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Tuesday, August 30, 2011

Got Power

The only road that gives access is still out, but I have been driving around the barricades so I don't see this as more than an inconvenience. This is why I would never buy a really nice car. My theory is that a car is a tool for transportation, and I never want to avoid driving over a heap of gravel on a washed-out road just because I'm afraid the car will get dinged up. Mud on your license plate helps, because they were ticketing people.

No, it wasn't all hype. Just got power back an hour ago. I've already cleaned the bathroom (somewhat), the refrigerator, done the dishes and I'm working on laundry.

You might wonder about bathing, but I spent two and a half hours earlier tonight, while it was still light, boiling water and taking a bath that way. I also washed my hair. I was just lying in bed feeling sort of clean, and marveling at the wonder of it, when THE MIRACLE HAPPENED.

I am one happy woman. It's not over, but it is sure is better.**

** Unless, that is, Israel and Iran really are going to war. Edgy Adji's claim that Iran is devoted to Israel's destruction does not exactly deserve the Nobel peace prize, but I bet the Nordics are discussing that already.

Friday, August 26, 2011

The Gentle Wit

and delicate tact of Governor Christie of NJ.

I can hardly believe that I have to prepare for a hurricane in this part of the country. I'm going to Super Doc's tomorrow morning early to do his hurricane prep.

Most amusing earthquake prep ob ever: I was behind this young guy in the express lane in the supermarket. His purchases:
A) Three pounds of butter,
B) Package of hamburger,
C) BIG package of ribs,
D) Three cartons of eggs,
E) A pound of sugar - and nothing else.

Maybe the reason SuperDoc wants to hold office hours tomorrow morning and Monday is that he knows he'll have heart attacks to deal with!

What's Next, Pestilence?

That's what the lady at the post office asked me when I went to mail stuff.

GDP: If you go to page 8, which is 2005 chained-dollar levels (real), you see that GDP grew 11.8 billion in the first quarter and now is reported as having grown 32.6 billion in the second quarter. Life really gets ugly when you realize that government spending dropped 38.2 billion in the first quarter and only 5.5 billion in the second quarter, which change alone pretty much accounts for the relative difference.

GDP would have come in better if production levels on autos had stayed up; that's an artificial drop which is unkinking in the third quarter. But still, this is quite flat.

In fact:
This graph is of percent change from a year ago in real GDP.

The US does not have any history of falling this far below 2% from a year ago without an ensuing recession. There has been only one case of staying close to even the 2% line without recession, and that was in the mid 1990s, when the Fed stepped on the credit pedal. Not an option this time.

Under these circumstances, Uncle Ben's speech seemed a bit odd, but it definitely adds up to a plea for fiscal stimulus (federal spending). The official story:
Consequently, although we expect a moderate recovery to continue and indeed to strengthen over time, the Committee has marked down its outlook for the likely pace of growth over coming quarters. With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate.
But clearly even the Fed doesn't believe this:
Notwithstanding the severe difficulties we currently face, I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if--and I stress if--our country takes the necessary steps to secure that outcome.
What steps!!!!?????? He drones on for quite some time before we get to it:
Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view--the exception to which I alluded earlier. Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well.
A plea for Congress to spend money like water. Congress is quite good at that, but it isn't good at all at spending money productively - there has been little real stimulus actually fed through to Main Street. But balance the budget!
To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. As I have emphasized on previous occasions, without significant policy changes, the finances of the federal government will inevitably spiral out of control, risking severe economic and financial damage.
Just not NOW, you jerks:
Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery. Fortunately, the two goals of achieving fiscal sustainability--which is the result of responsible policies set in place for the longer term--and avoiding the creation of fiscal headwinds for the current recovery are not incompatible.
This speech is the best possible one the Bernank could have given, and by knocking out some "irrational exuberance", it will have a stimulative effect on the economy.

Thursday, August 25, 2011

Hey, New Yorkers

I guess you have until tomorrow morning, but if Irene is still intent on her current projected path, you'd better be thinking about departure, hadn't you? (And the latest you'll probably be ABLE to get out is about 1AM Saturday morning, and I definitely wouldn't leave it that late.)

It's supposed to get slotted in between other weather, so this thing is going to basically riding the train right up the coast. NOAA.

There is no place I'd less want to be than NYC if it even gets a glancing hit from a hurricane this big.

If not, you'd better plan to be on your own for five days. No power, no water, no food. Cell phones will be out more than likely. Not a place for kids, people with health problems, the elderly or those who don't like spending days without any of conveniences of civilization in a very crowded city.

Busy, But

Initial Claims: According to DOL, the last two weeks have been dominated by a strike effect. These two weeks can basically be thrown out. I am questioning DOL's numbers, because they seem too large, but in any case the strike (Verizon) ended Monday, so this effect will fall out. I'd totally disregard the last two weeks.

Raw claims in August have run at the 340-350K level. For some comparison, in August of 2003 the high week of claims was 348K, the next highest was 333K, and the other three weeks were all below 320K. In August of 2002 claims ran from 310K to 332K. So I am not thrilled, and indeed claims at these levels don't promise much for employment gains in total. Unemployment now would be much higher if it weren't for retirements.

In August of 2004 claims were at the 260-290K level, centering on 270K. In August 2005 raw initial claims were at the 250-270K level. We can only dream....

Durables yesterday were good, mostly on autos and airplanes. These were for July. Orders for primary metals were encouraging also at 10.3%. Orders for fabricated metals were down after having been up the last two months; we may have cleared one round and be going back for another.

Crude inventories: They confuse me. Gas down, diesel supplied way up (4 wk MA). We'll have to see but this was a better report. 2008 comparable week for comparison. MBA apps are just totally depressing; it is hard to believe that home sales for August and September can be anything but bad. Apps can be up and sales can be down, if more buyers/appraisals aren't approved, but it is hard to imagine a scenario in which purchase apps can be down this much and sales would even be okay.

Tomorrow we get the next GDP estimate; hopefully no surprises. This is the first take on corporate profits, which are important. If, by chance, GDP is revised down and Ben disappoints, it could be a wild Friday on the markets. Stocks and bonds have a disagreement, and this usually indicates that stocks are a bit precarious, if you know what I mean.

Early take on Treasury receipts is somewhat equivocal. August 22nd, 2011. August 23rd, 2010. Corporate taxes a bit better, unemployment a bit better, the Monday take this year was down from the Monday take last year.... August wasn't good last year and I think we will pull off an increase, but admittedly the tension is building. There could be some strike effect, and because WIET this year is down by the 2% FICA cut these tax receipts are misleading in the raw. Excise taxes aren't encouraging.

PS: Irene!

Tuesday, August 23, 2011

My Favorite Economic News Lead Almost Ever

U.S. stocks rallied, driving the Standard & Poor’s 500 Index up from the cheapest valuations since 2009, as weaker-than-estimated economic data reinforced optimism the Federal Reserve will act to spur growth.
Personally, it makes me want to sell stocks when the economic news is so crappy everyone believes the Fed has to act to spur growth (especially given their recent record), but this is accurate.

USD is rolling a bit higher almost across the board as a result, I believe, of the Japanese sovereign credit downgrade by Moody's. The outlook is stable, so it is no big deal, and if the yen manages to drop a bit against the USD, it can only help Japan's economy.

I'm So Relieved

See, I was sitting there (I'm in the NE), and I felt this shaking, and I said to myself "That was a small earthquake!"

