votes (or at least buy entrance, food and entertainment for their voters), so arguably the most misleading thing the media does in covering it is, well, covering it at all. Still, if one is going to pay rapt attention to an unpredictive electoral stunt, shouldn't you at least pay attention to the leading candidates whose success the stunt unpredicts?

That didn't happen for Ron Paul​, who came within a percentage point of beating Michele Bachmann in Iowa, and yet, as this Daily Show segment lays out, was ignored even after the fact in listings of "top-tier candidates," being put behind peers who he beat or who didn't compete.

The sheer, smug dismissiveness with which the political press treat the libertarian Congressman in these clips is really something. And it's yet another example of political media winnowing the pack in advance by deciding who is a "serious" candidate and who isn't—in this case, seemingly, by deciding that Paul's beliefs are too far out there or, maybe more likely, simply don't easily fit the left-right narrative.

I'm not, by the way, making the argument that Paul would have a serious shot at the GOP nomination in any case. That hardly matters, though; a candidate with obvious significant support can still have a serious effect on the race, and its ideas, and that's news. Or it should be, if the horserace handicappers didn't insist on deciding their news angles in advance.

Time Magazine missed one critical aspect in its coverage of the straw poll: It was Michele Bachmann who bought her way to the top, not Ron Paul.

Paul a Significant Factor

Regardless of what one thinks of Ron Paul's chances, Time Magazine hits the nail on the head with analysis worth repeating: "A candidate with obvious significant support can still have a serious effect on the race, and its ideas, and that's news. Or it should be, if the horserace handicappers didn't insist on deciding their news angles in advance."

The media, especially Fox News is biased against Ron Paul.

Why?

Fox news like warmongers. Ron Paul wants to end wars and cut the defense budget. Republican hypocrites want military spending far in excess of what is needed, and they don't want to raise taxes for it.

Yes, we need to cut entitlements. We also need to cut military spending, not by a little, by a lot. Finally, we need structural Republicans should be sounding the horn on, but mysteriously are not.

Simple Facts of the Matter

1. The US can no longer afford to be the world's policeman.
2. US military spending equals the next 9 countries combined.
3. US military spending nearly equals the whole rest of the world combined.

Those numbers do not include military spending hidden in other buckets.

Blast of New York Times and Liberal Media

I took on the "Liberal Media" discussing needed structural reforms in a blast at the New York Times called Growing Gloom for States and Cities; Who is to Blame? What About Solutions?

I propose 4 badly-needed reforms as follows

Proposed Reforms

1. Scrap Davis-Bacon and all prevailing wages laws that force up costs of construction and other projects at the city, county, state and federal level.


2. End Collective Bargaining of public unions. Governor Scott Walker in Wisconsin shows the dramatic results that can happen if this is done. School districts that had budget deficits hugely in the read, saw them immediately go into the green, and not even for reasons that one might think. I wrote about it in Union-Busting is a "Godsend"; Elimination of Collective Bargaining is the Single Best Thing one Can do for School Kids


3. Pass national right-to-work laws. Again this will help cash-strapped cities, counties, and states that have to deal with union-mandated pricing instead of competitive pricing. The goal of government should be to provide the most benefit for the least cost. The goal of unions is to provide as little work as possible for the most cost. It's time we end that model.


4. Immediately kill defined benefit plans for government workers and accept the idea that promised benefits will be reduced voluntarily or via bankruptcy.
   

Why Republicans failed to hammer home those issues when they had a chance in budgets negotiations is a mystery (except of course for number 4 which would reduce their own benefits).

Why Fox News ignores Ron Paul is not a mystery. Fox News supports warmongers and is purposely attempting to ignore, if not outright discredit those with other viewpoints. Anyone who plays the video can come to no other logical conclusion.

I support Paul's effort to reduce military spending substantially. Please see Defense Industry Bribes and Legislative Whores for reasons we overspend.

I failed to mention in that article that Union Bribes and Legislative Whores is equally applicable. The result is the worst-of-both-worlds compromise. The US spends too much on defense and too much on entitlements.

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

Finland and Greece agree on loan guarantees

Amazingly Absurd Loan "Guarantee" Arrangement Between Finland and Greece

The idiocy of the day comes from Finnish Finance Minister Jutta Urpilainen regarding loan guarantees for the bailout of Greece.

Please consider Finland and Greece agree on loan guarantees

Finance Minister Jutta Urpilainen said in a Tuesday press conference that Finland and Greece have reached common ground on loan guarantees demanded by Finland for its participation in the Greek bailout package. The agreement still requires approval from other eurozone states.

The Finnish and Greek Finance Ministries have agreed that the Greek state will transfer a sum to the Finnish state, which, together with interest on that sum, will serve to guarantee Finland's share in the bailout loan to the troubled southern state.

The guarantee sum would, however, be only a fraction of the money that Finland is contributing to the rescue package.

Urpilainen has not divulged a concrete sum, because that is still being negotiated.

Got That?

If not, let me explain by an two-point analogy.

• You agree to give a homeless drug addict on skid row $10.
• In return, he immediately hands back to you $1 as a "guarantee" he will pay back the other $9, with interest, at an agreed upon rate.

Clearly there is no guarantee of anything. Rather the initial effective loan amount is reduced by the amount of the alleged guarantee.

Urpilainen is looking for approval of her nonsensical proposal from the rest of Eurozone states. I hope they have enough sense to laugh in her face. However, the proposal is so stupid, EU officials just might seriously debate it

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

Miami Declares Financial State of Emergency

Miami Declares Financial State of Emergency, Gives Unions Two Weeks to Agree to Cuts; California Revenue $541 Million Below July Forecast

The "good news" keeps right on rolling. As such, I keep wondering which major US city will be the first to declare bankruptcy. Please consider candidate Miami.

Miami Declares Financial State of Emergency

Bloomberg reports Miami Declares ‘Financial Urgency’ as It Moves to Cut Worker Pay, Benefits

Miami, facing a $61 million fiscal 2012 deficit, declared a state of “financial urgency” for a second straight year, moving toward wage and benefit cuts.

The declaration gives unions for municipal workers two weeks to agree to contracts for the year that starts in October or be subject to actions imposed by the City Commission. Workers including police and firefighters absorbed about $80 million in reduced pay, health insurance and pensions in fiscal 2011.

“In order to balance the budget, sacrifices have to be made by everyone,” Pat Santangelo, a spokesman for Mayor Tomas Regalado, said today by telephone. The city is the state’s second-largest by population, after Jacksonville.

Miami joins at least two Florida cities that also have invoked the fiscal statute, including one that may force reductions on union workers. Hollywood, which made a declaration in May, is set to cut salaries, including for police and firefighters, as much as 12.5 percent. State law gives cities special powers when they declare financial urgency.

Standard & Poor’s cut Miami’s general-obligation bond rating two steps to BBB, the second-lowest investment grade, on June 28 and gave it a negative outlook, partly because of lawsuits from city unions stemming from cuts imposed in August 2010. The legal actions “expose the city to significant liabilities at a time when its available reserves and liquidity are low,” S&P said in a report.

Bankruptcy the Best Solution for Miami

It is time to end these piecemeal negotiations that should not even be happening in the first place. A bankruptcy agreement could dissolve the unions and all their agreements.

Miami is dire straits because of unions, and unions, not taxpayers should suffer the consequences. Bankruptcy is the best solution for Miami.

California Revenue $541 Million Below July Forecast

More budget cuts are coming to California where Revenue Fell $541 Million Below July Forecast.

California revenue fell short of budget estimates by $541 million or 9.2 percent in July, the first month of the 2012 fiscal year, the state Finance Department reported.

The data was similar to figures from Controller John Chiang, who said Aug. 9 that cash receipts for the month missed the forecast by $538.8 million. Chiang said the shortfall may mean further budget cuts are needed.

The next round of budget cuts will be as contentious as the last round, only the amounts will be smaller. Once again I suggest cutting union wages and benefits, ending defined benefit pension plans, scrapping prevailing wage laws, ending collective bargaining arrangements, and making California a right-to-work state. Those things will all do wonders for containing costs.

