Saturday, November 26, 2011

It's Not the 1% Especially, It's the 0.1% & Mish Says: Perfect Storm the Most Likely Scenario; Is Europe Set to Declare a Chapter 11 in Early 2012?

Panic is spreading says Steen Jakobsen, chief economist at Saxo Bank. Steen eyes the perfect storm including a potential "Chapter 11" call for European banks.

Via Email:

This morning there is too much bad news.

US Super Committee failed to find the 1.2 trillion US Dollar needed to stop the automatic spending cuts being initiated from 2012, but the more acute problem being the expiration of the payroll tax and the emergency benefits by year-end 2011. It now looks less likely a deal can be struck as Congress now have even less incentive to find common ground ahead of next year US election.

The immediate impact could be a full one percent slower growth in the US – Goldman Sachs provided this excellent graph detailing the potential negative impact: The number could be -2.0% to -0.5% in first two quarter of 2012 – again underlining our believe in an economic perfect storm as the most likely scenario:

Mike Mish
Effect of Federal, State, and Local Fiscal Policy
The debt crisis is taking a new negative turn – as seen in prior liquidity crisis’ the EMG Europe bloc comes under attack and this morning there are two extreme worrisome news pieces out:

Hungary seeks Aid from EU, IMF: Hungary have submitted formal request to the EU and IMF for help. Hungary feels this is needed to secure risk-free growth for the economy – talks should be concluded in early 2012.

Austrian banks told to limit lending to the east
: Basically, they need and want to protect their AAA and they seems to believe, rather naively, that the best way is to cut lending to the their EEC bloc lending. Again the credit-cake is getting smaller.

Finally, another core country Belgium may lose its caretaker PM – Belgium been without elected government since June 2010! – the political landscape in Europe getting slightly concerning:

  • Greece – Technocrat – non-elected Government – Opposition still refuses to sign EU letter.
  • Italy – Technocrat- non-elected
  • Spain – new majority government, but on the basis of big no to austerity from prior government, not exactly vote of confidence to fiscal restraint.
  • France- Election next year – Marine Le Pen could surprise in the polls, as the French election is two rounds. She is making heavy anti-EU noises and starting to raise her campaign
  • Belgium – Belgian chief government negotiator asks to quit.
Keep an eye on Belgium rates today – they have risen from 3.6% in early October to now close to the magic 5.00 which spells trouble, with capital T…


Market bounced of the 1180-00 target for now, but a test still looks like on the down-side as 2012 more and more looks like one big perfect storm both politically and economically. This is not the time to be brave. This week will see dramatic revisions to US growth based on Super Committee failure, and same for Europe as PMI will show lacking confidence. This is now full blown “confidence crisis” – there is increasingly a need for my call for "Chapter 11" for Europe.

Safe travels,

Steen Jakobsen | Chief Economist

Chapter 11 in early 2012?

On his blog, Steen asks Is Europe set to declare a Chapter 11 in early 2012?

Europe may need to pull a Chapter 11 – a US-style bankruptcy, which would permit a market shutdown and Euro Zone reorganization before reopening for business.

The EU desperately needs a break from market pressures in order to allow the political apparatus to really gather its forces and finally move Europe and its debt crisis ahead of the curve. Here we are just a couple of weeks after the feeble attempt to apply an EFSF plaster on the problem and we’re already back to Square One: the EU debt crisis has reached the point at which none of the readily available tools or institutions are sufficient to match the magnitude of the crisis. This dictates the need for an out-of-the-box solution.

EU policy makers played the extend and pretend game for as long as they could - but now the writing is on the wall: popular outrage is on the rise and putting increasing pressure on the political process - as we are seeing increased demonstrations and grass-root activity taking over both the political agenda and the media. And markets are now balking as empty promises and now a real lack of funds are seeing bond yields beginning to spike out of control. The self-reinforcing cycle of downgrades and austerity and recession are taking us to the very brink of a full scale Crisis 2.0.

It’s important to point out that politicians will only do something drastic in a true state of emergency, so one catalyst we’ve yet to see to prompt action is a serious drop in the stock market.

The extend-and-pretend policies that have continued through 16 EU Summits have only led us to a Catch-22 in which everything that is done with good intentions (or not) is to the detriment of something else.

So what form might a Chapter 11 for the Euro Zone take? It is increasingly likely that some kind of total “bank holiday” is enforced to put a stop to market pressures – and then to reinforce and relaunch a stricter EU Growth and Stability Pact as a price for cranking up the ECB printing presses to full speed.

Before accusing me of lunacy on my idea of a market holiday, it’s important to point out that banking holidays are not without precedent. In 1933, President Roosevelt declared a bank holiday that ran for an entire week in March of 1933, during which he passed the Emergency Banking Act and the Federal Reserve moved to supply currency to banks.

After 9/11 we also had a “forced” bank holiday. The banking panic of 1907 saw massive illiquidity and bank closings as can be seen in this excellent link. The main point for 1907 however remains: The biggest and most solvent banks survived, the small ones failed – 73 banks failed but it created a rebirth which catapulted the stock market higher.

