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Wednesday, September 28, 2011

An Ugly Landscape When You Look Up

Roubini said yesterday in some panel discussion or another that the US was already in contraction and most other developed economies were heading into one. On that chirpy note, we start our Wednesday with a raft of reports about the Euro problem. The longer they play with this Greek thing, the larger the eventual loss.

The UK is clearly thanking its stars that it never went Euro. German inflation is up again, and this is not going to fill the Bundesbank with optimism and the urge to send Euros elsewhere by assuming more debt. Schäuble's conflict with Geithner is of long standing (that link is from May), and the positions have hardened. Attempting to build a huge Euro bailout fund would in fact denigrate Germany's credit rating, so success appears impossible over a couple of years time frame.

My guess is that the Greek question will break very soon, although apparently they are now opting for a property tax. That may prove suicidal - it looks like everyone who can is bailing out of Greece, so the country is going to be left poor with no investment.

While currently the rate isn't that bad - maximum 16 Euro a square meter - the chance of it being raised is high as the economy gets worse. )One square meter is about 10.76 square feet, so a 1,100 sq ft dwelling would be taxed about 102 Euro, or around $140 USD.] Bad numbers - could be be up to $2,200 or so. If you confiscated all residential property in Greece you could just about clear up Greece's debt - that is, if you could turn the property into money. But you couldn't do that, because once the government starts confiscating property no one will buy property. So Greece is on its last legs. Whatever it can get from measures such as this might be sustainable (and certainly collectible), but ultimately it needs a big debt writedown to start rebuilding its economy.

US durable orders for August looked good. There was a slight drop in new orders, but when you look at things a bit more deeply, most of the summer pop was in response to the clearing of the Japanese supply line block. Still, capital goods and machinery show that the US manufacturing recovery is still creeping along. At this pace, it is not enough to overcome the immense consumer drag, and it is still dependent on external sales for support. Any minor change in housing investment on the positive side will add a big relative boost.

Most of the basic economic flux (aside from the issue of government policy) derives from uncertainty about the pace of auto sales in the next year.

So I am marginally more comfortable with US prospects. I think we are in a recession, but it is a restructuring recession and not a cartwheeling-into-the-abyss recession. Unfortunately commodity prices will have a huge effect on the US economic trajectory over the next year. We have to get to the point at which real incomes for the bulk of working people aren't declining.

Note: Petroleum:
On a YTD YoY basis, petroleum products supplied are -0.7%, gas is -1.1%, and total imports are -10.2%, compared to a 4-week MA of -1.8% for products supplied, gas at -2.4%, and total imports at -12.3%. Current crude inventories are just above the average range for this time of year, so supply is good. Gas supplies are above the upper limit of the average range, and diesel supplies are near the upper limit of the average range. The average range is a five-year construct, so that is good strong supply, considering that total petroleum products supplied have been down consistently for years:

Nonetheless I think you will see petroleum prices only walk down, because there is just too much money out there chasing too few investment vehicles. I find it impossible to look at this graph and claim that we are not in recession. Unfortunately it is not just us, so I really wonder what Q1 of 2012 will look like globally. The global economic environment isn't going to get any better for a while.

You might want to check the math, because 16 euros per square meter is about 1.6 euros per square foot, so an 1100 square place would be taxed at 1,760 euros or $2,370 or so. This seems like quite a burden to me.
Yes, the 102 is the square meters in a 1100 square foot house. That has to be multiplied by the $16 euros per square meter. That is not just quite a burden, but it will probably start a revolt.
But in fairness to the Greeks, that 16 Euros is the max not the average. The law has some ins and outs to it.

Larger holders are going to be paying a whole lot more on their property, and I think that will cut construction and investment, which will blow the whole thing out of the water.

Here's a NY Times article on the new tax. That lady probably will pay about 2K a year, and since she probably gets income from the property, she will pay it because she can't have the electricity turned off.
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