Obama to blame Greece for the American Economy? Kathimerini reports;

Having seen the caliber of some of the Republican Party’s presidential candidates, it’s hard not to want with every fiber in your body for Barack Obama to succeed during his first term in the White House. But this week, thanks to the comments he made about Greece after meeting German Chancellor Angela Merkel, it was difficult not to feel respect for the American leader slipping away.

The headlines after the two politicians held their news conference in Washington revolved around Obama and Merkel’s warning that the Greek debt crisis could bring the world economy to its knees if it’s not tackled properly. «America’s economic growth depends on a sensible resolution of this issue,” said Obama. “It would be disastrous for us to see an uncontrolled spiral and default in Europe because that could trigger a whole range of other events.”

With no attempt by Merkel to correct him, Obama had suggested that by some bizarre twist of fate, Greece, that speck on the global economic map, could undermine the world’s most powerful economies. One has to ask: Who do they think they’re kidding?

If we just regain our senses for a moment, what we witnessed on Tuesday was the leader of the world’s most potent nation, one with a $14.6-trillion economy, and the head of Europe’s economic powerhouse, with a GDP of $3.3 trillion, claiming that Greece, which struggled to turnover $310 billion last year, posed a threat to them. To say that this premise seems absurd is an understatement.

o put things into perspective, the IMF calculated that banks lost just over $4 trillion during the financial crisis (the majority from US loans and assets) and that another $1.1 trillion was spent to remedy its effects. It is estimated that 8 million jobs in the US alone were lost as a result of the financial crisis. That’s what an “uncontrolled spiral” really looks like.

Furthermore, the fact that the US has done little if anything to address the root causes of the crisis, such as a largely unregulated financial sector and credit agencies that are less than transparent, makes it seem the height of hypocrisy for the leader of that country to express concern about “a whole range of other events” that could be triggered by a Greek default. It is the type of scaremongering and sensationalism that we have come to expect from his opponents. What a shame, we hoped for better.

http://www.ekathimerini.com/4dcgi/_w_articles_wsite3_3_11/06/2011_394417

China’s new bank loans for May showed a slowdown from April. Although the country is experiencing some slowdown in credit, China will try to manage the credit expansion in a orderly fashion.

The government has faced serious challenges in 2011 amid its attempts to curtail credit expansion after witnessing the inflationary side effects of the loose credit and monetary policies it enacted to avoid recession in 2008-2009. In China, it is the volume of loans rather than the price that matters because the government authorizes lending by quantity rather than quality and makes credit available at below-market rates for corporate borrowers. Even after a year of increased restrictions on banks’ required reserves and interest rate hikes, China’s depositors face negative real interest rates on their deposits, while corporations still enjoy low interest rates on the loans they receive. While the government shows signs of continuing to tighten control over monetary growth — facing an impending, politically sensitive inflation reading that could exceed 5.3 percent for May and even hit 6 percent in June — it has not shown remarkable strength in tightening the volume of new credit.

Specifically, May’s new lending numbers are lower than those from May 2009 or 2010 but are very similar to those from several months in the second half of 2010. Therefore, they do not reveal any new determination by the government to forcefully slow lending. Based on figures from the first five months of the year, China’s bank lending is still set to see strong growth in 2011 — it grew 17.6 percent in the first quarter, and if the pace of the first five months continues, it will reach nearly 9 trillion yuan in new loans by the end of the year. More importantly, while the government has attempted to slow the increase in new loans, the banks and companies have found new ways to expand credit through bond purchases and other financial instruments. In the first quarter of 2011, bank lending, once the largest and telltale indicator, only made up about 57 percent of total new credit expansion.

Inflation remains the top political concern for Chinese authorities. Specifically, high prices for food, fuel and housing are straining the society’s numerous low-income earners, adding to other social factors that could spur new bouts of unrest.

But China cannot curtail credit too harshly for fear of slowing down the economy. In recent months, new threats to growth have emerged, primarily in the form of high commodity prices, domestic energy shortages, bad weather and weak foreign demand. These factors have combined to pose new challenges to heavy industries that rely on commodities imports and small- and medium-sized exporters that are seeing costs rise sharply. The worker riots in Chaozhou, Guangdong province, that began June 6 have called attention back to unpaid wages, a widespread problem when foreign demand dropped in late 2008 (especially in the manufacturing hubs of the Pearl River Delta). The Chaozhou incident might reflect rising difficulties for small manufacturers amid higher wage costs, or even foreign export orders dropping, for which some new evidence has appeared in recent weeks. But these firms are precisely the ones that suffer from even a marginal tightening of credit because they lack good political connections to access loans if availability is reduced. If the risk of bankruptcies and unemployment rises in the manufacturing regions, China’s leaders could back away from even moderate attempts at tightening policy.