Note that just a few months ago the state was bragging about beating revenue estimates.

What happened?

Recession, that's what. The global economy is headed straight for one, if not in one already. Republicans in California need to get some real concessions before agreeing to tax hikes. I suggest an end to collective bargaining and passage of right-to-work laws.

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

Merkel, Sarkozy Shun Euro Bonds

Merkel, Sarkozy Reject Euro Bonds and Expansion of Rescue Fund; What Does it Mean? Middle of the End for Merkel

After all the debate and hype, with many clamoring for a European nanny state complete with common bonds, it has come down to this, at least for now: Merkel, Sarkozy Shun Euro Bonds

German Chancellor Angela Merkel and French President Nicolas Sarkozy rejected an expansion of the 440 billion-euro ($633 billion) rescue fund and rebuffed calls for joint euro borrowing to end the debt crisis, saying greater economic integration was needed first.

The leaders of Europe’s two biggest economies agreed to press for closer euro-area cooperation, tougher deficit rules and a harmonization of their corporate tax rates. A plan to resubmit a financial-transaction tax, which the European Union rejected in 2010, sent stocks lower in New York trading.

What Does it Mean?

For starters it means Angela Merkel no longer has capability to ram her ideas through the German Bundestag, the national parliament of Germany.

It also means that even if she could have, the measure would have failed.

The Dutch prime minister essentially rejected Eurobonds, and it is likely Finland would have as well.

More importantly, Germany's Finance Minister Wolfgang Schäuble emphatically stated "I rule out eurobonds for as long as member states conduct their own financial policies and we need different rates of interest in order that there are possible incentives and sanctions to enforce fiscal solidity."

Given that it takes a unanimous approval from all Eurozone nations to enact Eurobonds, Merkel and Sarkozy both realized political support was simply not present.

Middle of the End for Merkel

This is the "middle of the end" for Merkel. She has exhausted all of her political capital fighting a battle that is far bigger than she is. Merkel will not survive this mess.

Sadly, Merkel had it correct in the beginning, initially insisting on haircuts on bondholders. She gave in to the "no haircuts" fantasy under pressure from ECB president Jean-Claude-Trichet and French president Nicolas Sarkozy.

I said at the time it was a fatal Merkel mistake. Since then, Greece defaulted anyway and there are haircuts on bonds. More haircuts are coming.

Rescue Fund Insufficient

A "rescue fund of $633 billion is insufficient. All it takes to exhaust that fund are renewed problems in Italy or Spain, or increasing problems in France. All are likely. Expect more talks of EuroBonds in the not too distant future.

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

Value Traps and Road to Ruin

Earnings Collapse Coming Up; Don't Worry Companies Will Still "Beat the Street"; Value Traps and Road to Ruin

Of all the inept reasons to be bullish about equities, "beat the street" hype is near the top of the list. The fact is, in aggregate, ever since Reg-FD (full disclosure) companies always beat the street.

In Surprising Optimism in Face of Weekly Global Equity Carnage; Foolish Comments of the Day; "Beat the Street" Bullsweet I noted nearly every quarter, even in 2008 and 2009 the majority of firms beat estimates. Here is the way the process works:

• Corporations give analysts "tips" regarding profit expectations.
• Those profit expectations are purposely low.
• Wall Street analysts lower estimates, if necessary, as the quarter progresses such that corporations can "beat the street".
• If corporations are going to miss and need an extra penny, they change tax assumption or make other "one time" adjustments as necessary.
  
• Corporations beat the street by a penny with "pro-forma" (after adjustment) reporting.

Understandings Earnings Estimates

A couple of readers asked for a historic chart of "beat the street" metrics

I just happen to have one, with thanks to Understandings Earnings Estimates by James Bianco on the Big Picture Blog.

Aggregate S&P 500 earnings have beaten expectations for 50 straight quarters, including the current quarter. As we explained last July:

The chart below highlights the inception of SEC regulation “FD” (aka, Fair Disclosure). Before FD roughly 50% of companies beat expectations, as would be the case if analysts were trying to get it right. Now that companies have to disclose to all at the same time, we believe their investor relations departments are masters at “guiding” analysts just below actual earnings.

This way the companies “beat” expectations and get the positive press and accolades that come with it. Further, it seems that everyone is happy with this apparent gaming of the system. This is why we believe the percentage of companies that beat expectations is a meaningless statistic. The game is designed for this to happen, even when earnings are collapsing (during 2008′s epic collapse in earnings more than 50% of companies still beat expectations).

Percentage of Companies that "Beat the Street"



click on chart for sharper image

The last time companies failed to "beat the street" was third quarter of 1998. At the earnings trough in third quarter of 2008, 58% of companies in the S&P 500 still managed to "beat the street".

Sentiment, Not Earnings Key to Returns

If this "beat the street" talk was not pathetic enough in and of itself, the fact remains that sentiment, not earnings, is the key to stock market performance.

I discussed this concept at length in a pair of posts earlier this year.

• Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think


• Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble?

Please read those posts if you have not yet had a chance to do so.

Value Traps

On June 20, in Value Traps Galore (Including Financials and Berkshire); Dead Money for a Decade I noted Berkshire, Citigroup, and Bank of America were "value traps".

At that time Citigroup had a price-to-book valuation of .64, and Bank of America a price-to-book valuation of .50.

Citigroup Price-to-Book valuation is now .52 and Bank of America Price-to-Book Valuation has fallen to .38.

Those who thought Bank of America was cheap at book value, now find themselves 62% in the hole. I suspect they may still be in the hole 10 years from now.

Stocks that look cheap can always look cheaper.

Road to Ruin

John Hussman repeats his recession and valuation warnings in Two One-Way Lanes on the Road to Ruin

It is important to recognize that the S&P 500 is presently only about 13% below its April peak, and the word "only" deserves emphasis. Our valuation impressions align fairly well with those of Jeremy Grantham at GMO, who puts fair value for the S&P 500 "no higher than 950" - a level that we would still associate with prospective 10-year total returns of only about 8% annually. I would consider investors to be very fortunate if the market does not substantially breach that level in the coming 12-18 months.

Wall Street continues its servile attachment to forward operating earnings, seemingly unconscious that the perceived "norms" for the resulting P/E are artifacts of a bubble period. The fact is that historical periods of overvaluation and poor subsequent long-term returns correspond to forward operating P/E multiples anywhere above 12, while secular buying opportunities such as 1950, 1974 and 1982 map to forward operating multiples of only 5 or 6 (based on the strong correlation but downward-biased level of forward operating P/E ratios, when compared with multiples based on normalized earnings - see Chutes and Ladders for a graphic).

Without question, one of the notions buoying Wall Street optimism here is the hope that the Fed will pull another rabbit out of its hat by initiating QE3. That's a nice sentiment, but it does overlook one minor detail. QE2 didn't work.

Actually, that's not quite fair. The Federal Reserve was indeed successful at provoking a speculative frenzy in the financial markets, which has now been completely wiped out. The Fed was also successful in leveraging its balance sheet by more than 55-to-1 (more than Bear Stearns, Lehman, Fannie Mae, Freddie Mac, or even Long-Term Capital Management ever achieved), and driving the monetary base to more than 18 cents for every dollar of GDP. The Fed was indeed successful in provoking a wave of commodity hoarding that affected global supplies and injured the poorest of the poor - particularly in developing countries. The Fed was successful in setting off a very predictable decline in the value of the U.S. dollar. The Fed was successful in punishing savers and the risk averse, and driving investors to reach for yield in risky investments that they would normally avoid were it not for the absence of yield. The Fed was successful in provoking those with strong balance sheets to pay down existing higher interest-rate debt, and in creating an incentive for those with weak balance sheets to issue more of it at low rates, resulting in a simultaneous deterioration of credit quality and compensation for risk in the financial system.

Hussman's article is well worth a read in entirety.

