Wednesday, November 23, 2011
Nice To Start The Day With Comedy
Markit PMIs. Eurozone. Composite below 48, manufacturing in the grisly 46s. Third month of contraction. This is not an adjustment. Manufacturing output index has fallen below 46, in the fourth month of the contraction zone.
Germany hangs in for an October composite of 50.3, but manufacturing PMI has dropped to 47.9. Mfrg output index at 48.3. Germany isn't going to carry the rest of Europe through. The commentary is worth reading:
November data indicated a reduction of new business intakes across the German private sector for the fourth consecutive month. Manufacturers reported a much steeper drop in new work than service providers, and the rate of contraction in the sector was the fastest for two-and-a-half years.And Happy Thanksgiving to you too! Germany's economy should stagger through without too much angst most of 2012 on an internal expansion in housing, but Germany's economy is fundamentally export-dependent, so it isn't going to be stellar - and all the risks are to the downside.
Manufacturers also pointed to a steep fall in new export orders in November and, in line with the trend for overall new business volumes, the rate of decline was the sharpest since May 2009. Anecdotal evidence pointed to a broad-based slowdown in export sales, with firms commonly citing weaker demand from Western Europe, the US and Asia.
France. Services rebounded; manufacturing is still sliding, which supports the composite back up to 48.7. Services activity were still marginally contracting (49.3). The French economy doesn't move quickly, but since this spring it has been walking down. Only a sharp fall in prices (consumer) can save it from recession. So far, we do not see that.
China - we are assured by absolutely everyone that the landing is soft, but you know it really isn't for manufacturers out there. Will half the solar manufacturers go BK? I don't know, but they do need more bankruptcy judges, although that is not the type of employment that usually lifts an economy's output in the near term. Mfrg PMI at 48; Mfrg Output index at 46.7. No comment on the puffy clouds of softness theory.
Going briefly back to the Eurozone, click on the link provided and scroll down to the graph that shows core v. periphery. They have a strong contraction going on.
US: For the most part the news is at least halfway decent, although there are some oddities. Initial claims - these are good, having fallen below the 400K level decisively. The four week moving average is 394,250. BUT SA continuing claims seem to be edging in the other direction, so this report needs to be watched carefully over the next couple of months. Still, employment isn't bad. It does look like new job creation is slowing.
Personal Income and Outlays. Some good news here - in October, real disposable personal income (income less taxes) rose. This is very welcome, because it had fallen in July, August and September. What's driving the slackness in the US economy are declining real personal incomes for all too many consumers. A drop in inflation caused the change in direction for personal income.
Note that the Fed is not going to QE with inflation this high, employment still rising, and some decent bottom level indicators. The global economy is slowing and we can't avoid that. Federal Reserve is setting up another round of banking stress tests to beat the biggies into line. This is good.
In Europe, in keeping with the last two rounds of banking stress farce (following the best traditions of Italian improvisational comedy - think Scaramouche!) banks are now deleveraging by lending money to firms to buy their bad assets. It's a beautiful thing. I am almost certain that Chinese banks are far worse off than most Euro banks, but on the other hand the Chinese banks can get a lot more support from their governments.
There is nothing but pure financial fear and terror in Europe - not only is the EFSF apparently having difficulty raising money, a German 10 year bond auction failed quite decisively. This is probably due to a shortage of money rather than lack of confidence in Germany's ability to repay, but it's a dismal predictor. This brings me back to Stiglitz - if you have time to listen to the video, note the fantasy involved in getting Germany to back Eurobonds. If Germany does provide any more significant guarantees, it won't be able to raise money because Mr. Market will decide that it is not creditworthy. Right now there isn't much money out there, and investors have to be worrying about the long-term backing of the Euro. Should Germany exit the Euro, the value will plummet.
The only solution, even short-term, is for the ECB to print money like mad and throw it into the bond markets. This shortage of money is what will take down the Eastern bloc in Europe, and once that happens things can get terribly ugly worldwide. The Euro is thus currently an undefined currency. No one knows what it will be five years from now. The ECB will have to breakdown and manufacture money for the bond market if Germany will allow it. But the Germans will become hysterical if that happens - it seems wildly unlikely that they will ever agree.
As for Neil's question over commodities, this is what happens when currencies and money markets in currencies break down. Europe is shattering like glass, and the only security is either the dollar (which is rather problematic) or hard assets. There is still a lot of created money out there, and for a while it will support commodities. For a while. Not for very long, given what is happening in Europe.
Seems like printing will cause Germany to exit the Euro. Then again, a few German bank failures may change some opinions.
This would be great for the US, once we get the presidential deadwood out of the way, but it sure would suck for Germany.
On the other hand, inflation causes Germans to develop hydrophobia and run screaming for tanks, so it seems unlikely that they will agree to printing soon enough.
Manufacturing takes off, led by oil/gas exploration?
Yes, we should knock down some of the barriers to production in the US. Whether either will in fact even work for it is hard to know.
It may well be that our own short-sightedness propels us to a second Great Depression. It's not inevitable, but right now DC is completely out of touch with reality, and it appears they have no intention of getting closer to that ugly creature any time soon.
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