Yield Curve Casts Doubt on "Robust Recovery" Theory

A week ago Fed Governor Dudley announced "U.S. Economic Outlook Looks Brighter". My response was Ring! Ring! Goes the Bell.

Today, Curve Watcher's Anonymous offers a few charts that show the bond market ringing a bell in disbelief of Dudley.

Yield Curve as of November 28, 2014



Curve Analysis

• The yield curve flattened, then inverted prior to the last recession.
• The yield curve steepened well ahead of the end of the recession.
• Since then, the yield curve has steepened twice and flattened twice.

What's Next?

Starting at the beginning of 2014, short-term yields (2-year and 5-year) have risen while long-term (30-year and 10-year) have declined.

In a strengthening economy, yields on the long end of the curve typically rise faster than yields on the short end.

Those waiting for the typical recession indicator (an inverted yield curve where short-term bonds yield more than long-term bonds) may as well be waiting for Godot with the Fed holding 3-month rates near zero percent.


Nonetheless, expectations of a major Fed tightening cycle are pretty much the norm. If the Fed hikes (which I doubt), then I fully expect to see action similar to the first yield-curve flattening box in the above chart. If the Fed continues to hike, expect a quick inversion.

Regardless, the bond market does not believe this happy talk from the economic cheerleaders, and neither do I.

30-Year Yield Minus 5-Year Yield



10-Year Yield Minus 5-Year Yield



10-Year Yield Minus 2-Year Yield



The first chart shows two incidents since 2010, where declines in yield reversed. However, both occasions ended when the Fed stepped on the gas. 

If the Fed does so again, will the stock market respond the same way?

Feelin' lucky?

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

Enter the Carpetbaggers: Ukraine's New Finance Minister a US Citizen, New Economy Minister from Lithuania

Carpetbaggers Take Over Ukraine

Now that Ukraine's gold has been sold off, the only thing left to complete the plundering is to send in the carpetbaggers. That process is now underway. Ukraine's just-named "Finance Minister" is a US citizen, and Ukraine's new "Economy Minister" is from Lithuania.

To get around legal issues associated with having foreigners in top level government positions, Ukraine made the appointees Ukrainian citizens.

Reuters explains Foreign Technocrats Given Ukrainian Citizenship Before Cabinet Vote.

Ukrainian President Petro Poroshenko on Tuesday granted citizenship to three foreign technocrats nominated for cabinet positions in a new government hoping to tackle severe economic and defense threats.

Parliament is expected to vote on nominees for cabinet positions on Tuesday with Kiev under pressure to form a new government quickly.

Ukraine has been offered billions of dollars in aid by international lenders if it implements a program of economic reform and Poroshenko said the administration would benefit from international specialist input.

Meet Your New Carpetbagger Technocrats

• Natalie Jaresko, a U.S. citizen and chief executive of private equity group Horizon Capital, will take over as "Finance Minister". She has worked in Ukraine for more than 20 years after holding various economic positions in the U.S. State Department.
 
• Aivaras Abromavicius, a Lithuanian citizen and a partner in investment firm East Capital, will take over as "Economy Minister".
 
• Aleksander Kvitashvili, a Georgian citizen who has served as health minister and labor minister in Tbilisi will take over as "Health Minister"

Jacob Dreizin Comments

Reader Jacob Dreizin a US citizen who speaks Russian and reads Ukrainian offered these select comments.

Ukraine has a new finance minister, Natalie Jaresko. She is a former U.S. State Department official. After leaving State Department, she ran a Ukraine-based private equity firm. Her company site (Horizon Capital) is down now. I guess everyone was trying to look at her bio. She was only granted Ukrainian citizenship today, so she could legally hold the position.

The post of "Economy Minister" was just given to an asset management firm partner from Lithuania, and the "Health Minister" is from Georgia. The choice of nationality is not surprising. It's an attempt to give the EU direct access to Ukrainian economic policy, specifically "reforms" or lack thereof, as well as to poke a stick in Putin's eye.

These moves show that Ukraine is willing to be turned into a Western colony in exchange for whatever financial scraps can be tossed its way. While it's true that Ukraine is in desperate need of a total overhaul, any country that turns its economy over to foreigners wholesale is going to be pillaged wholesale. Greece is a perfect example. 

Finally, I should also mention that a number of Ukrainian power plants are down to their last few days of coal. And the winter is just starting.

