Wednesday, November 30, 2011
Gott Sei Dank
ADP was very good; I expect Chicago PMI to be pretty decent, and we have at least gained enough economic strength to be able to afford not to extend the FICA tax cut in 2012. I am now very confident that US housing will rebound off the floor and represent some additional strength to the US economy in 2012. The reason I am so confident is that it is already rebounding. There is nothing like predicting a thing that is already happening to generate confidence.
This means we can afford to continue with the state/local government restructuring in 2012. Not only does the Fed not need to intervene, it would be dire if it did. The 2012 economy will see ups and downs, but should continue an iffy expansion due to the simple fact that a lot of US households have quite a bit of money in the bank and conservative spending patterns have left quite a bit of residual demand for those households. If cars and housing are at least okay, the US economy cannot fall into a deep, protracted recession. It can dip, but it cannot crash out.
Between autos and SOME comparative residential strength, the residual demand in the US economy next year should prevent us from falling into the all-out recession. An up-down pattern is really our best possible outcome - maybe not over the next year, but when considered over four years, it generates a net positive GDP change of at least 5%. Thus, only the Fed can destroy us now, if you rule out asteroids, nuclear war and the eruption of the Yellowstone caldera. Since Iran is busily blowing itself up, I am going to tentatively rule out nuclear war. The risk of the Yellowstone caldera and asteroids is pretty small, and thus not worth worrying about.
Internationally, all things proceed to their appointed end. China is in an easing cycle, having loosened for regional rural banks previously, and announcing today that on December 5th it will cut bank reserve ratios. I expect them to continue in this cycle for some time. Europe cannot get the money it needs for the EFSF, and is trying the IMF. Europe can't get anywhere near the money it needs from the IMF, either, but this kicks the can a couple months down the road. The US, Canada, Switzerland, Japan, the UK and the ECB are extending the dollar swap lines and cutting interest rates to clear the way for ECB to print some money.
I'm busy, but I'll write more tonight.
Monday, November 28, 2011
Dems and WaPo: Screamingly Dumb And Proud Of It
Certainly WaPo reporters are too abjectly stupid to be allowed to write about national issues for a living. They must give prospective WaPo journalists special tests for low IQ and chicanery - you have to be either very mentally limited or very committed to lying in order to write the STUPIDEST article I have ever seen:
Senate Democrats are pressing ahead on President Barack Obama’s plan to cut in half every worker’s payroll taxes next year — paid for by a 3.25 percent tax surcharge on the very wealthy.Sounds good, doesn't it? You may be wondering why, after reading the lead-in quoted above, my eyeballs spontaneously ejected from my skull, metaphorically speaking. In the grimly physical sense, my mouth dropped open and my vision blurred as I attempted to reconcile WaPo Sen-Dem world with the universe I live in.
The $248 billion plan would trim Social Security payroll taxes from 6.2 percent to 3.1 percent in hopes of propping up the still-weak economy.
Gasping for breath and groping for an explanation, I wondered if perhaps in a fit of absentmindedness I had wandered through a some oval stone monument built by some ancient civilization that did not know when to let well enough alone, consequently finding myself reading WaPo in a different universe, with a different time line and totally different fiscal realities. Perhaps it's akin to the Star Trek universe, in which 1 to the fourth power is a MUCH larger number than 1.
That could explain a lot. In this WaPo universe, 1% of 10 million dollars of rich folks' money is a much, much larger number than 1% of 10 million dollars of poor folks' money. I am so shocked because in my universe, 1% of 10 million dollars is the same amount no matter whose money it is, and it always will be.
The problem here is that 3.25% of the total income of taxpayers earning over 1 million a year is a much, much smaller number than 248 billion, or 3.1% of all the wages in the country under the SS cutoff.
Reporters are supposed to check into this stuff, and later in the article it is clear that they know that tax raise for those with incomes over 1 million wouldn't come close to covering the SS tax cut next year. They just fail to point this out, possibly because they do not want to spoil the Senate Dems propaganda routine here. It sounds great, and it is a great Democrat talking point, and best of all, it implies in the mind of the cretins who buy into this stuff and WaPo journalists who exist to delude them (all the news that we want you to believe) that we really don't have to deal with our fiscal problems - all we have to do is tax the rich just a tad more. This is great electoral fodder, but it is a total lie, and a very destructive one.
IF all we had to do to correct our fiscal problems was to raise taxes on the very wealthy a few percentage points, we would do that. In fact, we don't have the choice. So in raising this plan, the Senate Dems are not only playing a very dishonest game, but they are playing a game that is designed to undercut all responsible legislators in the future, aren't they? And the WaPo journalists, in writing this remarkably misleading article, are helping destroy the country, aren't they? And when the country hits the fiscal wall, it will be significantly due to Senate Demograts (def = Democrat who loves to Demagogue), won't it? Which means that Harry Reid and his pages at WaPo are really intent on screwing over the poor and aged, aren't they?
You can verify this for yourself (I realize the average reader doesn't read tax stats for a living and thus probably doesn't have an intuitive grasp of the huge discrepancy).
Go to this SOI Tax Stats page and click on the link for Table 1. That will download a spreadsheet with income tax returns for 2009. This is entirely essential. Because I am afraid that people won't do this, I have two images:
2009 is the last year of tax data available. The ratios don't change that much, though, so you can safely assume that a big miss here will be a big miss in 2011.
Now, what we do here is add up the total income amounts shown for the brackets that are 1 million and above. There are three zeroes missing from each column, so we'll put those back in later:
Total: 735,144,440. You may be thinking "Dagnabit! That's a lot of money! They should pay up!"
