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Friday, October 28, 2011

Mr. Sensitive Wins The Pool

Italy sold bonds:

The Rome-based Treasury sold 3.08 billion euros ($4.36 billion) of 2014 bonds to yield 4.93 percent, the highest since November 2000, and up from 4.68 percent on Sept. 29.
Italy sold a total of 7.93 billion euros of bonds, less than the maximum 8.5 billion-euro target, after
Prime Minister Silvio Berlusconi vowed in a letter to the European Commission this week to boost growth and cut debt to fight the sovereign crisis. Also auctioned were 2.98 billion euros of 2022 bonds to yield 6.06 percent, 871 million euros of 2019 bonds to yield 5.81 percent and 1 billion euros of floating-rate bonds due 2017 to yield 5.59 percent.
But it makes sense if you think about what just happened - pushing all the losses on private holders has to nullify the effect on private investors of ECB bond purchases. Also see this article on Eurobank finances.

Thursday, October 27, 2011

I Don't Know Whether To Laugh Or To Cry

The numbers on the Euro deal sound big and impressive and all that, but look:
Europe’s leaders took the unusual step of summoning the banks’ representative, Managing Director Charles Dallara of the Institute of International Finance, into the summit to break the deadlock over how to cut Greece’s debt to 120 percent of gross domestic product by 2020 from a forecast of about 170 percent next year.
The 50% write down on of the bonds applies only to the private holders, and as protected entities like the ECB and the IMF get a larger and larger percentage of the outstanding bonds, it's clearly not enough to return Greece to paying status. Debt needs to be written down to 80-90% of GDP, because the Greek economy is now so weak it's close to becoming a humanitarian catastrophe. A goal of 120% by 2020 just guarantees further defaults.

You have increasing hunger among the Greek population and a shortage of medicines. This is ridiculous. They cannot pay the debt. No country really could.

The theory behind the trillion Euro stability fund is that current allocations will be levered up. That means that someone has to ante up the money. They are either guaranteed or not. If not guaranteed, those investing will want high returns which will make the fund sort of useless. If guaranteed, the creditworthiness of those nations providing the guarantees will be impacted. I assume that the real plan is to get China to ante up in order to preserve their exports to the Euro area, which China really needs at this point. Thus, the idea is to stiff China by not providing guarantees, which China will theoretically not demand because at this point China is looking at spending money that it cannot regain to support smaller businesses anyway.

At this point, I would think that Italy will have to leave the Euro within a couple of years - they cannot go on as they are for very long - they are close to snowballing. It has to be obvious that this kind of deal is structured to pretend that Italy is just fine, but Italy is not fine and cannot withstand another downturn.

One good feature of the last week's negotiations is that some sort of deal was made to prevent banks from pulling out money from their Eastern bloc subsidiaries. This will lessen the general economic decline.

The nervous collegiality of the EU leadership is now failing very publicly - in particular, the German population appears to recognize that the situation of the Greeks is untenable, but the leadership does not. It is one thing for a country to fail on its own. It is another thing to take control of another country's finances and then let it fail to provide the basics for the people. That sows the seeds of war.

For the first time, I wonder if the EU is doomed.

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.

Friday, October 21, 2011

So Busy I Don't Have Time To Sleep

Much less blog. Sorry.

This European thing isn't looking good. No matter what they decide to do, it's abruptly going to become clear that someone is in more credit trouble.

So far the ECB is refusing to take any losses on the Greek bonds, but that would deliver a massive loss to the banks because the ECB now has a big chunk of them. Even another 300 billion in the rescue fund is going to put France underwater after it funds its banks. It's not pretty.

Sunday, October 16, 2011

Can "It" Happen Here?

I would urge readers to see John Mauldin's latest column Can "It" Happen Here. If you aren't subscribed you will have to enter your email address to read the full thing.

There are several very important points in that article.

The first is about Barney Frank's bill to New-Yorkify/DCify the Fed. That's covered in enough detail to be self-explanatory. It would be a disaster of the greatest magnitude - in fact what Barney Frank thinks is democratic would be the destruction of the democratic process. The regional bankers are voicing worries because employment and trade in their regional economies are dependent on a somewhat stable currency. They are representing the full-employment agenda. But Barney isn't the brightest bulb in the DC closet, so he probably really believes in the justification suggested to a somewhat feeble mind by his own wealth constituents who are not exactly the average American.

The second is that incidents of hyper-inflation have historically been prompted not just by printing money but by printing money and big government deficit spending of that money. This is important, because US expenditures funded by deficits were 36% of net expenditures for fiscal year 2011, and Obama's proposed "jobs" bill would be doomed to make fiscal year 2012's ratios worse. This is so close to the historical danger line for hyperinflation episodes that it must be taken very seriously.