Jacob

With Ukraine's gold long gone (see ZeroHedge report With Its Gold "Vaporized", A Furious Ukraine Turns On Its Central Bankers), the carpetbaggers will soon take control of anything worthwhile that is left remaining.

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

EU-Canada FTA as a Precursor to an EU-US Deal

European activists believe stopping Canada precedes stopping America.

It appears that the EU-Canada FTA, a.k.a. the Comprehensive Economic and Trade Agreement (CETA), may soon be a done deal with Germany's SPD junior coalition partners indicating that they will let it push through despite initial misgivings about investment protection clauses that many left-leaning folks believe infringe on national sovereignty in the interests of global capital. Actually, bilateral EU-Canada negotiations were wrapped up a few months ago; these clauses and what to do with them have been among the principal sticking points:

German Vice Chancellor Sigmar Gabriel said he expected his Social Democrat party (SPD) would back Europe's free trade agreement with Canada (CETA), which has faced opposition from party left-wingers due to its investment protection clause. The deal, which could increase bilateral trade by a fifth to 26 billion euros ($34 billion) and is widely seen as a template for a larger trade pact between the EU and the United States, was wrapped up in August after five years of tricky negotiations.
However, critics say the investor protection clause, allowing companies to bring claims against a state if it breached the treaty, would give multinationals too much power and could lead to governments being pressured into ignoring laws on labor, the environment, data protection or food standards.

It is unclear whether all 28 EU states will have to ratify CETA. The EU Commission believes it is not necessary, but member states want a say, which means the dispute may have to be settled by the European Court.

The concern of European anti-globalization activists is not so much Canada as it is the United States. For, US firms with Canadian operations may use these investment protection clauses to sue EU nations over unfavorable state policies even if the EU-US FTA--a.k.a. the Transatlantic Trade and Investment Partnership (TTIP)--does not have them:

American multinationals could use investor-state dispute settlement (ISDS) provisions in the European Union-Canada trade deal to sue EU governments in costly legal battles that could stymie policymaking, campaigners have warned.

Corporations with Canadian subsidiaries and holdings could use the Comprehensive Economic and Trade Agreement (CETA) to take countries to international arbitration tribunals, even if the ISDS clause is dropped from the EU-US Transatlantic Trade and Investment Partnership (TTIP). US companies with “substantial business interests” in Canada would be able to use the CETA ISDS mechanism, if it is ultimately cleared by European and national parliaments.

They include ExxonMobil Investments, which used ISDS in the North American Free Trade Agreement (NAFTA) between Canada, the US and Mexico, to successfully sue Canada in 2007. The energy giant’s investment arm with Murphy Oil claimed about €49 million, but their final award was never made public. US food processing company Cargill would also qualify. In 2004, Cargill sued Mexico through NAFTA ISDS, winning €71.8 million. Mexico had tried to introduce a tax on drinks containing high fructose corn syrup. The syrup is linked to obesity.

American multinational conglomerates raise fears seldom matched by few others.  Uncle Sam is always the big, bad guy.

Incredible Populist Positions in Podemos' "Economic Manifesto"; Populism Explained

As noted last week, Spain's top-polling political party, Podemos, released an "Economic Manifesto" that called for "Debt Restructuring" and for Spain to "Abandon the Euro Trap".

The manifesto is 600 pages long and I did not dig into the details any further.

Via translation from Libre Mercado, here are some additional details to consider:

