s I watch the latest polls from Germany there are numerous outcomes, none of which will be pleasing to chancellor Angela Merkel, except outright victory by CDU/CSU +- FDP.
If anything but a CDU/CSU +- FDP majority happens, the chancellor will face seriously unwelcome choices.
For example: Reader Bernd pinged me with this comment yesterday "I just watched the last TV discussion. SPD has made it clear that EUROBONDS will be part and parcel of the package, if they come in with a coalition. Merkel was dead set against those up to now. Grand Coalition ??"
Indeed. Recall that Merkel is dead set against Eurobonds. Also recall eurobonds are against the German constitution.
And what is the price to pay for other coalitions?
Grand Coalition or Grand Fantasy?
A close friend continually points out: the German population wants a "Grand Coalition". And I agree with his assessment. But politically speaking, how stable would it be?
That is Merkel's concern, and that is why she is on a public campaign for voters to not split their votes.
But what if that is not good enough?
Here are the latest polls.
As INSA reports things, there are numerous possibilities.
Give or take a mere 1-2% there are many possibilities.
The only coalition that does not pose serious problems for Merkel is #3: CDU/CSU + FDP.
Mainstream Media Finally Catches On!
I have been talking about these issues since March. On September 19, CNBC finally reports Anti-euro party powers ahead as German elections near.
With just days to go until Germans head to the polls, the likelihood of Chancellor Angela Merkel retaining her crown grows ever larger. But Germany's establishment could still be in for a shock.
On Thursday, the anti-euro Alternative fur Deutschland (AfD) hit the 5 percent threshold for the first time that parties need to gain a seat in parliament, according to an INSA poll. The poll suggested Merkel may not be able to re-form her center-right coalition with the liberal FDP.
The poll gave Merkel's CDU/CSU coalition 38 percent of the vote, while the FDP got 6 percent. Their combined 44 percent would not give them a majority in parliament.
If the AfD makes it into parliament and the current liberal coalition partners don't, the party could prove a headache for Merkel. She will be faced with tough talks to form a new "grand" coalition and would have to join forces with Steinbrueck's SPD.
The margin of error on these polls is +-3% and given the 5% threshold, that makes many of the polls useless.
But notice the trend. And the trend by media was to completely ignore the possibility that AfD would make it into parliament.
The secondary trend assumption was that a "Grand Coalition" was likely.
While a "Grand Coalition" is possible, it is not a given, just as I have stated. And if it does happen, it will not be stable, as demand after demand will be placed on Merkel.
Biggest Political Chameleon in History
Of course Merkel could be ready and willing to sell voters straight down the river. Otherwise, some major compromises are in store.
The above discussion assumes that Merkel is really against Eurobonds except as a matter of political expediency. Is she? Or will the biggest political chameleon in history change colors once again?
Barring an outright majority by CDU/CSU + FDP, we may soon find out.
Mike "Mish" Shedlock
The truth is that there are structural problems with how our government operates. Baseline budgeting, the lack of single subject provisions in legislation, obscure rules in the House and the Senate and a tax code that's meant to achieve political and social ends rather than fiscal ends, have made us not just a slave to debt but also a slave to government.
For the stock market you can see it in a number of different decisions that of been made recently. There's a record amount of liquidity sitting in corporate accounts, and bank accounts, and investment accounts.
The government has made a lot of money available, primarily because IT NEEDS MONEY. It's very easy to see the recent Federal Reserve announcement that it will continue quantitative easing as only the continuation of a self-serving program for the federal government to be able to borrow more money conveniently in the open market.
So for those who need a little bit of a primer on how quantitative easing works, here goes.
The Federal Reserve Bank buys US treasury bonds in the open market that are already in the hands of private investors. The cash that private investors get has to be put someplace. It ends up in any one of a number of financial markets including the stock market, commodities markets, Forex markets. The wealth effect of higher financial markets and lower interest rates, the theory goes, should allow that wealth to, he he he, "trickle down" to Main Street.
The expansion of the Federal Reserve's balance sheet since 2007 above. Top brown color represents US-backed mortgage bonds. The gold color represents Long-Term Treasuries.
Of course under Obama the "trickle down" has been regulatory not money. The regulatory drag gives investors a lack of incentive to invest in other things besides financial assets, like the stock market, the commodities market, the Forex market.
Like what other things could they invest in? Jobs for example.