And then I realized, of course, that damn it all, we just don't have quakes like that on the East Coast. So then I spent a quarter of an hour worrying about this latest neurological manifestation, which was indeed new to me. I was most baffled and concerned.

And then I looked, and sure enough, it was an earthquake. 5.9 in VA according to USGS.

PS: The animals knew about it - they've been acting weird all day. Midmorning the deer all came out of the woods and gathered around the house in the clear, away from trees. According to them, it's not over because they are refusing to leave. I had tried negotiating with them, because I need to mow the lawn, but they were not prepared to be reasonable about it.

PS: DU is working on the fracking/Bushco conspiracy angle. Too many threads to count. You'll fall off your chair and die laughing, so this is the dangerous part. Best thread yet - the towering nuclear holocaust overtakes VA. I needed a good laugh.

PS: According to the deer, everything's fine now.

New Home Sales Couldn't Get Lower

But they did anyway. However we really don't know, because the reality is that sales at this level deliver numbers that change at rates below that are below the 90% confidence levels, so:
Sales of new single-family houses in July 2011 were at a seasonally adjusted annual rate of 298,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.7 percent (±12.9%)* below the revised June rate of 300,000, but is 6.8 percent (±13.5%)* above the July 2010 estimate of 279,000.
We need to get about to the 400,000 mark before changes in these numbers can mean much! For what it's worth, we are also testing the limits of numerical precision in GDP numbers again. Did the US economy contract in the first or second quarter? It's possible!

As The Asian Data Flows In

If you haven't read Mauldin's latest, it's worthwhile just because of the graphs. One of the issues for us all is that the ability to achieve growth with increased exports is fading fast.

Let's see. Asia. Japan, of course, reported its third quarter of contraction a while ago. At -1.3% annualized, not too bad, but contraction is contraction. Singapore also reported contraction in the second quarter. Thailand reported a mild contraction (-0.2, quarterly). Hong Kong is contracting and over there they are talking about recession quite unambiguously. They also have scorching inflation.

Indonesia is doing very well. The CB is holding off on rate increases for the time being, and they plan increasing domestic infrastructure spending, so I'm thinking it carries through. Indonesia tends to benefit from troubles in some other Asian domestic economies, and it has some pretty big commodity sectors. Malaysia is reporting a slower growth rate than average at 4% on the second quarter with relatively slim manufacturing growth (2.1%) but strong services/consumption growth in the 6-7% range.

India is a laggard reporter. First quarter GDP growth was reported at the end of May, and with a YoY of 7.8% but a Q4 (Jan-March is their fourth quarter) of 8.5%, we'll just have to wait and see. The monsoon started a bit slow but has been picking up, and a lot in India depends on the monsoon! Anyway, it provides hope of controlling inflation which has been a persistent and intractable problem this year despite RBI's best efforts with rate hikes. India's fiscal position is not that good; domestic gold demand alone has a very real impact on their current account balance. Also the energy company problems involved with their fuel subsidy program are forcing changes. India desperately needs a good harvest this year to help it move away from the fuel subsidy system, which is a real and growing threat to its economic future, but which is also a profound need for hundreds of millions of the poor. I realize this is hard for westerners to integrate. Perhaps India's growth in used car sales and the relative weakness of the new car market this year will provide a better conceptual hook.

India, Malaysia and Indonesia are different economies, but they are similar in that they have youthful populations and high relative demand growth. In general, I would expect these three countries to maintain growth but to see moderating growth through 2012.

China: In general, housing price inflation has dropped below CPI on curbs. This has not really slowed much of the demand for housing among the public; the younger bulge wants a breeding territory. The rise of consumerism in China is difficult to comprehend. Reading China Car Times for a while gives you a feel for it. Last year there were big sales incentives for autos, so this year demand has been relatively slack. However, they are still managing to rack up YoY sales gains in July, even if only marginal ones. More. As for economic prospects, one hardly knows what to say when reading something like this:
The Chinese economy will grow by 9.28 percent in 2011 if the United States can stay out of a double- dip recession and the eurozone can steer itself clear of a sovereign debt crisis this year, economists from China's Xiamen University and the National University of Singapore said in their latest forecasts released on Saturday.
One suspects this is their way of saying that growth must slow but it is due to external factors, which is of course partly true. I'm guess that China will dip below 8% and then we'll see. The Chinese government probably won't tolerate growth below 8%. They have an energy supply problem, infrastructure problems, corruption problems, inflation at levels that cause social unrest, and a huge bad debt problem. They are helped relatively by prospects for continuing foreign direct investment and by demographics; it is not clear that FDI will necessarily continue at these levels.

Now that is all the recent past. The US is in a double-dip recession, and the Eurozone is not steering clear of a sovereign debt crisis.

Moving into the current quarter, the scoring begins to look more troublesome. July global PMIs weren't good, and the next round indicates that Q3 is going to be slack at the very least. Chinese manufacturing and output PMI spends its third month below 50. German manufacturing is hanging in at the lower August levels (with the output index up), but services are continuing their slide. New orders for manufacturing have started their fall, and it is due to export weakness. France is the reverse of Germany, with manufacturing dropping and services rising. Overall this suggests continued growth for France, because its servicing sector is relatively larger. There is a sharp deterioration in confidence, however, and the drop in household spending in the second quarter indicates that they will have an increasingly upward slope to climb. Q2 Eurozone GDP was slack to say the least, and Eurozone PMI for August suggests similar to worsening conditions (new orders dropping), with additional negative inputs from the fiscal issues of governments and banks. The UK seems extremely unlikely to be a positive influence with household finances this weak.

Brazil is pacing along with France currently, but economic growth is clearly slowing and it is possible that Brazil will resort to rate cuts by the end of the year. In most of South America, trading sentiment shows such a clear dichotomy with policy pronouncements that I can only believe in a pervasive and broad shift in conditions on the ground. Mexico has been doing relatively well and we will have to wait until October to get a real read on how they can carry through. US remittances have remained positive, which helps domestic demand. That is one to watch.

The raw statistics do not capture one of the underlying global themes for 2011, however, which is that although the regionally well-off are still doing well, all around the world the condition of the poor and moderate-income groups has been degenerating. It's inflation. Despite all the projections, inflation in China has only increased, inflation in the US is still broadening out and it zipping up again on food, and everywhere in the world that I look, margins for producers are too low and indicate that prices should continue to rise. Currency swings are another factor. Japan is in deep trouble over the yen's rise. The Swiss are trying to figure out what to do about their currency's appreciation, which is damaging their economy. The Chinese want to raise the yuan but may not be able to do so due to the problem it poses for exporters. Foreign currency loans are an absolute nightmare for the Eastern bloc and to some extent, for Turkey. The eastern bloc in Europe would still be a growth vector, but I think the foreign currency loans are just sucking the life out of those economies. It's definitely a business factor as well in several of those economies.

Finally, the drop in real wage incomes for most US households is resulting in higher mortgage delinquencies and tightening lending standards ex GSE. This is the second quarter of rising mortgage delinquencies. Lower credit standard CC portfolios are beginning to show the impact; Capital One reported an uptick in card delinquencies this month. US consumer credit utilization patterns are utterly different than they were a few years ago, so I don't expect a big impact except on the GSEs, which are sitting out there with tons of imperiled, marginal mortgages. Auto loan delinquencies continued their drop in Q2, but are probably going to uptick slightly toward the end of the year. Student loan delinquencies, of course, are on the rise.