• Public Banking: Credit and finance is an essential public service. Public banks will be subject to strict conditions to ensure their submission to the above principle.
• Financial Transaction Tax: Transaction Tax on all financial transactions, progressive so as to weigh on shorter transactions.
• Minimum Wage Rules: Minimum wage increase coupled with rules stipulating the maximum difference between the highest wages and the average wage in companies.
• Labor Reform: Repeal recent labor reform.
• Pension Reform: A minimum and maximum contribution base to ensure that the system is progressive and trading for real income in the case of autonomous and self-employed.
• Higher Business Taxes: Extraordinary increase of corporate social contributions via higher taxes on businesses.
• Work Rules: 35 hour work-week, retirement at 65, with flexibility in case someone wants to keep working longer.
• Mortgage Reform: Restructuring household debt to provide the greatest possible stability to the system and repair the damage received by families in previous years.
• Flat Tax on Everything: Improve income tax collection by having an extensive single rate tax on all types of income, but elimination of joint taxation of marriages.
• Wealth Tax: Central government taxation of wealth.
• Budget Rules: Delete Article 135 of the Constitution, the newly inscribed constitutional obligation limiting public deficit.
• Work Sharing to Protect Women: We must change the pattern of distribution of working time paid by imposing shorter hours but also by regulating the distribution of housework and unpaid care. Unequal distribution is the main source of discrimination against women and one of the major impediments to advancing equality.
• Cooperative Business Models: They want to democratize business by introducing co-management by employees.
• Restructure Debt: Europe must adopt debt restructuring, especially in the peripheral countries to achieve sustainable debt levels.
• Minimum Income: A guaranteed minimum income system as a subjective right of all people, to eradicate child poverty.
• Universal Right to Nourishment: Recognition in the Constitution of the right to food as a universal human right.

Thanks to reader "Bran" for some of the above translations.

Did Paul Krugman secretly write that manifesto? Regardless, this plan makes the socialist nannycrats in Brussels look like extreme right-wingers.

If Spain abandons the euro and adopts anything close to this platform, expect a complete collapse in the Spanish economy.

Populism Explained

These populist ideas are taking hold for the simple reason the burden of the euro crisis is falling on the average worker, while the banks, the bankers, and the political classes were bailed out.

It should be no wonder that with each passing day, radical left and radical right parties attract voters.

Eventually, there is going to be a revolt in Spain, Greece, or Italy. Podemos is a strong candidate to lead the opening salvo.

For the current setup in Greece, another strong candidate to lead a populist revolt, please see Greece Needs Another €10 Billion Bailout; Syriza Leader Prepares for Power

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

Greece Needs Another €10 Billion Bailout; Syriza Leader Prepares for Power

Since the beginning of September, yield on the Greek 10-Year bond has gone from 5.53% to 8.05% with a spike high of 9.28%.



Inquiring minds may be wondering what's going on. More than likely yields are up for a number of factors.

1. Rise of Syriza
2. Chance of new elections
3. Greece needs another bailout

Points number 1 and 2 go hand in hand.

Alexis Tsipras, head of the Greek radical-left party Syriza is in a substantial lead in the polls. Syriza wants to end austerity and threatens to renegotiate the bailout.

The next election for prime minister is not scheduled until June 2016, but a February 2015 presidential election (a largely ceremonial position) threatens to upset the cart. Greek law requires a backing of 180 members of parliament to nominate a president, but support for current prime minister Antonis Samaras has dwindled to only 150 seats.

If Samaras falls short, parliament will dissolve and then a new election for prime minister will take place.

Syriza Leader Prepares for Power

Given the above election backdrop, Syriza Leader Alexis Tsipras Prepares for Power.

Alexis Tsipras, leader of Greece's far-left Syriza party, recently traveled to Frankfurt and Rome to meet European leaders. He is softening his confrontational tone with Greece's international lenders. Tsipras has a drafted an agenda for the first 100 days of a future government.

The 40-year-old former student Communist is acting like a prime minister in waiting.

Syriza, once a fringe far-left movement, is now the most popular party in Greece, representing the many voters who feel punished by the country's EU/IMF bailout. Last May, Syriza won the European elections, beating the ruling center-right New Democracy, and putting into question its political legitimacy.

In May, the party easily won European elections and gained the governor's seat for Greece's most populous region. Today, it polls higher than any other party, leading by a margin of between 4 and 11 points over Prime Minister Antonis Samaras's conservatives. One poll shows Tsipras as the most popular political leader in the country.

"The big change has begun. The old is on its way out. The new is coming," Tsipras thundered in a recent speech to parliament. "No one can stop it."

Key to Syriza's ascent, party officials say privately, is a calculated effort to moderate the radical leftist rhetoric that prompted Der Spiegel to name Tsipras among the most dangerous men in Europe in 2012.

The party still rails against austerity measures and a bailout-driven "humanitarian crisis". It wants to reverse minimum wage cuts, freeze state layoffs and halt state asset sales.

But Syriza no longer threatens to tear up the bailout agreement or default on debt. Instead, officials say it supports the euro and wants to renegotiate the bailout by using the same pro-growth arguments of partners France and Italy.