The third is that 2013 is probably the line. That's seriously true.

Hyperinflation occurs when the people who do most of the bottom-line trading, selling and servicing in any economy are forced to exit the monetary system. They usually do this by barter. The result is vicious, and it sets up a self-reinforcing cycle that can't easily be contained by CB activity. Instead, to correct it, central banks are forced to inflict nothing less severe than an acute recession on the hyperinflating economy, and in severe cases it has to be a depression. China is in a state of near hyperinflation, which is why it has to be so carefully watched.

The early symptoms of impending hyperinflation are difficult to diagnose. Money velocity slows because common individuals can't buy necessary commodities and services. Eventually barter networks emerge, and they probably already have in the US among many service businesses. As these networks emerge, demand for money in the real economy drops, and those who have money either have to bid up commodities or dump their money into equities. And then, if the deficit spending continues, the whole thing topples. But the earliest marker is always going to be when the average participant in an economy becomes less and less able to buy the basic goods and services with money.

Thursday, October 13, 2011

HSBC Emerging Market Index Q3 2011

Not good news. Backlogs of work are contracting, exports are contracting, It's a grim picture - read the report:
Emerging market output growth (covering manufacturing and services) eased to a nine-quarter low in Q3 2011. Additionally, the EMI reading was the fourth-lowest in the series history, only surpassing levels registered between Q4 2008 - Q2 2009.
In other words, we're in a global downturn. If world growth were to fall to the 2-2.5% level, that would qualify as a global recession. It appears we're very close to that, and we may be there.

Services follow manufacturing!

This is so bad that it makes the US look pretty decent by comparison. US initial claims don't look too bad - hardly an expansionary number, but not a collapse into the gutter either. Covered employment is 126,188,733, an increase from the summer quarter's 125,807,389. This also marks a YoY increase, with the low having been reached in the first quarter of 2011 at 125,560,066. Covered employment in the summer quarter of 2010 was 126,763,245.

Previous week's claims revised POSITIVELY. SA kicks in right about now - NSA claims of course increased strongly. The 4-week MA is now at 408K. The 4 week MA for continuing claims has been cycling in the same range for some time - a lot of recently unemployed are getting seasonal jobs.

August international trade balance didn't degenerate:

Still, it is time to bring in the brass monkeys. Input prices cannot fall quickly enough to change the overall trend; the problems in Europe are real and will not be isolated from private sector. India's clear downturn is not going to reverse quickly, and it is the game-changer. Also of concern is that as this wears on, eastern Europe is inevitably going to get dragged in somewhat. The new Chinese plan is to extend subprime loans to smaller private companies, and you all know how that ends.

Tomorrow, Singapore.

PS: The Europeans are thinking of tougher stress tests, but if they do them a whole bunch of banks are going to fail. That means governments would have to pour money into them. This is not going to resolve quickly!

Wednesday, October 12, 2011

Something About Massachusetts

Stuck in a corn maze at a farm, a Massachusetts couple calls police for rescue. A modern-day Green Acres:
Husband: "I see lights over there at the place, but we can’t get there, we’re smack right in the middle of the cornfield."

Woman: "I don’t know what made us do this. It was daytime when we came in. We thought if we came in someone would come in and find us... We can hear (the police officers) ... Oh, my goodness. The mosquitoes are eating us alive, and I never took my daughter out, this is the first time. Never again."
I'm not sure if this couple just didn't realize they could walk through the corn towards those lights they saw or whether they just couldn't take the mosquitoes. Fortunately they did not need to bring out the choppers - a K-9 team found them.

Why does that make me think of this, and, embarrassingly enough, our current president?


ECB's emergency lending program is seeing heavy use:
A total of 4.16 billion euros was borrowed from the ECB's instant-access overnight facility, which charges 2.25 percent interest as opposed to the 1.5 percent banks get money for at its mainstream operations.
This is hardly reassuring. Unless a lot of it went to the Dexia bailout, it implies that some big banks are cleaning out the vaults. ECB is extending pretty much unlimited liquidity, so the sky's the limit! I'm thinking numbers this big have to show up in French bank vaults somewhere! Ah, well, time to start reading ECB's site every day.

Harrisburg, PA filed for bankruptcy. In a controversial move, several ratings firms have put Harrisburg on negative outlook. (Just joking!!!!) What's really funny about this is that it probably isn't legal. They did it to prevent state takeover.