In terms of expected annualized returns, I think Hussman is a bit too optimistic over the long-term even though I endorse his intermediate-term philosophy "I would consider investors to be very fortunate if the market does not substantially breach [S&P 950] in the coming 12-18 months."

Speaking of optimistic, way too optimistic ...

Strategists Stick With 17% S&P 500 Gains Based on Earnings

I am amused at the amazing year-end projections of strategists as noted in Strategists Sticking With 17% S&P 500 Gain on Higher Profit

Wall Street has never been more sure that the Standard & Poor’s 500 Index will rally in 2011, even after speculation the U.S. economy is heading for a recession prompted the biggest plunge since the bull market began.

Strategists say earnings growth will fuel gains. S&P 500 profit will rise 18 percent in 2011 and 14 percent in 2012, according to the average per-share analyst estimates in a Bloomberg survey. More than 75 percent of corporations in the index have exceeded earnings estimates for the second quarter, with total income topping projections by 5.2 percent.

Year-End Estimates

• Tobias Levkovich, Citigroup Inc. (C)’s chief U.S. equity strategist in New York, forecasts the S&P 500 will end the year at 1,400.
• Brian Belski, the New York-based chief investment strategist at Oppenheimer & Co., estimates the S&P 500 will reach 1,325.
• Barry Knapp, the New York-based chief U.S. equity strategist at Barclays year-end projection is 1,450.
• Credit Suisse Group AG (CSGN) and HSBC Holdings Plc (HSBA) advised investors to buy equities today. Andrew Garthwaite, a London- based strategist at Credit Suisse, reiterated an “overweight” recommendation on stocks even as he cut his year-end forecast for the S&P 500 to 1,350.

Corporate Earnings Set to Plunge

Nearly anything is conceivable, but I think fiscal and monetary stimulus has run its course and earnings will plunge.

The Eurozone is heading for a recession or in one. China is slowing. The UK is in recession or headed for one, Australia and Canada, same story.

In spite of denial by analysts, the US is on a recession track if not in one.

Moreover, judging from the unemployment rate, corporations are running pretty lean here. If profits plunge, it will be tough to cut a lot of employees to make up for revenue shortfalls.

Implications are severe either way. One affects job, the other earnings. The US can easily take a hit both ways.

Telling Action in Bank Shares

Take a look at the action in bank shares. They tell the story of excess leverage and capital shortfalls. On July 18, 2011 Bank of America Clobbered on $50 Billion Capital Shortfall Related to Mortgage Losses

Capital shortfalls are not unique to Bank of America. For the current sorry state of affairs of the banking system, please see BNP Paribas leveraged 27:1; Société Générale Leveraged 50:1; Global Financial System is Bankrupt.

With this backdrop, I fail to see how earnings can't plunge. But hey, look on the bright side: companies will still "beat the street". They always do.

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

Congressional Job Approval Ties Historic Low of 13%

Congressional Approval 13%;Theory of Elections and Overcoming Huge Political Bureaucracies; What the Hell Does it take to Get Real Change?

The most recent Gallup poll shows Congressional Job Approval Ties Historic Low of 13%

Americans' evaluation of the job Congress is doing is the worst Gallup has ever measured, with 13% approving, tying the all-time low measured in December 2010. Disapproval of Congress is at 84%, a percentage point higher than last December's previous high rating.



click on chart for sharper image

These results are based on an Aug. 11-14 Gallup poll, which includes the first update on Congress' job approval rating since the government reached agreement on a deal to raise the debt ceiling after contentious and protracted negotiations between President Obama and congressional leaders

Implications

Americans have usually not held Congress in high regard, but currently they have a more negative view of the institution than any other time Gallup has measured. Although Congress agreed to raise the debt ceiling, the issue is far from settled, as a special committee of 12 House and Senate members will work toward an agreement to make significant cuts in federal spending over the next few months to avoid mandatory cuts in defense and entitlement programs.

Though the results of that committee's work are not likely to dramatically transform the way Americans view Congress, they could determine whether the institution's ratings remain in this new lower range or show some improvement.

If Congress' ratings do not improve much before the November 2012 elections, its membership could be in line for another shake-up.

Obama's Approval Rating at 39%

Gallup also reports President Obama's Job Approval Rating has declined in recent days, reaching a low of 39% in Aug. 11-13 Gallup Daily tracking.



click on chart for sharper image

What the Hell Does it take to Get Real Change?

In response to Amazingly Absurd Loan "Guarantee" Arrangement Between Finland and Greece my friend "Fedwatcher" commented ...

"Looks like the Finns need another election. As it was in Iceland, it took two elections to beat the banker politicians over the head with a two by four. The bigger the nation state, the more elections are required. I think Finland needs two more elections. We need four to eight."

Theory of Elections and Overcoming Huge Political Bureaucracies

Adding to Fedwatcher's observation, I propose: “The bigger the nation state, the more elections or global forces it takes to change direction, no matter how misguided current direction is.”

A bond market revolt, global currency crisis, or another major world war might suffice as well.

If the bond market or global currency crisis does not force change in misguided and unsustainable US spending and warmongering (actually I think it will - timing is unknown - but faster than 4 elections), then eventually US citizens may act on their own to stop fighting World War II, to end the US' role as world's policeman and pandering to various special interest groups (only to be replaced by pandering to different special interests of course).

Eventually boomers and those still fighting World War II will be swept under the rug by increasing numbers of Generation X, Y, and Millennials who will have had enough of the "pampered generation", bank bailouts, public unions, wars, global police actions, and other monstrosities.

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

Gold market is a ‘bubble poised to burst'

Wells Fargo Says "Gold Bubble Poised to Burst", Mish Says "Wells Fargo Bubble Poised to Burst"

Wells Fargo analysts proclaim Gold market is a ‘bubble poised to burst'.

Speculative demand from investors has pushed the gold market into a “bubble that is poised to burst” after prices surged to a record this year, Wells Fargo & Co. said.

“We have seen the economic damage” of past bubbles and “feel compelled to ring the warning bells,” Wells Fargo analysts led by Dean Junkans said in a report dated yesterday and e-mailed today.

Economic Damage Nonsense Regarding Gold

If gold fell to $1000 in the next 12 months, pray tell what economic damage would it cause? The answer is none.

The irony is that gold is rising on account of economic damage, currency debasement, and the simple fact that gold is the only currency with no liabilities. The second irony is if gold fell that much, it would likely be an indication that some of the global financial problems were finally fixed.

Those looking for bubbles would be advised to consider shares of Wells Fargo.

WFC - Wells Fargo Weekly Chart



I suspect there will be a retest of that March 2009 low if and when Wells Fargo has to mark-to-market its balance sheet chock full of piss-poor real estate loans and other assets. Then again, the market may take things into its own hands first.

Furthermore, were it not for taxpayer bailouts and extraordinary support from the Fed and Congress, Wells Fargo may have gone to zero in 2009.

Regardless, Wells Fargo is a far better short than gold given the US economic backdrop, weakening global economy, and the competitive currency debasement practices of central bankers throughout the world.

By the way, that is an opinion, not a recommendation.

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

SEC may have destroyed documents

SEC Destroys 9,000 Fraud Files Involving Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Credit Suisse, Deutsche Bank, Morgan Stanley, Lehman

Senator Chuck Grassley, Republican of Iowa, says SEC may have destroyed documents

“From what I’ve seen, it looks as if the SEC might have sanctioned some level of case-related document destruction,” said Sen. Chuck Grassley, Republican of Iowa, in a letter to the agency’s chairman, Mary Schapiro.

“It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what timeframe, and to what extent its actions were consistent with the law.”

Agency staff “destroyed over 9,000 files” related to preliminary agency investigations, according to a letter sent in July to Grassley, the top Republican on the Senate Judiciary Committee, and obtained by MarketWatch.

The allegations were made by SEC enforcement attorney, Darcy Flynn, in a letter to Grassley. Flynn is a current employee, and according to the letter, received a bonus for his past year’s work.

