PORTUGAL - Courts Blow Planned Austerity Apart

Two Weekend Developments: Portugal and Italy 04-07-13 Marc To Market via ZH

NEED TO KNOW

• In Portugal the Constitutional Court has now struck down part of the government's austerity measures.
• The court ruled that the Portuguese government violated that constitutional requirement for an equitable distribution of austerity and prevents the discrimination of state workers over the private sector.  Four of nine austerity measures were rendered unconstitutional.  
• These include the suspension of civil servants holiday pay, the cut in pensions, the tax on unemployment and health benefits and the cuts salaries for teachers, researchers, and scholarship holders.  All told around 1.3 bln euros of savings (~1% of GDP) were disallowed and it is not just about what happens going forward, the court decision is retroactive to the start of the year and the government will have to compensate the state workers and pensioners.  
• The government expressed shock at the decision and met on Saturday.  Last year the court blocked the intended reduction in state workers' pay in 2013 and 2014 (though allowed the cuts in 2012). The new measures were devised to replace those that had been struck down last year. 

The implications can be momentous.  

1. It could jeopardize the next tranche of aid payment.  
2. It could jeopardize the government's effort to return to the capital markets.  
3. It could deter the euro group of finance ministers from agreeing to extend the maturities on Portugal's EFSF/ESM borrowings, which was possible toward the end of next week.  
4. The court ruling could embolden the opposition and strengthen trade union pressure, after the government survived a vote of confidence in the middle of last week.  

The Wall Street Journal reports that the government was considering several measures in response. The one that was capturing the imagination of many was the possibility of paying civil servant workers and pensioners one month's salary in the form of T-bills.  The press report suggests that doing so would save the government as much as 1.1 bln euros in expenses.  

Portugal Considers Paying Public Workers In Treasury Bills Instead Of Cash Zero Hedge

As reported late on Friday, just as the market closed, the Portuguese constitutional court decided that several provisions of the country's 2013 budget were not constitutional. According to the high court, cuts in wages and pensions of public employees were unfair (there's that word again) because they targeted only the public sector. The court rejected plans to cut one of the 14 paychecks that public workers usually get each year and to slash 6.4% from pensions for retirees.  This coincided with the government warning that the court's decision would put into question the country's ability to fulfill its €78 billion international bailout program, which in turn would send bondholders of Portuguese sovereign debt scrambling for the exits as suddenly the country may find itself in the ECB's "dunce" corner, with Draghi preparing to pull a "Berlusconi" on a government which can't even whip its judicial branch in line. However, of more immediate concern is how will the government now plug a hole of up to €1.3 billion in its €5.3 billion 2013 budget. A solution has, luckily, presented itself: bypass the unconstitutional provisions by paying government workers not in cash, but in government bills!

From the WSJ:

The Portuguese government is considering a plan to pay public workers and pensioners one month of their salary in treasury bills rather than cash after a high court ruled out wage cuts, a person familiar with the situation said Sunday.

"This is one of the ideas being considered," the person said.

By paying one month of salary in T-bills to public workers and pensioners, the government would save an estimated €1.1 billion in expenses, narrowing the budget gap significantly.

Incidentally, this plan makes perfect sense: with every central bank openly monetizing its debt, it has effectively made debt and cash equivalent.

Now if only Portuguese public workers had access to the same shadow transformation pathways and government bond repo collateralization opportunities afforded to the big banks, then every bill thus obtained would be able to serve as a source of nearly infinite rehypothecation potential, and thus, a DIY fractional reserve banking system provided to every individual.

Coming next: the full convertibility of Spanish Spiderman towels backed by the full faith and credit of the Rajoy kickback scandal, and fully convertible into chorizo.

All joking aside, the fact that this absurd option is even being contemplated shows just how deep into the rabbit hole event horizon the modern completely insolvent financial system has traversed. 

