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Tuesday, March 03, 2015 5:23 PM


Ukraine Hikes Rate to 30%, Requires Corporations to Sell 75% of Foreign Currency Earnings; Miners Not Paid For 3 Months


In an effort to arrest hyperinflation and general panic over rising food prices, Ukraine's Central Bank Hikes Benchmark Rate to 30 Percent.

Ukraine's central bank will raise its benchmark refinancing rate to 30 percent from 19.5 percent, the head of the central bank said on Tuesday, as the bank tries to rein in rocketing inflation and persistent currency weakness.

The new interest rate, which comes into effect on Wednesday, is the highest for 15 years.

Central bank chief Valeriia Gontareva said in a media briefing that the decision was taken because the bank saw the "threat of inflation had risen strongly due to negative consequences from currency market panic".

The bank will also extend a rule obliging companies to sell 75 percent of their foreign currency earnings among other measures to help stabilise the hryvnia, which Gontareva said she hoped would return to a level of 20-22 to the dollar "quickly".
Interbank Trading

There is no "threat of inflation", there is inflation. In light interbank trading, the quote ranged from 24.50 to 25.00 UAH/USD compared to 30.01 on February 26.

With all the restrictions, and gimmicks, it's hard to call this a market.

Corporations Must Sell 75% of Foreign Currency Earnings

In addition to the rate hike, NBU Extends Rule Mandating Sale of 75% of Foreign Currency Earnings.
The national Bank of Ukraine extended the requirement for mandatory sale of 75% of foreign exchange earnings, said the head of the National Bank of Ukraine Valeria Gontareva on Tuesday.

"Our decision, Resolution No. 758, do not change. The mandatory sale of 75% of foreign exchange earnings remains," said Gontareva.

Recall that in November 2012, the NBU introduced mandatory sale of foreign exchange earnings for exporters. In August 2014, the NBU has obliged them to sell 100% of foreign exchange earnings. In September 2014, the NBU reduced the requirement to 75%.
Miners Block Road Due to Lack of Payment for Three Months

Ukraine is so broke it has not been able to pay miners at state-owned mines. Please consider Rebellious Miners Blocked the Road Lviv-Kovel"
The movement on the inter-regional highway from Lviv to Kovel was paralyzed: The road was blocked by striking miners, demanding payment of wage arrears.

Local officials who came out to talk just shrug and say the financial problems miners face is impossible to solve.
Miners Protest in Kiev

Also consider Miners of Western Ukraine Announced an Indefinite Strike in Kiev.
Among the strikers at the Verkhovna Rada [Ukrainian Parliament] are many workers from Western Ukraine, in particular, seven buses with miners from the Lviv region.

At the Verkhovna Rada and the Cabinet of Ministers, five hundred miners protested. They hit their helmets on the ground, and insist someone in authority speak with them.

Miners demand salary arrears for three months and state budget planned subsidies to the coal industry. Outraged miners from Lviv and Volhynia announced an indefinite strike.
Miners Forced Into Army

Want to get paid? Join the Army.

In the Volhynia region of Ukraine, sent 800 Miners Sent Draft Notices.
Miners in Western Ukraine who threatened a large-scale rebellion over a three-month salary delay were drafted into the army.

Eight hundred miners-rebels from Volhynia received the notice which the military commandants carried straight to the mine.

A miner from Novovolynsk said "It's worse now than in the 90s. People starved then, but there was no war. Now there is a complete ruin".
Black Market Rates

Reader John whose sister lives in Lviv, has not heard from her for a few days. Thus, I cannot say how the black market has responded to the miner protests or the rate hike to 30%.

Hopefully within a couple days I will have the street exchange rates to post.

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

2:08 PM


Chicago's Only Possible Salvation: Bankruptcy - a Name That Cannot be Spoken


Is the Chicago pension system so messed up and union work rules so entrenched the only way to change either of them is bankruptcy? I think so.

So does Dennis Byrne who wrote on his blog today Chicago's Only Salvation: A Detroit-Like Bankruptcy.

This is a guest post from Byrne.

Chicago's Only Salvation: A Detroit-Like Bankruptcy

Wait, I thought only the Republican Party was being torn asunder by a rift between the establishment middle and the fringe. That impression was nailed down, again, last week by the embarrassing fracture among House Republicans over funding for the Department of Homeland Security.

