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Monday, May 23, 2011

Monday, Yet Again

Overnight it was reported that the HSBC PMI survey (flash) for China fell to 51.1 from April's last reading of 51,8.

The European willies are ruling the western roost. S&P changed Italy to a negative outlook last week. Italy said it would respond promptly. This is a big deal. The failure to address the reality of Greek default is making everyone twitchier than hell. Trichet does not want Greek debt restructured; the main creditors don't want to give Greece more money so the debt doesn't have to be restructured, since it just increases the size of the eventual default. So the theory is that the Greeks will sell assets?

Spain's Socialist government was slaughtered in this round of elections, which is not surprising given unemployment over 21%. This raises real questions about whether an Italian government can do what S&P wants it to do without being tossed out on its butt. There is no need to bring up Ireland, but the cost of insuring government credit for many of these countries is escalating rapidly.

Jens Weidmann was recently appointed head of the Bundesbank (it's an 8 year term) to replace Weber. Weidmann promptly (May 13th) dumped cold water on the Q1 GDP report, which was really terrific at 1.5% on the quarter. It looks as if the Bundesbank's "no irrational exuberance" under Weidmann will be, if anything, strengthened. The better things get the more the more Bundesbank officials run in circles demanding that public finances should be kept under control. There is a real reason for Bundesbank angst, given Germany's demographics. It is clear that Germany will not loosen its purse strings to take up the austerity slack in flailing European economies.

CFNAI in US for April collapsed to -.45 from +0.32 in March. In March, production increases added +0.31, and production decreases were the big factor in April's decline. A great deal of the decline, although not all, was related to the Japanese supply problems, and Japanese supply problems should be affecting production and exports in China also. Experience suggests that this is an exogenous problem which may contribute to the downward pressure high oil prices are having on global economies, so at this point it is not safe to simply toss this off as a blip.

Germany's change of course with regard to nuclear power has the potential to inflict a bit of economic havoc there. I don't think it will this year, but Germany is a strong production economy, and Germany needs power to maintain its growth rate. Fortunately France and Czechoslovakia aren't going to do anything with their nukes, so Germany is now importing a heck of a lot of electricity from those countries. This is highly abnormal for Germany.

In the US, despite what many pundits would have us believe, the pace of inflation is just about to escalate rapidly and is now going to start hammering company profits. Despite the blip of Japanese supply line problems, the multi-year trend is for the US to add production, and this should be strengthened by the Japanese supply problems and ongoing power problems. But it is coming at a cost, and that cost is deflating production wages.

It is great to see 1,000 new production jobs opening up, but it is terrifying to realize that starting wages of $7.50 and probably eventual averages at $8.70 are the tradeoff. The US is in a long term deflationary domestic cycle a la Japan, and inflation in the prices of basics are lethal to such economies, because they destroy buying power and service jobs. The US economy still has a tremendous restructuring to accomplish, and the higher oil and food prices go, the greater the necessary destruction.

As money rolls back into Treasuries and German bonds, this time there will be no way to recirculate it. Most of the money injected into the economy just goes straight into commodities. Oil prices will stay at a level not justified by fundamentals, but justified by increasingly negative returns on other asset classes. The money that has been inserted will now correct itself quite without the Fed's help as the real economy destroys it.

June and July should be a fascinating demonstration of real-world constraints on monetary theories!

One of the factors not currently recognized is that US credit card policies are due to tighten again. The mechanism is that declining real wages for moderate income earners expose credit card portfolios to considerably increased loss potentials. To control that potential, review of credit card balances will be heightened, and companies will be lowering credit limits on cardholders who appear to be just holding their own or raising their balances. Expect to see other deposits try to rise faster, and watch the charge-off rates on CCs for quick indicator of how well the economy is coping with the price environment.

Right now the rail data doesn't support the theory that the US production economy is in big trouble, but the YTD carload pace has dropped to +3.3%, and that is a big decline from first quarter. If it can stabilize at 2%, that's one thing. If it keeps falling, the end of the summer could look pretty rough. Production is the growth edge of our economy currently, and the service economy in the second half is the real immediate concern. A lot of retailers are in for a rough patch.

Oh, and I have been meaning to post about the current drive to stop 401k loans. This is insanity; lower income savers who most need to take advantage of 401ks are the most likely to need the loans. If you stop the loans, you stop their ability to save in 401ks. In effect, this is a policy that will make it harder for lower income savers to use tax-advantaged savings programs. As public policy measures go, this is one of the more destructive. This segment is already paying a disproportionate amount of the tariff for our various asset bailout programs. "Hit the mule again until it's dead" is not going to produce retirees with more assets.

Good thing we are about to cut our safety net
to pay for bailing out the banking system.
If you are planning to steal the 401K's and IRA's, then it makes sense to make sure that the plebes don't empty them out first.
"but the cost of insuring government credit for many of these countries is escalating rapidly"

The US can just guarantee everyone's debt: http://www.bloomberg.com/news/2011-05-23/egypt-will-sell-1-billion-of-five-year-eurobonds-this-year-radwan-says.html

Since the debt will have the "full faith and credit" of the US backing it, I guess that means the Federal Reserve will be printing dollars, swapping, and buying Egyptian bonds. (Not that they will tell anyone that they are doing that.)

Now just hold your breath while I locate the part of the constitution that allows all of this -- I'm sure it will only take a second...

