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Monday, January 04, 2010

North America - US


I have been chasing what seems to be an anomaly through manufacturing reports for months, and it never resolves. Are people living off previous purchases? Is more manufacturing being exported?

The discrepancy shows up in two strong indicators - freight volume measures for metals and money drawn for production.

Let's start this morning with NACM for December, which was just released. Here, btw, we get back to Who-Struck-John's "sideways until the end of the year and then down", because:
The reports on the economy have been mildly encouraging at year’s end and now everyone’s attention is turned to 2010—the year that is supposed to provide the anticipated recovery. The December CMI matched the mood of the economy as a whole—essentially flat, but showing some mild progress.
That is the combined reading, and out of the last eleven months, December's combined CMI is the lowest since August and the third lowest. It is not a bang-up reading. Manufacturing is much worse; although it remained in expansion territory, the monthly change was negative for the first time since Jan 09. Sales and new credit applications declined a bit (after a great rise the previous month), and bankruptcies rose sharply. December is the third month the combined CMI was in expansion territory, but a fall in manufacturing would generally indicate a fall in services a month or two later.... It was not that much of a decline, so I wouldn't panic and run screaming, but this probably is something of a yellow alert.

Normally I would not place such weight on NACM, which largely reports on business-to-business credit. But I have been wondering where the money is that supposedly is fueling this expansion? It's not in commercial credit on the money markets, which have been falling for a while:

That blue line for non-financial popped up this summer when the first phase of the recovery really kicked in, but it has faded out and continues to sag down, having now reached new lows.

It's not in bank lending. Commercial and industrial loan (C&I) balances at commercial banks continue to fall, according to H.8. From November 08 to November 09, C&I balances dropped from 1,636.9 billion to 1,366.5 billion (-16.5%), and according to the December weekly reports, the decline continues.

Soooo, I was wondering how much was in B2B, but apparently not a lot yet. I do try to read a selection of company financials, and one common strategy for larger companies has been to try to sell corporate bonds, and for companies that have a significant exposure to currencies, in some cases those bonds were in Euros. So some money may be there, but overall these numbers don't support the idea that 2010 will see that much of an expansion.

If you will look up at the graph of commercial paper, you'll see that following the 2001 recession nonfinancial paper declined through 2003. Well, there were a lot of factors contributing, but the 2001 attack and the resulting stock market crash had a lot to do with it. There wasn't much of a pop when inventory started to clear, because US consumers never stopped spending during the 2001 recession or afterwards, thus there wasn't the same

But in general, the money that commmercial borrowers draw has a pretty strong correlation with non-consumer spending and investment, and most especially with higher-paying private sector wage and salary positions (Table A-5):

Click on this sorry little picture of A-5 private sector wage and salary positions and open it in a new tab or window. Then note the very high correlation between non-financial commercial paper in the previous graph after the 2001 recession and private sector jobs. M_O_M knoweth of what she writeth, and neither doth she bullshit. From the peak in November 2007, seasonally adjusted private sector wage and salary positions dropped from 114,064,000 to 105,932,000, and if that doesn't make your stomach flip, you are still hung over. Happy New Year.

And needless to say, the apparent growth in the employment is in government and casual (mostly government, and a great deal of them are Census temporary positions). This leaves those 105,932,000 private sector workers paying ever larger government salaries and benefits even as their own compensation shrinks. Dear readers, the mother of all tax revolts is pending - the last straw has just about hit the camel's back. Let's look at a longer history here, and you'll see why I sound a bit hysterical:

1980-82 was very bad, but the net loss of private sector jobs was considerably less in terms of numbers. There was also much less of a governmental drag at that time. The worker-retiree ratio was pretty good and the huge expansion in government compensation compared to private sector compensation had not yet occurred.

The jobless recovery from the 2001 recession is about to be duplicated, but this time the net loss in positions is far larger.

Because US incomes have fallen so heftily it is not reasonable to expect much oomph in services - people are still retracting spending to fall-back positions. We cannot lend our way out of this because most consumers are overextended. Federal, state and local governments all need to retract spending, and when the Census jobs fade out the official unemployment report is going to look a lot more like the private sector trends.

There is some US recovery going on, but it is largely related to previous pull-back in spending on items like clothing and autos. People need jeans, underwear and working automobiles, and after a time people who have any money at all are just forced by need to spend. But they don't buy hugely, and it is unlikely that spending on several categories of goods (like vehicles) will get back near previous highs in the next decade.

I think we'll remain stepped up to current levels with slow growth in those who are gaining new retail positions, but the main US recovery is going to have to come from the bottom up, and it will be slow. Debt has to be paid off or written down to come in line with incomes. A quick look at the graph above (jobs about at beginning 2004 levels) and G.19 Consumer Credit would hint that we have billions of dollars more of writedowns and writeoffs before we can hope to get back to neutral. It's also important for the older and wiser of us to realize that consumers were not capable of carrying the debt they had in 2004, which is why so much mortgage equity extraction occurred.

I wrote my Congress Critters in 2005 about the stinking bankruptcy "reform" bill, and I blogged about it, and it did no good at all. We are paying the price for that policy mistake now.

Next, the real position of US banks and US credit.


Why can't you see our eCONomy for what it is - a giant skimming operation? It's right in front of you, hiding in plain sight. You need to let go of preCONceived notions of a bygone era. You need to unbrainwash yourself that the system is set up so that wealth accrues to production.

The real economy you keep contemplating is gone and will not return. The productive economy is now utterly subservient to a financial sham eCONomy. The FIRE sector is the fourth and most powerful branch of our Government.

Here's the pecking order: FIRE, Government, private industry. If you doubt it, look at the facts and long term trends. Look at who gets the sweet bonuses and benefit packages? Look at whose piece of the pie is growing and whose is shrinking? Do tax policies encourage production or finance?

