With one month to go in the data series, US Total Non-Farm Payrolls have averaged 131.08 million in 2011. The problem is that the US is a Very Large System, and needs growth to support its array of future obligations, primarily Social Security and the debt it incurs to run its military budget, and other entitlements. If you had told someone ten years ago that Total Non-Farm Payrolls would be at similar levels in 2011, that likely would have sounded impossible, or extreme. But the fact is, US Total Non-Farm Payrolls averaged 131.83 million ten years ago, in 2001. The implications for this lack of growth are quite dire. | see: United States Total Non-Farm Payrolls in Millions (seasonally adjusted) 2001-2011.
With less economic growth, and no growth in global oil production leading to permanently higher oil prices, the United States is trying to operate its Empire at previous levels. Now you know why the country along with the rest of West has gone more deeply into debt. The population keeps growing, obligations keep expanding, inputs costs keep rising. But growth keeps slowing. | see: Global Average Annual Crude Oil Production mbpd 2001 – 2011.
Care to forecast the US will return to economic growth, given energy prices and aggregate levels of debt in the OECD nations? Good luck with that. The US could certainly increase taxes, and reduce government spending. But that won’t restore economic growth. How about increasing annual government deficits more rapidly, to double our debt even faster? Good luck with that too. As I have written before, the energy limit and total debt now trump the tiresome argument between Austrians and Keynesians, rendering the conversation moot.
There was a time when many “experts” forecast that oil prices would come back down, and that global oil production would increase. Six years later, you don’t hear much from these people anymore. Their books, asserting there never was or would be an oil crisis, can now be had for .99 cents through used bookstores on the Amazon network. I expect them to be joined by economic revival advocates, no later than mid-decade. Growth in real terms, in the OECD nations, has now basically come to an end.
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This may be in Germany’s future.
Sean Pignatell of Cowen International just put out a new note calling peripheral European debt “completely uninvestable” and predicting the end of the eurozone unless the European Central Bank makes a commitment to “unconditional and unlimited” intervention in the sovereign bond market.
That’s because it is now impossible to hedge both currency and sovereign credit risk.
A combination of policy that allowed Greece to default (even “selectively”) and bond yields surpassing 3% mean that investors are no longer able to hedge the sovereign credit risk of the PIIGS. Even France, Pignatell writes, is nearing the end of that rope.
But now it’s even impossible to hedge currency risk. Here’s why:
The real answer is that it never could be but, until very recently, it didn’t need to be. And here we have to go back to that pivotal moment when Merkel and Sarkozy openly called Papandreou’s bluff and turned his ill-advised political manoeuvre (the bail-out referendum) into a vote on remaining in the Eurozone. One bad decision compounded by a catastrophic one. Pandora’s Box was opened and there will be no coming back from that one.
So, in one move we went from a position whereby currency risk for individual countries in the Eurozone could be hedged via Euros, to needing to be hedged in currencies that, as yet, do not exist.
With the very fabric of the euro monetary union in flux, there is only one solution that would avoid catastrophe:
Markets will continue to be volatile, and Eurozone sovereign spreads will have good days as well as bad. However, until the ECB fully commits, both unconditionally and without limit, then these bond spreads will continue to rise.
The mechanism by which others get sucked into the periphery is not dissimilar to a black hole; as the periphery’s problems grow, so does its pulling power, drawing more countries into its vortex, in turn increasing its force. Eventually, without a break up of the Eurozone, even Germany would get sucked in.
by Zeke Miller
In public, President Barack Obama has kept his cool about Europe, rarely speaking out on the subject other than to encourage his counterparts across the Atlantic to act swiftly to stave off catastrophe. But privately, the FT’s Richard McGregor reports, Obama is in “morbid fear” of the crisis spreading the United States:
But behind the scenes, within both the administration and Mr Obama’s campaign team in Chicago, there is a morbid fear about a eurozone meltdown and its flow-on impact on the US economy and the president’s re-election chances.
“The thing that matters the most in determining the health of the US economy and job creation is what happens in Europe,” says a senior administration official.
Obama has slowly sharpened his language on the subject in recent days, calling for even faster coordinated action on the part of Europe, though he lacks the leverage to force an agreement. A U.S. bailout is off the table, amid opposition from Democrats and Republicans alike, and the independent Fed can only do so much or risk a public backlash.
In the meantime, Obama remains focused on the what he can control — extending the payroll tax cut and unemployment benefits — said White House Press Secretary Jay Carney on Tuesday. But even those won’t be enough to keep the economy going if another crisis hits, which would likely scuttle the president’s reelection chances.
by Eric Platt
The dark clouds in the Federal Reserve’s 2012 annual stress test are keeping bankers up at night, as banks are being asked to imagine their balance sheet situation under some horrible economic scenarios.