PUBLIC POLICY - Misdirected Policy Leads to Economic Stagnation

NEED TO KNOW

• There are innumerable factors responsible for the decline of the US. Only three important ones will convey why the economy is dying:

  1. The rule of law and property rights are under attack.
  2. Obamacare has raised costs
  3. Government policies have made the dole more lucrative than worK

• As government grows the private sector shrinks. As the private sector shrinks there are fewer goods and services produced (government produces no goods and few services).
• I believe it was Dick Armey who described this situation with the wagon analogy: there are more people riding in the wagon and fewer pulling the wagon. As the wagon becomes heavier, the remaining pullers must work harder to move it.
• That is what is happening in this country. If it is not reversed, the economy will stagnate and eventually implode.
• 110 million privately employed workers; 88 million welfare recipients and government workers and rising rapidly.
• for now, just stick head in sand, and pretend all is good. Self-deception is now the only thing left for the entire insolvent entitlement-addicted world.

FALSE ECONOMIC DATA - The Archilles Heels of the Deception

NEED TO KNOW

• CHINA: Chinese data manipulation has its Achilles heel in the form of monthly electricity consumption (and to a lesser extent, production) updates.
• US: US has its Achilles heel in the form of weekly updates from the Energy Information Administration, whose data on barrels of US product supplied of both total petroleum products and just gasoline are as indicative of the true state of the energy-hungry beating heart of the US economy as any other data set, and is likely a far more accurate representation of what is really going on between the lines.
• on a blended 52-week average basis, the total product supplied of motor gasoline is back to 2003 levels (black line on chart below).
• the total product supplied category, which includes gasoline and all other product such as heating oil, propane, and kerosene. As the chart below shows, the US economy, whose GDP we are led to believe has never been higher, now has the same total consumption of all petroleum products (red line) as it did... back in 1997!

Source: Weekly US Product of Finished Motor Gasoline (EIA), and Total Petroleum Product (EIA).

The same disturbing story is revealed when looking at various other EIA charts of sales, and thus demand, such as this one showing that 52 week average sales and deliveries of gasoline by prime supplier in the US has also tumbled to levels last seen in the late 90's.

Source: Total Gasoline All Sales/Deliveries by Prime Supplier (EIA)

But maybe it is just the usage of more efficient modes of transportation, and a higher MPG as more Americans shift to electric cars and some such. Sure, maybe. Of course, that would not explain why the total miles driven has hardly budged for the last decade, and is far off the all time high recorded when the economy was indeed humming on all fours, if moments before it imploded in 2007...

Source: Moving 12-Month Total Vehicle Miles Traveled (St. Louis Fed FRED)

... but the biggest question we have is just how did the biggest boost in energy and engine efficiency occurred at two key junctions: Just after the Lehman Failure, and just after the US downgrade and the first debt ceiling crisis, when the total sales of gasoline by US retailers literally went off the charts, and which data series is now languishing at levels not seen since the 1970s (unfortunately we can only estimate: not even the EIA's data set goes back that far).

Source: US Total Gasoline Retail Sales by Refiners (EIA)

Perhaps, just perhaps, Occam's razor applies in this situation as well, and the collapse in energy demand in the US has little to do with MPG efficiency, higher productivity, and throughput mysteriously achieved just when the entire economy was imploding in the months after the Lehman failure, and despite the re-emerging proliferation of cheap Fed debt funded SUVs and small trucks (discussed here), and everything to do with the US consumer being slowly but surely tapped out?

Of course, if that is the case, than the US economy is far, far weaker than even we could have surmised, although it certainly would explain the desperation with which the Fed is doing everything in its power to preserve the levitation of the S&P, i.e., the confidence that all is well despite all signs to the contrary. Because should the market finally be allowed to reflect the underlying economy - not the administration represented economy, but the real one - then everything that has transpired in the past five years will be child's play compared to what's coming.

GLOBAL INDICATORS - Macro Surprises Tell the Story

US Macro Data Plunges Most In 10 Months 04-05-13 Zero Hedge

The last two weeks have not been pretty for the 'it's different this time' crowd. Day after day has brought miss after miss in macro-economic data for the US; from PMIs to NFPs, no matter how hard you try, there is not even enough for an 'anecdotal' strategist to pin his BTFD thesis on. Quantitatively, the US macro surprise index has seen its biggest 10-day drop in 10 months, completely reversing all the 'seasonally-adjusted' difference from the 2011 'Deja-Vu' market and macro behavior. So with the first pillar of bullishness (macro data is 'supportive'), it is up to earnings (but but but profitability is at highs) to hold up the market - good luck with that.