Gary Johnson twittered:

"Pres. Obama: $2B in loan guarantees for Egypt'. Guaranteed with WHAT?? We're broke. Who will guarantee our guarantee??"

At least all of this madness is good for a laugh.

"June and July should be a fascinating demonstration of real-world constraints on monetary theories!"

OK, laughter now becoming unbearable. More please.

""Hit the mule again until it's dead" is not going to produce retirees with more assets."

You seem to be assuming that the government really wants retirees to have their own assets. Government seeks power. And power is obtained by making citizens dependent, not by making them independent. (Who-Struck-John beat me to it, but:) Besides, the plan to confiscate 401Ks and turn them into annuities in order to kick the can a bit further down the road won't work if all of the suckers empty out their 401Ks. These terrorists must be stopped!
Foo - I know John is right - the only feasible plan to keep this going without actual fiscal reform, including painful tax increases, is to raid the 401ks and IRAs.

But still, an impoverished populace will produce a declining economy, so it won't work LONG TERM. I note also that no matter what type of political forum you read, the pitchforks come out when this proposal is discussed.

I strongly suspect that the population is at the tipping point.
I would like to know why our President is guaranteeing the debt of a country that suspended civilian court proceedings and replaced them with military tribunals.

I regret that I have but one 401K to forfeit to my country. (Thank God I've never maxed my contribution into it.)
My guess is that a lot of people a choosing to borrow
from their 401k than go to a bank. It is cheaper,and less hassle. Why go to a bank and pay interest ?
Spork - or to pay off credit cards. You know, if your bleeping credit card has 14% interest (close to average), the best possible investment of your 401k is to pay off your effing card balance, and then you will have no trouble paying back the the loan and contributing more.

Spork, I saw red when I first saw this mentioned. I'm glad I had another couple of trees cut down - I need something to absorb my ire.


That 401k money NEEDS to stay invested in our restaurant industry or we'll end up just like Japan!!

Yeah, thoroughly disgusted by the Egypt deal.

But, um, the article didn't mention the CUSIP. Anyone happen to know? I'm asking for a... friend. Yeah, my friend at work asked me about it today, I said I'd look into it.
"Once he began making some of the heaters in a temporary facility in North Canton last year, he noticed that they sold 30 percent better than identical ones made in China, simply because of labels identifying them as made in America, he said."

I wonder if this is true of products in general or if there's something specific about his product/market that leads to this result? I've seen comments by other manufacturers who felt that the "Made in the USA" label did them very little good in the marketplace.
David - I think it depends on the demographics of your target market. If your targets are skewed toward more rural lower/median income (think of Reagan Democrats) then it is likely to help.
Products selling to the "think local, act global" granola crowd also get a premium for Made In U.S.A.

Unless it's an automobile.
Neil..."Products selling to the "think local, act global" granola crowd also get a premium for Made In U.S.A."

I think mostly these people are only interested in USA-made products that are truly *local*, ie sourced from within 100 miles or so. From what I've observed, they're far more likely to be intrigued by something that says "Made by villagers in Bolivia" than something that says "Made in North Carolina."
I'm just passing on my wife's research data on that. There may be a higher premium for localized manufacture (I don't know about that), but there is a premium of some sort for made in USA, or at least not made in Asia.
Re: 401k, the legislation doesn't seem too punitive. Max of three loans, and more time to repay? Hardship withdrawals unaffected?

Or is this just the prelude?

Dan - I recommend reading the report on 401k loans.

Only 2.5% of those with loans outstanding have more than two loans. Thus the three loan limit is pretty much of a farce. Most plans allow two loans at one time.

It is not surprising that outstanding loans are currently at an historical high. The economy experienced an historically unprecedented recession, and employment is nowhere near recovery. In fact, unemployment is still at a level that is associated with the peak of recessions.

The percentage of new loans taken out last year was just slightly higher than the norm. It's obvious that most people AREN'T being careless with these loans. In 2010 27.6% of accounts had loans outstanding, whereas in 2006 (the recent low) it was 21.8%. It is easy to see how this happened.

I recommend reading the report, but here's a quote:
A majority of the participants with a loan continued to contribute in their DC plan. Overall, 81.7% of participants with
outstanding loans continued to defer contributions to the DC plan. However, the average savings rate of those with
loans was slightly lower (6.2% of pay) than those who did not have loans outstanding (8.1% of pay). Generally speaking,
the employees who stopped deferring to the plan while repaying their loans are lower-earning individuals in their
30s or 40s.

These are economic necessity loans (with 35.9% of women earning 20-40K having at least one loan outstanding.

I cannot see what the legislation will accomplish, and I think it is based on an unrealistic premise - that people shouldn't be able to use these accounts as savings. If you limit access, lower income workers with dependents will be shut out of a tax-deferred savings program. It's perverse public policy.
Thanks for the link to the report, MoM, as well as your cogent analysis.

Here was a key takeaway quote for me from the report: "The most likely
point of default occurs when a participant has a loan outstanding at employment termination. Presently, the vast
majority of plans require employees to repay loans in full upon termination of employment (usually within 60 days)."

So, having more time to repay might be useful, since people with a loan usually keep deferring salary.

And, based on that report, it appears that legislators should be focusing on decreasing cash-outs at job changes if they want to increase retirement contributions: "Cashouts have a substantial impact on savings, typically larger than loans and withdrawals."

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