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Thursday, December 15, 2011

Looking Around....

US initial claims continue low. The four week MA is 387,750, this week's headline is 366K However that is much less important than the fact that SA continuing claims are dropping! We are down to 3,666,250. What usually determines the employment direction is less firings than reduced hirings, and so far the undoubted slack in larger service firms is being compensated by increased activity in smaller firms and manufacturing.

Let's see. The great Euro deal turns out to be nothing much. Spanish bonds are doing better, but then the concern with Spain is the future trajectory, not currently high debt levels. Italy, which has the very high accumulated debt, is not experiencing much help. Italian 10 year bond yield; Italian 5 year bond yield. The real moving part to what was announced was the plan to give banks unlimited access to cash from the ECB for three y
Linkears - the theory being that banks can borrow low, invest in sovereign bonds for a high yield, and pocket the difference. This all falls down if there is real risk of default or currency change in the bonds - if you take a loss on the bonds, you won't be able to repay your loan to the ECB, and it will turn out to have been a tragic, potentially bank-destroying mistake.

Probably because the latest European deal to end all deals did not seem to solve much, US Treasuries are galloping along. They seem to have an implicit Fed guarantee; they have the potential of currency appreciation against the Euro, US current debt levels are not at the eye-popping Italian levels, and the US economy is doing better. Further, Asia as a whole is sliding somewhat, with Chinese PMIs hardly stellar and Japanese indicators at best stagnant. Nor is India doing well. Therefore money is exiting the Euro and probably China, definitely India, and some of it is landing in US laps.
The 30 year US Treasury auction was just remarkable, with the bid/cover ratio at an eleven year high of 3.05. The yield awarded was 2.93 (rounded up). Earlier auctions this week were quite similar, with very high demand across most maturities. The three year was most notable, with a stellar bid/cover ratio of 3.62. The four-week ratio was 7.47, which is only slightly less than the previous week's 7.6 something. In general, it looked like increased demand this week shifted to the longer maturities with higher yields, which is NOT a good indicator for Europe.

Euro-woe: A flight of money never does much for a regional economy, and Europe is no exception. Eurozone PMIs improved slightly on Germany and France this month, but are still contracting at 47.9. I am getting more worried about Germany next year, because of signs of potential trouble in German construction. Residential has been carrying it, and I thought this would continue. But new orders are slack so I may be wrong. German services activity improved overall in the latest survey, but manufacturing was still contracting and if there is potential weakness for construction in the months ahead, services are unlikely to continue much of an expansion.

India has a host of problems - inflation is way too high after the CB has completed its tightening cycle, and there seems little chance that it will abate until the rupee starts gaining. But I think the whole thing has fueled an exodus of money, so the rupee is weak and destined to remain weak, and could become much weaker. The trade deficit is too high. India's industrial output fell strongly in October.

China is seeing a pause in the inflow of money from foreign sources. This is a big issue for China; China appears much dicier than most seem to believe. I suspect it will be loosening quite quickly. China claims it is not reversing its housing policy moves, but I question whether it can sustain that. However I don't think it will work when they try to reverse - the impetus is in building/selling, but the economic function is collateral for further borrowing, and this has never led to "quiet" corrections. A military buildup is about all that can save them now, but it would be of temporary help only and I think it would lead to a permanent case of foreign investment nerves. Right now they are rattling sabers for trade advantage, but they may end up rattling them in earnest.

US industrial production fell slightly in November, but the weakness in manufacturing was far more pronounced, at -0.4. This is the first negative for US manufacturing in a long while, and it may represent a trend change. The weakness was mostly in non-durables:
Manufacturing output decreased 0.4 percent in November, and the factory operating rate dipped to 75.3 percent, a rate 10.9 percentage points above its trough in June 2009 but still 3.7 percentage points below its long-run average.

The output of durable goods slipped 0.1 percent in November but was 7.1 percent above the level from 12 months ago. Decreases of more than 1.5 percent in November occurred for wood products; electrical equipment, appliances, and components; and motor vehicles and parts. Gains of more than 1.5 percent were recorded for primary metals and for aerospace and miscellaneous transportation equipment.