Bloomberg article:
Asian stocks rose, with a regional benchmark index posting its biggest five-day advance since March 2009, amid speculation that China will boost support for the equity market after valuations dropped to record-low levels.
Chinese stocks listed in Hong Kong advanced, with banks extending yesterday’s rally after Central Huijin Investment Ltd., a state-run investment arm, began buying shares of the top four financial institutions.
The classic warning about being careful of buying stocks with very strong institutional holdings probably applies. ...
Transport continues to be dicey. In other news, Japan's balance of trade continues to deteriorate. Income from foreign investments was all that kept August from being in deficit in its current accounts. The picture across most of greater Asia is not thrilling, and it is not going to bail either the US or Europe out of their current malaise. India.

Singapore advance Q3 GDP will be released on the 14th. Singstat.

A further cautionary note: When I see trading patterns like this (Brazil, BOVESPA), I am not happy. Brazil's CB cut rates in October, and August retail sales were released:
The Bovespa stock index climbed to a two-week high as homebuilders and consumer stocks gained after Brazil retail sales declined more than forecast, signaling the central bank may continue to cut interest rates.
Sigh. More detail. IP is down too. Inflation is running over 7%.

As I look around the world, I see that many ocean shippers are taking a loss, consuquently that industry has to consolidate and downsize to adapt to make money. I see that fundamental consumer costs have outrun consumer incomes in many of the large economies that have generated demand growth. I see that weaker outlooks and various factors, including the flood of money inserted into the global system as a result of 2008, prevent commodity prices from dropping meaningfully. And I see further baked-in inflation until trading conditions can adjust.

All these things point to the market being very unlikely to adjust in a smooth manner, which means that everything will be driven to its breaking point, and then, when enough damage has been done, prices will adjust and world trade will be able to pick up again. But we are a long way from resolution, and in some countries, this will mean revolution.

I cannot see where the ending point is this time, but getting there will not be pretty and the agonizing eternal focus on the Euro obscures the reality that conditions in many economies are degenerating pretty rapidly. This is important, because as underlying conditions in these economies slowly weaken, the likely global floor keeps falling. But money does not reflect this, so trade and pricing isn't adapting to reality, which is creating a weakness feedback loop that I don't like.

Tuesday, October 11, 2011

I Am Going To Bravely Watch the GOP Debate

I'm not saying that I am going to comment on it, just that I am going to watch it. I'm making coffee right now. Such is my burning enthusiasm.

I will be curious to see how Cain handles himself tonight. SuperDoc decided long ago that Cain was his candidate - Cain may have far more staying power than most think. But if Cain is unstable his ego will trip him up starting about now!

Update; my impressions: A decent lot with some ideas. The moment when Romney impressed me the most came with his comment about the banks and small businesses - it seemed like he really got it. He was quite evasive at points. A good talker, but can he deliver? Glibness is out of favor with me.

My weirdest moment came when Romney tossed a softball to Bachmann. I got the impression that he has already decided to pick her as his Veep. He shouldn't be so obvious about assuming he's got the nomination.

Overall Santorum did the best on the economic issues, but he has not a chance. Ron Paul was enjoyable but has not a chance. Gingrich, as always, is a great talker and genuinely does have a lot of ideas, but I don't think he has the background to understand how to deliver. I did feel acute sympathy when he went off on a rant about the Debt Limit bill. Romney has experience, but is a bit of an equivocator. Perry would probably be best as president IMO in general, but he has not done well in these debates and he would have to be more explicit about his economic plan.

I felt most depressed about the truth of Gingrich's statement at the end - any one of these people would be better than Obama. Obama has been a failure.

Regarding Cain and his 9-9-9 plan, he is the most likely to change things. I plan to write more about Cain and his plan, so I'll leave the rest for later. Cain is a bullheaded man with a surprising depth of background, and he should be taken seriously. Romney clearly does not take him seriously. This is a very severe mistake. Romney is running a polished campaign, but does he grasp just how serious our economic situation is?

NFIB October - The Buck Stops Here

Small businesses do seem to be the center of job creation right now. But this is not a very healthy mule, and I can't see it taking us very far:

Here's the full report. Note the minor blip up for this month. Note also that this only takes us to about a severe recession low, and the long, grim fall that preceded that nice little blip. Employment was a bit disappointing - over the summer it had moved up to -2, and in this report it fell to -5. On page 16 you can see the reported interest rates for regular borrowers. Small businesses aren't seeing any benefit from lower interest rates. Over the last couple of months, average rates have ticked up rather than down.

Finally, let me post this snippet from page 7. This series is one of the reasons that I have been such a woebegone, worried blogger of late:

I have always found this series to be a pretty good indicator of economic gates - times when the overall economy hits a diffusion point.

