0 Spain's Prime Minister Begs for European Fiscal NannyZone and Banking Union; Obama Seeks End to "Crisis Cloud"; Merkel Immediately Rejects Proposal; Cloud? What Cloud?

On Saturday, Spain's prime minister Mariano Rajoy Asked For a Eurozone Fiscal Authority, in effect the "Fiscal Nannyzone" that I have spoken about on numerous occasions.

Spain on Saturday proposed the set up a new fiscal authority in the euro zone which would control and harmonize national budgets and manage the European debts.

Prime Minister Mariano Rajoy said the authority was the answer to the European debt crisis and would go a long way in alleviating Spain's woes as it would send a clear signal to investors that the single currency is an irreversible project.

"The European Union needs to reinforce its architecture," Rajoy said at an event in Sitges, in the north-eastern province of Catalonia. "This entails moving towards more integration, transferring more sovereignty, especially in the fiscal field.

"And this means a compromise to create a new European fiscal authority which would guide the fiscal policy in the euro zone, harmonize the fiscal policy of member states and enable a centralized control of (public) finances," he added.

He also said the authority would be in charge of managing European debts and should be constituted by countries of the euro zone meeting strict conditions.

Obama Seeks End to "Crisis Cloud"

Bloomberg reports Merkel Rejects Debt Sharing as Obama Urges End to Crisis Cloud

German Chancellor Angela Merkel hardened her opposition to joint debt sharing in the euro region as President Barack Obama singled out Europe’s leaders for not doing enough to stop the financial crisis.

With Europe’s debt crisis cited last week for canceled IPOs, weaker-than-expected Chinese manufacturing figures and a rise in the U.S. jobless rate, Merkel rejected joint debt issuance in the 17-nation euro area as a solution, saying “under no circumstances” would she agree to Germany-backed euro bonds.

Now, some “come along and ask for euro bonds, saying all we need are equal interest rates and everything will turn out all right,” Merkel said in a speech to members of her Christian Democratic Union in Berlin today. Instead, what’s needed is an economic overhaul to tackle the lack of competitiveness in Europe, she said.

European ‘Cloud’

Obama, speaking at a Chicago fundraiser yesterday as he bids for re-election in November, said that a report showing the slowest month of U.S. employment growth in a year was in large part “attributable to Europe and the cloud that’s coming over from the Atlantic.” The “whole world economy has been weakened by it,” he said.

Cloud? What Cloud?

Clouds are imaginary. The markets have cast a clear sunshine vote that the euro is a failure.

Since the euro itself is the problem, the only clouds anyone can see stem from nannyzone proponents insisting at any and all costs to hold this untenable structure together.

Recall that when the economies of Spain and Ireland were artificially booming fueled by two of the biggest property bubbles in the entire world, the IMF, eurocrats in Brussels, and misguided economic fools everywhere were cheering the growth in those countries.


Contagion-Causing Policies

Nannycrats did not see this coming last time and they will not see the mess coming the next time either. Heck, they cannot even see the mess the LTRO has made now. Nor can they see just how counterproductive and contagion-causing their own policies have been.

Somehow these nannycrats are supposed to prevent messes?! Please be serious.

The only thing nannycrats will do, were the idea ever to gain traction, would be to sink all of Europe into a permanent mess.

Nannycrat Flashback

For my original post on the Nannyzone written June 2, 2011, precisely one year ago today, please see Trichet Calls for Creation of European "Nanny-State" and Fiscal "Nanny-Zone"

Even if such a proposal were possible, it would require a whole new treaty, and a constitutional vote in Germany, Ireland, and other countries.  

Fortunately, Rajoy's proposal is dead-on-arrival.

Thus, it is time to focus on reality, instead of imaginary clouds. The reality is the eurozone is going to bust up and nannycrats better get used to the idea or the markets will impose that break-up in their own messy way.

Addendum on the Nannycrats and the Nannyzone

Reader Stan says ..

Rajoy says he wants this "Nannyzone", but would he actually obey the dictates of the Nannycrats if they ordered Spain to live within it's means? I doubt it. He wants the Nannycrats to tell Germans they must subsidize the PIIGS, but he wouldn't care for Nannycrats telling PIIGS to balance their budgets.

Exactly!

Mike "Mish" Shedlock
http://mishblogdotcom.blogspot.com
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0 Morgan Stanley Bonds Trade at Junk Pricing, Downgrades Coming; Will Morgan Stanley Survive? Top 5 Banks Collectively Have 45:1 Leverage

Morgan Stanley's corporate borrowing costs are already way higher than Goldman Sachs and more downgrades are likely in the works.