Here are some of the key metrics, complete with headline numbers, for what would happen in the Fed’s worst scenario:
U.S. Real GDP:
- 4Q11: -4.84%
- 1Q12: -7.98%
- 2Q12: -4.23%
- 3Q12: -3.51%
- 4Q12: +0.00%
- 1Q13: +0.72%
- 2Q13: +2.21%
- 3Q13: +2.32%
- 4Q13: +3.45%
- 4Q11: 9.68%
- 1Q12: 10.58%
- 2Q12: 11.40%
- 3Q12: 12.16%
- 4Q12: 12.76%
- 1Q13: 13.00%
- 2Q13: 13.05%
- 3Q13: 12.96%
- 4Q13: 12.76%
U.S. 10-Year Treasury Yield:
- 4Q11: 2.07%
- 1Q12: 1.94%
- 2Q12: 1.76%
- 3Q12: 1.67%
- 4Q12: 1.76%
- 1Q13: 1.74%
- 2Q13: 1.84%
- 3Q13: 1.98%
- 4Q13: 1.97%
Dow Jones Industrial Average Price:
- 4Q11: 9,504.48
- 1Q12: 7,576.38
- 2Q12: 7,089.87
- 3Q12: 5,705.55
- 4Q12: 5,668.34
- 1Q13: 6,082.47
- 2Q13: 6,384.32
- 3Q13: 7,084.65
- 4Q13: 7,618.89
EU Real GDP:
- 4Q11: -1.03%
- 1Q12: -3.49%
- 2Q12: -5.40%
- 3Q12: -6.91%
- 4Q12: -4.92%
- 1Q13: -0.88%
- 2Q13: +0.35%
- 3Q13: +1.11%
- 4Q13: +1.50%
Remember, banks have less than two months to stress test their portfolios against these, and 21 other metrics. For a full list of scenario inputs visit the Federal Reserve’s site.
- The doomsday scenarios the Fed wants banks to test (business.financialpost.com)
- Fed Sets Jan 9 for New Round of Fin Inst Stress Tests (forexlive.com)
- The Fed’s Stress Tests: Too Little, Too Late (247wallst.com)
- Federal Reserve Board issues final rule on annual capital plans, launches 2012 review (bespacific.com)
- Top U.S. banks told to stress test against severe recession (business.financialpost.com)
- Federal Reserve Will Force 31 Banks To Stress Test Portfolios (GS, BAC, JPM, MS, WFC, MET, AXP) (businessinsider.com)
- Fed FAQ Re Fin Institution Stress Tests (forexlive.com)
- Fed Tells Top U.S. Banks to Submit Capital Plans (businessweek.com)
The IMF will offer a new credit line program to allow sovereigns to “break the chain of contagion.”
A new “Precautionary Credit Line” would allow governments with sound financials who have made prior agreements with the IMF to access liquidity of 1000% of a member’s quota for 1-2 years. It would also allow them to access up to 500% of their quota in liquidity on a 6-month basis.
The funds would be offered to sovereigns suffering from “exogenous shocks.”
Markets and the euro spiked immediately on the news.
There are, however, a few big problems with this new proposal.
First, it is unclear whether the IMF actually has access to the amount of funds that would be necessary to bail out a sovereign like Italy.
Italy currently has $2.2 trillion in gross external debt, far exceeding the IMF’s current available resources of about $540 billion. While that would significantly add to the resources the eurozone bailout fund—the European Financial Stability Facility—has available, this still falls short of the estimates for funding necessary to truly stem the crisis. Citi’s Willem Buiter recently suggested about €3 trillion ($4 trillion).
This suggests that the IMF might have to rapidly expand its funding resources to act as an effective bulwark against contagion. But that’s not likely to happen either.
The United States—which provides the largest percentage (17.7%) of IMF funds of any individual country—will also have to approve the plan. Previous bids to expand the IMF’s funding have hit a wall with U.S. opposition, primarily led by the GOP.
This press release from the IMF describes how the new program will work:
IMF Enhances Liquidity and Emergency Lending Windows
Press Release No. 11/424
November 22, 2011
The Executive Board of the International Monetary Fund (IMF) approved on November 21 a set of reforms designed to bolster the flexibility and scope of the Fund’s lending toolkit to provide liquidity and emergency assistance more effectively to the Fund’s global membership. These reforms, which have been under preparation for some time, will enable the Fund to respond better to the diverse liquidity needs of members with sound policies and fundamentals, including those affected during periods of heightened economic or market stress—the crisis-bystanders—and to address urgent financing needs arising in a broader range of circumstances than natural disasters and post-conflict situations previously covered.
“I commend the Executive Board for the expeditious response to support the membership in these difficult times,” said IMF Managing Director Christine Lagarde following the Executive Board meeting. “The Fund has been asked to enhance its lending toolkit to help the membership cope with crises. We have acted quickly, and the new tools will enable us to respond more rapidly and effectively for the benefit of the whole membership.
“The reform enhances the Fund’s ability to provide financing for crisis prevention and resolution. This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness,” she added.