The reason I bring up delinquencies is that it highlights the very great difficulty that monetary policy has currently in stimulating the US market. The potential demand is there; the ability to afford the required goods has degenerated over the last eight months, and lower interest rates can do almost nothing to stimulate demand in the broader consumer economy.

Monday, August 22, 2011


Hahaha. Thucydides left a comment about "normative economics". There's nothing normative about our current situation.

In graphs:

Here's the historical time series on bank deposits and loans and leases in bank credit (H.8):

91/92 was a pretty deep recession, and you can see deposits rising in relation to loans.

But still, our recent performance is remarkable by any standard.

Here is some recent detail on Commercial and Industrial loans and Consumer revolving loans:

The big step up comes from an accounting change, in which banks had to take sold pools of securitized assets back on their balance sheets if they retained liabilities or a certain degree of involvement.

As you will note, the step did not interrupt the general trend. The relationship is very unhealthy.

Here's a breakout of bank credit from 2007 on. The blue line is all bank credit.

One of the things banks can do with excess deposits is to buy bonds instead of making a loan. So banks buy Treasuries/MBS.

The red line is loans and leases in bank credit - the difference between the blue and the red lines would basically be the money "loaned" by purchasing securities.

The orange line is Commercial and Industrial loans; the green line is Consumer revolving.

Recent detail on deposits in relation to loans:

The red line is loans and leases in bank credit. The purple line is other deposits, which are the largest component of deposits.

Again, the "step" derives from the accounting change in which banks had to take managed pools of securitized loans back on their balance sheets.

Banks have money, but the money has no possible USE. And deposits are a loan to banks, and they are not a free loan - there is the cost of servicing the deposits, the cost of insuring deposits (FDIC insurance is bought with fees on deposits), and the risk of loss, which is real and a growing problem. There's nothing else the banks can do with this money other than buy treasuries or other government insured instruments. Japan R US.

The cost of banking to consumers is going to rise sharply. Since 5/18, other deposits at US commercial banks have risen by almost 480 billion dollars.

Without raising the ability to use money in the real economy, the US is doomed to follow first a Japanese pattern and then to an epic Keynesian crash, as the US loses the ability to borrow more money and the flow of money through the economy is deeply constricted.

The difference between Japan and the US is simple; Japan has consistently run a current account surplus. The US, on the other hand:

Our economy really blew up in the mid 1990s. We sustained it for about 12-13 more years on excess spending.

Ah, Monday

CFNAI came in better, and last month's figure was revised upward. Still, we are at a low number.

I am not too optimistic, because I think most of this was due to the clearance in some of the Japanese supply lines, and judging by rail that is now fading out.

Last week a range of forecasters issued major downward revisions for economic trajectories. Most of them are really now predicting recessions, because the US economy doesn't spend a year in definitely-below-2%-GDP range without falling into recession. It never has.

Other indicators do show gathering weakness. Retail profits aren't good at all, consumer confidence has dropped most significantly recently among the households with money, which would suggest less spending there, and the lower purchase money mortgage apps do suggest that these households are beginning to bow out.

My personal belief based on the latest indicators from stores is that there is another range of price increases just flowing through the system for living basics, and that the bottom 60% of consumers will be impacted by those increases quite negatively.

All of this does increase the probability that the Fed will do something stupid, though. Their only chance of goosing the thing enough to drive a quarter or two higher in order to escape the year-before-recession bound is to get those higher-income consumers to spend like drunken sailors.

Next year is an election year, and the Fed won't want to be placed in a position of having to announce QE3 in, say, March.

So everything now waits on Jackson Hole....

Sunday, August 21, 2011

While I Go Find My Visual Cortex

Here's something for those of you who do not have a neurological illness to contemplate.

St. Louis compiles its Adjusted Monetary Base Series. If you have never encountered this before, here's the explanatory page, and here's the short definition:
Beginning January 1959, the new AMB includes a revised St. Louis monetary source base equal to the sum of three variables: currency in circulation outside Federal Reserve Banks and the Treasury; deposits of domestic depository institutions at Federal Reserve Banks; and float-pricing related as-of adjustments. This measure of the monetary source base corresponds to line 8 of Table 1 in Anderson and Rasche (1996a, 1996b). All data are obtained from the Division of Monetary Affairs at the Federal Reserve Board of Governors, and are published on the Board's weekly H.4.1 statistical release. The second item, Federal Reserve deposits, equals the sum of two items published on the H.4.1: reserve balances and required clearing balance contracts, the latter shown in a footnote on the first page of the release. The third item, float-pricing related adjustments, is a small item mandated by the Monetary Control Act's requirement that the Federal Reserve recover from depository institutions the value of float generated in check processing; it is included in "service-related adjustments" in a footnote on the first page of the H.4.1 release.
If that still seems obtuse, here's H.4.1. Don't forget that these figures are in millions, so the first figure you see is 2.848 trillion.

Anyway, while we are all waiting to hear about Uncle Ben's Jackson Hole speech, we might want to consider the record:

Indexed on the left we have black Fed Funds (percent) and percent change in REAL personal consumption expenditures (red). Which looks so incredibly low, if you follow that historical sequence. The only time it gets near zero is in a recession.

Not that there's any chance of THAT, as I'm sure Ben will tell us in a soothing and uncle-ish manner.

Indexed on the right we have SAVINGS deposits at commercial banks (doesn't include transactional accounts like checking, etc) in dark blue and in powder (light) blue (keep your powder dry, Fed Uncle!) we have AMBSL, aka helicopter money. Here's where you want to start humming the M.A.S.H. theme.

As we can all note, it is fascinating to see how that powder blue line goes up and the red line goes down. Methinks that if more money would solve the problem, one would expect a different correlation.

Here's a shorter time series, same graph:

You can't blame our uncle for lack of trying.

To really get the full effect, let's take a look at the Aught Depression series, which really started in 2006:

It's easier to see QE and QE2 here. Let's just say that if this were going to have an effect, it would have had to be started about a year earlier, but it wouldn't have done much for Main Street.

You will note that as the powder was evaporating a touch, from about March to October of 2010, real PCE was doing better. I can't imagine what happened! Can you?

Because money is a proxy for the exchange of goods and services, intemperately shoving chunks of it into largely impermeable markets is a risky business. The net effect is largely to infiltrate the exchange-of-money markets, but unfortunately, in this environment that's durably pegged to commodities and specie (gold, silver).

See, when the money can't be passed out on Main Street, because we mostly borrowed our butts off already and have all the ability to repay a loan of a whale beached on top of the Empire State Building, the money kind of stays, circulating in exchange markets like a toxic glob strange attractor. The only point of connection with reality is commodities and ex-money exchange media, and unfortunately if you fool with your money too much commodities become an exchange media. It's a reversion to the barter system, electronically mediated. Unfortunately, the values aren't pegged to money circulating on Main Street, but rather pegged to the toxic money market glob. That can have only one effect, which is to shut down money circulation on Main Street, aka constrict trade.

But I don't think our dear old Uncle quite gets it yet.

Thursday, August 18, 2011

Thursday, Various

I am really thinking about moneyness and deflation, but in an absentminded way, some notes on this week's releases.