Look at Nov/Dec of 2007, and the huge change between March and May of 2009. According to this series, by July we had shifted into the "ice-cracking" recession wave.

Every "ground-level" indicator that I know of says that we are in a recession now. We probably entered it in April, definitely by June, and the question is when do we get out?

I am rather unhappy right now, and I have to lick my wounds a bit. I expected the "-22" in the above chart for September to be more along the lines of "-17", so I'm twitching and angsty. The next NFIB survey is the "big" sample, so maybe it will show up then.

Supermarkets are terrible, radio advertising is extremely worrisome, service consumer businesses are in trouble - and oh, yeah, consumer credit is definitely not bailing us out. H.8 chart:

Light vehicle sales were pretty good, but it isn't showing up here.

Monday, October 10, 2011

China - The Next Wave

Things seem to be far more difficult in China than they should be. China's property sales seem to be declining, and second hand property sales turnover prices suggest that a real problem impends. The crash may end up being deeper than I thought - the Chinese banking restrictions and the willingness of developers to pay 16-25% for working cash loans has blown up financing for smaller firms in China, and in some areas, the damage is obvious:
In Wenzhou, one-fifth of the 360,000 small and mid-sized businesses have stopped operating due to cash shortages, according to the city's council for small and medium-sized enterprises.

Of the 855 companies surveyed by the Wenzhou Economic and Information Commission, more than 76 percent said they are almost out of money and are struggling to continue production.
Unfortunately, I think that many of those business owners who are now so pressed bought property as an investment, and now will be twice whacked. It's certain that the property development whirlwind sucked a lot of ongoing investment out of other businesses. It's certain that far too many local governments became dependent on the developer market for ongoing spending - they were basically confiscating property from the holders and selling it to developers, in many cases financed by guaranteed loans.

It's the 1920s in China, and it will take perhaps a decade or even 14-15 years to fully unwind the current coil.

China's manufacturers aren't going to get any help from the international scene, that's for sure. The Chinese government has to unwind the property/local government financing coil, deal with the accumulation of bad banking debts (once again), try to restore the business environment for smaller businesses to keep employment up, and deal with what may be an epic outflow of capital as the class of very wealthy Chinese turn toward investing outside their own country. The pace of building has not slowed, and a lot of property is still lined up to come on the market.

Before this point I thought the likely outcome was for a downshift in the rate of Chinese expansion to 4-5% a year for 3-4 years, then an oscillation around the 6% point. But now I am not sure of that. I am very uncomfortable with the way things have moved over the summer. I'm still not seeing the necessary price adjustments in inputs! The system is not moving into the phase of internal regulation at all.

As the danger signs mounted over the summer (declining auto sales, for example), more unfilled jobs due to wages that didn't pay living costs, and growing production problems based on low sales prices and high input prices, the financial fever continued to mount. At this point, it seems as if many companies and wealthy people are buying assets outside China and are beginning to invest in production outside China, so I think all bets are off. Continuing electricity supply problems are another factor - hydro production is down in many regions due to drought/near drought conditions, and coal won't make up the difference.

In both China and India, the weakness is shown mostly in the first-time consumer buying market, with larger/luxury sales doing far better. This is a bad indicator.

Try this article. Hayek would have known what to make of this.

Sunday, October 09, 2011

Dexia Nationalized

Or so the NY Times reports. Belgium and France are coming up with the dough. This will not help the situation of either nation, but it does remove one weight from Monday markets.

Sarkozy and Merkel are promising that they will come up with some sort of Euro solution by early November. Given that Merkel recently promised her party not to further cut Greek debt and given that the July haircut on Greek debt is conceded to be too little, it is difficult to imagine what they will propose.

Clearly any package that would soothe the markets would have to include a significant bank rescue fund. What's at stake now is the creditworthiness of the rescuers! I don't see the way forward.

This is a long article from FAZ linked via Google Translate. There has been increasing discussion in Germany about adopting a Glass-Steagall approach to bank regulation, i.e. separating commercial and investment banking. In order to prevent vicious financial contagion, you have to keep commercial bank lending going. Then it is easier to let investment banks go BK.

Reading between the lines in a number of foreign newspapers, it seems to me that European policy makers are slowly coming to the consensus that they cannot bail out all the nations that will default on their sovereign debt, so they are now trying to figure out how to set up a financial structure that can tolerate the necessary losses.

