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Urgent Stock Market Message

Fiscal Insanity Virus Strikes Canada, Sweden, Italy, IMF

Economics / Credit Crisis Bailouts Dec 26, 2008 - 01:50 AM GMT

By: Mike_Shedlock

Economics Best Financial Markets Analysis ArticleThe world health organization has confirmed new cases of the extremely contagious Fiscal Insanity Virus (FIV) that is rapidly spreading the globe. Canadian Finance Minister Jim Flaherty is one of the latest victims as evidenced by the headline Flaherty gives banks deadline to lend more .

Finance Minister Jim Flaherty delivered the banks a deadline of just a few weeks to get more loans out into the sagging economy, prompting the banks to counter that they're already doing enough and added lending could prove irresponsible.

“We expect the banks to provide adequate credit in Canada,” Mr. Flaherty said at a news conference in Saskatoon yesterday. At the meeting in January, “I expect them to make it evident to us that they are taking steps to make that more available in Canada.”

Most senior bank executives were not willing to speak on the record about the situation, saying there's no upside to publicly sparring with Ottawa. Privately, a number of executives expressed a high level of frustration. They say they are caught between the market, which would punish their stock prices if they didn't rein in risky lending and boost their financial cushions, and the federal government.

One top bank executive said the banks are getting mixed signals from Ottawa, with the country's banking regulator signalling they should be holding more capital and now Mr. Flaherty pushing for higher lending, which would reduce capital.

Mixed Signals Or Mixed Madness?

FIV often strikes in mysterious ways. Contradictions and logic be dammed. Any bank anywhere stepping up to the plate and taking on more risk will have its head taken off, and when it happens, government (in this case from Ottawa) will ***** about irresponsible lending.

Flaherty, like Bernanke is in the late stages of FIV where the brain turns to mush and all hope of recovery is lost.

Range of Insanity

The Business New Network is reporting Bank of Canada has prepared range of insanity .

Bank of Canada governor Mark Carney says the central bank has prepared a range of options, beyond interest rate cuts, to stimulate the Canadian economy, but says it's "premature" to put any such plans into action right now.

"We have full legislative authority to undertake a range of actions. We obviously look at a very broad range of scenarios," he said. “"But it's premature to talk about putting those into place if you understand the distinction. Certainly, work is being done on non-conventional monetary policy."

As the financial crisis deepens, the Bank of Canada needs to become more aggressive, by taking on high-risk collateral from commercial banks, and even consider buying equities, added Nicholas Rowe, economics professor at Carleton University and a member of the C.D. Howe Institute's shadow monetary policy council.

The central bank's current measures to keep money markets moving have helped somewhat, he said, but the commercial banks are still shouldering all the risk, and that makes them reluctant to lend. The Bank of Canada could alleviate the risk by becoming "a pawnbroker of last resort" and accepting high-risk loans as collateral.

" I think they could be a lot more aggressive .... Let's go crazy and go into markets and buy the index of stocks. "

Let's Go Crazy

Nicholas Rowe fits the disease profile given that he is an economics professor, a highly susceptible group. A sure sign of FIV is when you think something is crazy yet you want to go ahead and do it anyway, hoping it works.

Sweden to Rescue Saab and Volvo

Yahoo!Finance is reporting Sweden to come to rescue of struggling carmakers Saab and Volvo.

Sweden will come to the rescue of its US-owned carmakers crippled by the financial crisis, Saab and Volvo, to secure the future of an automobile industry which accounts for 15 percent of exports, officials say.

"Of course the Swedish government is committed to supporting the carmakers. We can guarantee that we will have car manufacturing in Sweden because it is an important part of our economy," Frank Nilsson, a spokesman for the enterprise and energy ministry, told AFP.

"We have held intense negotiations with the Swedish government," Saab spokesman Eric Geers told AFP, adding that the centre-right government planned to increase its subsidies for research and development.

" Each country needs to keep in mind that it's important to follow the rules of competition, " he stressed.

Spain and France last week announced plans to aid their ailing automotive industries.