Initial claims. Not much happening here. 408K is the headline. Last week's number was revised up to 399K from 395K. The constant stream of upward revisions has not stemmed, which I think is probably more significant than the actual initial claims numbers. A lot of what we are seeing is seasonal adjustments - underlying claims are remarkably steady. This series has been improving over the last six weeks, but it is likely to change significantly in about three weeks. I don't know whether that change will be in a positive or negative direction.

In other notes, boy, CA's economy is doing badly! Look at the state comments for the prior week. The basis for the the insured unemployment, which is calculated from state account reports, is a good indicator of trend. While we did finally cross over to increasing territory this year, the slackness is obvious:
Jan-March: 125,560,066
Apr-June: 125,572,661
July-cont: 125,807,389
Because of the way the figures are derived, this number normally lags the employment report by at least half a year. For example, peak employment on this series was recorded in the fourth quarter of 2008 at 133,902,387.

The last three recessions:
1991: Peak 3rd quarter at 106,333,000. Trough 4th quarter 92 at 104,563,780. From there it inched up slowly by 150-225K until the 4th quarter of 93, when suddenly it jacked up by about 440K.

2001: This was not an employment recession. The jobs base kept growing, albeit quite slowly, until the financial shock inflicted by 9/11. The peak was Q1 of 2002 at 128,673,493. The jobs base started shrinking in Q2 of 2002, and continued to decline to a trough of 126,084,041 in Q2 2004. From there there was a slow rebound until the first quarter of 2005, when we managed to add more than 350K.

2007: Peak for the jobs base was Q4 2008 at 133,902,387. Trough, as shown above, occurred in Q1 2011 at 125,560,066.

The reasons for the notable change in employment/recession patterns over the decades are primarily due to the composition of the economy. A manufacturing economy both sheds jobs more quickly in a recession and regains jobs more quickly. The more we weight our economy toward services, the more we will see of this.

CPI/PPI: You know, I am not going to bang on a drum about this. I'll just write "I told you so". As I wrote before, there was a big surge of inflation in the pipeline last year before the Fed got all adventurous with QE2. The Fed does not have room for QE3, because there is STILL a lot of inflation in the pipeline.

CPI-U 12 month is 3.6%; 0.5% on the month. Food at home is 5.4%. Gas is 33.6%. The "core" ex-food ex-energy monthly was 0.2%. Medical commodities and services are both 3.2% on the year. CPI-W is 4.1% on the year, and 0.6% on the month. C-CPI-U is 3.5%.

The net effect of these reports is that any buying fervor induced by QE3 hopes is likely to be dampened.

Philly Fed Survey: This one is going to shake up the stock and commodity markets. 3.2 in July to -30.7 in August cannot be ignored; new orders -26.8 points. Unfilled orders - 20.9 points. Shipments -13.9 points. The current employment index -5.9. Average employee workweek index -14.4. These are strikingly recessionary readings, and indeed, it is hard to imagine them getting significantly worse:

I feel no need to dwell on this, and while I am not surprised, I am doleful. I am not into recession porn. This is recession porn. If you want to know how the heck this happened, it is a pricing problem. Prices paid +12.8; prices received -9.0. This will not redress until we get a pricing correction, and unfortunately there is little precedent for a pricing correction of the magnitude required without a global downturn, nor is there time for it to happen.

Existing home sales. -3.5% seasonally adjusted on the month. Given mortgage rates, I could make a feeble argument for Next Year - Jerusalem! but employment is going to be a big factor in home sales next year, so my hopeful 2012 forecast is imperiled. Months of supply at 9.4.

There is a minor Fed rebellion taking place against QE3 and even the 2013 ZIRP statement, which is also not going to fuel stock and commodity markets.

Wednesday, August 17, 2011

Moneyness, Deflation And Policy I

I have written before about the Levy Economics Institute at Bard College. I have a high regard for their work, although its derivations are about as far removed from my methods as you can get other than that the US model is accounting based rather than theory-based. That may be one reason why I bother with their output; these days a high quality parity check is hard to find.

A couple of papers:

The first is a position paper which the Levy Institute published. It is not their position, but an argument they found worthy for substantive debate. The paper is "It's Time To Rein In The Fed". It was written last year after the Fed had announced QE2 but before it had begun the buying program. They do note that the program could prove to be deflationary in the long run by reducing private sector incomes. I believe that has happened.

This paper should be read because the authors present statistics showing how the US is following a Japanese-like strategy, and as we can see we are getting Japanese-like results.

As far as QE2 went, it is succeeded in moving that Japanese peak up a couple of years in the sequence. Unfortunately, absent a major change in US fiscal policy, we appear doomed to have even a deeper fall after that peak.

This is not what I would consider "progress".

The paper is quite critical of concentrating solely on monetary policy and neglecting fiscal policy. I agree. I would have even harsher words, but we will let the comparatively gentlemanly scholars discuss the effect of inflicting serial asset bubbles on the "real" economy:
It is also important to recognize that monetary policy “works” only if it can alter the private sector’s preference for debt over saving out of current income. That is, adjusting interest rates up or down can only affect the economy if the private sector then decides to borrow less or more. Similarly, even if QE did work as both its proponents and some critics insist, it would only be through encouraging the private sector to spend more out of its existing income—which, again, is a highly questionable strategy in a deep recession where the private sector is (rationally) trying to deleverage. Consequently, a strong case can be made that, while monetary policy is relatively impotent when it comes to stabilizing our real, productive economy, it has played a big role in pumping up asset prices that then collapse in a speculative bust. Meanwhile, our monetary policymakers have chosen to leave the financial sector largely unregulated and unsupervised. That is, they have refused to exercise their authority in the one area over which they do have substantial control: regulation and supervision of financial institutions.
The section entitled "Democratic Accountability and Transparency of the Fed" is a must read. Ron Paul is not the only person out there with concerns.

The second paper is the March 2011 Strategic Analysis. This is the official position of the institute. Those who read the paper will note the similarity to certain aspects of the grimly sardonic but not scholarly Snarky Mark. The Levy Institute's jobs graph doesn't look any better than Mark's. See Figure 3 on page 4.

I do not want to warp anyone's perception of the March SA by discussing it before you read it. I think you should read it, and here is a graph from it to give you incentive to read it:

If the black baseline projection for unemployment doesn't trigger your appalled interest, nothing I could write about this would!

However, if you don't want to read the analysis, you probably want to read about shipping rates on the Asia/US West route. China is tinkering with its currency; I think it has to reverse the minor upward moves due to angst among the exporters, but how then can China control domestic inflation?

Tuesday, August 16, 2011

We're in the Comic Book Phase Now

You know, when the hero with superpowers meets the villains and there are a few panels of "Bish, boom, bang" as his iron fists encounter the apparently explosive glass jaws of the bad guys? That part?

Eurostat released EU and EU27 Q2 GDP today. Sad, at 0.2 (quarterly, non-annualized). This is "unexpected", and stuff is selling off as I write. Here's the release. If you scroll down you can see the individual countries. Note France at 0.0 in Q2 and Germany at 0.1. There are those that believe that the drop off in industrial production might have something to do with the German collapse.

Sigh. The last round of PMIs were not exactly positive for Q3 outlook, so the great expectations are, shall we say, fading.

Let's review the bidding: We are waiting for China. Japan is negative still due to the quake/tsunami disaster, but that is waning. Hong Kong reported a slight drop (-0.5) in Q2 GDP. Singapore reported a contraction in Q2 of 6.5%. Australia was negative in the first quarter; no word on Q2 yet, but if you go to this table and scroll down to the production monthly figures, their trend appears somewhat negative.