This really does not look good for many large European banks. The Euros going to be there, because both France and Germany desperately need it. Devaluation of the Euro is very good for the German economy, and France cannot go it alone with its own currency. By the end of the bailouts it seems likely that France's debt load will be more akin to Italy's, so they may be willing to deal with some sort of debt compromise at the end of five years. But can Italy wait that long?

The smaller countries are going to be in a world of hurt, because at this point it looks like the best deal anyone could possibly get on the Greek debt would be a 70% default, and it would take aid offers to get Greece to agree to that and perform. This implies severe funding problems for many smaller countries.

Everyone expects Ireland to eventually get a 30% write off on its assumed debt, so somewhere, buildings will be falling. The UK is going to have to bail out some more banks, I think. We are looking at some major financial shocks, and it's unlikely that the Euro economy as a whole will get through without a significant downturn. I also think this has implications for India. India's growth is okay but its underlying fiscal position is not and we are about to enter an era of international financial caution.

This is from France's official treasury site:

So far this year these projections for debt/GDP ratios have seemed overoptimistic:

The planned budget deficit for 2012 was 95.5 billion Euro; it looks like France will have to be adding to that with funds for banking shore-ups. French GDP is not reaching the growth targets built into the forecasts above.

Friday, October 07, 2011

Hope Meets Mr. Market, Dies Ignominously.

Below, there is a substantive economic post.

If I were a cartoonist I'd have fun with this. While Mr. Hopey-Changey is running around talking up his health care magical mystery reform (women will have no costs for contraception - utopia!), the issue of required coverage is causing certain canaries to stop chirping in the health-care mines:
An advisory panel of experts on Thursday recommended that the Obama administration emphasize affordability over breadth of coverage when it comes to implementing a key insurance provision of the 2010 health-care law.

Obama officials charged with stipulating what “essential benefits” many health plans will have to cover should make it a priority to keep premiums reasonable, even if that means allowing plans to be less comprehensive, counseled the committee of the National Academy of Science’s Institute of Medicine (IOM).
So basically what this means is that your free contraception comes at the cost of actually getting treatment for cancer. This committee was commissioned by HHS to guide HHS in its regulations. Try the Kaiser health care reform calculator - you can rapidly see that if comprehensive coverage is mandated, many employees will drop coverage and pay the fine, because it will be far cheaper. Then the public will be stuck with huge health care subsidies the public can't pay.

Next Year In Jerusalem?

Sigh. BLS employment for September is out. It's a little worse than I thought it would be, but thank heavens not much going by the Household Survey.

The good news - the employment/population is up to 58.3%. The bad news - in September of 2010 it was 58.5%. The good news - Table A shows that we added 398,000 jobs in the month. The bad news - the YoY change is 647,000 jobs, which doesn't of course keep pace with new entrants. Table A-9 reports that over the year we have added just 595,000 full-time jobs on an NSA basis (comparing Sept 10 to Sept 11).

Employed persons at work part time for economic reasons rose 444,000 in the month. Discouraged workers increased by 60,000 in September. Workers unemployed by 27 weeks and over increased by 208,000. The participation rate for older workers without a disability (over 65) increased again to 23%. That's a pretty high number!

There is a basic consistency here - we are seeing stronger job growth in smaller businesses, which was foreshadowed by NFIB surveys earlier in the summer. But some companies are slacking off in production.

I expected this to be a bit better because there was quite a bit of storm-related construction and utility work added in the heavily-populated Midlantic to NE regions.

Temporary employment increased by 19.4%, which is a better indicator (Table B-1). Local government dropped 35,000 jobs, two-thirds of which were in education.

The problem I have with this is that inflation should be tailing down somewhat, but we're in a bad income trend that employment cannot redress:

This is through August. Real disposable personal income looks a bit better, but that's only because of the surge at the beginning of the year from the discounted FICA tax rate. Disposable personal income is personal income less taxes.

So either we continue to drop further behind on funding the already-unfunded SS program, or we take another whack in personal income at the beginning of the year.

The only way to get out of this without too much more pain is for inflation to step downwards quite significantly, but it has to happen rather quickly. Realistically, interest income will continue to tail down as a result of the international angst and the Fed's efforts. Taxes need to go up.

Since the GD, we haven't had a period this long when RPI had not increased:

Right now we are moving sideways economically, but there's quite an undertow. The US economy is pretty heavily biased toward consumption and services, and the income does not seem to be there to support much in the way of growth. These periods of stagnation have not historically ended well:

When both real personal income and real GDP growth over the year drop below 2.5%, the US economy is, well, in recession.

Historically, that is. One or either can fall below that line for a bit, but if both do, it's time to turn out the lights and go light on the commodities and stay light on inventory.