You'd be right that it's a lot of money. You'd be even more right if you remembered to add the missing zeroes, which gives us $735,144,440,000 - 735 billion. However, those who can calculate 10% in their heads may at once grasp the problem - 3.25% of this number is going to be less than 10%, and 10% of this number is 75 billion, which is already way short of that 248 billion dollar shortfall projected over the 3.1% FICA cut. So we have just a tiny problem.
Taking off our shoes and socks (the digital math revolution at WaPo - classes held every Thursday at lunch in the main conference room) to calculate 3.25% of $735,144,440,000 (0.0325 * X) = $23,892,194,300. Unfortunately Digital SuperReporterMath classes may not yet have reached the lesson plan about why you have to insert zeroes in front of written percents before you multiply, which could, in fact, explain this article.
In point of fact, you do have to insert those pesky zeroes, which means that the 3.25% tax increase in 2009 would have raised close to 24 billion, which is kind of close to 10% of the FICA cut, isn't it? This is not really surprising, because when you compare total income for all taxable returns to the total income for those with incomes 1 million and up, it turns out that those with incomes of 1 million and up had about 10% of total income.
Since the vast majority of income for the non-wealthy in this country comes from wages, a good seat-of-the-pants rule is that to cover a tax cut of about 1% for most, we need to increase taxes on the incomes of the very wealthy (1 million and over) by about 10%. Total wages and salaries for all returns were listed (at the top of the table) at 5,707,088,487, or $5,707,088,487,000 (5.7 trillion).
Now income this year will hopefully be higher in 2012 than in 2009, so instead of multiplying by 10 to figure what we would need to actually co let's multiply by 9 (remember, wages and thus FICA taxes are going up too). 9 X 3.25 = 29.25%. To cover the tax break this year we'd need to raise taxes on the TOTAL incomes of the wealthy by at least 28%, which would probably put the top tax bracket over 75%. Bummer.
Now, if we are going to raise the taxes of the wealthy that much, we should be doing it to cover the deficit FIRST, because it is the deficit that threatens SS in the future, and SS, as Congress Critters solemnly assure us, is essential for the welfare of the working class. They are very devoted to the welfare of the working classes, so I am sure they will get that done before the 10% and up cuts that have been inflicted on pensioners in Portugal and Greece show up in the laps of the US working class.
Thank G_d we have all these very patriotic, cretinous Democratic senators, who I am sure will promptly raise total taxes on the very wealthy to cover last year's deficit of 1.299 trillion plus 75 billion to cover the additional FICA cut, to, ah, let's see what rate it would take to raise taxes of 1.299 trillion off income of 900 billion (adjusted significantly upward from 2009) - 153%. No problemo. It's done. Dems ride to victory on the shoulders of the cheering, cretinous OWS masses.
Unfortunately, matters won't be quite so joyous come 2013, because the IRS is going to have a problem collecting income people don't have. History has shown that when you show up demanding money people never made in the first place, you need attack dogs and thumbscrews to get it, and even that often doesn't work. Perhaps the IRS could contract with FARC to assist with collection efforts. Still, FARC isn't really doing that well, so I conclude that a substantial shortfall in revenue will occur.
We now understand why those OWS people have to create their alternate realities and their "people's libraries". Following the best precepts of post-modernism, they're trying to create an alternate narrative to create a new world. Unfortunately, they are all liberal arts students, so they fail to realize that the mathematics in the textbooks has something to do with the real world, and that no matter how often you insist that 2 plus 2 might equal 5 or even 6 or 10 or perhaps 120, when the bondholders open up the sack they always find 4. Then they sell your bonds.
Reality, she's a mathematical bitch from hell.
Friday, November 25, 2011
I have been reading a bunch of German angst, and they really don't know where to go. Eurobonds (limited) could work for the rest of this, but Italy is just too large - if they try to Eurobond out of the Italian sinkhole, every country is going to become uncreditworthy.
I think Mr. Market expects ECB to print and so is now figuring in Euro currency risk pretty strongly. Hungary's forint has fallen hard and isn't rebounding, and its ten-year yields are nearing 10%. Portugal, in the Euro, is seeing 10 year yields over 11%. German yields are slowly rising as well, and that's going to be mostly due to currency risk causing a dearth of extra-Euro buyers. It's not as if Germans have been buying this instruments - Germans appear to be buying houses.
Sooner or later, people are going to start saying the world "Japan". I expect that to happen this coming year. Right after the Japan phase, the US gets the spotlight.
We are on a train and we cannot get off. Soundtrack.
Update: Regarding Eurobonds, from the ECB statistical warehouse, aggregate European government debt/GDP
Okay, maybe we won't force the private bondholders to take all the losses. Maybe that wasn't such a good idea. Suddenly, the Euro mood brightens. It was the move to force the entire Greek writedown onto private holders that produced this cartwheel into disaster in the first place.
Thursday, November 24, 2011
Wednesday, November 23, 2011
Nice To Start The Day With Comedy
Markit PMIs. Eurozone. Composite below 48, manufacturing in the grisly 46s. Third month of contraction. This is not an adjustment. Manufacturing output index has fallen below 46, in the fourth month of the contraction zone.