This makes the US advance look decent, but we aren't staying at this level! So there is a global problem.

As for Japan, that deserves a post of its own.

Monday, August 15, 2011

What We Need Is Boredom

And we're not going to get it quite yet.

Empire State Manufacturing survey came in pretty bad. -7.7%/-7.8% (new orders). Future general business climate xpectations fell an eye-popping 24 points to 8.7, which is almost the lowest on record. This survey has shown an astonishingly steep drop in future expectations in just a couple of months.

This will make you want to puke - From 7/6 to 8/3, Other Deposits rose almost 200 billion:

Say whatever you like, but no QE3 is going to top that performance!

I think oil prices are just a touch too high (sarcasm).

Friday, August 12, 2011

11th Circuit Court Healthcare Ruling

They were prolix. This is the Atlanta district and the outcome was suspected. Probably next the government will appeal to have the case heard en banc (larger group of justices). I would assume that will be granted. If the decision is the same, the SC is pretty well forced to take the case.

The CBO memo referenced in the majority opinion is here. It dates from 1994, because it was written during the HilaryCare era.

This ruling surprised me a great deal; it is actually more decisive and absolute than the Vinson decision. One change occurred in the government's argument - this time they attempted to define a limit on Congressional authority providing the individual mandate were to be judged a constitutional exercise of the Commerce Clause power. The majority rejected their argument.

The majority of two also rejected the idea that cost-shifting from uninsured individuals would be meaningfully redressed by the law, correctly noting that the majority of the cost-shifting would either be picked up by enhanced Medicaid rolls or not be addressed at all, since illegal residents are exempted from the requirements. (Surely this is the first time in history Congress has attempted to impose more obligations upon the law-abiding?)

What the court didn't note is that the majority of the cost-shifting comes from those insured under government programs already, but it did note that the expectations were for insurance premiums to rise instead of falling.

Beginning on page 100! the majority gets down to the business of deciding the Commerce/Necessary and Proper constitutionality questions.

Regarding the Necessary and Proper issue, start at about page 93. These two justices start with Comstock's five-pronged test:
The majority opinion enumerated five “considerations” that supported the statute’s constitutional validity: “(1) the breadth of the Necessary and Proper Clause, (2) the long history of federal involvement in this arena, (3) the sound reasons for the statute’s enactment in light of the Government’s custodial interest in safeguarding the public from dangers posed by those in federal custody, (4) the statute’s accommodation of state interests, and (5) the statute’s narrow scope.” Comstock, 560 U.S. at __, 130 S. Ct. at 1965.
On page 98 they make a bid for Justice Kennedy by invoking his Comstock worries over rational basis:
Justice Kennedy’s primary disagreement with the majority concerned its application of a “means-ends rationality” test. He advised that “[t]he terms ‘rationally related’ and ‘rational basis’ must be employed with care, particularly if either is to be used as a stand-alone test.” Id. at __, 130 S. Ct. at 1966 (Kennedy, J., concurring). Justice Kennedy observed that the phrase “rational basis” is typically employed in Due Process Clause contexts, where the Court adopts a very deferential review of congressional acts. Id. Under the Lee Optical test applied in such due process settings, the Court merely asks whether “‘it might be thought that the particular legislative measure was a rational way to correct’” an evil. Id. (quoting Williamson v. Lee Optical of Okla., Inc., 348 U.S. 483, 487–88, 75 S. Ct. 461, 464 (1955)). By contrast, Justice Kennedy asserted, “under the Necessary and Proper Clause, application of a ‘rational basis’ test should be at least as exacting as it has been in the Commerce Clause cases, if not more so.” Id.
What is interesting about the Commerce Clause analysis is the sweeping nature of the rejection. These two justices do not find the distinction between activity (engaging in commerce) and non-activity meaningful. Instead they stake out a position which can best be described as "if the exercise of this power is so broad as to fundamentally change the rules of the game and arrogate all power to the federal government, it can't be constitutional." They flag this right up front with an SC quote:
It is because of the breadth and depth of this power that even when the Supreme Court has blessed Congress’s most expansive invocations of the Commerce Clause, it has done so with a word of warning: “Undoubtedly the scope of this power must be considered in the light of our dual system of government and may not be extended so as to embrace effects upon interstate commerce so indirect and remote that to embrace them, in view of our complex society, would effectually obliterate the distinction between what is national and what is local and create a completely centralized government.”
And now the justices in question:
Therefore, in determining if a congressional action is within the limits of the Commerce Clause, we must look not only to the action itself but also its implications for our constitutional structure. See Lopez, 514 U.S. at 563–68, 115 S. Ct. at 1632–34. While these structural limitations are often discussed in terms of federalism, their ultimate goal is the protection of individual liberty.
There are some pages of complimenting the SC's wisdom in never adopting a formulaic test or definition of commerce under the Commerce Clause. Some may consider this pure flattery; I would view it as an attempt to guide the current court's attention away from the Raich mindset back toward the Morrison and Lopez mindset.

Then we settle down to the meat (pg 113):
Every day, Americans decide what products to buy, where to invest or save, and how to pay for future contingencies such as their retirement, their children’s education, and their health care. The government contends that embedded in the Commerce Clause is the power to override these ordinary decisions and redirect those funds to other purposes. Under this theory, because Americans have money to spend and must inevitably make decisions on where to spend it, the Commerce Clause gives Congress the power to direct and compel an individual’s spending in order to further its overarching regulatory goals, such as reducing the number of uninsureds and the amount of uncompensated health care.
They point out that the unprecedented nature of the action is not favorable, because it is indeed attractive but yet it has never been done. They quote the SC:
As the Supreme Court has noted, “the utter lack of statutes imposing obligations on the States’ executive (notwithstanding the attractiveness of that course to Congress), suggests an assumed absence of such power.” Printz, 521 U.S. at 907–08, 117 S. Ct. at 2371; see also Va. Office for Prot. & Advocacy v. Stewart, 563 U.S. __, __, 131 S. Ct. 1632, 1641 (2011) (“Lack of historical precedent can indicate a constitutional infirmity.”); Alden v. Maine, 527 U.S. 706, 743–44, 119 S. Ct. 2240, 2261 (1999).
See page 119 and 120. On page 124, after having discussed Wickard and aggregation:
The question before us is whether Congress may regulate individuals outside the stream of commerce, on the theory that those “economic and financial decisions” to avoid commerce themselves substantially affect interstate commerce. Applying aggregation principles to an individual’s decision not to purchase a product would expand the substantial effects doctrine to one of unlimited scope. Given the economic reality of our national marketplace, any person’s decision not to purchase a good would, when aggregated, substantially affect interstate commerce in that good. 95 From a doctrinal standpoint, we see no way to cabin the government’s theory only to decisions not to purchase health insurance. If an individual’s mere decision not to purchase insurance were subject to Wickard’s aggregation principle, we are unable to conceive of any product whose purchase Congress could not mandate under this line of argument.
I can't either. Page 130:
The government’s position amounts to an argument that the mere fact of an individual’s existence substantially affects interstate commerce, and therefore Congress may regulate them at every point of their life.
Page 137:
Ultimately, the government’s struggle to articulate cognizable, judicially administrable limiting principles only reiterates the conclusion we reach today: there are none.
See page 139, in which the court points out the bogosity of the government's argument about cost-shifting as a unique factor.