Follow The Rules Of Competition

It seems to me the rule of competition should be survival of the fittest not survival of the weakest.

It's fiscally insane to support weak auto manufactures, yet the US, Canada, Spain, France, and Sweden are all doing it. Will it do anyone any good? How can it? There is only so much demand for cars. And every country want to keep making them.

Oceans Of Unsold Cars

I talked about auto insanity in the US and an ocean of cars stacking up at the port of Long Beach in Fed Destined To Become World's Largest Auto Dealership .

A sneak peak across the sea shows Europe's Biggest Car Terminal Bursting at the Seams .

Europe's biggest car terminal is bursting at the seams as unsold cars pile up, mirroring the dramatic situation in the automobile industry.

More than 90,000 vehicles are clogging the shipping terminal in the north German port of Bremerhaven, waiting to find new owners. Detthold Aden, head of the BLG Logistics Group, which administers the facility said they can't move the cars, work on them or deliver them until they find buyers.

Japanese family cars compete for the few remaining spaces available with Korean sports utility vehicles, German sports cars, delivery vans and even combined harvesters and bulldozers.

When cars roll off ships like the Danube Highway or Morning Champion, they come to a halt after just a few meters because there is no room for them on land.

BLG has been forced to find extra space in the area of the port normally reserved for shipping containers. Other cars are temporarily stored on freight trains. Ships normally jam-packed with vehicles destined for the United States are now leaving almost empty because of the dramatic downturn on the US car market.

The terminal and its surrounding area have a maximum capacity of around 100,000 vehicles. This figure could be reached at the end of the year, Ader said. He added he is optimistic the car market will start to improve from the second quarter and "should be back to normal by the end of the year."

Every country wants to protect its auto industry. It's simply not going to happen.

If you are looking to buy a new car, I have a word of advice. Wait. Prices are going to crash.

Don't Worry It's Not Dumping

In Spain, Ford is dumping cars at 25% off .

Ford Spain has announced that from Monday it is offering a 25% discount on 6,000 of the estimated 25,000 cars it has in stock.

All models will be available at the discount until January 24, with the exception of the new designs of the Ka, Fiesta and Kuga.

President of Ford Spain, José Manuel Machado, said that the measure responded to the ‘very delicate situation for the dealers', and the company could not be accused of dumping as it was a single and limited action.

New Ceiling is 25% Off

The new ceiling to sell a Ford in Spain is 25% off, direct from the manufacturer. Dealers are not exactly happy to say the least.

Ford denies it is dumping on grounds the offer has an end date of January 24, 2009. I expect to see 25% off (or more) in the US as well. All you have to do is wait. Why buy now when it will be cheaper tomorrow?

Italy Bails Out Parmesan Makers

The Age is reporting Mozzarella makers cheesed off at parmesan bail-out .

While the world's major economies are struggling to bail out their failing banks and car industries, Italy has revealed a different priority: parmesan.

Silvio Berlusconi's Government is to buy 100,000 of the country's beloved parmigiano reggiano cheeses from producers at a cost to the state of 50 million euros. The hard cheese, made around the northern city of Parma, has been a staple product found in most Italian households — and, as confirmation of the country's obsession with food, is Italy's most shoplifted product.

However, high production prices because of the rising cost of animal feed and milk have increased the cost of making the cheese so that manufacturers are losing money on each parmigiano they produce. Demand for the product from increasingly cash-strapped families has also fallen.

"It's a tragic situation," said Marco Iemmi, who has made parmesan for 30 years in the town of Salsomaggiore Terme. "I'll have to close up shop unless things improve."

Leo Bertozzi, the president of the Parmigiano-Reggiano Consortium, said: "Parmesan is undoubtedly the most famous Italian food product in the world and, although it is worth a billion euros a year, it is being hit by the economic crisis. Minister Zaia's announcement is without doubt a positive step forward to deal with what is a very difficult situation."

