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Monday, October 24, 2011

Oh, G_d, Have Mercy On Us

Those are some wretched European PMIs. Europe. Germany.

At first glance you'd think Germany improved a bit, but it's not so. Manufacturing moved into contraction - all the improvement was in services, and the service outlook fell again.
Manufacturers pointed to a particularly sharp drop in new orders, with the rate of decline the steepest since June 2009. Anecdotal evidence suggested that deteriorating confidence in the economic outlook contributed to weaker client spending and, in some cases, the cancellation of outstanding orders in October. Worsening export demand continued in the latest survey period, with manufacturers indicating the steepest fall in new business from abroad since May 2009
Still, in comparison to the overall European numbers Germany is still good. A European composite of 47.2 is sort of Halloweenish. It's also quite strongly into recession territory. The French composite fell to 46.8. French manufacturing improved a bit to 49.0, but that's almost a standard oscillation.

This, of course, makes the inadequacy of the Euro-crisis Bailout V 7.3.04 almost a non-story. But of course it cannot work, and of course another round of recession makes the task of bailing out banks much harder, and much more of strain on government finances.

What's the next round? Well, at this stage some of the Eastern Euro bloc gets hit pretty hard, and banks there are going to continue to struggle. This will hit some European firms again.

Sitting down to make some realistic calculations over the last week, I figured that Greece could actually become a paying creditor if its sovereign debt were reduced to 80% of GDP - almost a 50% reduction. However since ECB and IMF are privileged, that would require the private sector holders to accept over an 80% write off, and that would extraordinarily hard for France to swallow. It would have to dump enough money into several larger banks to earn itself a credit downgrade, IMO. So they are not going to do this.

The US economy is not crashing out like the European economy, but we aren't on a good trajectory either. Nor does the European Sturm und Drang help us over the long run on Main Street. China is sort of in line with the US, having shown a slight improvement in output. China, however, does export a lot of products to Europe, so China is going to feel the impact.

The main driving force for Europe is real household incomes, exemplified by this from the UK. Unfortunately, they are not improving, thus it is hard to see a trend change in the near term.

The main driving force for the US is real household incomes. Unfortunately, they are not improving. The poor Q3 performance in emerging economies globally points to the slow accumulation of barnacles on the global trade hull. I suspect that India is going to be a big contributor to general slackness; India cannot seem to get its internal pricing maladjustment under control. But we have some additional unfortunate shocks - the Thai flooding is going to have something of a regional economic impact. Singapore's economy often flags the regional trend, and it was slack last quarter (1.3%) after contracting the previous quarter, but September exports didn't look too hot, and August retail sales show that weakness may be accumulating.

There are two possible outcomes for the US. The first is a skipping recession, probably with three lows (kind of like what Singapore is seeing). That would be a good outcome overall, but it requires the Fed NOT to act further. That now seems unlikely - I think this round of PMIs will scare Bernanke into action within a couple of months. Commodity prices are already responding to the expectation that the Fed will launch QE3. The US consumer will respond to these increases with great spending restraint this winter, and that alone may be enough to drop us below the skipping recession zone.

So far CFNAI is still in skipping recession territory. But I think it will fall through by Q1 2012.

The US PTB cannot restrain themselves from an irresistible urge to meddle with things better left alone, and may meddle enough to blow the thing totally up. Stuffing bad debt into pension funds is not the best tactic right now.

Ace has a post out titled "DOOM: Doom schmoom! Gimme my money!"
where blogger Monty says "Politicians of whatever nationality seem to be constitutionally unable to keep their fingers out of things. They think in a flawed syllogism: a) something needs to be done; b) X is something; c) therefore X must be done. (Whatever "X" is.)"

Fits right in with your "The US PTB cannot restrain themselves from an irresistible urge to meddle with things better left alone" statement!

(And also the Ace post finishes up with a cute kitty picture).
With elections coming up I can't imagine the Federal
Government cutting spending . If they do the medicine
will surely throw us into a recession. Money velocity equals
Liquidity for so e and I expect the Fed to accommodate .
Trashing the dollar and therefore their debts does benefit
The government.
Don't you know? The Rapture has already come twice now; nobody noticed because G_d decided no one was worth saving from the consequences of their collective actions.
And yes, my snark does go to 11. :(
Who Struck John,

Just twice?

I think you are underestimating the power of the rapture.

"And it's finger popping
Twenty-four hour shopping in Rapture"

On credit no doubt! Woohoo! ;)
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