Germany and Northern Europe understand that printing money at the ECB will not solve anything, as it would only throw more debt on an already back-breaking load. But if this bloc countries wants to buy time to implement stronger constitutional changes, the most path is a quid-pro-quo solution in which Germany gets a stronger Growth and Stability Pact implemented, not only into EU law, but also ratified as part of a new standard for restrictive fiscal policies with built-in debt breaks for all individual countries. Germany gets it “discipline leads to growth” for the long term, while the Keynesians get their “liquidity fix” from the ECB.

In short, the main issues are the following (in no particular order of prioritization):

  • Time is up – the market needs solutions, not plans for plans. The timeline for Political Europe is way too slow for market comfort.
  • Interbank funding is starting to freeze over. Every day sees risk factors pointing higher and a systemic liquidity crisis could develop at any time.
  • Financing gap. EFSF has 440 EUR 440 billion (though it has never been funded). Some estimate that Italy and Spain need EUR 400-500 billion per year to refinance and recapitalize its banks – per year! Talk about mismatch of supply and demand.
  • Lack of constitutional frame-work to establish or enact changes.
  • Democratic and constitutional rights are close to being violated, if not in the letter of the law, then certainly in the eyes of the voters.
As we head into 2012, I am increasingly convinced that we have an almost perfect economic and political storm brewing on the horizon.

Germany Will Not Go Along

The obvious flaw in the idea of a Europe-wide bank holiday is Germany.

The German supreme court has ruled there must be a voter referendum for these kinds of changes. Would Merkel risk putting the German Supreme court to that test? I highly doubt it.

Individual countries, notably Greece, are another matter as I have mentioned a couple of times recently. For further discussion, please see...

Greece is at the breaking point now if they do not get the next tranche of money, and it still is not clear they will get it. If Greece left would Portugal be far behind? It's hard to say for sure.

Might Italy decide on a bank holiday? Yes, that is possible too, just not as likely, at least right now. It may be a different matter after the next election.

The ideal solution would be for Germany to leave. Might that involve a Eurozone-wide bank holiday? Certainly, just not yet.

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And if I know the $30,000-40,000/yr-guy watching this on the newscast, he's not going to care much.

He'll only wish he were a part of that 0.1% (and then quickly check the lottery winners cause it's bound to be his lucky day).

Friday, November 25, 2011

"We Should Really Be Focused on the 0.1%"

"We Should Really Be Focused on the 0.1%"
By David Atkins

"Paul Krugman has a great op-ed today with a reminder that it's not just the 1% that is the problem, but the upper one tenth of one percent of Americans who constitute the biggest problem. It's an issue that Hacker and Pierson have covered at some length, as has Matt Taibbi. The rewards of our skewed economy increase exponentially as you approach the top of the income chart. 

“We are the 99 percent” is a great slogan. It correctly defines the issue as being the middle class versus the elite (as opposed to the middle class versus the poor). And it also gets past the common but wrong establishment notion that rising inequality is mainly about the well educated doing better than the less educated; the big winners in this new Gilded Age have been a handful of very wealthy people, not college graduates in general.

If anything, however, the 99 percent slogan aims too low. A large fraction of the top 1 percent’s gains have actually gone to an even smaller group, the top 0.1 percent — the richest one-thousandth of the population. And while Democrats, by and large, want that super-elite to make at least some contribution to long-term deficit reduction, Republicans want to cut the super-elite’s taxes even as they slash Social Security, Medicare and Medicaid in the name of fiscal discipline.

All of the goodies have gone to the top one tenth of one percent: The recent Congressional Budget Office report on inequality didn’t look inside the top 1 percent, but an earlier report, which only went up to 2005, did. According to that report, between 1979 and 2005 the inflation-adjusted, after-tax income of Americans in the middle of the income distribution rose 21 percent. The equivalent number for the richest 0.1 percent rose 400 percent. For the most part, these huge gains reflected a dramatic rise in the super-elite’s share of pretax income. But there were also large tax cuts favoring the wealthy. In particular, taxes on capital gains are much lower than they were in 1979 — and the richest one-thousandth of Americans account for half of all income from capital gains.

And they're not really contributing much to the economy: Still, don’t some of the very rich get that way by producing innovations that are worth far more to the world than the income they receive? Sure, but if you look at who really makes up the 0.1 percent, it’s hard to avoid the conclusion that, by and large, the members of the super-elite are overpaid, not underpaid, for what they do.

 For who are the 0.1 percent? Very few of them are Steve Jobs-type innovators; most of them are corporate bigwigs and financial wheeler-dealers. One recent analysis found that 43 percent of the super-elite are executives at nonfinancial companies, 18 percent are in finance and another 12 percent are lawyers or in real estate. And these are not, to put it mildly, professions in which there is a clear relationship between someone’s income and his economic contribution. Executive pay, which has skyrocketed over the past generation, is famously set by boards of directors appointed by the very people whose pay they determine; poorly performing C.E.O.’s still get lavish paychecks, and even failed and fired executives often receive millions as they go out the door.

Bottom line? So should the 99.9 percent hate the 0.1 percent? No, not at all. But they should ignore all the propaganda about “job creators” and demand that the super-elite pay substantially more in taxes. It's pretty obvious, and conservatives don't really have a good answer for these facts and figures. If we had a decent media in this country, this stuff would be all over the airwaves.”

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