The Fiscal Times explains How Morgan Stanley sank to junk pricing

The bond markets are treating Morgan Stanley like a junk-rated company, and the investment bank’s higher borrowing costs could already be putting it at a disadvantage even before an expected ratings downgrade this month.

Bond rating agency Moody’s Investors Service has said it may cut Morgan Stanley by at least two notches in June, to just two or three steps above junk status. Many investors see such a cut as all but certain.

Even before any downgrade, the bank is suffering in the bond markets. Prices for Morgan Stanley’s bonds and credit derivatives have been trading at junk levels since last summer, according to Moody’s Analytics. Prices moved further into the non-investment-grade category over the past two weeks amid troubles in Greece and other Euro zone nations.

"The numbers have changed for the worse," said Otis Casey, director of credit research at Markit. "What has driven that, obviously, is Europe. The perception is – correctly or incorrectly – that Morgan Stanley is one of the U.S. banks most exposed to Europe’s problems."

Morgan Stanley’s problems were compounded by its handling of the Facebook IPO – its high price and large size, and selective disclosure of an analyst’s reduction of his forecasts for the social network’s revenue and earnings. Facebook shares ended regular trading at $27.72 on Friday, down 27 percent from their offering price of $38.

"A bank with a near-junk rating is in ‘no man’s land,’" said Edward Marrinan, credit strategist at Royal Bank of Scotland Group in Greenwich, Connecticut. "Banks rarely thrive with non- or borderline investment grade ratings."

In a May 7 securities filing, Morgan Stanley said it might have to post $7.2 billion worth of additional collateral and termination payments in the event of a downgrade to Baa2, the second lowest investment-grade rating, up from a $6.5 billion estimate it provided three months earlier.

But bond markets are not waiting for a downgrade. On Friday, it would have cost Morgan Stanley 1.20 percentage points more to raise five-year debt than its chief rival, Goldman Sachs Group Inc. The bank would even have to pay a little more than much-smaller competitor Jefferies Group.

"The Street is pretty efficient and is really moving ahead of the ratings agencies," said Carret Asset Management’s Graybill. "It’s never good in this business to have a disadvantage against a strong competitor."

Will Morgan Stanley Survive?

My answer is the same as I said about Citigroup in 2007: Not in one piece. And in spite of shedding numerous pieces over the years, Citigroup and others still have shedding to do.

JP Morgan added fat to the fire with massive derivatives losses, bringing the Volcker Rule back in the spotlight.

Top 5 Banks Have 45 Times Leverage

Reuters reports JPMorgan case puts Volcker Rule and SIFIs back in the spotlight

The massive losses which resulted from JPMorgan Chase hedging its positions against derivatives has once again cast the spotlight on the Volcker Rule and whether systemically important financial institutions (SIFIs) are too big to fail, industry observers said. Questions have also been raised about the firm’s hedging strategy, and what constitutes hedging in the first place.

Industry officials in Asia suggested that JPMorgan’s $2 billion hedging losses might embolden regulators to strengthen the Volcker Rule, on the premise that it would be of benefit to SIFIs. The rule, named after former Federal Reserve chairman Paul Volcker, forms part of the Dodd-Frank Wall Street Reform and Consumer Protection Act and has proposed the separation of proprietary trading from commercial banking activity. Most notably, it has argued against investing in derivatives or using derivatives as a hedge on investments. The rule has, however, faced strong opposition from many of the large global financial institutions.

Top five SIFIs’ OTC derivatives exposures

A look at the 2011 fourth quarter bank trading and derivatives activities report released by the U.S. Office of the Comptroller of the Currency (OCC) showed that the top five SIFIs — Bank of America, Citibank, Goldman Sachs, HSBC and JPMorgan — collectively accounted for more than 50 percent of the $700 trillion OTC derivatives trades worldwide in total notional value. JPMorgan alone accounted for more than $70 trillion of the $700 trillion, the report said. “That [$70 trillion] represents one-tenth of the global OTC derivatives exposures. This is what I call concentration of risk and what is defined as an institution that is too big to fail,” an industry official told Thomson Reuters on condition of anonymity.

The official said he found it alarming that, when the top five banks’ assets and total exposures to derivatives activities were added up, they showed a leverage of one to 45 times. The OCC report showed that JPMorgan Chase North America has total assets of $1.8 trillion to cover $70 trillion worth of OTC derivatives exposure. JPMorgan Chase & Co has total assets of $2.26 trillion, the report also stated.

“Five to 10 years ago, a leverage of one to 10 times was considered scary but now we are talking about a leverage of one to 45 times. The questions to ask JPMorgan are: ‘Were you using these derivatives for speculation or for hedging purposes?’ and ‘Can you qualify your definition of hedging?’” he said.