Flynn alleges the SEC destroyed files related to matters being examined in important cases such as Bernard Madoff and a $50 billion Ponzi scheme he operated as well as an investigation involving Goldman Sachs Group Inc. trading in American International Group credit-default swaps in 2009.

Flynn also alleged that the agency destroyed documents and information collected for preliminary investigations at Wells Fargo, Bank of America,, Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley, and the now-bankrupt Lehman Brothers.

The letter goes into particular detail about Deutsche Bank, the former employer of current SEC enforcement chief Robert Khuzami as well as former enforcement chiefs Gary Lynch and Richard Walker.

The allegations that the SEC destroyed documents were first reported by the Rolling Stone magazine in a report Wednesday.

Senator Grassley's Letter to the SEC

Inquiring minds may be interested in Senator Grassley's Letter to the SEC

Slap of the Wrist of MarketWatch

Once again I am irritated by articles and authors who quote other sources and do not have the decency to post a link. In this case the author is Ronald D. Orol, a MarketWatch reporter, based in Washington.

Orol should have caught that and if not the editors at MarketWatch should have caught it.

Is the SEC Covering Up Wall Street Crimes?

Please consider Rolling Stone: Is the SEC Covering Up Wall Street Crimes? by Matt Taibbi

Imagine a world in which a man who is repeatedly investigated for a string of serious crimes, but never prosecuted, has his slate wiped clean every time the cops fail to make a case. No more Lifetime channel specials where the murderer is unveiled after police stumble upon past intrigues in some old file – “Hey, chief, didja know this guy had two wives die falling down the stairs?” No more burglary sprees cracked when some sharp cop sees the same name pop up in one too many witness statements. This is a different world, one far friendlier to lawbreakers, where even the suspicion of wrongdoing gets wiped from the record.

That, it now appears, is exactly how the Securities and Exchange Commission has been treating the Wall Street criminals who cratered the global economy a few years back. For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – “18,000 … including Madoff,” as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.

Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency’s records – “including case files relating to preliminary investigations” – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term “Orwellian,” devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or “Matters Under Inquiry” – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission’s internal website. “After you have closed a MUI that has not become an investigation,” the site advised staffers, “you should dispose of any documents obtained in connection with the MUI.”

That is the opening snip. The entire article is worth a read.

I rather suspect the SEC has safeguarded with perfect care the files on Martha Stewart, two-bit Joe, and blogger Bob.

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

Greek unemployment rate hits all-time high

Bad Checks in Greece Soar 43% as Credit Dries Up; Greek Unemployment Rate Hits Record High 16.6%; Hey I have an Idea!

It is pretty tough to pay bills when you have no job, no money, and the unemployment rate is both high and soaring.

Greek Unemployment Rate Hits Record High 16.6%

Inquiring minds note Greek unemployment rate hits all-time high

Thursday August 18, 2011: Unemployment in Greece grew at a stunning rate of 1,200 people per day in May, climbing to 16.6 percent of the Greek work force that month, according to data released on Thursday by the Hellenic Statistical Authority (ELSTAT).

The total number of jobless Greeks soared above the 800,000 level for the first time in the last few years, reaching 822,719. Twelve months earlier, in May 2010, the figure stood at 602,185, or 220,534 fewer jobless people. In percentage terms it was at 12 percent, having been at just 6.6 percent in May 2008.

The steep rise in unemployment is obviously due to the recession of the Greek economy in the last couple of years and the austerity measures imposed, forcing a considerable number of enterprises to close down and thousands of jobs to be lost without being replaced in the market.

The situation is worsening by the month, as in April 2011 the unemployment rate had stood at 15.8 percent, which means an additional 36,260 people lost their jobs within May alone, or about 1,200 per day.

As usual, the problem is greater among women and the young. One in every five women (20 percent) seeking a job in May could not find one (against 14.1 percent for men), while 40.1 percent of people aged between 15 and 24 were unemployed. The worst-hit region was Western Macedonia, with a 24.9 percent jobless rate.

Bad Checks in Greece Soar 43% to 1.4 Billion EU as Credit Dries Up

With no jobs and no credit, one should not be shocked to learn Bad checks, unpaid bills of exchange stifling the market

Rubber checks soared by over 43 percent year-on-year in the first seven months of 2011, asphyxiating the market further as credit lines continue to dry up.

Data released yesterday by the Tiresias bank information system showed that bounced checks in the year to July amounted to 1.38 billion euros, up by 43.3 percent from the same period in 2010, while unpaid bills of exchange rose to 86,257 units, totaling 134,476,048 euros and representing a 6.47 percent increase compared to last year.

Given the growth in bad checks and the deepening recession in the real economy, it is almost certain that their total amount will exceed 2 billion euros by the end of the year.

A survey by the General Confederation of Greek Small Businesses and Traders (GSEVEE) has shown that just under half of the companies that make transactions through checks possess checks that have already bounced (37.9 percent) or are at risk of doing so (7.3 percent).

This phenomenon, which is set to grow, is causing a chain reaction in the market as it is also threatening the existence of healthy enterprises.

Hey I have an Idea!

Actually, I just want to recap ECB president Jean-Claude Trichet's failed idea.

1. Let's bailout the bondholders
2. Let's bailout the banks
3. Let's raise taxes
4. Let's expect the situation to improve by 2012
5. Let's ignore impending recessions
6. Let's stick with growth estimates for Greece, Spain, Italy, and Portugal

I agree with the forced productivity improvement ideas, cutbacks in pension plans, increase in retirement age, and the liberalization of work rules. I vehemently disagree with most of the rest of the bargain and ECB president Trichet's solution as implemented.

Banks eventually took haircuts on Greek bonds. Spain, Ireland, and Italy coming up.

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

Economic Indicators Show Recession As Early As Next Month

Sentiment Leads Consumption; Sentiment Four Ways: Chris Puplava, Calculated Risk, Consumer Metrics; Gallup

Chris Puplava at Financial Sense put together an excellent series of charts last week in Economic Indicators Show Recession As Early As Next Month.

Puplava's prognosis that the "Global Economic Train Is Coming Off the Tracks".

My commentary below pertains to one topic of Puplava's post, namely consumer sentiment. I will add to his commentary with additional charts and commentary of my own and from others.

Sentiment Leads Consumption



Today we were treated to the August reading for the University of Michigan Consumer Sentiment report which showed a reading of 54.9, the third worst reading in history and well below the median estimate of 62.0. This has been the case now for the past month in which economists have been way off the mark in terms of their estimates and reality. This often occurs at major tipping points (both bearish and bullish) as economists often extrapolate past results into the future and thus overshoot at economic peaks and undershoot at economic troughs. The string of overshoots in estimates from the ISM Manufacturing Index to GDP to consumer sentiment indicates we are yet at another economic inflection point in which the economy is rolling over. What is troubling about the Michigan Consumer Sentiment reading is that it often leads turns in consumption trends. First consumer’s moods change and then spending patterns follow suit. The sharp drop in consumer sentiment suggests consumers are likely to pullback sharply on spending in the months ahead.

Consumer Metrics

Puplava's call for a consumer spending pullback piqued my interest because Consumer Metrics Institute's Contraction Watch online spending chart suggests something different.

Consumer Metrics tracks online internet sales in the US, where the transactions are conducted in English.

Here is Consumer Metrics latest consumer spending "Contraction Watch" chart.



click on chart for sharper image

The chart is confusing in that there is no blue-red crossover. The red line represents days since the 2008 contraction and the blue line is days since a 2010 contraction. The word "contraction" is in reference to Consumer Metrics' proprietary indicator of online sales.

The 2010 contraction started in January 2010. Interestingly the 2008 contraction did not start until May.

Note that the first time in approximately 560 days, consumer spending as tracked by Consumer Metrics crossed the zero line.

Keeping Perspective

Consumer Metrics reports ....