Germany hangs in for an October composite of 50.3, but manufacturing PMI has dropped to 47.9. Mfrg output index at 48.3. Germany isn't going to carry the rest of Europe through. The commentary is worth reading:
November data indicated a reduction of new business intakes across the German private sector for the fourth consecutive month. Manufacturers reported a much steeper drop in new work than service providers, and the rate of contraction in the sector was the fastest for two-and-a-half years.And Happy Thanksgiving to you too! Germany's economy should stagger through without too much angst most of 2012 on an internal expansion in housing, but Germany's economy is fundamentally export-dependent, so it isn't going to be stellar - and all the risks are to the downside.
Manufacturers also pointed to a steep fall in new export orders in November and, in line with the trend for overall new business volumes, the rate of decline was the sharpest since May 2009. Anecdotal evidence pointed to a broad-based slowdown in export sales, with firms commonly citing weaker demand from Western Europe, the US and Asia.
France. Services rebounded; manufacturing is still sliding, which supports the composite back up to 48.7. Services activity were still marginally contracting (49.3). The French economy doesn't move quickly, but since this spring it has been walking down. Only a sharp fall in prices (consumer) can save it from recession. So far, we do not see that.
China - we are assured by absolutely everyone that the landing is soft, but you know it really isn't for manufacturers out there. Will half the solar manufacturers go BK? I don't know, but they do need more bankruptcy judges, although that is not the type of employment that usually lifts an economy's output in the near term. Mfrg PMI at 48; Mfrg Output index at 46.7. No comment on the puffy clouds of softness theory.
Going briefly back to the Eurozone, click on the link provided and scroll down to the graph that shows core v. periphery. They have a strong contraction going on.
US: For the most part the news is at least halfway decent, although there are some oddities. Initial claims - these are good, having fallen below the 400K level decisively. The four week moving average is 394,250. BUT SA continuing claims seem to be edging in the other direction, so this report needs to be watched carefully over the next couple of months. Still, employment isn't bad. It does look like new job creation is slowing.
Personal Income and Outlays. Some good news here - in October, real disposable personal income (income less taxes) rose. This is very welcome, because it had fallen in July, August and September. What's driving the slackness in the US economy are declining real personal incomes for all too many consumers. A drop in inflation caused the change in direction for personal income.
Note that the Fed is not going to QE with inflation this high, employment still rising, and some decent bottom level indicators. The global economy is slowing and we can't avoid that. Federal Reserve is setting up another round of banking stress tests to beat the biggies into line. This is good.
In Europe, in keeping with the last two rounds of banking stress farce (following the best traditions of Italian improvisational comedy - think Scaramouche!) banks are now deleveraging by lending money to firms to buy their bad assets. It's a beautiful thing. I am almost certain that Chinese banks are far worse off than most Euro banks, but on the other hand the Chinese banks can get a lot more support from their governments.
There is nothing but pure financial fear and terror in Europe - not only is the EFSF apparently having difficulty raising money, a German 10 year bond auction failed quite decisively. This is probably due to a shortage of money rather than lack of confidence in Germany's ability to repay, but it's a dismal predictor. This brings me back to Stiglitz - if you have time to listen to the video, note the fantasy involved in getting Germany to back Eurobonds. If Germany does provide any more significant guarantees, it won't be able to raise money because Mr. Market will decide that it is not creditworthy. Right now there isn't much money out there, and investors have to be worrying about the long-term backing of the Euro. Should Germany exit the Euro, the value will plummet.
The only solution, even short-term, is for the ECB to print money like mad and throw it into the bond markets. This shortage of money is what will take down the Eastern bloc in Europe, and once that happens things can get terribly ugly worldwide. The Euro is thus currently an undefined currency. No one knows what it will be five years from now. The ECB will have to breakdown and manufacture money for the bond market if Germany will allow it. But the Germans will become hysterical if that happens - it seems wildly unlikely that they will ever agree.
As for Neil's question over commodities, this is what happens when currencies and money markets in currencies break down. Europe is shattering like glass, and the only security is either the dollar (which is rather problematic) or hard assets. There is still a lot of created money out there, and for a while it will support commodities. For a while. Not for very long, given what is happening in Europe.
Tuesday, November 22, 2011
GDP , OMG Spain
Let's see - Spain had to pay over 5% to borrow money for THREE months. Admittedly long bills are more expensive at over 6.5%, so Mr. Market is sending Spain to stand in the bailout corner. And who's got the money? EFSF ain't exactly rolling in the cash, now is it? Until the Europeans get serious about funding arrangements for EFSF, i.e., guarantees, it would appear that it is going to have difficulty raising much money. It's time to buckle down and set up a structure that will serve for at least a year. The reason why the Europeans aren't doing this is that "no country" wants to extend the guarantees for fear of experiencing a credit downgrade, and here you might substitute the word "France" for "no country". Germany is already in with major guarantees, and it ain't gonna guarantee no more. Italy can't, Spain can't.
Pressure on the Eastern bloc is rising rapidly. Poland, which in most ways looks pretty good, is having its own problems. Hungary is in there struggling, but paid over 6% for three months. The Czech Republic is okay and relatively stable economically, but is likely to have tougher conditions over the next year.
US - I am pretty sure that the failure of the Super Committee means that the FICA tax cut won't be extended to 2012. It shouldn't be, but that is not going to help the economy much. The automatic cuts due to go into effect as a result of the Super Committee failure don't hit much in 2012, so I wouldn't think it has much other significance, aside from the fact that Fitch is using it as a negative in its ratings scheme.
