Tuesday, June 23, 2009
And Optimism Wears Thinner
European PMI came in weaker than expected at 44.4 versus the predicted 44.9. That is solidly in the contraction zone. French consumer spending fell in May, and German PMI fell to 43.4 from May's 44.
A flash manufacturing PMI index rose to 40.5 from 39.6 in May. By contrast, the flash services PMI reading fell to 44.3 from 45.2 last month.Well, not if consumer spending continues to fall. Eastern Europe is, on the whole, still weakening. If the French aren't going to buy stuff, there doesn't seem to be all that much prospects of a true rebound. Italy is in very difficult straits, Spain is an ongoing bust (-7.4% in the first quarter), most of northern Europe continues a depression-like sag, and now European services for June showed a declining trend that is quite inconsistent with hopes for a second-half rebound:
PMI data on the manufacturing sector showing the ratio of new orders to stocks of finished goods dipped to 1.12 after rising to 1.18 in May.
"That ratio remains at a level that is consistent with a further recovery of output," Williamson said.
Figures published by Markit Economics Tuesday showed the euro zone's service-sector preliminary purchasing managers index, a closely watched gauge of private-sector activity, dipped to 44.5 in June from 44.8 in May, well below the 45.8 reading expected by economists.The result of these figures will be further retraction in manufacturing. Use Swiss watches as a guide:
"The failure of the service-sector PMIs to make further gains may lie in the fact that unemployment is beginning to pick up sharply in the euro zone," Matthew Sharratt, a European economist at Bank of America Merrill Lynch, said in a note.
Watch exports tumbled 27.6 percent in May, data from the Swiss Watch Federation showed on Tuesday, bringing the drop in demand in the first five months of the year to 25 percent.There's going to be a nasty knock-on effect through the next 8 months as rising unemployment erodes the effect of the lower interest rates and consumer subsidies in the developed economies.
Demand from Hong Kong, the biggest market for Swiss watches, fell by 26.2 percent, while exports to the United States tumbled 42.7 percent -- largely in line with the pace of decline in the previous month, the federation said.
Exports to France and Germany slipped 13.5 percent, while demand from Italy dropped 17.8 percent.
"Now, for the first time we saw that Western European countries had a double-digit decline," Weber said.
In the meantime, rising freight rates are causing problems around the world as current fuel prices dictate higher pricing in a world trade contraction.
As many observers are beginning to comment, the current contraction in world trade is on pace with that of the Great Depression. See, for example, Mauldin's current Outside the Box newsletter entitled A Tale of Two Depressions:
This week's Outside the box looks at some very interesting research done by two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O'Rourke of Trinity College, Dublin They give us comparisons between the Great Depression and today's downturn. They continue to update their data from time to time, the link to their work is at http://www.voxeu.org/index.php?q=node/3421. I have not previously heard of www.voxeu.org, but it is a collection of the work of well regarded international economists that seems quite interesting for those who enjoy readings in the dismal science.The charts are not very friendly. The bottom line is that only a very different response to these events will prevent a severe and extended global decline from forming. Velocity must be stimulated. One of the very big factors slowing velocity and likely to slow velocity much more in the near future are effective fuel costs.
This week's OTB will print long, but it is primarily charts.
My opinion (and it's just my opinion) is that Europe should cut its energy tariffs heavily and that there should be a concerted international effort to properly regulate energy exchanges such as ICE. There is not much you can do about buying and holding of energy, nor is there anything you can do about dysfunctional but energy-rich countries such as Venezuela and Iran. Venezuela is about to lose more energy money due to the ongoing seizures of assets. We can safely say that such countries are not going to be expanding energy production because they are lethal to investors.
The US should sharply shift its energy policy. We need to drill and we need to develop our own oil shale resources. Nuclear energy should be a priority but is not, and in the near term we will be forced to expand coal-produced electricity.
Still, none of this is any good unless the emerging countries stop subsidizing energy and the western world stops the stupid subsidies for renewables that can never produce energy at competitive rates. Energy production is such a baseline input to the world economy that no other government policy can compensate for a bad international energy policy.
I am strongly in favor of renewables, but the reality is that heavily subsidizing renewables is draining economic resources at an ever-increasing rate at a time when we can least afford it. Why, for example, should Italian utilities be buying electricity from consumers at more than twice the rate at which they provide it? What type of collective pyschosis causes the CA legislature of a bankrupt state government to create an energy policy that will cost the state over 100 billion dollars over a decade and raise energy prices by 28%?