It is very important to remember that our Daily Growth Index (and its precursor Weighted Composite Index) measure year-over-year changes in consumer demand for on-line discretionary durable goods. In other words, the indexes measure the slope of the demand curve, not the actual demand itself. When the indexes first cross into neutral territory (a reading of 0 for the Daily Growth Index and 100 for the Weighted Composite Index) it only means that the actual "absolute" on-line demand is no longer getting worse -- i.e., it has just reached rock bottom.

Sampling Error Bias

The following paragraph from Consumer Metrics Methodology discloses potential sampling error problems.

We understand that there are biases in our data:

• We are monitoring only U.S. consumers who are transacting in English on the internet. This causes demographic sampling biases that means that our consumers may be educationally, economically and socially skewed relative to the entire U.S. population and economy.
• We are tracking only discretionary durable goods ordered, purchased, or financed via the internet. This means that we are not capturing many significant sources of spending: groceries, non-discretionary medical services, some utilities, gasoline, non-reserved entertainment or dining, items ordered by phone or mail, bills paid by conventional check, etc. That being said, we are convinced that the portion of the consumer economy we monitor (major discretionary durable goods) represents the most volatile and stimulating component of the entire economy, and that our internet-only sample of that component is a sufficient proxy for the whole.
  
• We use GDP quarterly growth tables since 1947 to gain perspective on how the economy is performing, i.e., how 'normal' it is. We're not very convinced that the over sixty years represented in the tables is truly representative of the U.S. economy over the past twenty years.

The potential biggest flaw is the first bullet point regarding internet sales and how sales are captured.

Consumers Shift to Online Purchases

Please consider the following news story posted a few days ago by Marketing Bit: Online Retail Sales sees 14 Percent Increase

ComScore released its Q2 2011 U.S. retail e-commerce sales estimates, which showed that online retail spending reached $37.5 billion for the quarter, up 14 percent versus year ago. This growth rate represented the seventh consecutive quarter of positive year-over-year growth and third consecutive quarter of double-digit growth rates.

Per comScore Chairman, Gian Fulgoni, these double digit increases infer that

"Consumers are continuing to shift to the online channel, with almost $1 in every $10 of discretionary spending now occurring online. E-commerce’s benefits of convenience and lower prices continue to be the drivers of the shift. At the same time, we are constantly reminded of an overall macroeconomic situation that is not indicative of a strong recovery. With economic growth remaining soft, the unemployment rate stubbornly high and financial markets in turmoil, consumers are less optimistic today than they have been in preceding quarters, which raises concerns for the future. We believe the third quarter will be an important indicator of which direction this economy is really headed and what that will mean for consumer spending."

Reasons for Increased Online Spending

• Cheaper prices
• No sales taxes
• Save time
• Easier to make comparisons
• Save gasoline and driving costs

Discussion With Rick Davis at Consumer Metrics

I had a discussion with Rick Davis at Consumer Metrics over the concern that rising online sales in general accounts for some of the rise in Consumer Metrics' indicator.

However, Davis replied that Consumer Metrics adjusts for the rising percentage of sales coming from the internet. That alleviates one concern assuming the adjustment is accurate. However, there are other issues.

The discussion revealed that Consumer Metrics tracks online sales by IP address in a per-capita basis. IP addresses will change when someone buys a new computer. Families can share computers. Some heavily used sites, primarily businesses with a fixed IP address and hundreds of employees all shopping online during lunch breaks (if not regular hours), might skew interpretations.

In response to questions about IP Addresses, Rick Davis replied via Email.

1) If consumers consistently share the same computers or IP addresses (a family) we end up with a "profile" of a collective shopper. As long as the shoppers within that profile are the same over time, the fact that we have a "family" profile instead of an "individual" profile is statistically irrelevant.

However consumers shopping at work can represent an out-sized family, and for some large corporations a single IP address can end up representing thousands of workers in dozens of locations. Not to mention publicly shared IP addresses for hotels or coffee shops. For that reason (and several others) we toss out the 10% of the IP addresses with the heaviest traffic.

2) The second problem that you listed could end up improving our data. In fact, occasionally the changing IP addresses assigned by the broadband carriers is the limiting factor in the span of time that we can do our "same shopper metrics," and one of the major reasons we start out with year-over-year data. Longer term use of unchanging IP addresses would be a major help.

Consumer Metrics discards the top 10% of IP addresses. Is that valid? I do not know. Is per-capita capture the best way of looking at things? I do not know. Are Consumer Metrics' adjustment factors including demographics correct? Again, I do not know.

There are a lot of variables and adjustments in play and maybe they cancel each other out or maybe they don't.

Absolute Demand Index

Let's look at Consumer Metrics data another way.



That chart conveys a completely different impression than the first chart.

This is why in reference to the first chart Davis cautioned "The indexes measure the slope of the demand curve, not the actual demand itself."

Event Driven Declines

Calculated Risk discusses Event Driven Declines in Consumer Sentiment

On Friday, Reuters and the University of Michigan released the preliminary consumer sentiment index for August. This showed a sharp decline in sentiment to 54.9, the lowest level in 30 years (see graph below).

My reaction was the decline in sentiment was related to the heavy coverage of the debt ceiling debate, and not due to the usual suspects: gasoline prices or a weakening labor market. Of course consumer sentiment was already low because of high gasoline prices and a weak labor market, but gasoline prices are now falling and initial weekly unemployment claims have declined recently (the key for sentiment is that neither appears to be getting worse rapidly).

I looked at some of the previous spikes down in sentiment due to fairly short term events: 1) the 1987 market crash, 2) the Gulf War, 3) 9/11, 4) the Iraq Invasion, and 5) Hurricane Katrina. These events are apparent on the following graph (along with plenty of noise):

My feeling is the debt ceiling decline - assuming the decline was due to the insanity in D.C. - is most similar to the 1987 stock market crash (that scared everyone, but had little impact on the economy) and to Hurricane Katrina (although Katrina led to higher oil prices and a direct impact on consumption in several gulf states).

Event Driven Declines in Consumer Sentiment
Event	Date	Bounce Back	Impact on Consumption	Other Factors
1987 Market Crash	Oct-87	2 Months	None	None
Gulf War	Aug-90	6 Months	PCE declined	Recession, Oil Prices Doubled
9/11	Sep-01	4 months	PCE declined 3 out of 4 months	Recession
Iraq Invasion	Mar-03	2 Months	None	Oil Prices increased 10%+
Hurricane Katrina	Aug-05	3 Months	PCE declined 2 months	Oil Prices increased 10%+
Debt Ceiling	Aug-11	---	---	European Crisis, Weak Recovery

If I'm correct, then sentiment should bounce back fairly quickly - but only to an already low level. And the impact on consumption should be minimal. Of course sentiment could have declined because of other factors (weak labor market, European financial crisis, etc), and then sentiment will probably not bounce back quickly.

So, which interpretation is correct?

It is possible they all are or none of them are. I am happy they all publish their ideas for free, for everyone to review.

Can they all be valid? Sure. Pulpava can be correct about a sharp pullback in spending even if consumer sentiment snaps back a bit from extremes. Consumer Metrics data can change at any time but the Absolute Demand chart looks pathetic now. Durable goods (notably appliances may simply be skirting along the bottom).

In terms of effect on the economy, a pickup in new home sales is far more important than existing home sales. Davis does track housing but cannot distinguish between existing homes and new homes.

Gallup

Sentiment-wise I note a deterioration in Congressional approval ratings to a record low of 13% and a new all-time low approval rating of Obama at 26%.

Please see Congressional Approval 13%;Theory of Elections and Overcoming Huge Political Bureaucracies; What the Hell Does it take to Get Real Change? for my thoughts on Congressional Approval Ratings.

Yesterday, Gallup came out with a new poll that shows 26% Approve of Obama on the Economy.

These are post-debt-ceiling polls. The debt-ceiling may have been increased, but on the political side, no one seems any happier about it.

Conclusion

Given the weak data everywhere I look, coupled with increasingly sour sentiment on the economy and political leaders, it appears the US is headed for recession if not in one. Thus, I am inclined to agree with Puplava that the "Global Economic Train Is Coming Off the Tracks" regardless of near-term consumer spending patterns or online sales.