Some corporations are choosing not to reinvest that money in the operations of their own company- which would add to jobs- but instead are doing things like increasing dividends, increasing share buyback programs, and looking at strategic alternatives for unlocking the value in their companies.
In other words, the government's insatiable need for money combined with quantitative easing, has been the best thing for Wall Street perhaps ever. At least over the short-term. Long-term, we're pretty much screwed.
this week, similar in size to dividend and repurchase announcements in recent years.Shareholder activists would have been aiming for higher numbers, which would explain why this seemingly good news hasn’t boosted the share price at all.Morgan Stanley reports that Microsoft has $77 billion in cash; $70 billion of which is located offshore, and cannot be repatriated to the US without a tax penalty.
What does this mean to investors?We have a famous company, lacking a future CEO, struggling to eke out every possible percentage point of earnings growth in order to attract investors, because new share purchases help support the share price.The company is barely growing earnings through actual revenue or gross margin increases, so it’s relying on share repurchases to enhance the numbers.(The fewer shares outstanding, the higher the earnings per share for the remaining shares.)
Also,it’s a disturbing trend within American public companies that time and again, we see them allocating cash toward dividends and share buybacks in lieu of building new manufacturing plants or hiring more empoyees.Sure, actual investors are benefitting through dividends and capital gains, but the man on the street is walking toward the unemployment line.
Does that make companies like Microsoft and UPS evil or immoral?No.Their boards of directors have watched waves of onerous and expensive business legislation and taxes come down the pike from the Obama administration – a la Dodd-Frank, the EPA, and Obamacare -- and they’re battening down the hatches and waiting for the storm to blow over.
When corporate leadership sees the winds change, and Congress stops attacking corporate wallets, then boards of directors will feel that they can safely hire employees and expand business without the threat of another tax increase or plant closure.
What should investors do with Microsoft shares?
Earnings are projected to grow about 5-9% per year over the next three years at Microsoft.The PE is 11.9 and the new dividend yield is 3.34%.The low PE and large dividend should add support to the share price around $31, but earnings growth is too slow to give investors a compelling reason to buy the stock when they can buy companies like Verizon Communications (VZ), Dow Chemical (DOW), and Lorillard (LO) with a better combination of earnings growth & dividend yield.
It will take a while for Microsoft to absorb the 32,000 employees from the Nokia purchase, and turn the combination of a slow-growth company (Microsoft) and a barely-profitable company (Nokia) into a thriving enterprise.Current shareholders would likely grow their capital more quickly by trading out of Microsoft in the low $30’s and reinvesting in a growth stock.
Steen Jakobsen, Chief economist at Saxo Bank in Denmark, pinged me today with his thoughts on "the morning after" and "price discovery".
In my opinion these two paragraphs of the FOMC Statement are the key ones:
- The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.
- The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
#1 – Tighter monetary conditions clearly concerns them – the only reason for forward guidance as per Vice-chairman Yellen is to “direct market” to FOMC central projection – this got out of control and we now effectively have not only a put on the stock market, but also a put on the bond market. The whole financial market is now “government controlled” – Price discovery has been reduced close to ZERO – as even the term-premium (expected rate expectations) is ignored and considered invalid by Fed and its merry men.
# 2 – The wording is mild, but it’s a real concern. I have no doubt inflation, or lack of, played bigger role than anything else in taking decision to not taper. An economy with weak inflation, is an economy with excess capacity – An economy with excess capacity is not an economy healing and creating jobs – hence – Fed also de facto yesterday stated: the unemployment rate is invalid to use as gauge for future monetary policy but also as statistical indicator.
Whole Financial Market Government Controlled
In regards to Steen's comments "The whole financial market is now “government controlled” – Price discovery has been reduced close to ZERO", I agree 100% (for now).
But will "control" last forever? If you think it will, then why did we have a housing and stock market crash?
In regards to inflation, I have to shake my head. Inflation is not a good thing, not now, not ever. And with so many boomers headed into retirement on fixed income with few assets, inflation is even more crippling.
I have a question: Does the following chart look like price stability?
Inflation Targeting at 2% a Year
The next chart will show you what happens when wages do not keep up with prices.
Real Disposable Personal Income Per Capita Detail
The above two charts from my post Huge Problem With Bernanke's 2% Inflation Target Explained in Pictures.