This is why I was so steamed up last year over the Fed's move, because at that time we were emerging into a less-than-brilliant recovery, which is all we could ever have expected. But we still had to face the Euro crisis this year, so it wasn't a time to be getting fancy. It was a time to plod sturdily along ignoring the bear, who was gaining on the folks in our rear on the other side of the pond.

I spent a ridiculous amount of time the last three weeks walking through stores, and it certainly LOOKS like we are in recession, somewhat masked by desperate machinations.

The nice part is that we do have a lot of pent-up demand out there. We do have some rebuild of manufacturing helping. We do have a little strength in light-heavy vehicles, although I suspect that's a transitory pop. Manufacturers have not built up inventory unduly. So I can still argue for a skipping, milder recession. The US domestic situation is not going to be assisted by foreign events, although certainly the current panic is helping us with our unwieldy public debt load.

Inflation should be falling pretty hard about now on commodities, which I believe it is. But inflation in services costs is still going up, which is not good for incomes.

Anyway, here's the detail on that graph:

If you look at the longer term series above, you'll note that RPI used to be a lot more chained to GDP. The unchaining is not a good sign; it means that more of our incomes are dependent on fluffy credit.

Finally, I believe the Fed was chasing a chimerical problem. CPI-W has a long history, which is one reason I use it by preference. You take a look at tell me where the deflation was - show me the danger the Fed was averting:
Seriously, click on that graph and contemplate it in detail - sort of like your financial life depended on it.

Go back and study the pre-GD period. You can see it then. I figure that Uncle Ben has a 50-50 chance of putting us into an honest-to-God depression in the next six months. He has certainly killed off another three hundred banks with Operation Twist.

Wednesday, October 05, 2011

Roaring With Laughter

The Occupy Wall Street "Joy of Outraged Incoherence" crowd have met their match, Chicago Style:

The protesters are making signs about being the 90% or the 99%, so these boys hung signs out the window announcing "We are the 1%".

One admires their willingness to state it as it is, although many of the workers at the CBOT aren't the 1%. But they are at least aspiring to get there, and frankly by now I am more in sympathy with them than the protesters.

I had enough of incoherent wild-eyed demonstrators when I was growing up. By the 70s it was all drugs, alcohol and "how dare you make me work for a living or get good grades to get a good job", so the romance of the 60s never took hold in my unredeemed little heart.

I think the Occupy Wall Street gang is rolling votes from the Dems to the GOP by the millions. If they can just keep it up for another two or three weeks, the Senate will go over 60% GOP, and we'll have a solid GOP federal government in 2013. It all depends on the weather - one good cold snap and these hippies will have to move to SF and boycott the local head shops for their outrageous pricing cartel.

The popular anger at the financial gurus is so very great that I would have sworn that nothing could defuse it, but NPR's desperate attempts to make the OWS (Occupy Wall Street) crowd look, well, sane have convinced me that the specter of the 70s is still haunting the country. I think the OWS crowd also has a lot to do with Cain's rise in polling - people want the country to work again, and you don't have to contemplate the wild-eyed or vacantly smiling, tattooed free-food crowd milling around urban centers for very long to realize that whatever their goals may be, they do not constitute anything most would describe as "working for a living".

So the JOIsters (Joy of Outraged Incoherence-sters) are rolling the country red in a big way. From Mr. Punch-A-Hippie to the Anchoress, a broad swathe of ordinary Americans are staring at the Occupy Wall Street crowd and recoiling in distaste. They want to get as far away as they can from That Sort Of Thing, and as far as they can get is pretty much Herman Cain at the moment and most definitely not another vote for Obama. I suppose Romney is really the leader, and Perry has a very good chance, but the reality is that Americans are fed up with the current powers that be and would like to put some more ordinary people in office, and Cain is the type of ordinary American most ordinary Americans aspire to be.

Americans really aren't that conservative, but they do want this era of misery to end! It's tremendously hard to follow even favorable coverage of the whacked-out movement without developing the suspicion that these people only agree about wanting to get their hands on Other People's Money, and Main Street has had some experience as to how that really works out. They can feel hands in their own pockets already, and those hands are sort of grubby and disgusting hands that they don't even want to shake.

The Hippie-Marxists on DU are roaring with joy and breathless anticipation over this, but they are not in touch with reality or the popular psyche.

Challenger, Et Al

The headlines on the Challenger layoff report are pretty bad, but over half of the announced total is from army force reductions and the BofA 30K layoff. So it is unlikely to be a continuous trend. Not that cuts like these are positive for hiring and the unemployment rate!