Tackling Greece's mountainous debt remains at the top of the party's agenda. But talk of a debt "default" is gone, replaced with "renegotiation". Syriza wants Europe to write off a big chunk of Greece's 318 billion euros of debt - worth 175 percent of GDP - on a recognition that Greece's problem is Europe's problem too.

Other proposals include linking debt repayments to economic growth, an aggressive ECB policy of buying government bonds and excluding the roughly 38 billion euros spent to prop up Greek banks from national debt.

Some European officials say this is pie-in-the-sky thinking. Bailed out twice with over 240 billion euros over four years, Greece's prospects have improved since it nearly crashed out of the euro but it still needs aid and lacks full market access.

One senior EU official, speaking on condition of anonymity because of the sensitivity of discussions between Greece and its lenders, said that Greece is not in a position to negotiate.

Greece in Need of Third Bailout

Having already thrown €240 Billion at Greece over the last four years, the Greek patient is still quite ill as Europe Debates Third Bailout Package for Athens.

"The era of bailout packages is ending," Samaras promised in September during an appearance in Thessaloniki. "Greece is now welcoming the new Greece."

Samaras knew the line would guarantee him applause from his audience, but the promise also came a bit prematurely. Following the announcement, Greece got a small taste of what it might mean were Greece were released from the oversight of the troika, comprised of the European Commission, the European Central Bank (ECB) and the International Monetary Fund. The more often Samaras spoke of a "clean solution," the more yields rose on long-term Greek government bonds. At the beginning of September, the rates had been 5.8 percent, but they soon climbed to almost 9 percent.

It was the financial markets' way of hinting that it is still too early to grant Greece full fiscal independence.

€2 Billion Shortfall

Last Wednesday in Paris, there was a minor uproar when troika officials made it known that they felt Greece hadn't fulfilled conditions for the payout of the final tranche from the second bailout package. Athens' international creditors determined the country will fall around €2 billion ($2.5 billion) short of reaching its commitment of not exceeding a budget deficit of 3 percent of gross domestic product.

Inefficiency often associated with Greece remains a fact of life in many areas, despite massive European development aid. The country still lacks important institutions, including a reliable national land registry office where the size of properties and their owners can be registered in a legally binding way.

'We've Lost Another Year'

Ongoing uncertainty about property ownership is considered to be one of the greatest hindrances to development in Greece. In response, the EU dispatched experts from the Netherlands to help Greece establish a functioning system. Earlier this year, the project was put out to a public tender, but the Greeks later simply cancelled it. The financing of the land registry offices was also suddenly questioned, even though they could actually help generate revenues for the country.

"We've lost over a year once again," says one fatigued EU official in Brussels. Although the government had agreed it would make progress on the land registry offices, the official speculates that the plan likely fell afoul of one of the local oligarchs that pulls the strings in the background. The vaguer the better for black market dealings.

Third Bailout

Progress is slow and tedious, and German Finance Minister Wolfgang Schäuble believes it has to be safeguarded with a third bailout package for Greece. At the end of last week, a group of finance ministry deputies from the euro-zone countries met in Brussels to discuss a so-called precautionary credit line for Greece that would be provided by the Euro Stability Mechanism, the common currency's permanent backstop fund.

There is already broad agreement on the scope of the aid. Greece is expected to be granted around €10 billion, and the ESM will not be required to raise any additional funds for it. Some €10.8 billion is still left in the current aid package for Greece. That funding had been earmarked for shoring up the capital resources of Greek banks, but so far it hasn't been used.

Now this money is expected to be redirected so that it can be used to provide financing for the Greek national budget. But unanimous approval from the ESM's board of governors is required before that action can be taken.

Cost of Protection

To avoid the loss of €40 Billion or so, the Troika threw hundreds-of-billions of euros at Greece, and then when that failed, more hundreds-of-billions in a second bailout.

We now see that did not work, so to protect the €240 total thrown at Greece, the EU is debating another €10 Billion.

Room to Negotiate

Curiously, a senior EU official, speaking anonymously said that "Greece is not in a position to negotiate".

Really?!

Watch what happens when Tsipras wins the snap election and demands haircuts.

Greece is at or close to a current account surplus excluding interest on €240 bailouts. Thus, no longer needing foreign support for funding, Greece is in a strong position to tell the Troika to go to hell. And I encourage Greece to do just that.