Click on the link for still more charts.
Is Inflation Really Under 2%?
I think not. In fact I know it isn't. You just have to know where to look.
Inflation is only under 2% if you ignore soaring money supply, the stock market bubble, bond market bubbles, a reblowing of the housing bubble, and other global bubbles.
And what is so magical about 2% anyway? Why not 1%, 3%, 5% or some other number?
Actually any price-inflation target is ridiculous. Price targets of any kind cannot accurately be measured precisely because price targets, by definition, ignore asset bubbles (including housing, which is not directly a part of the CPI).
And didn't we go down this path before? Twice?
Yes we did: first with a dot-com stock market bubble, then with an even bigger credit-housing bubble.
Was there anything stable about that? Indeed not. The Fed has a history of blowing bubbles of increasing amplitude over time.
Ridiculous Comment of the Day Revisited
Yesterday in Ridiculous Comment of the Day, I took exception to statement made by Paul Denoon, head of emerging-market debt at AllianceBernstein Holding LP (AB), who regarding the Fed's decision not to taper said "This creates stability."
My reply ...
Really? The Fed buying $85 billion in assets a month creates stability? Denoon must live in Bizarro World along with Ben Bernanke and the rest of the Fed.
In Fed Bizarro World; One-Sided Risk Assessment; The $64 Trillion Question I asked "How in the hell is the Fed going to normalize interest rates with a recovery in full bloom, with interest rates three or four full percentages points below normal?"
Some people prefer short-term stability even when the outcome is long-term disaster.
Is the Fed doing all of this on purpose? I think not. For further discussion, please see Purposeful Class Warfare? Breathing Room for Rupee? Sheer Stupidity?
Not My Fault Says Bernanke
Whether on purpose or not (and I strongly suggest "not"), the result is the same and it looks like this comic from Merk Investments, via email from Steen.
Bernanke Wants 2% Inflation in a Deflationary World
Here's the problem in a nutshell: Bernanke Wants 2% Inflation in a Deflationary World; Who Pays the Price?
Asset bubbles and massive income inequality are the direct results of Fed policies.
For still more reading, or in case you are unconvinced about who is to blame, please see Reader Asks Me to Prove "Inflation Benefits the Wealthy" (At the Expense of Everyone Else).
Even though the problem is the Fed (central banks in general), coupled with fractional reserve lending and pseudo-money created out of thin air, many seriously misguided souls (including Keynesian high-priest Paul Krugman) think the answer is a destabilizing rise in the minimum wage and still more inflation!
Mike "Mish" Shedlock
Boy, it almost doesn't matter what Ben Bernanke says. The market is bound to gripe either way. On the expectation that the Federal Reserve Bank would begin to taper, the market rallied yesterday, sprinting it into new territory when Bernanke he said that tapering would not yet begin.
Today however the market seems to be having second and third thoughts regarding the continuation of quantitative easing.
Here's what's giving traders pause: The market in the 10 year treasury has been signaling the end of quantitative easing since May.
I wrote about this disconnect by the 10 year treasury and the policy of the Fed earlier on this blog. The bond market at least is saying that the Federal Reserve Bank either should end quantitative easing or will end quantitative easing.
Since it's apparent now that the Federal Reserve won't end quantitative easing, then by logic and deduction it must be that the bond market believes the Fed should end quantitative easing.
And the takeaways on that are these: 1) The Federal Reserve Bank believes the condition of the economy is worse than perhaps people are giving a credit for; 2) The bond market at least believes that quantitative easing at this point won't help.
I think that it's a good Federal Reserve chairman who does not take the market by surprise. Clearly traders were surprised by this announcement of the continuation of quantitative easing.
So somebody has the story wrong: either the market or the Federal Reserve. Perhaps even both of them.
But when I see a chart of the last six months of the 10 year treasury interest rate action, it looks to me like some of that will happen within the next couple of weeks that will propel interest rates higher.
The quote of the day goes to David Stockman. In a Bloomberg video, Stockman claims (and I agree) "Bubbles Ben to be Replaced by Calamity Janet".
They are stumbling into the endgame of this whole misbegotten spree of QE, ZIRP, and massive manipulation of financial markets.
We are going to basically replace bubbles Ben with calamity Janet.
She has no clue how to wean wall street from the pathetic addiction to this massive stimulus, easy money that has been going on for the entire century.
