Eurozone Stress Tests


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The eurozone has decided to keep its banks running via government insured liabilities without regard to capital levels. The new ‘tests’ are most likely for show only.

All governments with non convertible currency and floating FX policy have this option, which allows banks to continue indefinitely with or without capital, however defined.

The only reason to shut a bank down due to capital concerns is to protect ‘taxpayer money.’

Moral hazard is less of an issue as all bank assets are regulated and supervised in any case.

Japan’s recovery was not dampened by its banking system which was there to make loans and service deposits with our without bank capital.

It was dampened by a lack of aggregate demand due to insufficient deficit spending- taxes too high or spending too low.

Every time the economy started recovering they slapped on a consumption tax, in the name of fiscal responsibility.

Taken at its word, the Obama administration seems intent on doing much the same.

EU To stress test banking system

by Jan Strupczewski

May 12 (Reuters) — The European Union will stress test its banking system to determine its resilience to the economic downturn and find out if it is adequately capitalised by September, EU sources said on Tuesday.

The stress tests will be conducted by national supervisors according to common guidelines and methodology issued by the Committee of European Banking Supervisors (CEBS), the sources
said.

“The decision was taken by the EU finance ministers. They decided to ask the Committee of European Banking Supervisors to organise a stress test,” one source familiar with the ministers’ deliberations said.

“But it is not a stress test of individual institutions like the Americans are doing. It is more a highly aggregated stress test, which should show the degree of resilience of the overall EU banking sector,” the source said.

“It would show if there are additional capital requirements or if banks are adequately capitalised for the present situation,” the source said.

A second source close to the EU finance ministers’ deliberations confirmed the stress test of the EU banking system was to be ready by September.


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Obama Serious About Balancing the Budget


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Yes, it’s early, but seems he’s serious about his campaign promise to balance the budget.

The economy won’t see the drop in demand until it actually happens.

But valuations can adjust to rising tax rates long before GDP does.

Obama Proposes New Taxes on Dealers, Life Insurance

by Ryan J. Donmoyer

May 11 (Bloomberg) — President Barack Obama proposed raising money to pay for his health-care overhaul by imposing $58 billion in new taxes on securities dealers, life insurance products and Americans with valuable estates.

The eight new proposals, outlined in budget documents released today, are in addition to more than $1 trillion in tax increases over the next decade the president wants to impose beginning in 2011. Those would include higher rates for top earners and restrictions on tax-avoidance techniques commonly used by U.S.-based multinational corporations.


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Obama on Energy and Food


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(email exchange)

This will drive up prices of food and energy longer term.

Still no plan to quickly bring down crude demand to offset declines in supply side incentives.

>   
>   Obama doesn’t buy the idea that US tax credits encourage oil and
>   gas production. His FY-2010 budget would delete eight such tax
>   breaks – start importing Brazilian ethanol.
>   


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It’s not just Chrysler


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Thanks!

Another example of politicians using the TARP card to influence the bankruptcy process. Banks may think twice before they provide their next DIP. If nothing else, the cost of this financing will increase. Which I believe is counter to what said politicians would like to see happening.

Hartmarx- A Harbinger of Things to Come

by Rodney Johnson

May 9 (HS Dent) — Hartmarx, the clothier who’s recent fame is making suits warn by President Obama, filed for bankruptcy protection in late January. Wells Fargo supplied Debtor in Possession Financing (DIP) while the company reorganized. Three bidders have emerged: two of the bidders are interested in keeping the operation going, the third would liquidate the company. When employees got wind of the third bid, they rallied against Wells Fargo, assailing the bank and calling congressmen, as reported by Progress Illinois:

This news of a potential liquidiation caused workers, union leaders, and members of Congress to spring into action to aid the company, which employs 3,000 people nationwide, including 1,000 in Illinois. Rep. Phil Hare, who spent 13 years as a Hartmarx employee, described himself as “livid” at the bank, which accepted $25 billion in federal bailout funds. He went on to enlist the help of Rep. Barney Frank (D-MA) and Sen. Chuck Schumer (D-NY). Rep. Jan Schakowsky, whose great-aunt found a job with Hartmarx after emigrating from Russia, called Wells Fargo CEO John Strumpf and urged him to keep the company running. Illinois Treasurer Alexi Giannoulias, meanwhile, sent a letter to Strumpf threatening to sever the state’s business with the bank if Hartmarx was ultimately liquidated.