But don't forget last Tuesday's Chicago primary in which incumbent Rahm Emanuel, the so-called establishment candidate, was forced into a runoff election for mayor with progressive Cook County Commissioner Jesus "Chuy" Garcia.

Observers on the right and left expect that Garcia's unexpected success bodes well for progressives and is bad for moderate, establishment Democrats. That includes "centrist" (I don't necessarily agree with the label) and president-in-waiting Hillary Clinton.

They see an uprising among progressives that'll energize the drive to draft the far-left Sen. Elizabeth Warren, D-Mass., to challenge Clinton. Suggesting that a national movement is afoot to cleanse the Democratic Party of centrist heretics, they also point to the election of New York Mayor Bill ("I'm a progressive, don't call me liberal") de Blasio. Others said last year's election of labor-backed Ras ("We are the mayor") Baraka as Newark, N.J., mayor energized progressives.

Locally, left-wing Democrats have draped their mantle over the shoulders of Garcia. That's happened even though, after reading his answers to the Tribune's Candidate Questionnaire, I wouldn't call him the perfect progressive. The Illinois branch of MoveOn.org (the left's noisy equivalent of the right's tea party) endorsed Garcia. The Chicago Teachers Union and assorted progressive activists credit themselves for Garcia's unexpectedly strong showing and their successes in several alderman races.

So, yes, there is a fissure within the Democratic Party, between the establishment types and progressives.

So what? Frankly, I don't care about whatever splits are ripping apart whatever political party. More important than political process is the substance of the issues — the incredible, shrinking city of Chicago.

At least give Emanuel credit for trying to confront the city's calamitous deficits and debt. Give Garcia and his supporters a thumbs down for not only failing to try to provide some realistic, convincing answers, but for wanting more of the same policies that are sinking the city and the schools.

How dare Emanuel close down 50 Chicago schools! Keep them open, but don't ask how to pay for them. How dare Emanuel face the real problem of government labor costs! Pretend that the Chicago Public Schools don't have to find $688 million in pension payments in fiscal 2016. Hey, get rid of those red light cameras; they're only there to make a bundle of money for the city! Jump on Emanuel for finding sneaky ways to increase revenues without raising property taxes. Applaud Garcia when he promises no property tax increases.

In this, progressives are true to form. Pain avoidance is a priority. More and costly programs are desperately needed. Instant gratification trumps the long-term common good. Saving for our children's future is inconsequential.

Emanuel and Garcia, the latter especially, are criticized for not coming up with a better solution. Few commentators have great ideas, either. The problems have become too mind-boggling. Turning over all the tax increment financing, or TIF money, that has been salted away won't do it. New and higher taxes will fall short. Promises of "operating more efficiently" are hollow. The idea of a state bailout from nearly bankrupt Illinois is preposterous. Don't even look to Washington.

There's a reason no one is putting forth a realistic solution: There is none.

Chicago is too far in over its head to dig itself out. The only solution is the one whose name may not be spoken: bankruptcy.

It worked in Detroit. Last December, it emerged from what was the nation's largest municipal bankruptcy after about 17 months of court supervision. Ironically, under bankruptcy, the city's homicide rate, the highest in its history, dropped 18 percent, The New York Times reported. Police average response time dropped to less than 18 minutes, from 58 minutes. Replacement of the city's streetlights — of which 40 percent failed to work — is in the offing. Detroit isn't out of the woods yet, but it's in a better place now than when there appeared to be no hope, none at all.

Rip Chicago's finances out of the hands of the connivers, special interests and political opportunists and give them to a court-appointed manager to oversee the necessary reorganization. Start with Chicago Public Schools and, if necessary, throw in the entire stinking mess, called city of Chicago.

Might as well include the state of Illinois, too.

End Guest Post

Byrne is a Chicago Tribune contributing op-ed columnist and author of forthcoming historical novel, "Madness: The War of 1812." Byrne is also a reporter, editor and columnist for Chicago Sun-Times and Chicago Daily News.

Election Runoff

In an election runoff, mayor Rahm faces Emanuel Jesus "Chuy" Garcia. The Chicago Tribune endorses Rahm Emanuel.

One can quibble over Emanuel's accomplishments. And Emanuel certainly has his faults as the Tribune noted in an endorsement.

  • He failed to end Chicago's crippling dependence on borrowing.
  • He continued Daley's practice of issuing taxable bonds, stretching debt payments far into the future.
  • He pushed a $900 million borrowing plan through the City Council nearly three years after being elected.
  • He has been slow to respond to public outrage over that scandal-ridden traffic camera program.