On page 147 they address the federalism issue, noting correctly that the states have traditionally regulated their own insurance markets. This is the weakest line of reasoning. They know it, but amass detail and finally end that line of argument on page 157 which brings us to the Necessary and Proper issue.

On page 158:
On this facial versus as-applied point, the Raich Court declared that “the statutory challenges at issue in [Lopez and Morrison] were markedly different from the challenge respondents pursue in the case at hand. Here, respondents ask us to excise individual applications of a concededly valid statutory scheme. In contrast, in both Lopez and Morrison, the parties asserted that a particular statute or provision fell outside Congress’ commerce power in its entirety.” Id. at 23, 125 S. Ct. at 2209. The Court deemed this facial versus as-applied distinction “pivotal,” as “we have often reiterated that ‘[w]here the class of activities is regulated and that class is within the reach of federal power, the courts have no power to excise, as trivial, individual instances of the class.’” Id. (quoting Perez, 402 U.S. at 154, 91 S. Ct. at 1361). The plaintiffs here, of course, are not asking for courts to excise, as trivial, individual instances of a class—rather, the plaintiffs contend the mandate to purchase insurance from a private company falls outside of Congress’s commerce power in its entirety.
This is the real issue to be decided:
At best, the individual mandate is designed not to enable the execution of the Act’s regulations, but to counteract the significant regulatory costs on insurance companies and adverse consequences stemming from the fully executed reforms. That may be a relevant political consideration, but it does not convert an unconstitutional regulation (of an individual’s decision to forego purchasing an expensive product) into a constitutional means to ameliorate adverse cost consequences on private insurance companies engendered by Congress’s broader regulatory reform of their health insurance products.128
I believe the interpretation of the necessary and proper clause as allowing exercises of power which otherwise clearly violate the constitutional structure is obviously flawed.

For example, what if Congress added the provision in the the health care reform that since a woman having more than five lifetime sexual partners greatly increases the odds of STDs and associated health complications, women having more than five lifetime sexual partners would henceforth be charged an excise tax on their tax returns? Furthermore, that since anal sex is associated with much higher rates of structural dysfunction as well serious infectious diseases, it will cost those engaging in butt sex an extra $2,000 each year on their tax returns.

The findings are true, and the measures are rationally related to holding down health care insurance premiums. We will pause for a moment of awed silence while contemplating enforcement measures - perhaps the IRS could offer a $500 reward to those wishing to report a "tax cheat" for one or the other offense.

The SC however would find these provisions of the law unconstitutional, given the penumbras and emanations of cases such as Casey and Lawrence. The Supreme Court has found in the Constitution the principles that who individuals choose as sexual partners and the activities in which persons engage with said partners are deeply personal matters involving a fundamental liberty not to be regulated by government.

True, the Supreme Court has never said that Congress can't pass a law mandating that individuals buy dildoes, condoms, or shares of stock in which various Congress Critters have substantial holdings and disappointing profits, or the shares of companies that have given substantial donations to Congress Critter campaign funds. But this does not make such laws constitutional.

For example, consider the banks. Suppose Congress needed to engage in yet another TARP campaign, but found that for some puzzling reason China really didn't want to buy another trillion dollars worth of Treasuries? Such a provision might be one of the few ways that Congress could bail out the nation's financial system. This isn't really farfetched - once Congress realizes it has the power, it is likely that it will take to spending taxpayers' money by fiat with great enthusiasm.

Yet the mere fact that the Supreme Court has never said that Congress cannot mandate that taxpayers purchase bank stocks obviously does not make it constitutional for Congress to do so, nor does it become constitutional under the rubric of the Necessary and Proper Clause pursuant to Commerce Clause powers. There is no doubt that Congress has the authority to regulate the nation's banking and financial system, yet I do not think the Supreme Court would have found a law mandating that individuals with AGIs greater than 30K must buy at least 5 shares of Bear Stearns stock each month or pay a penalty of an equivalent amount on their tax returns constitutional. The justices wouldn't have liked the investment themselves.

In the end, this will be decided by the Supreme Court, which has government health insurance and thus might have been deemed by Congress to be more compliant with its desires on this issue. But even if the Supreme Court gives it a thumbs up, I believe the voters will not. The US Constitution contains provision for constitutional amendments, and the crazed Congress that voters are now contemplating will not be trusted with this power.

Congress clearly has the power to levy a tax upon households and individuals, and to use the proceeds to buy those uninsured individuals insurance (of a sort) from private companies. But it did not employ that power in this law. Congress has the power to levy a tax and to set up some sort of nationalized health system, but it did not employ that power either. The supporters of the constitutionality of this bill ignore a meaningful distinction; this blurring of the public/private line does have constitutional implications, and it does fundamentally change the structure of government.

Here I will refer you back to the CBO memo linked above. It might seem tangential, but it is not. Passing laws that mandate private expenditures for public purposes completely obscures the line between government and "everything else", and it does so without accountability or right of appeal under law, because it splits the categories of those impacted under the law, it hides the expenditures made under such laws, and it shifts the axis of negotiation (a forced purchase must surely involve great need for negotiation) from a unified government to individuals and a number of private companies.

Therefore, if I were arguing this case before the SC, I would argue it under due process and equal protection grounds, and advance the claim that such a scheme must inevitably deny masses of individuals equal treatment before the law and an effective avenue of redress. Great power can never be safely combined with evasions of accountability, and an evasion of accountability was largely what Congress sought to achieve with the healthcare reform law/ Some parts of the bill are fiscally impossible to implement, but the individual mandate is by far the most pernicious aspect.

Congress has the power to set up a nationalized health system, and to tax us all to fund it. But it did not use that power. Congress has the power to tax individuals and households and use the proceeds to buy uninsured individuals health coverage from private companies, but it did not use that power. I don't think Congress has the power to tax uninsured individuals and NOT use the proceeds to secure them insurance, and I am certain that if Congress has the power to tax an uninsured individual $2,000 for not having insurance it has the power to tax an uninsured individual $10,000 for not having insurance. The power to tax is the power to compel, and used in this way, the power to tax amounts to complete destruction of liberty and representation.

I do believe that the "tax" is in fact a penalty, but regardless, the regulatory structure which Congress has here erected is both so viciously incompetent and yet so cleverly splintered that it, in effect, destroys the fundamental nature of representative government under the Constitution.

In the end, I believe the SC will strike this provision, and I believe it will do so because it fears being overridden by the population and it would correctly view that as creating a constitutional crisis.

July Monthly Treasury Statements

July 2011. July 2010.

Self is virtually unchanged at 204/205. Wages are somewhat encouraging at 14,010/13,572. +3.2%.

We won't go down without a struggle! It is difficult to escape the stunning drop in consumer confidence, though. I thought being in the 63 range was bad, but 54.9? AWWWWK.

And cluck, cluck, Tyson says it will lose money on its chicken division in the fourth quarter, because, well, consumers can't afford to buy chicken. What was that about a chicken in every pot?

I Can Make No Sense Of The Retail Report

Somebody's crazy. Maybe it's me. Here's the report.

The more I look at this thing, the more confused I get. There were five weekends in July, so it ought to have been a good month.

