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Thursday, July 01, 2010


Why people are grumpy: Initial Claims:
Headline number 472,000 seasonally adjusted weekly claims. Last week's number was revised up 2K to 459,000.

Moving average goes to 466,500. This is the first week we broke range. We began May with a four-week moving average of about 450,000. In June we moved to the low 460,000 range. If in July we move to around 470,000, life will be ugly indeed. The 450/low 460 range had been in place since the end of March.

Worse yet, continuing claims are now showing signs of morbidity. NSA continuing claims rose to 4,311,264 and June 5th they were 4,200,675. SA claims are 4,616,000, which is significantly above the four-week moving average of 4,567,500.. We hope not to see these start on a sustained upward course.

Both Challenger (tracks large corporate layoffs and Monster (online help-wanted) remain positive, which should indicate that most of what we now see in claims is government-related. Yesterday's Chicago PMI was pretty good. It is now a question of whether an improving private sector can overcome the state and local job cuts which are what the initial claims reports are probably picking up.

ISM Manufacturing took a fall. Looking at the details, the only positive indicators are inventories and customer inventories, which explains the significant fall in new orders (rising inventories do not induce new orders). Employment dropped. However the general levels of the indicators remain in "very solid expansion" territory, so it would be quite premature to run screaming and talk about a global depression.

Also, people seem to be freaking out about the moderate Chinese decline, but it was pretty much baked in after the strikes.

May construction spending dropped slightly. We will see this continue to decline because of the fall in home sales, which affects sales by homebuilders, and therefore building. But the level of construction is so low that declines here no longer hurt the economy very much.

Last but not least, NACM. NACM covers business-to-business credit, and generally would lead ISM a bit. This report comes from a lower level of personnel, and generally, the further down the chain you go the more accurate the early info is. Executives are the last to know; convenience store clerks are the first, credit managers at businesses fall in between the two levels. NACM is clearly predicting a sharp drop in growth, although not at this point a contraction:

This is the combined service and manufacturing reading. As you can see, there has been a marked degeneration over the last few months.

Last but not quite least, the fruits of the housing tax credit (due to be extended by your witless Cr_tt_r any day now) are worth looking at. We paid a great deal to book a lot sales far more quickly than otherwise, but anyone who looks at the pending home sales report is going to realize that it was a very expensive (and elitist) exercise in "Let's Pretend". Nationally SA sales dropped 30% on the month and 15.9% on the year. The more money we spend to try to prop up home sales the worse it gets. We might as well quit and take our licking now.

The irony and the tragedy of yanking extended unemployment benefits with unemployment around 10% while giving thousand of dollars a pop to people who were either going to buy anyway or really can't afford to buy and will most likely default is beyond belief.

One of the reasons the average person doesn't want to hear "stimulus" any more is because stimulus has been very badly spent. The housing tax credit in particular is an exercise in witless, very expensive legislation. The results are as predictable as the results of cutting off benefits to unemployed.

I am beginning to feel like I got drunk and woke up in a S&M club. I want out.

PS: More momentousness. Gold is down, oil is down, stocks are down, and the long bond, according to Bloomberg, has dropped below 3.90% yield. Call it revenge of the Angry Saver.

...the fruits of the housing tax credit (due to be extended by your witless Cr_tt_r any day now) are worth looking at...

Too late. It's now a third-rail middle-class entitlement. We're addicted, and we're going to get a housing market collapse every time it's allowed to expire.

Woe betide the politician caught failing to extend it.
Neil - we may be addicted to crack, or at least pyschologically dependent on it, but the bottom line is that we don't have the income to support our habit.
Income? What's income to an addict?

Especially when the addict has access to the Fed's balance sheet. Like I was saying, we've apparently chosen hyperinflation. It would take some truly shocking election results this fall to change that now, but that's a low-probability event.
Neil - if you look at T-bill yields, we look a heck of a lot more like we've chosen deflation.

Still, I remain stuck on growth, although looking at the very high intermodal rail traffic, I would say that US retailers have overextended themselves a bit and China is due for a slump.
M_O_M, I've been in the deflation camp for years, and I'll still maintain that the one thing we're not going to get is relatively moderate 1970's-style inflation. It's either deflation or hyperinflation. With apologies to Milton Friedman, inflation is always and everywhere a demographic phenomenon.

The problem is that right now, we're a better bet than Europe, so hot money is flowing here looking for safety. Washington, meanwhile, is sucking up all that inflow (which could be going toward productive capital) and using it to set up recurring expenses that don't do anything to remedy the structural imbalances in our economy. If anything, they are intended to prolong or exacerbate the problems. In just a few years, the debt overhang will simply be too big to service, period, without the advantage of fear-induced interest rates.

By the time the safe-haven money leaves (which will happen eventually, maybe even soon), the debt will be too big either to pay off or to roll over. We'll have a choice between repudiation and simply adding the debt to the Fed's balance sheet. I suspect the latter is far less painful than the former, and hyperinflation will be the result.

The only thing that can stop this is to start NOW, gradually putting the government back on a sound financial footing. A lot of sacred cows need to be steak for this to work, and neither party is convinced that the voters are going to accept that fact.
"I am beginning to feel like I got drunk and woke up in a S&M club. I want out."

You covered it MOM, have a nice 4th!
Hello MoM, you may appreciate this proposal for Social Security:

Of course, once SS is means-tested, I can't imagine the test ever going away -- the budget problems will always be with us. And once the means-test for benefits is de rigueur, that quaint fig-leaf from the 30's, that SS is some how something other than communist redistribution, is dropped. And sans fig-leaf there is no reason not to tax wealthy people on their full wage income. And why stop with wage income, Medicare doesn't? Viola deficit problem solved (for now) and no one in the middle class had their taxes increase or their SS cut. The SS "lock box" is safe as it ever was.
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