Emanuel Jesus "Chuy" Garcia

When asked about the Chicago's pension crisis, Garcia's non-solution is even more problematic. Consider three statements made by Garcia in the Tribune's Candidate Questionnaire.

  • This is a problem we created together as a City, and it is a problem that will require everyone's participation to resolve. That said, I do not support cutting benefits for current retirees.
  • I believe in the right of collective bargaining and the important social policies that it reflects, and I would prefer to negotiate such changes with the elected union leadership.
  • I do not support a property tax rise to fund pensions, because I know too many families – and especially senior citizens -- who are already struggling to pay their existing tax bills.

Garcia also wants to put more police on the street.

Garcia's solution apparently involves magic because it maintains benefits and adds police officers without hiking taxes, at least property tax hikes. Nowhere does Garcia explain how he pays for his position.

Simply put, Garcia is in Fantasyland.

The Problem and The Solution

Even with Chicago's recent financial reforms and spending curbs, there's a $300 million hole in the 2016 budget and a $550 million balloon payment for police and fire pensions due next year. The Chicago Public Schools system faces an unfunded pension obligation of more than $9 billion.

The problem is debt and untenable pension promises.

Someone needs to step up to the plate and admit the obvious:

  1. Pension promises need to be cut.
  2. The only way to cut pension benefits in a court-approved manner is bankruptcy.

Nothing else works. Unions will fight every other attempt, just as they have done now.

Say the Word!

Bankruptcy is the word no one wants to say, but eventually bankruptcy will be thrust upon Chicago.

Detroit would have been in recovery years ago had it taken that action years ago. Instead, every mayor of Detroit fought bankruptcy for a decade or more after it was perfectly obvious that bankruptcy was in the cards.

Every delay made matters worse.

Hopefully Chicago will not suffer the same sad fate of delay after delay accompanied with crumbling infrastructure.

Pension Plan Review

For more on the sorry state of Illinois pension plans, please see ...


For a look at pension plans in general, PIMCO founder Bill Gross (now with Janus Capital) says There's Too Much Debt, Too Many Zombie Corporations, and Low Interest Rates Destroy Pension Systems.

Conclusion

Byrne has it correct. Chicago's only possible salvation is bankruptcy. Let's admit the problems and the solution before more damage is done.

The Illinois legislature needs to permit bankruptcy because that is the only conceivable solution, not just for Chicago, but for numerous Illinois cities afflicted with untenable pension plans.

Delay means more problematic tax hikes accompanied with business and personal flight.

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

Monday, March 02, 2015 8:54 PM


Bill Gross: Too Much Debt, Too Many Zombie Corporations, Low Interest Rates Destroy Pension System


In an Bloomberg Television interview Bill Gross of Janus Capital spoke with Bloomberg Television's Trish Regan about the outlook for Federal Reserve policy, the U.S. economy and his objectives at Janus Capital.

Key Quotes

  • "Not even thin gruel is being offered to our modern-day Oliver Twist investors. You have to pay to come to the dinner table and then sit there staring at an empty plate."
  • "The interest rate can't be raised substantially even over the next two to three years."
  • "The US has escaped the liquidity trap that euroland and Japan are in. But, not necessarily for all time."
  • "[Low interest rates] keeps zombie corporations alive because they can borrow at 3 and 4 percent, as opposed to the 8 or 9 percent. It destroys business models. It's destroying the pension industry and in the insurance industry."
  • "ultimately, [low interest rates] destroy the capitalistic model at the margin. Instead of investing in the real economy, [corporations] can now simply borrow at close to 0 percent and buy their own stocks, which yield 2 or 3 percent on a dividend basis and provide a return of 6 or 7 percent on an earnings to price ratio basis."



Transcript

TRISH REGAN: Well, fresh off the presses, famed bond investor Bill Gross' monthly investment outlook, where he says the reality of today is that -- and I quote, "Not even thin gruel is being offered to our modern-day Oliver Twist investors. You have to pay to come to the dinner table and then sit there staring at an empty plate."

In other words, you're paying Germany, for example, to hold your money right now. Well, what does this mean for the health of the investing world? What does it mean for the Fed? What does it mean for pension plans? What does it mean for you?

BILL GROSS: Thank you, Trish.