I backed that up because she has spent her whole life as a monetary bureaucrat in the Fed system, and has no clue what honest capital and genuine free markets are about.
[She] believes the entire system has to be run by a monetary politburo, turning all the dials and short-term interest rates and yield curves and the entire financial system.
She is part of group-think, part of the Keynesian consensus that 12 people are running at $16 trillion economy.
They are delusional.
Link if video does not play: Yellen Has No Clue How To Run the Fed
David Stockman was Ronald Reagan's Budget director.
Stockman is also the author of The Great Deformation: The Corruption of Capitalism in America and the #1 New York Times bestseller The Triumph of Politics: Why the Reagan Revolution Failed.
For more on Stockman, please see ...
End of U.S. Imperium—Finally!?
Heart of the War-Mongering Hypocrisy
Stockman nails the heart of US war-mongering hypocrisy with this question [on Syria]:
"After having rained napalm, white phosphorous, bunker busters, drone missiles, and the most violent machinery of conventional warfare ever assembled upon millions of innocent Vietnamese, Cambodians, Serbs, Somalis, Iraqis, Afghans, Pakistanis, Yemeni, Libyans, and countless more, Washington now presupposes to be in the moral-sanctions business?"
There is much more in the article. Please take a look.
Mike "Mish" Shedlock
I spoke a little bit on the show today about the failure of the Federal Reserve to actually do the thing that it was originally formed to do. Reserve banks are typically formed in order to provide a reserve of currency for member banks against panics during uncertain economic times.
In addition our reserve banks in the Western world picked up the additional task of smoothing out the business cycle, checking inflation, and providing for full employment.
There was an astonishing chart, however on, CNBC that should have us re-thinking what the Federal Reserve actually does.
The people at CNBC- and the technical analyst they had on- were talking about this as the end to 32 year long bull market in bonds. It just shows you that sometimes you can't see the forest for the trees.
Because if you use interest rates as a proxy for the business cycle you can see that we substituted the normal business cycle for a business super cycle. If you look at the gigantic V pattern on the right and of the chart from approximately 1946 to the present day, you'll see you a period of rising interest rates unlike any we've ever seen in our history. Then of course from 1981 to the present day we've seen a period of falling interest rates unlike anything else we seen in our history.
What it looks like it's happened here is that we've concentrated a number of many business cycles into one gigantic business cycle. While it appears that the Federal Reserve's activities on a daily basis have some positive effect on the business cycle, the actuality is that it's really having a negative effect on the business cycle.
You need only arrange the cycle to look at periods of time longer than 5, 10 and 20 years.
That's because the chart shows that there's more interest rate of volatility in a business cycle then there was in the past. And that's the exact opposite of what proponents would expect the Federal Reserve Bank to do when it comes to monetary policy.
I'm guessing that if you look at inflation that you'd see more volatility in the inflation numbers as well.
Ps. Hope you don't own bonds.
On September 16, Spain's economy minister, Luis de Guindos, said Spain on Track to Meet Budget.
Spain is on track to meet the 2013 budget deficit target it agreed on with its European Union partners and should emerge from recession before the end of the year, the economy minister said on Monday.
After the financial crisis burst Spain’s construction bubble in 2008, “no doubt 2014 will be the first year when Spain will have some recovery,” the minister said.
Given the depth of Spain’s recession, the European Commission agreed in May to give Madrid more time to reach its budgetary targets. Mr. de Guindos said he expected Spain’s deficit to fall to the new target of 6.5 percent of gross domestic product — rather than the initial target of 4.5 percent — from 7 percent last year.
Although officials from the International Monetary Fund and other creditors started another review of Spain’s banking progress on Monday, Mr. de Guindos suggested that “Spanish banks don’t have an important capital need,” implying that Spain would not require an extension of its bank bailout.
How many lies and distortions can one man present in a few short paragraphs?
If by some miracle Spain meets this year's target, it is only because the target changed 4 times in the past two years.
Yet, I still have to ask: how likely is that?
Spain Budget Deficit Soars
On September 17, Dow Jones Business News reported Spain Budget Deficit Soars
Spain's government said late Monday the country's budget deficit stood at 5.3% of gross domestic product in the first seven months of the year, an indication that the euro zone's fourth-largest economy may miss its deficit target for the fourth consecutive year.