This is not isolated. This is not about Chrysler, GM, and tens of thousands of workers and the ability of the United State to mass produce heavy vehicles as a point of national security and safety. This is a company that makes clothing, who through the power of employees, not owners, is bringing pressure on a bank through political paths because of TARP funding. A year ago this would have been seen as a bizarre episode. Today it is an indication of where we are headed, as the recently silenced critics of the Chrysler deal know all too well.


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Re: Globe & Mail – Canadian Propaganda


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(email exchange)

Yes, thanks.

I just saw a replay of the Obama comedy routine of a few days ago.

It wasn’t at all clever or funny, but sarcastic, mean spirited, cheap shots and arrogant self glorification, etc. and delivered as such. The shots against Clinton, Summers, and Biden- who I criticize perhaps more than anyone- were particularly cruel and tasteless, and unthinkable that their ‘boss’ would publicly humiliate them like that unless he intended to fire them. And the hostile undertone was similar to that of his attacks on the Chrysler secured lenders and corporations with legal untaxed offshore earnings.

The progression is getting worse. Wouldn’t surprise me if he starts losing support from some of the more intellectual Democrats before the end of the year.

>   
>   More on the theme of who could have predicted that a mainstream Canadian
>   newspaper could be on this side of the debate ?
>   

Amid the rhetoric, a profound threat to capitalism

by Avner Mandelman

May 9 (Globe and Mail) —


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Macroeconomic Review


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Briefly, in mid 2006, I had written that the Fed’s financial obligations ratios suggested that the federal deficit had gotten too small to sustain the kind of growth we’d been seeing, and that aggregate demand would moderate until the economy got weak enough to get the federal deficit to probably about 5% of GDP as had been the case in most previous cycles.

And, at the same time, rising crude prices due to monopoly pricing power would drive up CPI.

I had also thought the Fed would keep rates steady or increase them as inflation expectations rose, and that the higher interest rates would further drive up CPI and support incomes through the interest income channel as the non government sectors are large (equal to the size of the outstanding Treasury securities) net savers.

GDP growth did start declining and CPI did start climbing, as did inflation expectations. However I was wrong about the Fed’s reaction as they cut rates long before CPI peaked. Ironically they made the right move regarding inflation, but the rate cuts did remove interest income and contribute to the decline in aggregate demand. The Q2 08 fiscal package more than offset that, however, and real GDP remained positive for the first half of 08.

The end of the fiscal package coincided with the Great Mike Masters Inventory Liquidation which was larger than I had ever imagined, lasting to year end, and driving GDP to unheard of post war negative numbers, particularly in the housing sector.

By year end the rapid increase in unemployment and the decline in tax revenues combined to increase the federal deficit to over 5% of GDP, boosting the USD net financial equity of the monetary system and slowing the decline of personal income to the point of ending the inventory liquidation and reversing the decline in the rate GDP some time during Q1.

Q2 GDP is currently looking to be somewhere near flat and maybe positive, with housing slowly on the mend as well, and with inventories starting from extremely low levels.

My proposals for fiscal policy once the inventory liquidation was in progress were the payroll tax holiday, revenue sharing for the states, and funding a job for anyone willing and able to work that included health care. This would have eliminated the need for unemployment to rise and GDP to fall as the means of restoring the federal budget deficit to levels necessary to sustain output and employment.

All with the caveat that energy prices would resume their climb as soon as stability was restored if there was not a credible plan in place to immediately cut US domestic crude oil consumption.

The Obamaboom is now underway due to the ‘automatic stabilizers’ described above, and the additional fiscal adjustments are now kicking in as well. Unfortunately we got here that ugly way, via rising unemployment and falling taxable incomes- a real and tragic cost that is, sadly, water under the bridge.

And, unfortunately, our crude consumption has dropped only modestly and is already increasing as GDP stabilizes, even at current levels of unemployment. As a consequence, crude prices are headed north again, and will support headline and eventually core CPI through the cost structure, as cost push ‘inflation’ resumes after pausing for the inventory liquidation. While off of last year’s highs, food prices are now rising from levels that are about double those of a few years ago and crude prices nearly triple earlier levels.

The US fiscal expansion is also likely to drive imports, with rising crude prices increasing the US import bill as well.

This keeps a lid on domestic employment as unemployment remains high and real wages stagnate, meaning increases in real consumption and wealth due to productivity increases and (some) employment gains necessarily flow to the ‘top.’