REGAN: If you can work Dickens into an investment letter, along with a few references to the Westminster Dog Show, my hat goes off to you.

GROSS: Here's another one. You know, back in the Depression, in the 1930s, humorous Will Rogers said that he wasn't so much concerned about the return on his money, but the return of his money. And in today's financial markets, we're, as you mentioned, $2 trillion of euroland paper trades at negative yields, some as much as minus 75 basis points, I think Will Rogers would have to be concerned about both.

A negative yield assures the investor that not only is the return on his money or her money unsatisfactory, but the return of her money will be left (INAUDIBLE) paid.

REGAN: You know, it's pretty crazy. And you've got investors, Bill, out there that are getting somewhat desperate, right, for yield, because, as you rightly point out, there's just none out there.

So theoretically, let me ask you, could that change? Should it change?

Do we anticipate that Yellen will raise rates in June?

GROSS: Well, I think that's part of the problem, although it's one that can't be easily diagnosed in terms of historical models. And to the extent that the interest rates at -- at zero bound in the United States, you know, promote higher stock prices, higher bond prices, you know, some of that trickles down to the real economy and, you know, promotes growth.

But to be fair, not much has.

You know, what has been promoted has been, you know, potential bubbles in stock markets and in bond markets. And I think the Fed is willing, at this point, to at least acknowledge that by raising interest rates 25 basis points in June.

I also think -- and this is important, Trish, that the interest rate can't be raised substantially even over the next two to three years. I mean the market is anticipating the -- a 2 percent Fed funds rate in 2018, late 2018. And I -- I think the reason that they continue is that the U.S. economy and the global economy to which the U.S. dollar and the U.S. interest rate basically serves, is -- is too levered, too highly levered. There's too much debt and ultimately 2 percent is probably the top in terms of this Fed cycle.

REGAN: Let me ask you, though, how, Bill, does Yellen and company get off of the zero interest rate policy at a time when the U.S. dollar is showing so much strength?

You talk about, you know, the currency war, effectively, that we're seeing right now, but nobody wants to call it that.

But how can the Fed move when the dollar has already rallied as much as it has against other currencies?

GROSS: Well, I think that's a really good point and -- and I agree with it. Obviously, I put that it my investment outlook.

You know what, a stronger dollar does promote, you know, some negatives. It promotes not only lower exports and -- and lower growth in terms of manufacturing, but it promotes a -- an infusion of deflation as opposed to inflation, which is exactly opposite the -- what the Fed wants to do.

Today's number, Trish, the Personal Consumption Index, you know, on a year-over-year basis, was at 1.1 percent and going lower. And their target is 2 percent.

So ultimately, that's, again, one of the reasons why, you know, if they get off the dime in June or if they get off the dime in September, that they basically have to go very slowly, because ultimately, a stronger dollar promotes lower growth in the United States as opposed to higher growth.

REGAN: You mentioned this lack of inflation, 1.1 percent versus what they would like to see, 2 percent.

Do we need to be worried about deflation?

Clearly, it's a concern overseas.

Is that a reality that we could be facing?

GROSS: Well, I don't think so in the United States. I mean for the most part, our -- our inflation indexes, outside of oil and outside of food prices, you know, basically reflect health care expenses and wages in the United States, which are going up by 2 percent themselves.

So the United States, it appears, has escaped this, you know, this trap, this liquidity trap that euroland and Japan are in. But, you know, not necessarily for all time.

And so do we have to be worried about it now?

No. But I think if the Fed truly wants to get to a 2 percent inflation rate, which, by the way, is the reason why they need to get there, is that in an ensuing recession or a slowdown, they need some room to lower rates.

And so, you know, if the Fed eventually gets to 2 percent inflation, then that's probably the sweet spot for Janet Yellen and the Fed.

REGAN: You say eventually 2 percent.

I mean how long is it going to take for that to unfold?

Do you think these are going to be very slow moves, Bill?

GROSS: I do. You know, I basically think, you know, 50 basis points a year. Right now, the forward market, as I mentioned, is anticipating a 2 percent Fed funds rate in late 2018.So that's three and a half years.

Whether or not that's the -- the proper path, the proper -- the slope and in terms of a -- a forward yield curve, no one really knows.But it gets back to, you know, what I've talked about in April of last year, you know, the new neutral rate, the new policy rate, which ultimately, in my view, has to be much lower than historically because of high leverage and because of demographic influences that basically promote lower structural growth.