Read more: New Lending, New Risks in China | STRATFOR

Remember last year, when the famous Norwegian oil fund was loading up on Greek junk. The same guys are now taking a big stop. Despite the fact, their time horizon being indefinite, according to themselves, they are now taking the stop on European exposure. Indefinite is a year, only, as the old saying says, you are as good as your last trade. Today marks a hat trick, we have Roubini screaming sell after the market has come off for six weeks, S&P downgrading Greece (short gamma agency) and lastly Norway selling out Greek exposure. Time to pick up some cheap stuff for a bounce up. FT reports;

Norway’s $570bn sovereign wealth fund is “very positive” about the long-term outlook for Europe despite deciding to shift more of its assets into emerging markets.

Yngve Slyngstad, chief executive of Norges Bank Investment Management, which has responsibility for investing Norway’s North Sea oil riches, said the eurozone debt crisis had created a catalyst for economic reform.

“The changes going on in Europe at the moment may actually be positive for the private sector,” he told the Financial Times in a video interview, arguing that companies stand to benefit from “restructuring [and] maybe some narrowing of… the public sector”.

Norway’s so-called oil fund is one of the world’s biggest sovereign wealth funds and Europe’s biggest equity investor, owning about 2 per cent of all European stocks.

It recently announced plans gradually to reduce exposure to Europe, which currently accounts for half its equity holdings, as part of efforts to increase diversification but Mr Slyngstad said the fund remained bullish about the region in the long-run.

However, he acknowledged the “enormous challenge” facing eurozone policymakers and voiced concern over the potential repercussions of a possible restructuring of Greek debts. “It is difficult to see all the secondary effects of such a move and therefore I think there will be a lot of caution before any such decisions will be taken,” he said.

The fund has sharply cut its exposure to the debt of crisis-hit Greece, Ireland and Portugal over the past two years but Mr Slyngstad said it had been buying bonds from other European countries, including Spain, resulting in an increased overall holding of European debt.

Norway’s $570bn sovereign wealth fund is “very positive” about the long-term outlook for Europe despite deciding to shift more of its assets into emerging markets.

Yngve Slyngstad, chief executive of Norges Bank Investment Management, which has responsibility for investing Norway’s North Sea oil riches, said the eurozone debt crisis had created a catalyst for economic reform.

“The changes going on in Europe at the moment may actually be positive for the private sector,” he told the Financial Times in a video interview, arguing that companies stand to benefit from “restructuring [and] maybe some narrowing of… the public sector”.

Norway’s so-called oil fund is one of the world’s biggest sovereign wealth funds and Europe’s biggest equity investor, owning about 2 per cent of all European stocks.

It recently announced plans gradually to reduce exposure to Europe, which currently accounts for half its equity holdings, as part of efforts to increase diversification but Mr Slyngstad said the fund remained bullish about the region in the long-run.

However, he acknowledged the “enormous challenge” facing eurozone policymakers and voiced concern over the potential repercussions of a possible restructuring of Greek debts. “It is difficult to see all the secondary effects of such a move and therefore I think there will be a lot of caution before any such decisions will be taken,” he said.

The fund has sharply cut its exposure to the debt of crisis-hit Greece, Ireland and Portugal over the past two years but Mr Slyngstad said it had been buying bonds from other European countries, including Spain, resulting in an increased overall holding of European debt.

Rating Agency trading short gamma, again. S&P cut Greece rating earlier today. They probably promted the last longs to get washed out, before equities start the bounce up. Rating agencies have lately been chasing their own tail, and will do so this time again. Let’s see how many hours before Greece starts accusing Standard and Poors. Ratinale behind the rating cut;

On June 13, 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit ratings on Greece to ‘CCC’ from ‘B’. The short-term rating was affirmed at ‘C’. The ratings were removed from CreditWatch. The outlook on the long-term ratings is negative.

Standard & Poor’s ’4′ recovery rating for Greece remains unchanged–indicating an estimated 30%-50% recovery upon default–and its ‘AAA’ transfer and convertibility assessment for Greece, which applies to all members of the eurozone, also remains unchanged.