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

Philadelphia Fed Business Outlook Survey

Collapse in Philly Fed Manufacturing Index to -30.7; Treasury Yields at Record Low; Stocks Sink, Gold Soars

The Philadelphia Fed Business Outlook Survey plunged to -30.7 with all indicators in decline.

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a slightly positive reading of 3.2 in July to -30.7 in August. The index is now at its lowest level since March 2009 (see Chart). The demand for manufactured goods, as measured by the current new orders index, paralleled the decline in the general activity index, falling 27 points. The current shipments index fell 18 points and recorded its first negative reading since September of last year. Suggesting weakening activity, indexes for inventories, unfilled orders, and delivery times were all in negative territory this month.

Firms’ responses suggest a deterioration in the labor market compared with July. The current employment index fell 14 points, recording its first negative reading in 12 months. About 18 percent of the firms reported an increase in employment, but 23 percent reported a decrease. The percentage of firms reporting a shorter workweek (28 percent) was greater than the percentage reporting a longer one (14 percent). The workweek index fell 9 points.

Current and Future Activity


click on chart for sharper image

Activity



click on chart for sharper image

As you can see, new orders, shipments, unfilled orders, and inventories are all in contraction. What's not? Prices paid. This represents a price squeeze on manufacturers.

Carnage in Equities



Futures are a bit off their lows but the S&P 500 is down 3.63%, Nasdaq 100 Index, 3.76%. The Dow is down 392 points, and the Nasdaq composite 101 points.

Yield Curve as of 2011-08-18



$IRX = 03-Mo Treasuries - Brown
$FVX = 05-Yr Treasuries - Blue
$TNX = 10-Yr Treasuries Orange
$TYX = 30-Yr Treasuries - Green

All but 30-year treasuries are at or near new all-time lows today.

Meanwhile, a quick check shows gold is +25.6 to $1817, having hit an all-time high of 1828 in the session.

If you thought the US is going to have a miracle second-half recovery you were clearly wrong. The US is likely in recession now.

Moreover, if you think gold is measuring "inflation" you are fooling yourself.

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

Americans' Satisfaction With National Conditions Dips to 11%

Americans "Can't Get No Satisfaction"; National Sentiment Dips to 11%, Lowest Level Since 2008; Satisfaction with Obama, Congress at Record Lows

The collapse in sentiment of all kinds continues. Concern over jobs and unemployment are at the top of the list of worries.

Gallup report Americans' Satisfaction With National Conditions Dips to 11%

Americans' satisfaction with the way things are going in the United States has fallen back to 11%, the lowest level since December 2008 and just four percentage points above the all-time low recorded in October 2008.



Gallup began measuring Americans' satisfaction with national conditions in 1979. Since then, satisfaction has been lower than the current 11% in only a few measurements in the final months of 2008. The all-time low of 7% came in an Oct. 10-12, 2008, poll, conducted shortly after stock values plummeted following Congress' passage of the TARP legislation in response to the September 2008 financial crisis.

Economic Concerns Paramount in Americans' Minds

In all, 76% of Americans mention some economic issue as the most important problem facing the country, the highest percentage since April 2009.

Low national satisfaction ratings make incumbent politicians vulnerable to defeat, and Presidents Jimmy Carter and George H.W. Bush were defeated for re-election at times when Americans were largely dissatisfied with the state of the nation. Satisfaction ratings tend to be low when the economy is struggling, so economic progress over the next 15 months will be a crucial factor in determining whether Obama is elected to a second term.

Americans Not Satisfied with Obama

Gallup reports Obama's Weekly Job Approval at 40%, Lowest of Administration

President Obama's job approval rating dropped to 40% during the week spanning Aug. 8-14, the lowest weekly average of his administration. During this period, Obama's three-day rolling average also hit a new low of 39% for Aug. 11-13, the first such average below 40% since he took office, though it recovered to 41% for Aug. 12-14.



Although the new lows in Obama's job approval rating represent only a slight drop from his previous low readings, they symbolically underscore the weaker position the president is in as he begins a "listening tour" of the Midwest this week.

Ten incumbent presidents have sought re-election since World War II, and none has won a second term with final pre-election job approval ratings below 48%. The last two presidents who lost their re-election bids -- George H.W. Bush and Jimmy Carter -- had job approval ratings in the 30% range in the fall of the election year. Thus, Obama's challenge is not only to move his rating back above 40%, but also to push it close to or above 50%.

Just 26% Satisfied with Obama's Handling of Economy

Gallup reports New Low of 26% Approve of Obama on the Economy

August 17, 2011
A new low of 26% of Americans approve of President Barack Obama's handling of the economy, down 11 percentage points since Gallup last measured it in mid-May and well below his previous low of 35% in November 2010.




President Obama's approval rating has dwindled in recent weeks to the point that it is barely hugging the 40% line. Three months earlier, it approached or exceeded 50%. History will remember this period for the messy political debate in Washington over the debt ceiling, followed by distress on Wall Street and tragedy in Afghanistan. How much each of these factors is responsible for the overall decline in Obama's approval rating is unclear. But Americans' unhappiness with each of them is reflected in recent declines in Obama's specific job ratings for the economy, the federal budget deficit, and various foreign policy measures, as well as in his markedly low rating for creating jobs.

Satisfaction the Rolling Stones

There are numerous videos of Satisfaction but I like this one even though the video quality is poor. It captures the spirit of the era best.
I took a look at various sentiment measures yesterday, including views from three different people in Sentiment Leads Consumption; Sentiment Four Ways: Chris Puplava, Calculated Risk, Consumer Metrics; Gallup

Congressional Approval 13% - What the Hell does it Take to Get Change?

I discussed the above question Congressional Approval 13%;Theory of Elections and Overcoming Huge Political Bureaucracies; What the Hell Does it take to Get Real Change?

One thing is clear, people are not satisfied with anything.

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

Not a Minor Complication

"Not a Minor Complication"

A recent post by the New York Times got me thinking about "Minor Complications", or rather the inverse. I will comment on the New York Times article shortly. First consider a list of items that are "Not a Minor Complication".

"Not a Minor Complication"

• The Collapse in Philly Fed Manufacturing Index to -30.7 is not a minor complication to the second-half recovery thesis.


• That Americans "Can't Get No Satisfaction"; National Sentiment Dips to 11%, Lowest Level Since 2008; Satisfaction with Obama, Congress at Record Lows is not a minor complication to confidence will recover once the debt-ceiling is raised thesis..


• That the SEC Destroys 9,000 Fraud Files Involving Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Credit Suisse, Deutsche Bank, Morgan Stanley, Lehman is not a minor complication to the effort to restore investor confidence.


• That Miami Declares Financial State of Emergency, Gives Unions Two Weeks to Agree to Cuts; California Revenue $541 Million Below July Forecast is not a minor complication in regards to the health of cities.


• That Germany, France Slide Toward Recession; German Economy on Verge of Contraction is not a minor complication to the belief a global recovery is still underway.


• That Merkel, Sarkozy Reject Euro Bonds and Expansion of Rescue Fund is not a minor complication to the idea the EU is doing something meaningful to address the crisis in Europe.


• The Smallest Yield Curve Gap Between US and Japan in 19 Years is not a minor complication to the idea the US is in or headed for massive inflation.

Collateral Requirements of Three Countries "Not a Minor Complication" to Greek Bailout

The New York Times reports Request by Some for Collateral Is New Hurdle for Greek Bailout

Greece’s international bailout hit a new obstacle Thursday when three euro zone countries indicated they were likely to seek collateral in exchange for their loan. Finland earlier reached a similar deal with the debt-laden government in Athens.

Though the three countries — Austria, the Netherlands and Slovakia — are small or midsize economies, accounting for little more than 10 percent of the new bailout of 109 billion euros ($156 billion), their intervention presents a headache for policy makers.

“If this spreads as we fear it could, it is not a minor complication,” said one European official who spoke on condition of anonymity.