It also means US dollars will be ‘easier to get’ overseas which puts downward pressure on the USD. The Fed and Administration is prone to look at this as a ‘good thing’ as they view increased ‘competitiveness’ that drive increased exports ‘necessary’ to ‘balance the trade account.’

For the real economy, rising prices of imports while nominal wages are contained decreases real standards of living as workers use up their take home pay on food and energy and export a greater share of their output rather than consume it. This is what happens with an administration that doesn’t understand that exports are real costs and imports real benefits.

The Fed will soon be looking at sub trend GDP, unacceptably high unemployment, a falling dollar, rising headline CPI and rising inflation expectations.

Recent history says they will keep rates low as long as they perceive an continuing output gap.

The administration will see the same data and be hesitant to blame the Fed for inflation, for fear of triggering higher interest rates.

Ironically, this disturbing scenario is currently a historically a near ideal environment for nominal equity prices, so the administration will also be seeing increasing wealth in the financial sectors, at the senior management level, and in the investor classes in general, while pondering what to do about unemployment in the face of rising inflation.


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2009-05-08 UK News Highlights


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This highlights my macro themes.

Highlights

U.K. Producer Prices Increase Most in 10 Months

Rising crude prices driving up CPI.

U.K. Homebuyers Bet Property Recovery to Be Illusory

No one believes fiscal policy works.

Julius Says BOE Risks Woes of ‘Love Affair’ By Printing Money

Everyone is afraid ‘quantitative easing’ has ramifications beyond dropping targeted rates a few basis points.

U.K. Income Gap Reaches Widest in Five Decades, Researchers Say

The income gap will only get wider with the recovery as unemployment keeps real wages in check and the real wealth flows upward.


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Posted in UK

2009-05-08 USER


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Karim writes:

  • NFP -539k; net revisions -66k, and +60k contribution from census workers (census workers will add about 75k jobs/mth thru year-end)
  • Underlying trend doesn’t show any real change
  • Index of aggregate hours down another 0.6% and avg weekly earnings up 0.1%
  • Wage and salary component of personal income will be down again (hours x jobs x wages)
  • Unemployment rate up from 8.54% to 8.87%; total unemployment rate up from 15.6% to 15.8%
  • Only good news was diffusion index rising from 20.3 to 28.2
  • Consensus on CNBC was this would be the ‘last, really bad number’, mostly on grounds of running out of people to fire.
  • I guess ‘really bad’ wasn’t ‘really defined’, but judging by the workweek data, doesn’t seem like material improvement anytime soon.


Change in Nonfarm Payrolls (Apr)

Survey -600K
Actual -539K
Prior -663K
Revised -699K

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Change in Nonfarm Payrolls YoY (Apr)

Survey n/a
Actual -5240.00
Prior -4861.00
Revised n/a

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Nonfarm Payrolls ALLX (Apr)

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Unemployment Rate (Apr)

Survey 8.9%
Actual 8.9%
Prior 8.5%
Revised n/a

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Unemployment Rate ALLX 1 (Apr)

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Unemployment Rate ALLX 2 (Apr)

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Change in Manufacturing Payrolls (Apr)

Survey -155K
Actual -149K
Prior -161K
Revised -167K

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Change in Manufacturing Payrolls YoY (Apr)

Survey n/a
Actual -10.7%
Prior -10.0%
Revised n/a

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Average Hourly Earnings MoM (Apr)

Survey 0.2%
Actual 0.1%
Prior 0.2%
Revised n/a

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Average Hourly Earnings YoY (Apr)

Survey 3.3%
Actual 3.2%
Prior 3.4%
Revised n/a

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Average Hourly Earnings ALLX 1 (Apr)

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Average Hourly Earnings ALLX 2 (Apr)

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Average Hourly Earnings ALLX 3 (Apr)

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Average Weekly Hours (Apr)

Survey 33.2
Actual 33.2
Prior 33.2
Revised n/a

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Wholesale Inventories MoM (Mar)

Survey -1.0%
Actual -1.6%
Prior -1.5%
Revised -1.7%

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Wholesale Inventories YoY (Mar)

Survey n/a
Actual -3.5%
Prior -1.9%
Revised n/a

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Wholesale Inventories ALLX 1 (Mar)

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Wholesale Inventories ALLX 2 (Mar)


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