Here is one of the main drivers of the scam: the FIRE industry purposefully and CONtinually overcapitalizes the future via debt knowing full well that the Fed will preserve the aggregate value of the fraud.

The lastest cycle of overcapitalizing the future has resulted in sky high unemployment and wide spread economic misery. Millions of American families are facing foreclose and coming to grips with insolvency. And yet, not one meaningful reform has taken place. FIRE bonuses are at record levels again.

Dithering around with eCONomic theories and stats will not fix the problem. Besides, what good is more output anyway if all the wealth accrues to fewer and fewer?

The financial skimming will not end as long as we have a fiat system founded upon the ridiculous CONcept that deflation is the greatest evil of all.

You must fear the deflation boogey man, MWAHAHAHA!
Angry Saver - oh, I basically agree. It's attractive to run bubbles only until they burst, and then you find out that you need a real economy for the skimming to work.

We did the same thing we did leading up to the Great Depression, and we got the same result.

But my point is that this is all coming to a head. The banks are shams - the only way to bail them out is to rebuild a real economy.

I don't think we've faced any one of our problems yet. I do believe we'll be forced to do so.
Higher interest rates and a deep double dip or
low rates and a currency and wealth devaluation, pick your medicine. We need tariffs now.

The banks are shams - the only way to bail them out is to rebuild a real economy.

The banks are indeed shams, but I don't agree that the only way to bail them out is to rebuild a real economy. In fact, not bailing out the banks would have been a better solution and would ultimately make rebuilding a real economy more possible.

Seriously, I'm supposed to believe that taking public money and loaning it to venal, bonus seeking bankers that then turn around and lend it back to us at higher rates is going to make us wealthier? The same bankers that insist on keeping housing unaffordable? The same banks that thought making people pay twice as much for a house was a way to generate wealth? No way!

We should have let the banks fail or nationalized them. Then house prices and the associated debts could have been written down to affordable levels. Lower house prices are necessary - it's just a matter of who eats the losses.

What kind of system requires that houses should remain unaffordable for the middle class? It's completely non-free market and immoral. Total idiocy and the costs will be high. All this misery has been thrust upon American families so that banks and creditors can remain whole and keep their skimming operation going.

Sadly, it's NOT coming to a head. For the majority, the pain is only just beginning.

The Federal Reserve is preserving the aggregate value of credit just as Bernanke said they would in his helicopter speech. Unfortunately, trillions of dollars of that credit are fraudulent and non-economic.

We just can't allow a deflation even though deflation was the norm for a thousand years.

Productive Americans are supposed to support a bloated Government, overpay for housing to support a bloated financial system AND compete with billions of Asians that work for $1/hour. Good luck with THAT!
I'm glad you're looking at B2B.

It's ignored in the GDP equation in favor of consumer spending thanks to our Keynesian friends. We continually miss out on the true picture of the economy by ignoring it.
MAB - you may be misunderstanding me.

My fundamentals here are two:
1) A bubble produces an unrealistic growth in the underlying assets used to fuel the bubble. Any real worth there is burned up. At the end of the bubble, the extra worth just vanishes from the system. No power on earth and no financial strategy can put it back.
2) Therefore the only way for banks to improve their positions is to support the real economy that was eroded as a result of the bubble. This still indicates massive losses on debt, but it saves what can be saved.

The strategy of "bailing out" the banks was doomed to fail. Finding a way to lend money on the real economy was a necessity, but that didn't require stupid steps like writing further home loans.

Anyway, stay tuned for the next installment.

"People need jeans, underwear and working automobiles, and after a time people who have any money at all are just forced by need to spend."

I drive less than 3,000 miles a year. My next vehicle might be a bicycle.

Let's hope I am the exception. I was buying more than my fair share when oil's price was rising faster than consumer goods and now that my hoard is mostly complete my purchases have slowed.

I hoarded a LOT of clothing as a wimpy inflation hedge. For example, my odds of needing more socks in the next few decades is remote.

I can't complain that I did it either. They no longer sell Gold Toe socks at my local Wal-Mart. They replaced them with a cheaper but lower quality version.

I'm particular about my socks. I have size 12 feet and the typical sock only fits to size 12. That makes things a bit crowded. Gold toe socks fit to size 13 though.

I feel like I'm recreating a Spinal Tap joke here! Sorry. ;)
Mark, sock sizes are sort of like glove sizes, which come in medium, small, tiny, and extra tiny.
Not Good.If Obama had any huevos they would be smaller than my cat's and she is neutered.
2) Therefore the only way for banks to improve their positions is to support the real economy that was eroded as a result of the bubble. This still indicates massive losses on debt, but it saves what can be saved.


Again, your mind is hung up on noble economic ideals and notions of fairness that just don't exist as they once did.

The big banks ignored both of your solutions and improved their positions by garnering bailout money. The banks also received massive tax breaks and Government/accounting support for asset values. Lending for productive endeavors (the type you espouse) results in deflation - that's the last thing the banks want and need.

And it's NOT getting better or coming to a head either. Consider that on X-mas Eve, Treasury upped the bailout dollars available to FNM/FRE from $400 million to unlimited.

Our financial system has been perverted into a giant skimming operation. A ponzi debt sham.

Have their been any attempts to squeeze the ponzi from the system? No, just the opposite. All effort has been towards preserving and restarting the ponzi. Cui bono?

The financial system has been horribly perverted. It's an unwelcome development, but it must be accounted for in any economic analysis.
Angry Saver - uh, that's 400 BILLION for mortgages, not million.

We're in a mildly deflationary cycle, and nothing can keep it mild but jacking up the rate of production of real goods.

That's the problem. All of the "solutions" to date have ignored the way the economy will actually work, and several of them have made our position worse.
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