If regulators get really serious about enforcing the Volcker rule, none of the top financial institutions will survive in one piece.

Actually, they will all breakup regardless. At some point the derivatives time-bomb will go off, and that will take care of matters so to speak.

Mike "Mish" Shedlock
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0 Edge of a Precipice; Doublethink Extraordinaire; Spain in Discussions With US Regarding Bank Aid; Gold Soars; Geithner to the Rescue?

George Orwell coined the term doublethink in his classic book 1984. Doublethink is the power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them.

Have you listened to the conflicted beliefs coming from Spain lately?

Conflicted Beliefs

1. “I don’t know if we are on the edge of a precipice, but we are in a very, very difficult situation”  said Spain's finance minister, Luis de Guindos, at a conference on Thursday night.  "Madrid needs assistance, no strings attached" says Spain’s deputy prime minister, Soraya Sáenz de Santamaria. Meanwhile, Guindos has made overtures to the ECB, EU, and now US treasury secretary Tim Geithner to help capitalize Spanish banks.
 
2. Guindos, Santamaria, and prime minister Mariano Rajoy insist Spanish banks are sound and Spain does not need any international assistance

Geithner to the Rescue?

The Financial Times reports Spain and US hold talks on bank aid

Madrid has begun openly discussing outside assistance for its troubled banking sector, with a top Spanish official saying she had raised the issue with Tim Geithner, the US Treasury secretary, who urged the EU to “find a solution” to stabilise Spain’s banks.

Soraya Sáenz de Santamaria, Spain’s deputy prime minister, said after a meeting with Mr Geithner that the two had discussed proposals to recapitalise Spanish and other European banks “without state intervention and without conditions,” a clear reference to Madrid’s wish to get EU bailout assistance without strings attached.

“It’s something in the debate, and we’ve been discussing that possibility,” Ms Santamaria said. “Treasury secretary [Geithner] has indicated that we are working in the same direction and that we must find a solution to the banks, because the problem is not just a problem in Spain as a nation, but our financial system.”

Madrid has insisted it will not need an international rescue, with the government in complete opposition to any form of externally imposed programme as seen in Greece, Portugal and Ireland.

Luis de Guindos, Spain’s finance minister, travelled to Germany earlier this week to meet his counterpart, but received no compromise from Berlin on its opposition to European funds being injected directly into troubled banks.

“I don’t know if we are on the edge of a precipice, but we are in a very, very difficult situation,” Mr De Guindos said at a conference on Thursday night.

De Guindos is globe-trotting the world, holding meetings with the EU in Brussels, with French president Hollande in France, with Germany's finance minister in Berlin, with treasury secretary Tim Geithner and the IMF in the US, asking for "assistance with no strings attached" while insisting "Spain does not need a rescue and its banks are not in trouble".

This is exactly the kind of Orwellian story that is nearly impossible to make up.

In response, gold is bucking the overall market trend as is the $HUI unhedged miner index up nearly 7% on the day as of 1:30 central while the overall market is down 3.3%.

So what can Geithner really do? Nothing is the answer. What did Geithner say? Undoubtedly something along the lines and as pertinent as "Rah! Rah! Rah! Ciscoom Bah!"

Mike "Mish" Shedlock
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0 Another Payroll Disaster: Jobs +69,000, Employment Rate +.1 to 8.2%, April Jobs Revised Lower to +77,000; Long-term Unemployment +310,000

Quick Notes About the Unemployment Rate

• US Unemployment Rate rose .1 to 8.2%
 
• In the last year, the civilian population rose by 3,653,000. Yet the labor force only rose by 1,307,000. Those not in the labor force rose by 2,345,000.
 
• This month the Civilian Labor Force rose by 642,000. Last month the Civilian Labor Force fell by 342,000.
 
• Those "Not in Labor Force" decreased by 461,000. Last month those not in the labor force increased by 522,000. If you are not in the labor force, you are not counted as unemployed.
 
• Those "Not in Labor Force" fell to 87,958,000 from last month's record high of 88,419,000.
 
• By the Household Survey, the number of people employed rose by 422,000. Last month employment fell by 169,000.
 
• By the Household Survey, over the course of the last year, the number of people employed rose by 2,479,000.
 
• Participation Rate rose .2 to 63.8%
 
• There are 8,098,000 workers who are working part-time but want full-time work, an increase of 245,000
 
• Thus of the the net of 422,000 people presumably hired by the household survey, 245,000 were for part-time jobs.
 