The index for nondurable manufacturing declined 0.4 percent in November. Among the major components of nondurables, losses of more than 0.5 percent were reported for textile and product mills, apparel and leather, printing, and chemicals. Only the indexes for paper and for petroleum and coal products moved up.
In durables autos were the prime mover.

The best world disaggregator is in the peripheral Chinese investment prospects. Countries like Thailand, to some extent Vietnam, Malaysia, etc. These should all be the beneficiaries of Chinese price/allocation problems, and they should help Asia as a whole.

We just have to hope that we can maintain, on a global basis, differences in economic rhythms. Generally world inventories are not too overloaded except for ships and some commodities, so maybe we can. If we can't, it kind of looks like war lies ahead.

Whoa Moma!...War?
I suppose I understand some of your logic at some level, but do you see something more? Has something triggered or tipped your scales to come to that conclusion now? Should I buy the nephews GI Joe action figures for Christmas???
And on a slightly less gloomy topic, regarding the continuing claims data released today. I look at continuing plus the "emergency programs" put in place, and I think that data series increased a "smidge" this week. The trend is still down though.

Thanks for all your insights and hope all's well.
Anon PA
That's a hell of a phrase to end a post. Adding my voice to PA's: are we talking trade wars, or shooting wars?
Depression is the harbinger of war.
Yeah, what Neil said.

China's predicament is very real. They seem to have reached the saturation point at which pushing a whole lot more bank lending doesn't really provide enough oomph to justify most the inevitable losses. They've been doing the same thing over and over again, and this time it has become somewhat different.

From China's POV, the only real way to deal with the problem of a manufacturing economy (acutely energy-dependent) at somewhat overcapacity and a credit bubble may be to arm up. Arming up (since they are going to spend the money anyway) will keep mfrg going and offset some of the housing/loan problems. More recruits in the military take care of some of the excess population they have to occupy.

If then they can use that military to get control of enough fossil fuel resources, they help themselves further.

But look around the world. Egypt is in a terrifying spot - they don't seem to have the currency/cash flow to import the food they need to feed their people.

Iran is an obvious problem, and Iran is pushing for some sort of hegemony over the Gulf.

China doesn't want to go to war - it would rather do anything else. But it has a knotty set of difficulties to face that may drive them to it. Fracking, if they can gear up quickly enough, might buy them something.
If China is going to go to war, it's time to invest in Mark 48 torpedoes, because China is an island.

Our hope is that the Chinese leadership loses the Mandate of Heaven before they can start the Second Great Pacific War.
It's a good thing that we assisted in China's rise and
America's demise all for the sake of corporate profits.
Corporate profits that went mostly to the uber wealthy
And not into the few remaining workers salaries. If there
is war you can be sure that the poor and middle class
will bear a disproportionate burden.
John - excellent article, and after reading your link I would suggest reading this this article about the Wukan standoff.

This isn't isolated - it's been going on for years in various places:
A thousand armed police attempted to enter the village on Dec. 11 and were blocked, the Daily Telegraph reported, citing a local resident. Tear gas and water cannons failed to disperse the crowd and after two hours the police withdrew and barricaded roads to the village, the newspaper said. Wukan is currently being supplied by residents of neighboring areas carrying in food across fields, the Telegraph reported.
China also faces two demographic problems that often lead to war. One is the current large cohort of military-age males, which is followed by a much smaller cohort in 10 years or so due to the "One Child" policy. This is a "use it or lose it" situation for them, militarily.

The other is that the males of soon-to-be military age drastically outnumber females of the same age. Again, an unintended consequence of the "One Child" policy. Historically, large numbers of young males in a society with no situation for them to settle down in are prelude to war.

Not that this automatically means war with China. I think it's just as likely to mean a new Chinese civil war. But there's a lot of things pointing to chaos in China, which is no good for anybody.
MOM, yes I'd seen the Wukan item a couple of days ago. The pot is already boiling. I wonder whether the regime is going to be able to keep the lid on. They'll certainly try very, very hard.
one child and one adult. I am looking on line also. Or if you know of any group rate tours, coming out of Charleston SC.

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