Like take autos. According to Ward's (which, btw, is a very fun read. Thorium-powered cars?), July sales were good compared to YoY, although there was a shift from cars to domestic trucks in the mix. Still, I was expecting to see a rise in the month-to-month raw figures for MV, and now the unadjusted sequence May-July is reported at 70,070 > 70,747 > 69,910? Ward's reported raw unit sales higher for July than June. Then when you come to look at the pattern of adjusted vs raw figures, things get weirder yet. The adjustments are in the reverse pattern than normally.

Now I should go ahead and look up methodology and seasonal factors and see if there is a change, but you know what? I'm not going to. I'm just going to pull the raw figures for the last three years and work from them, although I have real doubts about the raw figures. The retail number is also confusing.

But first, I think we should all contemplate thorium-powered engines for commercial heavy vehicles. These now run off diesel. The engines should be heavy, but extraordinarily durable. The upfront investment would be significant, but one engine would actually power several vehicles sequentially. The impact on energy balance and oil-derived inflation of basic costs would be immensely positive. So the natural application is in heavy vehicles first, although any such unit could potentially pay off as a substitute for fossil-fuel powered boilers for space heating in commercial buildings and perhaps even homes.

Now if you read this blog you have got to be something of a nerd. Therefore, read about the thorium and think about the thorium:
“The issue is having a customized application that is purpose-made,” he says, admitting that developing a portable and usable turbine and generator is proving to be a tougher task than the laser-thorium unit.

“How do you take the laser and put these things together efficiently?” he asks rhetorically. But once that is achieved, “This car will run for a million miles. The car will wear out before the engine. There is no oil, no emissions – nothing.”

Stevens says his company should be able to place a prototype on the road within two years. The firm has 40 employees and operates out of an in-house research workshop.
The concerns about radioactivity are overblown, because this is not a nuclear reaction.

Rail kind of sucked this week, so I think we should all think about the thorium. What this guy is doing has multiple practical applications, and it sure sounds like a few private investors could make a good buck. Also it might be time to buy up potential thorium mining resources.


Eurostat: EU industrial production drops by 0.7 in June; EU27 industrial production drops by 1.2%. That's on the month.

Meanwhile, France reported a real GDP growth rate for Q2 of zero. There are implications; Sarkozy has promised to drop the French deficit much faster in light of the waves of European debt angst. He needs some growth to do that. French household spending was the primary culprit. If you go back to the French tables I posted recently, you'll see the ominous -1 there.

German Bunds benefited. Both these numbers were unexpected; the "soft patch" is more quicksand-like than policy makers have wished to believe. The Eurobond issue is a huge, flaming political nightmare sweeping across Germany right now.

Everyone's blaming the short traders. Country after country is banning short-trading. It does not seem likely to improve their debt/GDP ratios.

Thursday, August 11, 2011

Treasuries, The Bad Movie

This may be just a blip, but the long end moved today.

We'll just have to watch it. There was an auction for 30 year Treasuries today, and the bid/cover ratio was 2.08.

I prefer the text version.

Today was an extremely volatile day for everything, but here's the blurb from the Bloomberg Economic Calendar:
Extremely low yields may finally be stemming demand for Treasuries. Coverage for today's 30-year bond auction, at 2.08, is the lowest in more than 2-1/2 years. The auction tailed steeply with the high yield of 3.750 percent more than 10 basis points above the one o'clock bid which is a record. Another sign of weakness is that less than 1/3 of the $16 billion offering went to non-dealers in what is evidence of weak investor demand including weak foreign demand. Demand for Treasuries is falling in reaction to the results.
It's not clear that this really says anything about US instruments. We might want to compare to the German Bunds, which marched up today. I really don't like the looks of the short end there.

Trade Balance, June

It turns out that the trade balance in June kinda went south:

June, that magical mystery month of brilliant possibilities, continues to disappoint. Foreign Trade Main:
The Nation's international trade deficit in goods and services increased to $53.1 billion in June from $50.8 billion (revised) in May, as exports decreased more than imports.
May's trade deficit was revised up from 50.2 to 50.8 billion.

Relative to May and June, there was a big increase of petroleum and petroleum product, although the average cost per barrel did drop slightly from $108.70 to $106. Exhibit 1 gives you the SA version - between June's figure and May's upward revision, SA net imports fell from -140,796 in Q1 to -147,523 in Q2. Exhibit 10 gives you the seasonally adjusted real figures for goods (does not include services). For imports we now see Q2 at 145,919 > 148,761 > 148,445. Note that structurally, net real goods imports for Q2 were probably suppressed by Japanese supply problems - look at the automotive category and look at the relationship between the Q1 months and the Q2 months. For exports, we now have 102,274 > 100,879 > 97,554. Not a favorable progression.

That's a three month SA real deficit of 142,218 compared to the first quarter's 150,786. Net exports in the advance GDP release contributed about 19 billion of the total 42 billion quarterly annualized gain, and it does not look like that trend will continue. Q2 GDP will probably be revised down.

Another way to look at this is via Table 2, which gives you the rolling three month averages on a seasonally-adjusted, but not price-adjusted, basis.

Mr. Market in action:

Weekly Claims

I believe this. Headline 395K this week, 405K 4-wk moving average.

There's another round of claims coming, but mostly what is happening now is that we seem to be rolling higher-paid jobs out and lower-paid jobs in.

Because of the funding problems at the state and local government levels and pending cuts in some service industries, these are pretty well doomed to tick up again. But right now we are through one bulge, auto production is okay (although final sales trends may still be degenerating), and we will have to live through a pretty tight winter.

As we move through into next year, lower mortgage rates and time should help home sales. This will boost the economy a little. If we do not continue the FICA tax cut (and we shouldn't) it will take some money out of the economy. However lower fuel prices seem likely to put far more back in.

India reported 9.9% inflation, mostly on food. China is sitting at 6.5%. We have a way to go before we can get prices more aligned with incomes and production profit margins.

PS: On policy. First, see Mark's post. The Fed cannot possibly afford to do QE3, because inflation expectations are relatively high. The last a debt-loaded economy needs is higher interest rates, and the fact that interest rates are so discontinuous with inflation expectations is a bad warning in and of itself.

Second, the consumer economy worldwide is teetering, primarily on basic rises in costs:
“You’ve got to stimulate demand growth,” said Indra Nooyi, CEO of Purchase, New York-based PepsiCo, in an interview. “Until we stimulate primary consumption, the cash will continue to sit on the sidelines.”
Yeah, well that's a fine idea, but the ability to continue stimulus operations is highly limited. And you know what? For many companies, demand is going to fall relative to the last six months, because of the collapse of capital markets. That high end 20-25% that Howard Davidowitz was talking about just got a painful kick in the, er, confidence organs:
The biggest one-week plunge in stocks since 2008 followed by the downgrade of the country’s top credit rating may even be unnerving those who are fully employed and earning more than $100,000 a year. Rising concern among such households, which have the wherewithal to spend, poses a risk to a recovery that Federal Reserve policy makers said this week was already advancing “considerably slower” than projected.
Regarding this, and I apologize for the crudity, I can only comment "No Shit, Sherlock". The high-end consumers were carrying retail sales expansions! Now they will be considerably more cautious, which means further impairment of money flows throughout the economy. This points out the perils of following a stimulative strategy which selectively increases the incomes of the top 1/4 while decreasing the incomes of the bottom 3/4, plus impairing the return on investment for companies producing stuff.

The cure for this is to let Mr. Market work his magic and destroy the excesses in the system. It's gonna hurt, but at the end of it prices will settle at a point at which the volume interchange of goods and services can begin to increase again. Prevent the financial system from collapsing. Let investors take losses on their bad investments. That's the only cure now, and it is a sure and certain cure.