In the deal between Athens and Helsinki, Greece is offering Finland a deposit to back loans, and Finland has said that this cash plus interest would be comparable to its contribution to the rescue.

It is likely that Athens would struggle to find the capital for similar deals with other countries.

But political pressure is growing in creditor countries. In the Netherlands this week, Parliament debated the Dutch contribution to the second Greek rescue. Such debate has made it difficult for governments to explain why Finland is receiving preferential treatment.

The Austrian Finance Ministry said that it had made its position clear before and that its latest comments were in line with what euro zone leaders agreed to at the July 21 meeting. “If there is to be a model for collateral, Austria would also make a claim,” a spokesman, Harald Waiglein, said, according to Reuters.

I blasted the Finland deal on Tuesday in Amazingly Absurd Loan "Guarantee" Arrangement Between Finland and Greece

My blast above was fair, given the details as presented, notably the guarantee was "only a fraction of the money that Finland is contributing to the rescue package".

Upfront cash collateral simply reduces the size of the loan, as I stated.

However, if Finland required other non-cash collateral, that changes the story. So does the fact that the Netherlands and Austria now want collateral for loans.

Why shouldn't there be collateral for loans?

The fact that Greece does not have enough collateral does not change the picture. It only means more bailout loans should not be made, and Greece will head for full default, not this alleged "temporary" default swindle the EU is attempting to parade as realistic, hoping to get taxpayers of all the Eurozone nations to bail out Greece instead of boldholders taking bigger haircuts.

This is certainly "Not a Minor Complication" and I commend any European nation that insists on real collateral for otherwise bogus loans.

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

ECB Will Not Disclose Affected BanksEuropean bank stocks hurt by borrowing crunch

"Lehman-Like" Credit Crunch Hits EU; ECB Will Not Disclose Affected Banks; Euro-Style Anxiety Spreads to U.S.

Signs of a Lehman-like borrowing crunch have hit the EU. Banks are distrustful of lending to each other in overnight operations. Interest rates are low, but not for every bank. Systemic stress reverberates.

Please consider European bank stocks hurt by borrowing crunch

European bank stocks tanked Thursday as fears mounted about their exposure to the region's debt crisis and weakening economy.

The stock prices of Britain's Barclays and France's Societe Generale led the way down, falling 11.5 percent and 12 percent, respectively. Germany's Commerzbank fell 10 percent.

Analysts said the plunge was partly a reaction to evidence that European banks are being forced to pay more for the short-term loans they need to finance day-to-day operations.

Some European banks with heavy exposure to the debts of Greece and other weak countries are relying on loans from the European Central Bank because other private banks are reluctant to do business with them. The ECB said one bank, which it didn't identify, had paid above-market rates to borrow $500 million a day for seven days.

No bank had requested such a loan for nearly six months. Analysts said fears about one bank's troubles are enough to spark concerns about the entire industry.

"These are worrying signs," said Neil MacKinnon, an economist at VTB Capital in London. "You could think of it as a mini-Lehman moment: There is the risk that a major eurozone bank might be a casualty."

Euro-Style Anxiety Spreads to US

The New York Times reports Euro-Style Anxiety Spreads

European banks are continuing to show signs of strain, making investors increasingly skittish about American financial institutions.

Regulators, bank executives and others continued to play down the risks on Thursday, emphasizing that this would not be a repeat of the 2008 financial crisis. In Europe, political leaders have vowed to prevent a Lehman-like collapse of a major bank, while American firms are better insulated from potential shocks than they were three years ago.

But on Thursday, shares of some big Wall Street banks sank to levels nearly as low as that in the months after the downfall of Lehman Brothers. Among investors, anxiety has been intensifying over the soundness of European banks despite repeated efforts to contain the sovereign debt crisis. The latest fears flared up after an unspecified lender tapped an emergency borrowing program set up by the European Central Bank to ensure that firms had ample funds in dollars.

On Wednesday the bank, which officials would not identify, borrowed $500 million, considered a relatively modest sum in global finance. But the move was widely viewed as a sign that Europe’s financial problems were deepening, given that it was the first time a European bank had used the dollar pipeline since February.

In Europe, temporary bans on short-selling of financial stocks, imposed last week by regulators in France and several other European countries, provided only a bit of relief. Traders say the measures have caused them to place some negative bets on bank stocks in countries that did not impose such measures, like the United States and Britain.

European banks have amassed vast holdings of government and corporate bonds from Italy and Spain, two countries whose debts have worried investors. Doubts about the stability of these European institutions, in turn, are generating concerns about American banks, which are among their biggest lenders and trading partners. That is prompting investors on both sides of the Atlantic to unload their shares while also ratcheting up bank borrowing costs.

The short-term credit markets, where European banks turn for billions of dollars in financing, have been under serious strain, although nowhere near the levels of three years ago. Most European banks can borrow dollars only overnight or as long as a week; banks elsewhere can take out loans for as long as several months or more.

“A lot of this concern around the European banks is overstated,” said Alex Roever, a short-term fixed income analyst at JPMorgan. “We are not looking at another 2009, although investors are obviously being cautious.”

Overly Cautious?

The global financial system is bankrupt. There is no way loans that have been made can be paid back. That statement applies to the Eurozone, the US, the UK, China, Australia, Canada, and for that matter nearly everywhere one looks.

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

Asia Pacific Index Erases All Gains Since January 2010

Asia Stocks Lower Following Europe, US Bloodbath; Asia Pacific Index Erases All Gains Since January 2010

Amid heightened volatility in both directions with top-to-bottom swings of 8% or more on some days, Asia Pacific shares are only "modestly" lower tonight (Friday Morning in Asia) following a veritable bloodbath in Europe and the US on Thursday.

Europe 2011-08-18 Close



Asia Pacific 2011-08-19 Mid-Session



Charts courtesy of Yahoo!Finance Major World Indices.

Asia Pacific Index Erases All Gains Since January 2010

Bloomberg reports Asian Stocks Set to Erase 2010’s Gains as World Economy Concern Deepening

Asian stocks fell, with the regional index revisiting levels from last week’s global stock rout, amid signs the world economy is slowing and Europe’s debt crisis will damage the banking system. South Korea’s Kospi Index was set to drop the most since November 2009.

The MSCI Asia Pacific Index fell 2.4 percent to 120.17 as of 11:23 a.m. in Tokyo, set to erase all its gains since the start of 2010. The gauge is also headed for a fourth straight week of loss. About 20 stocks dropped for each that advanced on the index today. The Kospi Index (KOSPI) sank 4.4 percent, headed for its biggest slump since Nov. 27, 2009.

The MSCI Asia Pacific Index lost 11 percent this year through yesterday, compared with drops of 9.3 percent by the S&P 500 and 18 percent by the Stoxx Europe 600 Index.

Futures on the Standard & Poor’s 500 Index slid 0.9 percent today. In New York, the index tumbled 4.5 percent yesterday on concern the global economy is slowing and speculation that European banks lack enough capital. The Stoxx Europe 600 Index plunged 4.8 percent in London yesterday, the biggest drop since March 2009.

“We have a fear-based, emotional-based market right now,” Erik Ogard, director of multi-strategy investments at Russell Investments, which oversees $163.4 billion, said in an interview with Susan Li on Bloomberg Television’s “First Up.” “There are real economic things to be worried about, however it’s the degree of the reaction that we think might just be a little overdone.”

The Bloomberg article is from Japan, written on the 19th. That will explain the term "yesterday" in the second to last paragraph in the above blockquote.

Note that nearly everyone thinks the reaction is "overdone". They simply do not understand debt-deflation and how little the Fed can do about it.

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

Downgrade of U.S. Debt Long Overdue

In Praise of Timely, Blatant Incompetence

Tonight I am going to do something different, openly praise blatant incompetence. I will list my reasons later but first let me sing the praises of sheer incompetence at Moody's, Fitch, and the S&P (the big 3 rating agencies).