US GDP 3rd quarter - second revision comes out, 2% is the headline. Gross Private Domestic Investment drops a tad. In current dollars ("real"dollars) GPDI was 1766.8 in Q3 2010 and 1774.6 in Q3 2011, and that explains everything about the extremely low levels of growth we are seeing. Over the last year there has been about 0.004 (decimal) or 0.4% growth in the main economic driver in the US:
What could possibly go wrong in 2012? All the Fed has to do is drop interest rates and a veritable surge of private investment is sure to follow....
Come to think of it, maybe the administration's decision to delay Keystone was equivalent to economic treason? Just a vagrant thought.....
I still think the US is basically in skipping recession territory, but staying there is going to be a challenge and requires a slight uptick in housing next year, the Fed NOT to stage another QE folly, and some dumb good luck. I think we'll get it, but what do I really know? The world is being thrown over Niagara Falls in a barrel, and it seems likely that when the barrel is opened at the bottom we will all have a very different perspective and some of the participants will be quite mangled.
The commodity markets are mostly completely overblown as everyone tries to get out of currencies. More realistic pricing would help global economic growth quite a bit, but there is too much money out there to get there quickly - it seems that we will go to crash mode first.
Monday, November 21, 2011
There Is No Doubt That America Is Declining Economically
Probably it is due to the lack of imagination among advertising staff. Why is this not a pet food commercial? Don't tell me you wouldn't buy the bleeping food! Stolen from Althouse. I haven't laughed so hard in ages.
If We Could Only Get That Fat Lady To Keep Singing!
As for Europe, absolutely none of the players have a clue as to how to deal with the situation. The worse it gets, the more they rely on fantasy solutions. Not only hasn't this improved, it has gotten worse. This time I do believe that the Austrian/Eastern bloc line of credit gets busted.
Bundesbank is indulging in Wagnerian gloom, and if it ain't happening in Germany, it ain't happening anywhere in Europe. Due to the German property boom I wonder if the Bundesbank is too negative - domestic investment in building ought to carry them through an export drop with near 2% growth. Yet Bundesbank is generally very good at projecting changes in the German economy, so we'll see.
China, India, Singapore and Japan are all seeing some internal difficulties as well as negative changes in the global economy. They will not provide much help. Japan is probably only a few years out from its collision with its own sovereign debt crisis. What will happen and how that will adjust remains to be seen, but Japan has to remain a net exporter, and the nuclear power transition is going to impede them.
Right now commodity prices are being supported by the flight ex-currency, but they appear to have advanced too far - all too many commodities can't maintain market absorption at current pricing - so we are likely to see some discontinuities develop.
At the current time, Ireland, Spain, Italy and Greece are all basically locked out of the sovereign debt market. If ECB weren't buying, both Spain and Italy would be seeing yields above 7% on a very consistent basis. Italy's plight is worse, because short-term yields are quite high. Rumors that the EFSF bought part of its last penny-ante bond offering persist. This is a real issue - the EFSF is the only avenue to funnel money to Ireland and Greece really, and if it fails to be able to raise funds, the ECB and Europe needs to turn its attention quickly to rescuing the EFSF. ECB could buy the bonds - that may be where it ends up.
In the US, CFNAI confirms that we pulled out of one dip but strongly suggests that we are about to enter another with six weeks. Gas sales are startlingly weak. Diesel is strong; how long this continues probably has a lot to do with Snarky Mark's port traffic projections.
Within two years, the US is going to have to launch a massive austerity campaign of its own. It won't be pretty, and it will induce a restructuring of the US economy to a more Germanish 68/32 or so consumption/production ratio.
The Census and the NY Times did something worthwhile for a change. This article on the "near-poor" captures something important about the US economy:
Perhaps the most startling differences between the old measure and the new involves data the government has not yet published, showing 51 million people with incomes less than 50 percent above the poverty line. That number of Americans is 76 percent higher than the official account, published in September. All told, that places 100 million people — one in three Americans — either in poverty or in the fretful zone just above it.This is also the reason why the cost estimates for health care reform were so hugely underestimated. The Supreme Court can rule however it wants to - it is simply not possible financially to implement the darned thing:
Another surprising finding is that only a quarter of the near poor are insured, and 42 percent have private insurance. Indeed, the cost of paying the premiums is part of the previously uncounted expenses they bear.If ACA ever were to go into effect, a substantial number of these households would discover that they have more economic stability if they earn less, plus more access to medical care. They will - they will go on Medicaid. Another large portion of these households will find themselves pushed down a level by medical premiums and high copays, or the alternative fine (most of these families can't afford to pay premiums). The subsidy is not high enough to help them stay in their current living arrangements.
So we have an impending discontinuity in China, two very large impending discontinuities in the US (fiscal adjustment and dumping health care reform), an ongoing splat in Europe which this times seems likely to take out a big chunk of the Eastern bloc, and no solutions in sight.
A drop in commodity prices MAY bail India out next year. Or it may not. The rupee is collapsing, the balance of trade is quite negative, inflation is soaring well above real rates of economic growth, and suggested government initiatives are likely to raise the fiscal deficit again. Growth of 8% with a fiscal deficit of 4-5% is one thing, but a fiscal deficit of over 5% with growth at 6-7% gets frighteningly close to the line. I think there is only a 20% chance of a real Indian spin-in next year, but it is a very unwelcome prospect, and it cannot be ruled out.
Monday, November 14, 2011
This Would Be Funny If It Weren't So Dire
Let's see. All is well so far on the home front. As far as family goes, that is.