The major problem is Greece still needs massive reforms to make an abandon-the-euro scheme work. Unfortunately, those are exactly the reforms Tsipras will fail to deliver. Of course Samaras failed to deliver any significant reforms either.

Thus, the entire setup is unstable. Nonetheless, when faced with the prospect of Greece walking away from €240 billion, I expect there is going to be plenty of room to negotiate.

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

Fed Governor Dudley "U.S. Economic Outlook Looks Brighter"; Ring! Ring! Goes the Bell

New York Fed President William Dudley says "Dreary Days for U.S. Economy May Be Over".

Despite some headwinds, Dudley is optimistic that America could grow closer to 2.5% to 3% in the coming year instead of the ho-hum 2% growth that has been a hangover of the Great Recession.

"The U.S. economic outlook looks brighter, with growth likely to be somewhat above the trend of the past five years," Dudley said in a speech on Monday

In fact, Dudley thinks the economy could soon be healthy enough for the central bank to lift interest rates off the ground.

He's signaling the Fed will likely be able to raise interest rates in 2015.

"While raising interest rates is often portrayed as a difficult task for central bankers, in fact, given the events since the onset of the financial crisis, it would be a development to be truly excited about," Dudley said.

"When the [Fed] begins to raise its federal funds rate target, this would indicate that the U.S. economy is finally getting healthier," he explained.

Dudley On the Economy




Fed Governors tend to be among the best contrary indicators you can find, so much so that I have to wonder if a bell just rang.

Ring, Ring Goes the Bell



William Dudley is ready to sell...

But I ain't buyin' it.

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

And Now for Hugo Chavez, the Ballet

Wasn't the real Hugo Chavez a homely, pudgy bloke?

For those with a taste for entertainment with a political bent, there is no shortage: Evita, Les Miserables, Imelda...the list goes on and on. However, for the truly outre in contemporary entertainment, you will have to leave the confines of London and Broadway. Make that off, Off, OFF Broadway: book your flight--and make sure it's a round trip ticket lest you get stuck in a socialist hellhole--for Caracas. Sure you can have reheated boilerplate socialist propaganda from North Korea, but why settle for that when you can combine agitprop with Latin brio?

Ladies and gentlemen, welcome to the retelling of Hugo Chavez, the ballet:

The piece, From Spider-Seller to Liberator, is roughly based on a series of personal reminiscences culled from the late president’s speeches and his weekly TV show Aló Presidente. A team of Cuban journalists combed through thousands of hours, selecting the folksy childhood anecdotes which he would drop in among state decrees and political announcements.

My Venezuelan friends inform me "Alo Presidente" was a snoozefest of Hugo Chavez rambling and ranting eccentrically about all the evils that afflict his country--especially those visited upon it by Los Estados Unidos. To go through hours and hours of such dreck in order to construct a propaganda number is, at the very least, heroic. We continue...

According to the advance publicity, the show takes the viewer from President Chávez’s humble origins in the state of Barinas to his transformation into “the guide of the fights of the Venezuelan people’s struggles”. The work’s name is drawn from the spider-web sweets which Chávez sold on the streets as a boy. A previous staging of the state-sponsored piece earlier this year saw more than 40 artists on stage, combining live music with video art and circus-like antics.


The work begins with a recording of Chávez’s voice saying: “I was like a seed which fell on hard ground,” before a female character representing the mother country takes to the stage; she later dances a pas de deux with the male dancer portraying Chávez. Throughout the work, Chávez’s voice can be heard overhead while footage of key moments from Venezuelan history and the president’s life are projected behind the dancer.

“People won’t go to see a ballet performance. They want to see their leader’s life set on stage,” said the critic Marcy Alejandra Rangel, who reviewed the piece’s debut performance. “It was both weird and emotional. On one hand you were watching Chávez as a military or a baseball player pirouetting on stage, and on the other hand you were seeing an audience rally around the memory of their late leader,” Marcy said.

So it's not the Nutcracker Suite. The statement that there is no accounting for taste holds true here, but hey, who am I to say that it's not entertaining in a highly perverse way? Given the radical devaluation of Venezuela's currency, ticket prices are appropriately dirt cheap in foreign exchange terms. How about seeing it for less than a dollar?

Tickets for Saturday’s one-off show will cost $16-$44 at the official currency rate, or $0.80-$2.30 on the black market for dollars.