The reform replaces the Precautionary Credit Line (PCL) with the more flexible Precautionary and Liquidity Line (PLL), which can be used under broader circumstances, including as insurance against future shocks and as a short-term liquidity window to address the needs of crisis bystanders during times of heightened regional or global stress and break the chains of contagion. The Fund’s current instruments for emergency assistance (Emergency Natural Disaster Assistance and the Emergency Post-Conflict Assistance) are consolidated under the new Rapid Financing Instrument (RFI), which may be used to support a full range of urgent balance of payments needs, including those arising from exogenous shocks.
The Precautionary and Liquidity Line:
- Qualification criteria remain the same as under the PCL. A member needs to be assessed as having sound economic fundamentals and institutional policy frameworks, having a track record of implementing sound policies, and remaining committed to maintaining such policies in the future. A member can seek support when it has either a potential or actual balance of payments need at the time of approval of the arrangement (rather than only a potential need, as was required under the PCL).
- Can be used as a liquidity window allowing six-month arrangements to meet short-term balance of payments needs. Access under a six-month arrangement would not exceed 250 percent of a member’s quota, which could be augmented to a maximum of 500 percent in exceptional circumstances where the member faces a balance of payments need that is of a short-term nature and results from exogenous shocks, including from heightened regional or global economic stress conditions.
- Can also be used under a 12 to 24-month arrangement with maximum access upon approval equal to 500 percent of a member’s quota for the first year and up to 1000 percent of quota for the second year (the latter of which could also be brought forward to the first year where needed, following a Board review). As under the PCL, arrangements of these durations include Executive Board reviews every six months.
The Rapid Financing Instrument:
- The RFI broadens coverage of urgent balance of payments needs beyond those arising from natural disasters and post-conflict situations, and can also provide a framework for policy support and technical assistance.
- Funds are available immediately to the member in need upon approval with access limited to 50 percent of the member’s quota annually, and to 100 percent on a cumulative basis.
- The member needs to outline its policy plans to address its balance of payments difficulties, and the IMF must assess that the member will cooperate in finding solutions for these difficulties.
Review of Flexible Credit Line and PCL:
The Executive Board also reviewed the FCL and PCL and found that that these instruments have bolstered confidence and moderated balance of payments pressures during a period of heightened risk. The rigorous qualification framework has worked well and access decisions have reflected the evolution of risks facing users of these instruments. The review calls for focusing qualification discussions more on qualitative and forward-looking aspects of policies and policy frameworks, and enhancing the transparency of access decisions.
- IMF to rescue eurozone from debt crisis? (cbsnews.com)
- G20 asks IMF for solutions to eurozone crisis (thestar.com)
- Steen’s Chronicle: Wrestling with a lack of liquidity (tradingfloor.com)
- IMF Playing Larger Role In Addressing Europe Debt Crisis (huffingtonpost.com)
- ECB in talks to lend to IMF Quantitative Easing by the back door to save the Euro (politics.ie)
- IMF’s Largarde: IMF to Propose New Crisis Management Tools (forexlive.com)
- What lies beneath the IMF’s (liquid) blanket (ftalphaville.ft.com)
Political leaders and economists in the euro zone are searching frantically for answers to the same question as a bond market rout of European sovereign debt accelerates, putting the future of the single currency in jeopardy.
Until a few weeks ago, the most likely outcome appeared to be that the 17-nation currency area would muddle through. The euro zone would bail out a few highly indebted small peripheral states, patch up its rickety fiscal governance and avoid either a break-up or a major shift toward federal integration.
That was then. Now it seems that without a radical game-changing initiative within weeks, the crisis may no longer be controllable. – Tighter euro zone gains ground as debt crisis exit, Reuters
Here is an update of the SPX Meridian Market Theory chart that I have been following throughout the year. In my last update – I was opportunistic in the mindset that the charts may have been pointing towards an approaching long-term low. And while we found a low a few weeks later, I now find myself reinterpreting (in light of what I have found in the charts and the data from Europe and Asia) what the most recent rejection may mean towards the market going forward.
You may say I am becoming more concerned as the market has double and tripled dipped the same positive news out of Europe.
Near term, in either case – bull or bear, I find the market precariously placed at the top of the range and likely to fall back swiftly over the balance of the month.
Charts & More – The Money Game
- Europe could be in worst hour since WWII, Merkel says (calgaryherald.com)
Now that 60 Minutes has done a report on Congressional Insider Trading, the whole country is buzzing about their financial holdings.
Source – Money Game
- ’60 Minutes’ Blows The Lid Off Congressional Insider Trading (businessinsider.com)
- Congressional Insider Trading Gone Wild (zerohedge.com)
by Andrew Shen
With plans for the Keystone XL oil pipeline on the rocks, and China looking to diversify its energy supplier portfolio, this might be the perfect opportunity for Canada to get its foot in the door of the Chinese energy market.