Italy flogged five year bonds, but had to pay over 6%. This does not compute if it continues. ECB is buying bonds, but it is not enough so far. I guess ECB will keep cutting rates. A five year rate at 5% would be very dicey over the next couple of years, given Italy's weak economic trajectory. ECB can thus either buy nearly all Italy's roll over the next six months, which would allow the ECB to set rates for market risk, or Italy will be in trouble by next August. Draghi has said that the ECB won't do this, but we'll just see. The adoption of the Euro provided a one-time bump for Italy which deferred its problems, but demographics and politics forbid a repeat. This has implications for seemingly remote nations!
Given what was reported about the Monti measures, it does seem as if the attempt is to raise enough revenue to cover an additional annual financing cost between 10-12 billion Euros. The problem is that each year Italy will roll more debt over at higher costs - they can't keep jacking up taxes by even 8 billion Euros each year for four years straight. This is why traders seem to be risk focused on the next few years. The alternative is a wealth levy, but that can only be a one-off, and it will produce capital flight unless it is done in circumstances such that property holders believe it won't be a reiterated measure.
Italy's economy is currently over 70% services, and you can expect higher taxes to inflict a pretty sharp drop in employment and service activity, which is already occurring, with the inevitable consequences for employment. Services cuts usually inflict a two to three year downturn/low growth cycle on a modern Western economy, so it appears impossible for Italy to balance its budget by 2014. It's almost 2012!
Nor can Italy expect any oomph assistance from external economic growth, because France tumbled down the hill in October to join Jack (Italy) and Jill (Spain) at the bottom. This is pretty impressive, as far as declines go. The French and German economies are tightly intertwined, so don't expect Germany to sustain epic growth without France at least remaining stable. In October, Eurozone composite PMI fell into the highly recessionary range.
Raising taxes at the beginning of a recession, which is what Italy is doing, is the best way to increase employment losses and a consumption fall. This has a particularly serious impact on service-weighted economies (which is why service-weighted economies tend to build up public debts over time), and I cannot see any factor that would prevent Italy's GDP from contracting 2% or so. Thus, I expect the Italian debacle to reach its inevitable end in 2013. Either the EU finds a way to pool excess Euro sovereign debt and write it down, or Italy exits. If Italy exits, it will still have trouble deflating its way out, so I do expect some outright defaults as the 70% probability.
India's inflation is still over 9%, and in fact closer to 10%. This despite a truly impressive series of tightening measures by their central bank, aka RBI. Last month RBI said it was about at the end of that cycle, and bets were building that it might have to ease, because higher rates are really curbing demand. In the absence of CB easing, the government is seeking other ways to stimulate growth. I think fuel costs and lower profits are going to exert an inexorable drag. India's government has a fiscal problem which is not yet severe but which dictates caution, and now you can expect increased investor wariness.
Spain - the next ECB buying opportunity. This gets deep fast now. Realistically, the ECB is limited as to its total purchases under its current line. Draghi has warned of this. Things will change. Ireland and the UK are currently holding their own, but it probably will be difficult to sustain this through the middle of next year.
Because Italy is such a large economy in global weighting, the investor psychology change involved will change the world economy. For the US, it brings forward our confrontation with Mr. Market backed by Mr. Reality. For China, it limits the ability of banks to accumulate bad debt as a stimulus measure. For countries like India, it forces tighter management of budgets and fiscal balances.
Right now the US seems to be passing through a native skipping recession, a la Japan. There are two reasons for the skipping effect. The first is that the US has a large group of consumers with plenty of cash on hand - the fiscal conservatives - and many of those consumers have been conservative for so long that they should be forced to spend some money. The second is that next year spending on housing (mostly maintenance) should pick up. The third is that the USD is hardly strong and that US manufacturing should continue a slow mild climb (with fluctuations).
However US real per capita incomes are still on a downward trend so growth cannot be strong, and it is likely that we will see a continued pressure on the services side of the economy. The best possible trajectory is for the third trough to end up (on a real basis) no lower than the first (that we have just been through). The likeliest is that we edge down a bit in a Japanish way over the course of this adjustment period.
Now a great deal depends on Mr. Market's patience - if we are forced to correct the US budget deficit very quickly, things will be much tighter and we could see a 1% fall over the course of the trough/peak skipping recession cycle.
When I look at fuel prices I think world events have overtaken us, and that 2012 will blow up our native cycle and throw us into an outright recession. It's clear that refineries can't produce product and sell it profitably right now from production/supply data, so it seems that the jig is up and that there will be no market-based adjustment, which means that the real economy just skids down a hill into a ditch.
Whatever happens to us is likely to happen to China.
A property boom is hitting in Germany - people there are not in the mood to throw money into Bunds. I have to believe that this is significant. The money that does not go into sovereigns has to go somewhere.
Friday, November 11, 2011
Happy Veteran's Day, and a great big thank you to all who have served your country. Here's hoping that it stays quiet - this is not the way to celebrate.
Thursday, November 10, 2011
Ten Year US Auction Yesterday Was Light
Weak are the results of the monthly 30-year bond auction where coverage of 2.40 compares with 2.94 and 2.85 in the prior two auctions. The award rate of 3.199 percent is nearly four basis points higher than expected in what is a significant sign of weakness. Dealers were awarded 56 percent of the $16 billion auction which is a sizable share that points to limited participation from long-term investors. Demand for Treasuries is falling in reaction to the results.The thing is, three year bonds did great this week - the Bid/Cover ratio was over 3.40, which is just huge. The yield was 0.379%. Dealers only took 41%.
It certainly looks like investors are getting worried about the future, given no action in Congress and the spectacle of several unfortunate demo projects of the effects of jacking up public debt. End update.