Biggest 2-week drop in macro data in 10 months...

is reverting all the 'seasonally adjusted' green shoots that made this time different from last year...

and once again, just for fun, someone explain how the market is not solely dependent upon the Fed for this to occur?

Charts: Bloomberg

CHINA FURIOUS - Calls It Japanese Monetary Blackmail

"Livid" Top Chinese Economists Call BOJ Decision "Monetary Blackmail", Demand "Currency War" Retaliation 04-08-13- Zero Hedge

The Chinese Central Bank has so far stoically endured the monthly injection of $85 billion in boiling hot money for the past seven months, lovingly delivered by the inhabitants of the Marriner Eccles building, even if it meant a proportionate hawkish response which has pushed the Shanghai Composite red for the year, and having to deal with a property market that is on the verge of another inflationary blow off top. But while the PBOC will grudgingly take this kind of monetary abuse from Bernanke, now that it has to deal with another de novo created $70+ billion in monthly central bank liquidity (poetically called Carry-O-QE by Deutsche's Jim Reid), this time coming from that loathed neighbor and one time invader across the East China Sea, China won't take it any more. As the SCMP reports, "Many of China's top economists are livid at what they view as an effective currency devaluation by Japan and are calling on the People's Bank of China to retaliate by weakening the yuan to defend itself in what they see as a new currency war." 

Of course, calling on the PBOC to "do something about it" is one thing, and certainly China whose GDP is still extremely reliant on net exports for economic growth would like nothing more than to crush the CNY, boost its exports and hurt Japan in the process. However, if it does that, it will merely accelerate already rampant home price inflation, which in the aftermath of the recent chicken culling birdflu outbreak and what is already a scracity of pork meat after last year's corn drought, will then spread to food prices and lead to mass social instability (something Japan, and its docile, irradiated population apparently has little to worry about).

More from South China Morning Post:

These economists, including Tsinghua University professor Li Daokui and ANZ Bank's Liu Ligang, see Japan's plan to double its monetary base within two years as "blackmail" and have criticised the Japanese central bank's decision to open the liquidity floodgates to bump up the economy.

Liu said Japan's unprecedented easing programme, aimed at ending more than two decades of deflation, was "a monetary blackmail" targeted at other export-driven Asian countries such as China and that the central bank should sell more yuan and buy the US dollar to push down the yuan.

He also called on authorities to guard against a fresh wave of hot money into China's fragile financial markets, warning that Japan's move would reignite the so-called carry trade, under which investors borrow in low-interest yen and invest in high- interest markets.

"The massive monetary stimulus by the Japanese central bank could spell doom for other nations in the region," said Tsinghua's Li, a former adviser to the People's Bank of China.

All spot on, and all well-known in advance, but apparently all the brilliant minds in the world forget that trade is a zero-sum game, and that Japan's current account and trade surplus gain (if any, recall both hit record lows recently) facilitated by a plunging yen, will come at the expense of other very angry exporting nations. This also ignores what happens to Japanese import energy and food prices, already exploding as has been documented here previously. The BOJ's hope: companies will promptly hike wages to make up for rising staples costs. We hope the central banker often confused with a Yankees pitcher is not holding his breath on that one...

As for countries hating Japan's guts right now, China may have to wait in line: if there is one country that has to be truly livid at Japan it is South Korea, whose net exports account for nearly 60% of its GDP. So yes: the next currency war salvo will come most likely not from China, which is already caught between a rock and a hard place, but from Seoul, where the perfect storm of a totally nutjob neighbor to the north has emerged just in time for Japan to do everything in its power to crush its economy.

In conclusion, if there is one thing Japan has done, is to make sure all the overnight angst so carefully focused on Europe in 2011 and 2012 (and where it is pretty much game over now following news that "success-story" Portugal will pay public workers in bonds not in cash, all it takes is someone to put down the time of death) shift forward, with the attention now focused not on the 3 am European open, but on what promises to be a daily 8 pm Eastern JGB volatity explosion each and every day.