ADP employment report
: ADP notes that its headline job add at 91K is not very consistent with a "stable employment rate", i.e. we are seeing signs that unemployment could go up. This report only covers private sector hiring and the trend for state and local, plus armed forces, is not that strong. Plus you have new entrants. A lot of people went back to school because of the recession and a wave will be building of graduates with loans seeking employment, so the picture for next year is not that hot. Job cuts occurred at large companies; job adds were concentrated at small companies.

The fiscal problems at the state and local level are intense. Look at CA alone. In the first two months of the fiscal year, the cash deficit (revenues - expenses) was 5.37 billion, compared to the previous year's cash deficit for the same two months of 3.93 billion. A tremendous amount of the problem exists at the local level (see Stateline.org article) and it can't be resolved easily. Mr. Push is shaking hands with Mr. Shove right before the wrestling match begins, and it promises to be an ugly bout.

Then consider a state like Illinois. Although its economy is in relatively better shape than CA's (CA state motto - "The New Michigan"), Illinois passed a very large tax increase to deal with its finances. And sure enough revenues have come up - note the very large increase in personal income taxes, which derives mostly from the very large increase in personal income tax rates. Still, the current fiscal year deficit is projected to be along the line of 8 billion dollars:
In all, the state will be $8.3 billion short on June 30 if nothing is done, according to the report. The majority of that money, roughly $5.5 billion, will come in the form of unpaid bills from companies that provide everything from meals for the elderly to toilet paper for prisoners. Another $1.2 billion is composed of Medicaid payments the state will push off until the next budget year, while the remaining $1.6 billion is owed to companies for tax returns and health insurance bills for state workers.
The third "recovery summer" in a row is not going to bail them out. They can't keep increasing taxes. Illinois' state unemployment rate was actually a tiny bit higher in August 2011 compared to August 2010, according to BLS - a sharp change from July's YoY pace, although the unemployment rate did not increase this summer - it's just that last year it rapidly improved. CA is at least notching improvements in its unemployment rate although its current rate of 11.9% is higher than Michigan's rate of 11%, which is not something of which to be proud.

The final solution for Illinois is going to have to involved cutting retirement benefits and probably services. More tax increases are unlikely to increase revenues much at this point. So once again, Mr. Push shakes hands with Mr. Shove.

Michigan's economy is growing after its long depression - it is increasing high-tech hires and unemployment continued to fall over the summer. So it is not all grim news.

Without a stronger pace of private job growth over the country, weaker states are going to have a very difficult time over the next year.

To properly understand the full impact, I recomment this Rockefeller Institute briefing on state and local taxes. On page four you will find a graph showing the real change in taxes over time. Note that sales tax (the early warning system) fell right through the recession floor between the second and third quarter of 2007, meaning a recession had started.

Although tax receipts have been rebounding, they still haven't gotten back to where they were in real terms in 2006 except for property taxes, which of course kept growing. But in a real sense, property taxes are now probably not keeping up with inflation (see page 5 in the review). With high inflation this year, the nominal growth being reported over the last few months doesn't look very good in real terms, and it is obvious that many of these states cannot keep raising tax rates. Sooner or later you create Camdens and Detroits if you keep doing that, and a nation of Camdens and Detroits would be a tragedy.

Still, the tighter tax picture, especially for localities, wouldn't be that much of a threat if it were not for demographics. It is really pension and retirement medical benefits costs that are destroying the the budgetary outlook in so many places. Despite any reasonable adjustments that can be made, there will be decades of high expenses and low current investment and hiring - that is inescapable.

Tuesday, October 04, 2011

EPA Watch - If You Want To Eat

API (American Petroleum Institute) produces really good stats at a very high price. This is not relevant to my readership on balance, I suspect.

Another thing they do is highly relevant - they monitor the rules and regs of those delightful fairy dust people at the EPA. Read this, and read this, and be aware that US chances of sneaking through the current round of economic troubles with relatively little impact are deeply endangered by these projected EPA rulings.

The EPA has turned into a genuine threat to US economic stability, and this is an issue that warrants contacting your Critter. Overall energy production (including oil) and refinery production has been one of the underlying bright spots in a necessary US economic restructuring. Gasoline demand is weak, but diesel demand remains relatively strong, and increased production has dropped our import dependence and is helping economic growth fundamentals.

The reason I am currently for Herman Cain is that I think he is the only possible candidate likely to take a seemingly radical approach that has the potential to back us away from the abyss. Maybe Christie, who is not running, would be better at dealing with the federal retirement crisis, but Cain is the only candidate who truly seems to understand that we can shift the fundamentals by making some real changes.