Rationale

The downgrade reflects our view that there is a significantly higher likelihood of one or more defaults, as defined by our criteria relating to
full and timely payment, linked to efforts by official creditors to close an emerging financing gap in Greece. This financing gap has emerged in part because Greece’s access to market financing in 2012 and possibly beyond, as envisaged in the current official EU/IMF program, is unlikely to materialize.

This lack of access, in our view, creates a gap between committed official financing and Greece’s projected financing requirements. Greece has heavy near-term financing requirements, with approximately €95 billion of Greek government debt maturing between now and the end of 2013 along with an additional €58 billion maturing in 2014.

Moreover, the downgrade reflects our view that implementation risks associated with the EU/IMF program are rising, given the increasingly complicated political environment in Greece coupled with its current difficult economic climate.

According to thetrader, nothing new. Let’s see if market can close above 1280 today, just to see all the short gamma buy everything back again.

A lot of Academics out there during the recent couple of days. Lawrence Summers, now also back to academics, is now on Reuters discussing the Jobs market. Admitting the total failure of QE2 creating jobs is not in the article. Great they at least saved us from the Great Depression, at least the one percent holding the majority of US assets.

Even with the massive 2008-2009 policy effort that successfully prevented financial collapse and Depression, the United States is now half way to a lost economic decade. Over the last 5 years, from the first quarter of 2006 to the first quarter of 2011, the U.S. economy’s growth rate averaged less than 1 percent a year, about like Japan during the period when its bubble burst. At the same time the fraction of the population working has fallen from 63.1 to 58.4 percent, reducing the number of those with jobs by more than 10 million. The fraction of the population working remains almost exactly at its recession trough and recent reports suggest that growth is slowing.

Beyond the lack of jobs and incomes, an economy producing below its potential for a prolonged interval sacrifices its future. To an extent that once would have been unimaginable, new college graduates are this month moving back in with their parents because they have no job or means of support. Strapped school districts across the country are cutting out advanced courses in math and science and in some cases only opening school 4 days a week. And reduced incomes and tax collections at present and in the future are the most important cause of unacceptable budget deficits at present and in the future.

Bernanke on Japan (1999). We see how obsessed Bernanke, the self proclaimed scholar of the Great Depression is, with not letting USA getting there again. Some good historic reading of Bernanke’s view on Japan, that could partially be applied to the US Economy.

Some perspective is in order. Although, as we will see, there are some analogies between the policy mistakes made by Japanese officials in recent years and the mistakes made by policymakers around the world during the 1930s, Japan’s current economic situation is not

A major source of the difference in my calculation and the IMF calculation is that the IMF bases its potential output estimate on the actual current value of the capital stock. Relatively low investment rates throughout the 1990s have resulted in a lower Japanese capital stock than would have been the case if growth and investment had followed more normal patterns. I thank Paula DeMasi of the IMF for providing their data.

1remotely comparable to that of the United States, Germany, and numerous other countries during the Great Depression. The Japanese standard of living remains among the highest in the world, and poverty and open unemployment remain low. These facts, and Japan’s basic economic strengths—-including a high saving rate, a skilled labor force, and an advanced manufacturing sector—-should not be overlooked. Still, Japan also faces important long-term economic problems, such as the aging of its workforce, and the failure of the economy to achieve its full potential during the 1990s may in some sense be more costly to the country in the future than it is today. Japan’s weakness has also imposed economic costs on its less affluent neighbors, who look to Japan both as a market for their goods and as a source of investment.

Full report,

bernanke-japan monetary policy, 1999

Some Geopolitical situations to keep track of, and below link to full Schedule of important political events. Stratfor reports;

1. Syria: While there is little indication that opposition in Syria is close to endangering the regime, a major split within the military could be significant. Reports and STRATFOR sources have suggested an increased level of desertion and possible defection, but the true magnitude of those defections is unclear.

2. Russia/Germany: Russian Prime Minister Vladimir Putin and German Chancellor Angela Merkel are rumored to be privately meeting on the sidelines of the 100th Session of International Labor Conference in Geneva on June 14 to talk about the proposed Russia-Europe Foreign Policy and Security Council. The council is still vague in its construction and purpose, but Russian-German cooperation and Russian efforts to divide the Europeans are a key dynamic.

3. Kazakhstan: The heads of state of the Shanghai Cooperative Organization (SCO) — Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan — will meet in Astana on June 15. Militancy has long been a problem for the group, particularly in the heart of central Asia, but problems appear to be growing and becoming more complex in Kyrgyzstan, Tajikistan and even Uzbekistan. With the drawdown of U.S. and allied forces in the war in Afghanistan nearing, Central Asian countries are increasingly nervous about the post-withdrawal landscape.