Economic efficiency MATTERS. Economic downturns end when economic efficiency rebounds to the point at which more people can buy more products and a growth pattern resumes. You have to let the world adapt to growth by letting it adapt rather than by adopting ridiculous policies to push on a string.
The end game for almost all of this - including bad tax policies in some European countries, overconsumption in the US, bizarre energy policies, government overexpansion, demographic changes and world trade imbalances - is now upon us. We won't defer the time of reckoning past this year, if I am reading the freight tea leaves correctly.
It's going to be a long, cold night.
Hmm, that's something I've never thought of before, but with a nice 100% margin, it seems there is an easy arbitrage of buying power from my neighbor and selling it back to the power company. Enron would be jealous.
It really is Enron-like.
Base rates have been raised for some ocean routes since their lows.
MOM - I think you're correct on that. I'm expecting the financial markets to spend most of the rest of the summer bouncing around the lows reached this past March. Come fall, there will be another collapse--unless Washington "gets religion" before then. Not that there's any chance that will happen.
I just read a couple of interesting posts by Hernando de Soto, the Peruvian economist who wrote "THE MYSTERY OF CAPITAL." IMO, one of the most important books on economics in the last 25 years. The two posts on his website at:
are of articles from Newsweek and the Guardian discussing his views about our present financial crisis. He believes the derivatives that have been produced over the last 15 years have created a "shadow" financial market that is much like a black market. These entities are not recorded or traded on exchanges where everyone can see what they are worth and who owns them. Ownership, particularly of MBSs and CDSs is murky and values are near impossible to determine. He believes we need to bring these instruments into an exchange where ownership is registered and prices can be determined. It is his thesis that the basis for all proper markets is registration of ownership and transparency of prices. I think he may well be on to something and recommend the two articles for food for thought. It would be nice if Turbo Tax Tim would look at de Soto's ideas. What he's done so far has not worked to resolve the situation.
If we don't get some action on energy production we are going to see a rerun of the 70s with stagflation and constant energy crises.
Yes, I agree about the exchanges.
There is no cure for stupidity like clarity.
In any case, the bills are coming due and the current round of dimness won't last long on the right or the left. The only cure now for our ills is a nasty dose of reality.
I have been posting hard numbers on DU every time someone comes up with some idiotic proposal. Some of them are actually responding.
Now if we can only convince the Republicans that you can't solve the problem by giving away tons of govt. money. Sometimes I want to cry; sometimes I just sit and laugh.
Do your demographic concerns extend beyond the boomer hump or the makeup of gen x and y as well? Bill gates has been occasionally speaking about a science training crisis for some time. Do you know if anyone in banking and finance is modeling the dumbing down of the populace ala Idiocracy?
However my reaction to the technical/scientific shortfall is that there is a structural economic reason for it. The jobs aren't there.
Look around, and you'll see that engineering grads often don't get jobs, and that scientists have trouble.
My own family is sort of topheavy with the science/engineering types (with some medical), and their jobs are nowhere near as secure as those of other professions in my family. Nor are they relatively as well paid.
If we brought back more production, we'd bring back more of these technical/scientific jobs.
I don't know if we really need lots more scientists and engineers, but general knowledge of the scientific method and basic literacy in technology--that's something else entirely. Everybody capable of doing so ought to learn the difference between the mean and the median and which one is appropriate at what times, the difference between energy and power, why pasteurization doesn't "cook" food, etc.
Tell me this is good? It isn't.
Neil - Oh, I think we need the production and the tech/sci back. Our economy cannot survive as it is - we produce too little.
But your other point is valid too. The cognitive abilities imparted by technical training are crucial and should be involved in public debate, and if we are trying to run the country on disposable, non-citizen H1-Bs, we are losing something priceless from our cultural mix.
When I ran through the first lot of Obama's appointees, I was utterly dismayed. The big-idea types, the govt gophers, the big dreamers and the eye-rollers. There is a reason why his administration is performing so poorly and that mix is a big part of it.
There is an article online somewhere, about a guy that set up just his bedroom to run completely on solar power. I've always wondered why these folks who are so dead set on alternative energy can't do the same. They could at least do something constructive, instead of just paying lip service to the idea.
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