But regardless of what happens, the EPA's actions are going to have to be clipped ASAP or the end of 2012 and 2013 could be uglier than sin. Congress has to do it; the public needs to place intense pressure on Congress to get off its butt and change some laws to get EPA out of the CO2 regulating business and stop the current round of rulings. EPA is under pressure also, and they have to conform to current law. Congress Critters are attempting to evade their responsibility in this.

The EPA has recently changed some stances, but pressure groups have the power to sue and force EPA action, so they are in a dual squeeze and in a bad position overall - getting shot at no matter what they do. Congress seems to like EPA as a scapegoat but doesn't want to clarify the rules under which EPA is operating. Overall these are big money decisions, and Congress needs to make them.

I'm fighting off a virus so blogging will probably be light for a bit (unless I end up sitting around and doing nothing because I am really sick, in which case I will probably be so bored that the result will be a blogging blitz).

Sunday, October 02, 2011

The FERS Media Dam Breaks

While everybody is getting excited about a few thousand nutcases running around on Wall Street, the real domestic news of significance is that the media wall over federal retirement pensions broke last week.

USA Today:
Retirement programs for former federal workers — civilian and military — are growing so fast they now face a multitrillion-dollar shortfall nearly as big as Social Security's, a USA TODAY analysis shows.

The federal government hasn't set aside money or created a revenue source similar to Social Security's payroll tax to help pay for the benefits, so the retirement costs must be paid every year through taxes and borrowing.
It's a good article - read it. Now everyone's jumping on the bandwagon. ABC's picked up the story.

The most basic problem is the same as the SS/Medicare problem - there ain't no funds in the Trust Funds. I've mentioned the Treasury Direct Debt to the Penny website before. Here's a subpage that explains the funds for federal retirement programs. Those "special-issue Treasury securities" are the same type of instrument used to "save" all the SS excess payments.

To actually follow this, you need to go to this page, which has all the monthly statements of the public debt reports. Then click on the year/month you want. August 2011 is the last available. I download the excel file for primary dealers, which allows you to track exactly what is out there. Once you open up that file, you click on the sheet names "GAS" (short for Government Account Securities). Here you want to stop, check your BP, take antacids and that sort of thing. If you do not have a heart condition and are not a federal retiree, you may continue without making your will.

So now we are reading GAS, first column. The second column shows you retired securities, and that happens when the trusts are being drained. The amounts listed are in millions of dollars - add six zeroes. And you find here 139 billion in the Thrift Savings fund, Federal Retirement Thrift Investment Board. 828 billion for the Civil Service Retirement and Disability Fund, OPM. 162 billion DOD Medicare Eligible Retiree; 334 billion DOD Military Retirement Fund. DC Federal Pension fund, only about 3.2 billion. Deposit insurance right above that. Employees Life Insurance and Health Benefits funds, OPM, 18.6 billion and 39.6 billion.

Now we come to some of the general public entries: DI (SS Disability) 171 billion, dropping fast. Medicare HI (Medicare Part A) 259 billion, also dropping quite quickly. SS Old Age (SS retirement), 2.579 trillion, or 2,579 billion. A 102 billion for Medicare SMI, which includes Part D and Part B.

Now back to the government employees - 16.4 billion for the Foreign Service Retirement and Disability fund. Postal Service Retiree Health Benefits fund, 43.7 billion.

Anyway, the point is that ultimately all the accrued savings that people were led to believe were there have all vanished into the Great American Money Hole, a la The Onion. There are no funds there. Treasury will have to borrow all this money from the public - some public - in order to give back the money, or we will have to raise taxes. We literally cannot raise taxes enough, so we are going to default on a significant portion of these promises. The rich simply don't have nearly enough money to close the deficit, although there is room to raise their taxes. But it won't cover that much.

This is one of the huge reasons for our deficit, but it interests me that the very large retirement obligations for federal or military retirees have only just come into the discussion. If SS benefits are to be cut, Federal employee benefits should be cut also, and so should Federal retirement health benefits. If we are going to default, let's default on everyone equally!

Person by person, our liabilities for federal employees are much greater than our SS/Medicare liabilities, and any meaningful discussion of fiscal reform should included very significant cuts to federal retirement benefits for higher-income federal retirees. But this has not yet even been discussed, and my congratulations to USA Today.

My bottom line over fiscal reform is that whatever reforms are imposed upon the general public should also be imposed upon the government employees. They should have the same retirement age for full benefits as the general public, be eligible for retirement medical benefits at the Medicare eligibility age, have higher premiums imposed for medical retirement benefits on the same scale as for Medicare, etc.

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