Producers of Italy's other celebrated cheese — buffalo mozzarella — are looking on enviously after suffering an 18 per cent drop in sales this year. "We've asked for help too," said Vincenzo Oliviero, the head of Italy's mozzarella producers' association, which has yet to receive an injection of state aid.

Blessed Are (Some of) the Cheesemakers

The New York Times had a report on the cheese bailout called Blessed Are (Some of) the Cheesemakers .

While most Americans have been more concerned with the fate of the on-again, off-again — on-again — bailout of U.S. automakers, food industry observers have been writing, and joking, about another recent government bailout that got done a whole lot faster, of Italy's Parmesan producers.

According to Reuters' Deepa Babington , the core problem is that

The large round blocks of cheese now command a wholesale price of only 7 euros to 7.5 euros per kilogram ($9.61-$10.29 per 2.2 lb), while adhering to the strict guidelines to make Parmesan mean a minimum of 8 to 8.5 euros per kilogram is needed just to cover costs.

Leo Bertozzi, director of the Consorzio del Formaggio Parmigiano-Reggiano, tried hard to avoid the implication that the Italian government's decision to purchase 100,000 wheels of the cheese was, in fact, a bai-out. Mr. Bertozzi stressed that the cheese would be used to feed the poor and said he was glad his industry could be involved in that noble effort.

The Journal wrote that mozzarella makers are “making a stink.”

The Times of London claimed to see a regional divide in Italy as a result of the policy: “ North says hard cheese as parmesan subsidy grates with struggling southern mozzarella makers .”

But no one took things quite so far as the author of a Financial Times editorial who left no pun unturned:

Producers of parmigiano in the Emilia-Romagna region smell the pungent whiff of trouble. With many selling their cheese at below cost, parmigiano makers are facing the prospect of going out of business – some are even using their cheese as collateral against bank loans they are using to pay for workers' salaries. Now Luca Zaia, the big cheese for agriculture in the Italian government, has intervened, announcing a €50m bail-out for the celebrated formaggio.

The move has already grated producers of other cheese varieties. Makers of buffalo mozzarella, for instance, fear that without dipping into a fondue of government cash they too may fall by the whey-side. The blood of some economic observers has curdled at the thought of the Italian government rescuing any and every industry facing difficulty. Unlike the cheese itself, the case for protecting parmigiano has not been easy for some to digest.

IMF head worried about lack of fiscal stimulus

Here's a sure sign of FIV in the late stages: IMF head worried about lack of fiscal stimulus .

International Monetary Fund chief Dominique Strauss-Kahn said a lack of fiscal stimulus by governments to tackle the global slowdown may make a bad 2009 even worse, according to an interview released on Sunday.

Strauss-Kahn told BBC radio that the IMF may need to cut its next economic growth forecasts, due in January, referring to "2009 as really being a bad year."

"I'm specially concerned by the fact that our forecast, already very dark ... will be even darker if not enough fiscal stimulus is implemented," he said in an interview.

The IMF has called for fiscal stimulus -- higher government spending and temporary tax cuts -- worth $120 trillion, or 2 percent of global annual economic output, to fill the gap caused by slumping private demand following the credit crunch.

Britain has announced fiscal stimulus worth around 1 percent of output, and despite "disturbing" level of public debt, Strauss-Kahn said more public borrowing would be the lesser of two evils.

$120 Trillion takes the cake for the most absurd stimulus proposal to date.


The IMF stimulus request has been corrected to $1.2 trillion as per CORRECTED: IMF head worried about lack of fiscal stimulus to which I reply "What's the worry?"

The US has already blown close to $1 trillion and will likely do another and that does not count another $7 trillion or so in swaps via an alphabet soup of lending facilities. The UK and China are each likely to blow close to a trillion dollars, and given the insane proposals running about, I would expect to see $5 trillion minimum globally.

What's the point in calling for $1.2 trillion when the promised total already is double or triple that and getting higher every day? $120 trillion never made any sense, but neither does requesting $1.2 trillion when the number pledged easily exceeds that already.

By Mike "Mish" Shedlock

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2008 Mike Shedlock, All Rights Reserved

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