We'll have to see how the 30-year goes. The US debt clock is ticking away. Admittedly the current yields are pathetic, but the logical result of the Euro crisis is increased investor focus on governmental fiscal balances, and the US doesn't exactly shine in that area.
I'm dealing with a family medical emergency, which hopefully will have a good outcome. The Chief is okay and I am okay, but blogging is limited.
This is the big good news out of Italy:
Italy raised 5 billion euros by selling 366-day bills at an average yield of 6.087 percent, the highest since September 1997.Mr. Market is worried about the near term!
10 year graph.
2 year graph.
These things keel over quite quickly, and the US is due within a couple of years to get in the danger zone.
In the meantime refineries are ramping back production in a big way. I think NFIB's predictive power will hold true.
Wednesday, November 09, 2011
The yield on Italy’s five-year notes jumped 27 basis points, or 0.27 percentage point, to 7.14 percent at 9:44 a.m. London time. The 4.75 percent securities due in September 2016 dropped 0.98, or 9.80 euros per 1,000-euro ($1,372) face amount, to 90.825.Not only do these yields mean that any hope of Italy staying in the Euro and paying its debts is gone, but they also predict a hefty recession.
The two-year note yield climbed 43 basis points to 6.81 percent. Ten-year rates rose 19 basis points to 6.96 percent. The difference in yield between the Italian and German 10-year yields increased to as much as 520 basis points, or 5.20 percentage points.
The nice thing for Italy is that it was running a primary surplus before the 2008 crash. Thus it can afford to default, whereas Greece can't afford to default. You can't go short when your yields are rising like this, but when your longer term yields are over 600 basis points and your outstanding debt is over 100% of GDP, the mathematics are inexorable. Running a primary surplus of six percent when your median age is over 45 years is not possible, and that's what Italy would have to do to stay in the Euro without being allowed to write down its debt about 25%.
Since both the Italian services sector and the Italian manufacturing sector are in a hard contraction, and since the last Euro-solution offered was tantamount to telling any private sector holders that they would take more than their share of the aggregate loss, the increase in Italian bond yields is deeply rational. Indeed, Mr. Market hasn't caught up with Mr. Grim Reality yet - those ten year yields should be much higher, based on the economy, the demographics and the direction of the Euro crisis resolution. The only reason they are not is that Italy can leave the Euro.
A bunch of Italian banks are now insolvent and will have to be bailed out by the Italian government. Italy will have to move pretty quickly to avoid the EU-declared fiscal Blitzkrieg:
I don't have precise figures, but Italy can probably restructure at 90% or 80% of GDP by handing foreign holders an implied 50% loss. They will probably negotiate to make that closer to 30%.
Internal Italian sources probably hold about 60% of their debt. One can imagine that it is being shuffled around quite quickly.
Italy has a large gold reserve (more than the ECB - only the IMF, Germany and the US own more), and most of the population isn't that indebted, so it can probably flee to the lira, devalue the external portion of the debt by 20-30%, and struggle along paying for energy imports.
After the EU's recent performance, I think Italy should feel no compunction about leaving the Euro and staying in the EU. The EU can whine all it wants to, but can it really afford to retaliate? Italy has enough debt out there to give it some strong negotiating leverage.
Now, if you assume that Italy goes back to a national currency, and shuffles off a decent portion of its externally held debt by devaluation, then the ten year prospect doesn't look so bad. Thus I assume that many traders are assuming that Italy will exit the Euro and move itself to stronger growth patterns doing so.
Tuesday, November 08, 2011
NFIB - The Swedish Movie
So here it is - the Small Business Survey by Ingmar Bergman. Someone just broke a clock. Look at the symbolism:
First, five months in the double digit negatives for general business conditions outlook is a clock museum on fire.
Second, it's October. Note that in October 2008 the outlook was better. October should be relatively good in this survey. Any negative number in October is cause for deep concern - a double digit negative is cause for panic.
The dark shading indicates that October was a large sample month, as was July. Large sample months in negative double digits say something really bad about the future of the economy. Admittedly the Jan/Apr/Jul sequence for 2008 was worse, but not by much, especially since we may have the seventh month yet to come.
Because this is a relative, not an absolute scale, it presages significant moves in the US economy by at least six months. It's hard to look at this and not see a very, very bad Q1 2012. What's causing this is sales - sales expectations have been worsening since February (see page 9 in the report), and actual sales changes have been trending slowly negative since June.
I would strap in. There are too many variables to predict what will happen next year, but next year is going to be quite negative across much of the globe, and although right now US stats don't look that bad in comparison to other regions, it seems clear that they are due to take a turn for the worse quite shortly.
Monday, November 07, 2011
And Somewhat Pricey
This is a really big deal - the market ought to be looking for this type of instrument. Demand was solid, but pricing indicated that Mr. Market has some reservations.
The relatively high spread on the new issue “is a complete level-changer, a completely new world for the EFSF,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “This will be the new reference point” for any future 10-year deal, he said.Meanwhile, back at the commodity ranch, prices are rising. The horrific mistake of shunting all the damage on the last Greek deal to private holders has the potential to take out Italy within a year. They have to roll a lot of that debt, and the ECB can buy, but the more the ECB buys, the riskier holding the debt is for a private entity.
The EFSF’s existing notes have underperformed European benchmark debt, with the extra yield over governments on its 2021 bonds widening to 167 basis points, the most since the notes were sold, Bloomberg Bond Trader prices show.
So what happens to all those Italian banks that have a lot in Italian sovereigns?