4. China: The SCO meeting is only one stop on a much more extensive trip around the former Soviet Union for Chinese President Hu Jintao. Hu’s top agenda item in both Kazakhstan and Russia is energy. Potentially substantial deals could significantly change the energy outlook for China and alter the balance of Russian and Kazakh energy relations with Europe.

5. China: China’s economic growth rate has shown slight signs of slowing in recent months. New statistics for May will be released this week, revealing the most recent information on where the slowdown is occurring as well as its intensity. Chinese authorities have struggled all year to control inflationary pressures and rapid growth, but now they are starting to confront the potential downside to those efforts. Is China facing a moderate slowdown, or one that could prove sharp and rocky? How will they adjust policy to deal with simultaneous concerns about inflation and growth?
Read more: Intelligence Guidance: Week of June 12, 2011 | STRATFOR

Thetrader has been arguing for a correction during the last two months. Many indices have come off substantially from their highs. We are now approaching some good support levels, and despite our bearish bias, we believe the market will hold here, and we get another leg up, just to confuse the bears once again. We’d also like to bring your attention to the fact, many sentiment indicators, are becoming overly bearish. Below charts that matter, all indices reacheing support levels. Stoxx, Dax, Dow, SPX and Nasdaq.

Great timing from Roubini again. On all the mini corrections over the past two years, Roubini has been banging his messages right when markets find some support. Although many of his arguments are valid, and we also believe in the market and economy contracting further, his message out after six weeks of straight declines, probably marks the bottom short term. Bloomberg reports;

A “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy, New York University professor Nouriel Roubini said.

There’s a one-in-three chance the factors will combine to stunt growth from 2013, Roubini said in a June 11 interview in Singapore. Other possible outcomes are “anemic but OK” global growth or an “optimistic” scenario in which the expansion improves.

“There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”

Elevated U.S. unemployment, a surge in oil and food prices, rising interest rates in Asia and trade disruption from Japan’s record earthquake threaten to sap the world economy. Stocks worldwide have lost more than $3.3 trillion since the beginning of May, and Roubini said financial markets by the middle of next year could start worrying about a convergence of risks in 2013.

The MSCI AC World Index has tumbled 4.9 percent this month on concern recent data, including an increase in the U.S. unemployment rate to 9.1 percent in May, signal the global economy is losing steam. U.S. Treasuries rose last week, pushing two-year note yields down for a ninth week in the longest stretch of decreases since February 2008, on bets the Federal Reserve will maintain monetary stimulus.

http://www.bloomberg.com/news/2011-06-11/china-economy-at-risk-of-hard-landing-after-2013-nouriel-roubini-says.html

A couple of important dates coming up in the Greek Drama. A failure to reach an agreement in Greece, could spark new panic, and a new Lehman like situation. NYT reports;

Bond traders and officials at theEuropean Central Bank have been unified in their warnings that a restructuring of Greece’s debt would set off an investor panic similar to the one that followed the bankruptcy of Lehman Brothers.

Others, however, have argued that Greece’s debt of 330 billion euros, or $473 billion, while too large for the country to bear, is small enough to allow banks and other institutions to take a loss without bringing the world financial system to its knees.

But the comparisons between Greece and Lehman grew more frequent last week as global markets reeled, spurred in part by the view that Germany’s insistence that private investors participate in a second rescue package for Athens would overcome the objections of the European Central Bank.

“It is a valid concern,” said David Riley, head of sovereign ratings at Fitch. “The Rubicon would be crossed — we would have a sovereign default event and that can be quite a shock, not just for the peripheral countries but for Spain and beyond.”

The thinking goes like this: though banks and other investors have done much to pare their Greek holdings in the last year, if they are forced to take a loss, and the ratings agencies declare Greece in default, investors would start selling in a panic. And they would not sell just the bonds of countries struggling with debt — Portugal, Ireland, Spain and Italy. In a hasty retreat into cash, traders would unload more liquid assets as well, everything from high-grade corporate bonds to American and emerging market equities — as occurred in 2008 after Lehman failed.

To be sure, much has to be wrong for the European debt crisis to approximate what happened after Lehman failed in 2008. Not only did banks, hedge funds and insurance companies immediately seize up, but the effect on the broader global economy was also striking as trade flows nearly ground to a halt.

Analysts point out that the global financial system has survived sovereign defaults in the past, including Russia’s in 1998 and Argentina’s in 2001.

http://www.nytimes.com/2011/06/13/business/global/13euro.html?_r=1