Downgrade of U.S. Debt Long Overdue

Many are in shock that the S&P downgraded debt of the US from AAA. Not me. It was long overdue.

However, the S&P proved it was incompetent in the way it made the downgrade. Pray tell how can a rating agency make a $2 trillion error? The answer is obvious: sheer incompetence.

The irony is Moody's and Fitch proved they are incompetent by not downgrading U.S. debt.

If you need a myriad of reasons, I highly recommend Issues and Solutions for Restoring Credibility to the Credit Rating Agencies and Rehabilitating the Alternative Banking System by Janet M. Tavakoli, President, Tavakoli Structured Finance, Inc.

Also note that Egan-Jones downgraded US debt on July 18 from AAA to AA+ and nobody batted an eye.

"We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP in excess of 100% compared to Canada's 35%."

NRSRO Certification

The SEC certifies Egan-Jones as one of 10 NRSROs "Nationally Recognized Statistical Rating Organizations".

The "Big 3" NRSROs are Moody's, Fitch, and the S&P.

Most have never heard of Egan-Jones or any rating agencies but the big 3, and that explains why nobody howled when Egan-Jones did its downgrade, yet everyone howled like rabid wolves over the S&P's action.

The wolves demanded action and action they got.

S&P Under Justice Department Investigation

The Associated Press reports Justice Department investigating Standard and Poor's mortgage securities ratings .

The Justice Department is investigating whether the Standard & Poor's credit ratings agency improperly rated dozens of mortgage securities in the years leading up to the financial crisis, The New York Times reported Wednesday.

S&P Investigated for Insider Trading

The Wall Street Journal reports SEC Asking About Insider Trading at S&P

The post-downgrade backlash against S&P seems to be gathering strength.

The FT is reporting, citing anonymous sources, that the SEC is investigating whether there was any insider trading done by employees of Standard & Poor’s ahead of their downgrade of the US a week ago.

Dow Jones Newswires writes:

"The U.S. Securities and Exchange Commission has asked Standard & Poor’s to disclose who within its ranks knew of the recent decision to downgrade U.S. debt before it was announced, the Financial Times newspaper reported Thursday on its website, citing unnamed people familiar with the matter."

Remember, rumors of a post-bell downgrade were rampant on Wall Street very early on Friday, rumors that turned out to be true. It sure sounded like a leak, though the leak could have come from either S&P or Treasury. It seemed inevitable there would be an investigation, though it could be hard to find anything.

MarketWatch points out that, according to the 2006 Credit Rating Agency Reform Act, S&P could have its license revoked if it leaked word of the downgrade.

Nearly universal sentiment was that treasury yields would rise on a downgrade. I said "no effect". Yields plunged in spite of the downgrade, so clearly the decision had no effect.

Rumors float all the time. The S&P gave a date as to when they would announce. They even hinted at a downgrade in my opinion. So, how tough is it for someone to start a rumor that had a 50% chance of being correct?

Excuse me for asking, but as long as prostitutes are under investigation, what about an investigation of the other two whores, Moody's and Fitch, or better yet all of them for reasons far more serious than unfounded witch-hunts, like outright fraud.

AAA Rated CDOs, CDOs-Squared, and Other Garbage

By now nearly everyone realizes Moody's, Fitch, and the S&P were grossly incompetent and fueled the mortgage crisis by rating pure garbage mortgages in numerous forms as AAA.

But was it gross incompetence or purposeful fraud by the big 3 to see who could collect the most "paying johns", damn the consequences?

Regardless, why is only the S&P under investigation?

The answer is the big three whores are supposed to do what the government says they are supposed to do, and the S&P didn't. So the S&P is under investigation. And that serves as a warning to Moody's and Fitch.

Explanation of Whores

I have used the term "whores" twice now so it needs an explanation. What I mean is the big 3 rating agencies arguably sold themselves to the highest bidder, essentially granting an AAA rating to damn near anything for a fee.

The Rating Agency Model, as it now exists, pays raters on the basis of how much volume they do, not on how well they rate anything. If you are willing to rate pure garbage as AAA no matter what it is really worth, you get a lot more "action" and make a lot more money.

And action the "big 3" got. And everyone, turned a blind eye to the process, because no one likes to end a party, especially a party that whores are throwing with Greenspan and Bernanke cheerleading like a pair of pom-pom girls at the big game.

The SEC Caused this Mess

There is just one more detail I need to point out before we get to the proper solution. That detail pertains to the question "Who Caused this Mess?"

I have talked about this on numerous occasions actually, but perhaps now is the time someone will listen.

Flashback September 28, 2007: Time To Break Up The Credit Rating Cartel

The rating agencies were originally research firms. They were paid by those looking to buy bonds or make loans to a company. If a rating company did poorly it lost business. If it did poorly too often it went out of business.

Low and behold the SEC came along in 1975 and ruined a perfectly viable business construct by mandating that debt be rated by a Nationally Recognized Statistical Rating Organization (NRSRO).

Establishment of the NRSRO did three things (all bad):

1. It made it extremely difficult to become "nationally recognized" as a rating agency when all debt had to be rated by someone who was already nationally recognized.
2. In effect it created a nice monopoly for those in the designated group.
3. It turned upside down the model of who had to pay. Previously debt buyers would go to the ratings companies to know what they were buying. The new model was issuers of debt had to pay to get it rated or they couldn't sell it. Of course this led to shopping around to see who would give the debt the highest rating.

Spotlight on Prostitutes

There is nothing new here. I have been talking about this for years.

But finally rating agencies are in the spotlight of Congress, of foreign governments, of investors, and of pension fund managers stupid enough to buy AAA rated garbage stamped by paid prostitutes.

Solutions

Some of the proposed solutions to this mess are horrific. There is a massive 400 page bill in Congress to address the problem.

Tavakoli's report, cited above, is 50 pages long. I agree with most of her analysis. I cannot endorse the ending paragraph.

The solution is to raise one or more rating agencies up to standard to merit the NRSRO label. Meanwhile, rating agencies can continue to issue ratings but must commit to coming up to standard. Those that cannot should have the privilege of issuing ratings completely revoked. The second part of the solution is to develop global third party benchmarks and global third party rating scales and make accurate ratings the only measurement of success.

No, that is NOT the Solution

The government does not have and never has had a need to have a NRSRO label. Moreover, there is no need to require all debt be rated. Indeed, the act of mandating that all debt be rated by designated rating agencies is what led to the escalating problem of everything being rated AAA in the first place.

Finally, it is complete silliness to suggest some committee can determine who merits NRSRO and to wait until rating agencies come up to standard.

THE Solution

1. End immediately the NRSRO label. Neither the government nor the SEC has any business handing a monopoly business to anyone.
2. End immediately the requirement that all debt be rated. The market will sort this out in a flash.

By immediately I mean 6 months, 8 months or whatever time is appropriate for debt-buyers to decide who they want to use as opposed to some committee deciding who should be approved.

People buying debt will have to do homework, but that is far better than trusting an AAA rating placed on garbage by prostitutes paid to place a label.

Over time, Moody's, Fitch, and the S&P will do a better job, or they will cease to exist. Simply put, those who rate debt accurately will flourish, those who don't will go out of business.

What's wrong with that?

So Why Do I Praise Blatant Incompetence?

I praise blatant, timely incompetence because it takes massive force (in this case universally recognized blatant incompetence at precisely the right time), before there is any chance of getting change.

There is a small window of opportunity here.

The time to take advantage is now. Instead of silly Congressional investigations of the S&P in regards to the timing of their announcement, Congress simply needs to write a bill eliminating the NRSRO label and the requirement that debt be rated. Yes, it's as simple as that.

S&P, I salute your gross incompetence. Your timing was perfect. Whether anything sensible happens remains to be seen, but at least there is a small chance for reasonable voices to be heard.

Contact Congress

Please send your congressional representatives an email or fax and tell them to scrap the NRSRO "Nationally Recognized Statistical Rating Organizations" rating entirely, ending the monopoly of Moody's, Fitch, and the S&P.

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