Also, central banks have effectively run out of the ability to use monetary infilling to support price structures. The Fed's QE2 was 600 billion over six months. Now let's look at the retraction of money into Other Deposits in the US - here's the last graph again:

If you look at that graph, Mr. Market has sterilized over half of that money in a few short months. The beatings will continue until morale improves, and morale will improve from the bottom up this time.

In its own way, the Fed has become a Communist Party-like structure attempting to fix prices and control markets. This is working just as well for us as it did for the Soviets and the Communist Chinese era. Planned economies don't work because they are inherently brutally inefficient economies. It is not the name of the thing that counts, but the nature of the thing.

Wednesday, August 10, 2011

The Eye Problem

Seems to have been measles. Apparently it can cause eye inflammation.

FYI, I have been vaccinated against measles. Twice. The early vaccines that were given when I was youngster weren't very effective, and after my older brother got measles in college, I was dragged off for another shot. However it may not have worked because I was being treated with steroids at the time.

I did not realize it was measles until after I developed the rather distinctive rash. After a spate of googling, I discovered that I darned sure wasn't the first in this area. Apparently there's a European measles epidemic and they conveyed it here in the spring.

Anyway, I'm resting, because I was getting better before I decided to split wood in very hot weather and mow the lawn. Apparently this sort of activity is not a cure for measles, although I have found it works for some other viruses. It turns out, as was explained to me by a very disgusted doctor, that you should rest. That's the cure for measles. Who'd a thunk? It's a real pity that I don't apply some of the excellent advice I gave to Gordon to myself. I still claim that the GDP release would scarify anyone's eyeballs, though.

In other news, the European containment is spreading. France now has a touch of the Greek Grippe and the Italian Fever. The ground is very close indeed. ECB is supposed to be making unlimited money available to banks, which should help matters somewhat. Call it supportive therapy.

From here there are two possible outcomes. Either Germany coughs up and impairs its own credit, which would be really stupid ( although not as stupid as trying to treat measles with very vigorous sustained exercise in very hot weather ) or there's just a money dump to keep the banks afloat and some sort of deal to restructure sovereign debt in multiple European countries is developed.

I have no idea what the Europeans will do, but Mr. Market has caught up to them and the fundamentals just aren't there to BS their way through this. The problem is really that France can't afford to risk incurring more debt for bailing out any other countries. On its own it is quite plausible that it can tighten down and work its way through this. It cannot put money into rescuing other countries, however.

The ratings firms are trying, but it isn't going to work.



Desire Meets Reality, Reality Kicks Desire's Butt

Auf Deutsch, yet.

German inflation is up on energy costs. And they really ain't seen nuthin' yet. In the meantime, the green jobs are just proliferating. The Germans are going to wrest the top place in the "Hike Consumer Energy Prices" away from Denmark.

I was working on a long post about the German Grünholzkopf syndrome, but it looks like we can all watch it play out in the news.

The complicating factor here is that not only are the Germans spending big chunks of money for expensive, unreliable power, they have burdened their future budgets with big payouts for solar. Solar power is not a good fit for Germany and they get relatively little out of it, but their feed in-tariff is over 50 cents a kwh. This is guaranteed for over a decade more. Add to that the need now to build more coal plants, and then combine that with the credit hit they are slated to get from their obligations under the European bail-everybody-out scheme, and German economic growth is going to be impaired.

That's unfortunate, because Europe really needs them cranking along.

But note, there is no bad idea so bad that it won't win admirers. Chicago Boyz on the fallacy in the US.

Tuesday, August 09, 2011

Middle-aged, Sedentary Male Mice

This does not have anything to do with economics, really. Everyone's waiting for the FOMC, so why not live a little?

The kind folks at UCLA San Diego have proved that dark chocolate improves exercise performance. That is, they've proved it if you are a middle-aged, sedentary male mouse. No word on middle-aged non-sedentary human females, but hey, this is a prescription I'm willing to follow. Should one of my readers in fact be a sedentary male mouse, this is good news indeed for you, but I suspect this demographic among my readership is minimal.

They put half of these fat, demotivated little rodents on treadmills, while half were allowed to lie around watching reality shows and Seinfeld reruns. SOME of the mice were given just water. SOME of them were given an epicatechin solution, which is believed to be the good ingredient in dark chocolate, somewhat like THC is in marijuana. (So now I observe grimly that not only were no humans involved, and no females, but no actual dark chocolate was involved. The plot thins quickly.)

This story has a tragic ending for the mice involved. I think it would have been more justifiable if they had at least given them dark chocolate so they could have had a happy last few weeks. Worse yet, they made them run on treadmills until they dropped.

Some of the mice were put on exercise programs during the water/epicatechin protocol, presumably with very small personal trainers. The payoff here amongst all this anti-rodent cruelty (PETA, are you paying attention?), is that even the sedentary middle-aged male mice who were not forced to exercise but were dosed with epicatechin lasted much longer on the run-until-you-drop rodent torture marathon than the water group who were forced to exercise. That's pretty strong evidence.

At the end of this they autopsied the leg muscles of the mice and discovered more mitochondria and increased capillary formation in the epicatechin group, even for the sedentary, happy male rodents, which explained the better performance.

Now, since human studies have shown that dark-chocolate-chompers have lower risks for high blood pressure and heart disease, which would be somewhat explained by the capillary formation, I think it is possible that the same would be true for non-sedentary middle-aged human females. Tragically, the amount of epicatechin used corresponds to about 1/2 of 1 square of a dark chocolate bar. I'm sure doubling the dose would work fine.

The trial commences NOW. There's not going to be a control group. See, I was just thinking mournfully that the emergency dark chocolate bar stash in the freezer had somehow disappeared quickly due to the high stress of the last week (insane markets, insane central bankers, really bad eye problem). So now I have an excuse to up the dosage. In the cause of science.

See, there's some good even in recessions, because somehow I think funding for this came from Big Chocolate.

I also protest against the unnecessary cruelty to mice. (And why just male mice?) See, if you offered me ENOUGH dark chocolate I would have done this for free, and even let the researchers take small biopsies of leg muscle tissue before and after. In fact, I'd volunteer for the lifetime study. Wouldn't it be GREAT to track this for one non-sedentary human female's lifetime? Cough up a lifetime contract for dark chocolate and I'm your lab animal!

Monday, August 08, 2011

Sitting Here Watching Nymex Crude Futures Fall

Down to the high 70s now.

As difficult as this period is, at least in part the correction is necessary to stave off a really nasty worldwide downturn. What we will get in terms of the global economy depends, in part, on this collapse.

$76 now.... Going, going, gone....

Just Because It's So Purty

Do your own over here. That's July/August 5th.

Yields are falling quite hard now, not surprisingly. On Friday the 2-year was at 28 bps. Now it's 24.

The ten year lost 19 bps and is at 2.37 now.

Despite the Fannie downgrade, real risk for the GSEs just dropped pretty hard in the last month. Their inventory is worth more and in effect bond yields got a lot of extra shielding from any possible losses with better returns in comparison to Treasuries.

So I wouldn't be crying about that.

I am watching these curves for the formation of a risk inflection point, which should set in sometime over the next year if Congress doesn't eventually get off its butt and make an attempt at imposing some fiscal constraint. My guess is that it will show up at 10 years first.

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