REGAN: You know, Bill, Janet Yellen has indicated that she's going to stay patient. But here we are, what, six years into (INAUDIBLE). We've had multiple rounds of QE. And all we've got is this anemic growth.

In your view, has the Fed been too patient?

I mean do you worry at all that its policies have actually had the unintended consequence of causing people and companies to delay purchases because they know money is going to be cheap for the foreseeable future?

GROSS: Yes, I -- I think they went too far, Trish, and that's, you know, a -- a subjective assessment of history, I guess. But a zero percent interest rate, yes, induces positives in terms of higher bond prices and stock prices, but also some negatives.

You know, it keeps zombie corporations alive because they can borrow at 3 and 4 percent, as opposed to the 8 or 9 percent. It destroys business models. It's destroying the pension industry and in the insurance industry because, you know, basically, their liabilities can't be -- they can't be provided for by very low interest rates.

And ultimately, I think it destroys, you know, the capitalistic model at the margin. You talk about stocks and cheap money, they're basically corporations, instead of investing in the real economy, can now simply borrow at, you know, close to 0 percent and buy their own stocks, which yield 2 or 3 percent on a dividend basis and, you know, provide a return of 6 or 7 percent on an earnings to price ratio basis.

So, you know, there are a lot of negatives in terms of 0 bound interest rates. And I think one of the reasons why the Fed will move is to -- to sort of gradually move away from those negatives.

REGAN: Yes, because it's given birth to all this financial engineering, but you wonder these days whether investors are really valuing assets for what they're worth.

Let me -- let me ask you, with that in mind, do you ever worry that the Fed is just, perhaps, too forthcoming in its information, as well?

I mean they seem to want to tell us everything and anything that they're going to do.

And I just wonder whether investors have become overly reliant on that telegraphing from the Fed.

I mean do you ever long for the days when you actually had to wait and check the markets to see what the Fed had done, back before it was as transparent as it is now?

GROSS: Well, I don't long for that day, because it was -- it was very uncertain and you waited on a Thursday afternoon to -- or morning to see whether or not the Fed was, you know, changing its interest rates on a weekly basis.

But I think the Fed is moving away a little bit from this -- from this certainty, from Draghi's whatever it takes, from, you know, basically alerting the market as to, you know, how high interest rates are going to go and what level they should be at.

So, yes, I think that's a reflection of Stanley Fischer. He basically wants to move away from the certainty model.

We'll see a little of that movement. But I'd like at least to know a little bit about what the Fed is thinking in terms of, you know, new neutral interest rates, where they think, you know, the neutral interest rate should be relative to the Taylor Rule, which they used prior to the recession, to the Great Recession in 2008 and '09.

REGAN: You know, Bill, let me ask you, this is the first time you and I have talked on air here since you made your move to Janus. You were a founder of PIMCO. Your name was synonymous with that firm.

What's it like being some place new after having spent your career -- your entire career -- elsewhere (INAUDIBLE)?

GROSS: Well, it's certainly different. You know, PIMCO had 2,500 people. Janus Newport, you know, basically has seven or eight, although Janus Denver a much larger location and a much larger corporation, you know, has thousands of people, too.

And it's a little bit different. There's more flexibility, basically, in what I'm doing, the -- the unconstrained funds that are run on a separate account basis and the mutual funds. There's a lot more flexibility. There's the ability to move as opposed to not move so much, as was the case in PIMCO.

So, you know, a little bit smaller, certainly, but a little bit more flexible and I enjoy that.

REGAN: You know, Bill, a lot of people would have said, look, I don't need to do this, I've got plenty of money, I've had plenty of success.

Why keep going?

Why get up and go to the office every day and do what you do at this point?

GROSS:Well, part of it, you know, my wife said she married me for better or worse, but not for lunch. And so...
(LAUGHTER) so lunchtime is spent in Newport Beach. But, also, you know, I wanted to show clients and to show the world, to the extent that they're interested, you know, that I can continue to produce a track record like I did at PIMCO.

You know, I won't have as much time. I won't have five to 10 to 15 years of leeway like I had at PIMCO in terms of proving that. But certainly for the next two, three or four years. You know, I'm a very competitive person and I like to post numbers that are better than the market and better than the competition. So it's a combination of both of those.

REGAN: Well, my congrats to you. Bill Gross, great to see you. Hope to see you again soon.

GROSS: Thank you, Trish.

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

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