Spain is looking to bring its budget deficit to 6.5% of GDP this year, down from 10.6% last year. The target, set by the European Union Commission, was already relaxed earlier this year from a previous 6.3% of GDP, but many economists say even the easier target may be hard to attain, as the economy was in recession at least until the second quarter, and only moderate economic growth is anticipated in the second half, which should keep tax receipts at low levels.
Just Monday, think tank Funcas said 19 economists surveyed were expecting, on average, that the economy will grow 0.1% in the third quarter from the second, and Spain will post a budget deficit of 6.7% of GDP for the full year. The economists surveyed are also expecting that Spain will miss next year's deficit target, of 5.5% of GDP.
This is important because a string of large deficits has driven Spain's government debt to the highest level in over a hundred years. Last week, the country's central bank said debt stood at 92.2% of GDP as of June--well above the year-end target of 91.4% of GDP.
This reinforces the view held by many private sector economists, and the International Monetary Fund, that Spain's government debt will rise significantly above 100% of GDP before it peaks, despite government assurances to the contrary.
Spain's Budget Deficit €54 Billion Through July
Via translation from Guru's Blog, please consider Spain's Budget Deficit Rises to €54 Billion Through July.
Let's try not to lose the debt and deficit data since our politicians have a special ability to change forecasts as if nothing had happened.
The deficit totaled €54.293 billion in the first seven months of the year, and representing 5.27% of GDP against a target of 6.5% set for the full year, according to the latest data released Monday by the Ministry Finance and Public Administration.
The odds of meeting the deficit target, barring last-minute window dressing is quite low.
Total government debt is €947.184 billion, a new record. The ratio of public debt to GDP level is 92.6%, according to the Bank of Spain.
Recall that in September 2012, the government forecast for year-end 2013 was debt-to-GDP ratio 90.5%. Unless miracles, we will be well above that figure.
By the way, the total debt of €87.660 billion in short-term securities matures within one year.
Is Spain going to meet even four-times reduced targets? I highly doubt it.
Mike "Mish" Shedlock
As the world endures yet again another mass hysteria pandering by the Obama administration, I'm tempted to feel sorry for liberals.
There's been lots of bad news for them.
Earlier today I wrote about the CBO forecast that says that healthcare and Social Security will bankrupt the country. Then there was news that another electric car company is filing for Chapter 11 bankruptcy protection.
Ecotality Inc <ECTY.O>, a maker of charging stations for electric cars that won a $99.8 million grant from the U.S. Department of Energy four years ago, has filed for bankruptcy protection and said it plans to auction its assets next month.
The San Francisco-based company is among a growing number of U.S. alternative-energy companies that have struggled or succumbed amid consumer resistance to the high cost and restricted driving range associated with electric vehicles.
This on top of news that the Obama administration will be selling its loans in Fisker Automotive, which secured $192 million from the administration under the green car boondoggle. Fisker has been in financial trouble since 2011 and has lost 75% of its workforce. It also hasn't manufactured any cars.
From the AP:
The Energy Department says it is selling a $192 million loan made to struggling electric car maker Fisker Automotive Inc.
The sale, to be held next month, is the latest setback for a half-billion-dollar loan guarantee offered to the California car maker in 2009 as part of the Obama administration's program to promote green energy.
The administration suspended the loan in 2011, after Fisker failed to meet a series of Energy Department benchmarks. Fisker has not produced a vehicle in more than a year and has laid off three-fourths of its workers.
Fisker had received $192 million before the loan was frozen. The DOE says it has recouped about $28 million since then; the auction will allow the government to collect as much of the remaining $164 million as possible.
My bet would be that they get less than $.10 on the dollar. I don't know what Fisker has left in assets but it's got to be very puny. My father once auctioned off the remnants of a nuclear power facility in Washington state that went into bankruptcy. There's probably as much demand today for defunct to solar equipment as there was for defunct nuclear equipment back in the 1970s.
To put an exclamation point on the day for liberals and their misguided energy policies, consultant IHS just came out with a report saying that light, tight oil outside of North America could reach recoverables of 300 billion barrels.
Take it from the top Reuters:
Commercially recoverable reserves of tight oil in the rest of the world could be double or more those of North America and the geology of the 23 best opportunities is better in some cases, according to a new study.
Okay so remind me again Obama: Why are we building electric cars now?
Oh that's right: It was for your donors.
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