Plan C is of course to turn the EFSF into a Euro-brand bond pool, but it appears that is likely to be more expensive than planned.
France begins real cuts now - they are moving to try to stem the rise in bond yields relative to Germany.
A Really Good Article About The Chinese Economy
The material facts are not that the problem is a credit crunch - this man's business is not capable of supporting the money he owes and hasn't been for years. The problem is that very few in China was afraid of massing large debts, and the entire economy has been slowly pulled into a cycle of rapidly increasing credit.
The reason why so many empty buildings have been built is that they are good collateral. It's true that the young want homes, but the big push to build ever more buildings has been driven by people buying property as collateral and an investment. Those empty cities you see discussed are bought cities. Businessmen wanted the buildings as collateral for much cheaper loans, and almost any structure turned into a paying investment.
Note the recursiveness of all this. The local governments fund their operations heavily from the sale of land to developers. The average people aren't making much in earning, so those with capital and savings have lent it out at high returns to businessmen and developers. Larger funds of capital are often lending to developers. The banks have lent on collateral - mostly homes and commercial buildings - but they are really dependent on payments funded by an ever-increasing society-wide expansion of lending.
This is such a classic credit bubble that it has global implications. The structural capacity of China to grow real GDP is probably now in the 4-5% range, and the longer they continue the credit push to get it higher, the worse the end result will be. Some time in the last five years the Chinese economy shifted from being propelled by business expansion to propulsion via credit expansion, and that never does last much longer than seven years. The max seems to be about 10 years. So they are very close to the end!
The businesses are facing narrow profit margins and declining profit margins. Having been hit hard by inflation, now they face rapidly rising credit costs. As their ability to pay their loans declines, the incomes of the population will be cut, which will cause further problems for businesses.
The Chinese government is pursuing the only option it can, which is to transfer these loans to banks at lower rates somehow, accepting large future credit losses as the cost of continuing to do business. But I think they cannot pull it off, because too much of the money circulating in population at large is dependent on the repayment of interest - actual incomes from enterprises don't support the Chinese economy any more. This is a recipe for disaster - businesses have become increasingly dependent on being money lenders, and such a situation is impossible to unravel in an orderly fashion.
The seven year debt-reset of the Old Testament seems to have had a mathematical basis that holds true over a wide range of human economies.
Saturday, November 05, 2011
Comic Gold - The New Proletariat
PS: What is nonhierarchical and self-regulating? The riots in Oakland?
Read the link - after describing the large flows of monetary and in-kind donations:
Each day, the race to reproduce life itself at Liberty begins, and each day it is largely met, in theory at least, without the use of two things—the money-form and hierarchy.
Friday, November 04, 2011
Pretty Good Employment
I still believe that the Census/household survey portion is more accurate at this time. That survey showed over 270K more employed this month and, better yet, the not-in-labor-force number hardly increased. The employment-population ratio increased from 58.3 to 58.4%. It is off its cycle low of 58.2%. Employed persons at work part time for economic reason dropped hard - over 370K persons.
We still have two decent months to come as seasonal hiring helps us along, even if the flux of auto employment drops, which I think it will.
All of this is coming from small businesses and autos. Large businesses and governments are net laying off or sitting stagnant. There are major ongoing consolidations still in government, financial services, pharmaceuticals, some services, consumer electronics and so forth.
I think at this point there is increased participation from "liberated" older workers with much experience who are not going to get rehired and are scratching a living by setting up their own business enterprises. I have been looking carefully at the ADP employment report and hunting around for all the data I could find to impute this, and although I can't prove it, I believe it. This is one reason why the establishment survey can miss so hard at times - they have to impute this type of activity and they impute it from data gathered considerably earlier, so their imputation is off-cycle.
There is some support in Table A-8 for my hypothesis, because wage and salary workers SA didn't increase this month - the unincorporated self-employed workers did. There should be a reasonable number of skilled construction workers picking up some employment from storms and household maintenance, and in this environment skilled professions such as engineering etc can usually find some contract work in the better areas if they want to scratch around for it. The expiration of unemployment benefits will have some effect on this activity, but a somewhat better business environment also does.
Temporary help services increased this month, which is a comforting sign.
I am waiting with some anxiety to see how NFIB looks. I believe that the "scavenge" economy is now picking up, and that generates a surprising amount of activity. Also US manufacturing is still on the slow upswing.
The problem for the US economy is that we need to raise FICA taxes next year to get back to some reasonable pretense of funding the economy, and real incomes are still down, so it is hard to play this through and see a vibrant economy in 2012.
One major help for the US economy is just timing. The huge peak in auto purchases occurred over a decade ago, and at this point, more and more people will have to buy cars. But listening to the radio, I hear more and more "everyone drives" ads for auto dealers, so I know that a lot of people just can't afford to buy. A lot of people can't afford to heat (my editors have struck again) their homes this winter. In this environment, small jobs abound - if you have the basic skills. Unfortunately a lot of people don't. It is the dirty jobs people who will carry us through.
Update: Canadian unemployment up - mostly on private sector losses. That squares with my expectations on auto production, but there's more to this. North America only seems to be a few months behind Europe, which seems to be in a rapid and accelerating downturn.
Wednesday, November 02, 2011
Eurozone PMIs Out
Eurozone October. Look at the country table on the right of the page - Ireland is the only one still expanding! Greece is at 40.5, Spain and Italy are in the 43.X range, France, Austria and the Netherlands are all 48.X, and Germany is hanging in at a relatively strong 49.1. Still, it's intimidating. German unemployment rose very slightly. Article. German PMI hints why this is so; export orders were down sharply. More dire is the detail; German manufacturers are still accumulating finished inventory, which means they have further down to go. French manufacturers aren't on the whole.