• Long-Term unemployment (27 weeks and over) rose by 310,000.
 
• Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

These numbers and the monthly swings in the numbers are well past the point of believability and will be revised at some point in my opinion.

Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Some of this was due to major revisions last month on account of the 2010 census finally factored in. However, most of it is simply economic weakness.

Jobs Report at a Glance

Here is an overview of today's release.

• US Payrolls +69,000 - Establishment Survey
• US Unemployment Rate rose .1 to 8.2% - Household Survey
• Average workweek for all employees on private nonfarm payrolls fell .3 hours to 34.4 hours
• The average workweek for production and nonsupervisory employees on private nonfarm payrolls was unchanged at 33.7 hours.
• Average hourly earnings for all employees in the private sector rose by 2 cents.
  

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

May 2012 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) May 2012 Employment Report.

Nonfarm payroll employment changed little in May (+69,000), and the unemployment rate was essentially unchanged at 8.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in health care, transportation and warehousing, and wholesale trade but declined in construction. Employment was little changed in most other major industries.

Unemployment Rate - Seasonally Adjusted



Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted



Employment is finally above the total just prior to the 2001 recession.

Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted



click on chart for sharper image

Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

Since a recent employment low in February 2010, nonfarm payrolls have expanded by 4.1 million jobs. Of the 8.8 million jobs lost between January 2008 and February 2010, approximately 46.7% percent have been recovered.

Statistically, 125,000+- jobs a month is enough to keep the unemployment rate flat. For a discussion, please see Question on Jobs: How Many Does It Take to Keep Up With Demographics?

The average employment gain over the last 27 months has been 139,000, barely enough (statistically speaking) to make a dent in the unemployment rate.

Yet, the civilian unemployment rate has fallen from 9.8% to 8.2%.

Current Report Jobs



Average Weekly Hours



Average weekly hours for all employees on private nonfarm payrolls declined to 34.4 hours in May. Average weekly hours for production and nonsupervisory employees remained unchanged at 33.7 hours.

Average Hourly Earnings vs. CPI



Except in the depths of the recession when the CPI plunged into negative territory, wages have not kept up with the CPI.

"Success" of QE2 and Operation Twist

• Over the past 12 months, average hourly earnings have increased by 1.7 percent. In April, the Consumer Price Index for All Urban Consumers (CPI-U) had an over-the-year increase of 2.3 percent. For about a year beginning in late 2010, price increases outpaced increases in earnings. Since the third quarter of 2011, however, the gap between the two has narrowed.
 
• Not only are wages rising slower than the CPI, there is also a concern as to how those wage gains are distributed.

BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011



Birth Death Model Adjustments For 2012



Birth-Death Note

Once again: Do NOT subtract the Birth-Death number from the reported headline number. That approach is statistically invalid.

Household Survey Data



click on chart for sharper image

In the last year, the civilian population rose by 3,653,000. Yet the labor force only rose by 1,307,000. Those not in the labor force rose by 2,345,000.

That is an amazing "achievement" to say the least, and as noted above most of this is due to economic weakness not census changes.

Decline in Labor Force Factors

1. Discouraged workers stop looking for jobs
2. People retire because they cannot find jobs
3. People go back to school hoping it will improve their chances of getting a job
4. People stay in school longer because they cannot find a job

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Part Time Status



click on chart for sharper image

There are 8,098,workers who are working part-time but want full-time work.

BLS Alternate Measures of Unemployment



click on chart for sharper image

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 8.2%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 14.8%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Duration of Unemployment



Note the huge drop in duration of unemployment in the 15-26 week category accompanied by an even larger increase in the long-term unemployed category.

Grossly Distorted Statistics

Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers.

Digging under the surface, the drop in the unemployment rate over the past two years is nothing but a statistical mirage. Things are much worse than the reported numbers indicate.

Last month the seasonally adjusted Civilian Labor Force fell by 342,000. This month it rose by 642,000.This is beyond statistical noise, to the point of pure statistical bullsheet.

Mike "Mish" Shedlock
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0 Mish on Capital Account: Spotlight on GDP, Spexit, Grexit and My Ideas on How to Breakup the Eurozone

Once again it was a pleasure to be on Capital Account with Lauren Lyster. The show is live TV with the studio in Washington D.C. with the feed to my house over Skype.

The clip below was taped. The audio connection dropped twice but most of that was edited out in the video below.

The main topics were US GDP, hyperinflation, Ireland, and a eurozone breakup. I present my ideas on how a breakup should happen.



Link if video does not play: Mike Shedlock on the Spexit, the Grexit and Running for the Eurozone Exit!

Mike "Mish" Shedlock
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