Really not good for the Eastern bloc; much of that is dependent on German manufacturing orders. Poland's manufacturing PMI improved in October, but look at the big fall over the last few months. Export orders continued in the contraction zone. Russia improved in October to 50.4, although that's not strong, employment is declining, and cost pressures remain.
Italy is getting hit hard, with manufacturing unemployment accelerating. The huge fall in manufacturing PMI from September to October is accompanied by price cuts, etc, 48.3 in September to 43.3 in October?
Oh, yeah, the EFSF is delaying its bond sale. Not the time, they say.
Indian manufacturing PMI, which had come close to stagnation in September, improved heartily in October. But employment is falling and prices are rising; it remains to be seen whether this improvement will be transitory. This index had been dropping hard for months, and finished goods stocks are dropping, so I think they have another couple good months ahead. Harvests should be injecting money into rural areas and boosting domestic demand.
Chinese HSBC manufacturing PMI improved, although only to low levels for China. New export orders increased. Taiwan is well into contraction. South Korean manufacturing continues in the contraction zone, though I am hoping it bends up a bit over the next two months to get close to neutral. I think it will due to the impact of the Thai floods. Japanese manufacturing PMI seemed to be bouncing around the neutral zone the last few months, but I think Thai floods and power problems will have some negative impact.
Manufacturing in North America is doing decently, but the strong Brazilian contraction continues.
US Fed is expected to announce some sort of QE program or that it shortly will do some sort of QE, so commodity prices in USD are off and running for the gate. September CPI-U was 3.9% unadjusted, so I think it is a suicidal dash. The Fed cannot afford to boost CPI by another two percent, because it will put the economy into a hard, sustained contraction as real incomes fall further below real minimal living costs. Adding another 10 million people to the food stamp rolls is not the way to boost the US economy and the Fed probably realizes this.
Further, it is too soon after Operation Twist was announced for another program to be announced. It would make the Fed look lunatic, and the Fed won't do that.
Tuesday, November 01, 2011
This isn't good
Honda Motor Co. said it will halve output at all six plants in the United States and Canada for 10 days starting Wednesday because the flooding in Thailand has disrupted parts supplies.Diesel YoY came up in August after auto production ramped back up.
The company said it will then halt production in North America for one day on Nov. 11 and decide on its next move after monitoring developments in Thailand.
Oh, yeah, the Fukushima Daiichi thrills keep going. TEPCO is spraying boric acid on No. 2 again after detecting Xenon. Land values.
Too Big To Bail
The Italian opera is about over. 10 year yields at 6.21%, and:
The European Central Bank was said by three people to have bought Italian debt today as it tries to stem financial-market contagion to the euro area’s biggest bond market. Two-year note yields still rose 28 basis points to 5.27 percent, the highest since 2000. The five-year rate rose to more than 6 percent, a premium of more than 5 percentage points compared with similar- maturity German debt.It is now bad news for holders of Italian bonds if the ECB buys bonds. Since private holders of the securities have to assume that the ECB will be insulated from any eventual losses following the Greek pattern, private buyers take an implicit writedown every time the ECB or any guaranteed entity buys this debt. If other private entities buy debt, the yields may rise to invite buyers, but the loss expectation is still evenly spread.
Since Italy is about at 120% of GDP, yields averaging over 5% imply that debt servicing costs will rise to about 6% of GDP within a couple of years.
This is being blamed on the Greek vote, but it is due to the leadership's "solution" to the Euro crisis last week. In the meantime, Greek bonds being sold privately seem priced for an almost total loss (the yield on two years quoted at 82.82%), which does in fact make sense since it is impossible for Greece to pay its notes in the near term and thus the privileged entities are going to end up with a lot of notes. Since Greece needs about a 50% writedown, if the guaranteed parties end up with 30%, the private holders have 70% of total holdings with a 50% writeoff, leaving 20% in actual assets. Add any scheduled near-term interest payments funded by the privileged, and you get a figure depending on maturity.
So the Dragon now takes the helm of a gelded ECB facing a hopeless situation in Greece, a pending debt strike in Ireland and an Italy being shoved out of the Euro.
Corzine's shop goes bust, because the Europeans don't have to bail it, and you have to think that France is going to take a credit downgrade very soon, because surely France is going to have to pour some more capital into several large banks.
A pretty big question remaining is whether the implicit deal that money won't be pulled out of those Eastern bloc banking subsidiaries can hold. If it doesn't hold, then Europe is facing a pretty rough recession. Erste Bank is the bellwether - can it really boost its capital without pulling money back in? That's a huge jump in estimated capital requirements in just a few months. RZB and RBI are pretty much the same entity, and are standing in the Eastern bloc banking fall line. There is also feedback from the Greek banking crisis, because Greek banks were lending in chunks of the Eastern bloc also.
None of this really helps the US, much less China. The EU is a massive consumer of Chinese goods, and quite a lot of them go to the Eastern bloc. See 2010 data. Thus China would like to support the EU, but it certainly cannot afford to do so by buying debt that's mostly unsecured - for monies offered to Europe, it would want to be mostly secured. China has a pretty severe internal bad debt program, and its latest theory is that it will boost lending to small businesses to sustain employment. This will prove to be very expensive, because those small businesses don't have the profit margin they need to pay back debt and continue production.