Saturday, December 31, 2011
Happy New Year!
At best, my impression is that it will be mixed. It's US election year, so Mercans are doomed to spend part of it feeling about like this:
(Gacked from Ace).
Blinding me with SCIENCE. Oh, wait - that's not science? For this malady, I can only offer these famous words of wisdom:
Why do people who know the least know it the loudest?I have been reading DU recently, which is why this question is much on my mind. Only today, for example, I learned that military spending is 58% of the US budget and that the US does not borrow - that in fact no sovereign nation with its own currency borrows.
If it's any comfort, Mark Twain was being exceedingly snarky about Congress long before we were born. Some things never change.
This does not pertain, but it is one of the best bits of knock-down snark ever composed, and it is attributed to Mark Twain, so:
The average American may not know who his grandfather was. But the American was, however, one degree better off than the average Frenchman who, as a rule, was in considerable doubt as to who his father was.Oh, yeah. Since I digress, is there something about Snark and the name Mark? Look at this modern master of econo-snark in action. This man does not tolerate idiocy - he savors it. He rolls it on his tongue and enumerates the flavors - and he is named Mark! Do you believe in reincarnation?
The political and commercial morals of the United States are not merely food for laughter, they are an entire banquet.That could be the motto of the Snarky Mark blog, couldn't it?
Said banquet will be laid out for us in glorious panorama in 2012 due to an election which is all about money, in a nation running out of money, with problems that substantially due to many of the citizens not having enough money to eat in restaurants as much as they like while having the prospect of having even less money in the future.
Hopefully we will all survive the year without cocaine poisoning. You may find this collection of Twainese a great relief to your feelings as we get closer to the icks of November. For example:
That awful power, the public opinion of a nation, is created in America by a horde of ignorant, self-complacent simpletons who failed at ditching and shoemaking and fetched up in journalism on their way to the poorhouse.There is also the comforting reflection that although it was this bad back then, we still survived and did pretty well. So if you get depressed this year, just walk around singing a song about "from sea to shining sea of idiocy", and reflect that what you see is probably about what got us the successes of the past. There is no reason to be too depressed.
There is also no reason to be that optimistic. If you haven't got money, and you have little chance of getting money, and a very substantial hunk of your economy requires spending money that you haven't got, it stands to reason that some degree of angst lies in your future.
Thursday, December 29, 2011
Deadly Flue Germs?
No kidding, there's a headline up at Bloomberg that catches the eye:
Deadly flue germs? Why do research on them? Just keep your head out of the chimney and all will be well.
But then in the article they talk about bird flu and not chimney sweeps. Someone's confused.
My sixth-grade teacher is weeping in frustration in her grave. She always warned us it could come to this, and her dark prognostications about the decline of literacy have apparently been fulfilled.
Okay, okay, I made coffee and am having at it. Forget the deadly flue germs. Maybe they will fix the headline.
China's manufacturing PMI contracted again. Inventories rose. This month, both input and output prices fell. Stimulus is lurking just around the next chimney bend, along with coughing chickens. Don't kiss the rooster! More pertinently, the HSBC chirpy commentary about how nothing is really wrong has been omitted again this month in favor of a plea for fiscal and monetary relief. This probably begins the end of the long global inflationary surge. Money was tight in China yesterday. They are going to have trouble fluffing up this bubble.
Japan says everything's really all right, but of course it isn't. China's subdued demand comes up. I think Japan should improve a bit as the Thai shock wears off. Over the longer run, their fiscal problems are gaining on them. I don't think this will really happen. We are playing global fiscal hopscotch. After Europe, Japan. After Japan, the US. It looks like Noda is going to be another short-term PM.
I won't really know what I think about Asia's prospects next year before I see Singapore GDP, which is due out next week, I think. I have it stuck in my head that Indonesia and Malaysia and Thailand are picking up some, and that this should carry the region as a whole through in moderate growth. But the Thai floods are a threat to that belief, and fiscal stability and balance for these nations is generally a bit dicey. It will show up in Singapore either way.
Russia is seeing a little more slack but on the whole is still doing well. The average people aren't, though. I never know what to do with Russia. In trade it is mostly European, but in outlook and response it is mostly Asian.
PS: India, tides, Speedos. I am shocked, shocked, shocked. There was gambling going on? Stacked decks? Shaved equity? Who'd a thunk?
Ha, Bond Good Will Is Evanescent - Because Funding Is
I'm working on several longer posts about the US economy, but the active news is unfortunately Italy. Yesterday was a day of wild bounces. Italy's ability to sell short term debt was bucking everyone up, until the ECB released its balance sheet and the dark news hit - when ECB said it meant "unlimited" financing, it meant it. This is very relevant for Italian banks, because other ECB measures included taking as collateral the bank's own debt if it was guaranteed by the Italian government.
Now why the big expansion in the ECB's balance sheet shocked the market I cannot figure, since that was obvious. But it did. The Euro fell pretty hard.
So basically the good auctions were a mirage (funded by ECB), and since the three-year unlimited liquidity has a definite expiration date, today's 10 year auction was not good at all. Yields at 6.98 and they didn't sell it all, plus ECB is rumored to be buying Italian bonds again.
The knock-on effects for Spain and Portugal are covered in the link. Spain, however, is still probably viable. Portugal and Italy are not.
US claims are still pretty good, but more about that later.
Saturday, December 24, 2011
Merry, MERRY Christmas!
My favorite Christmas carol:
Thursday, December 22, 2011
Well, Claims Are Good
Unfortunately, that is where the goodness stops. CFNAI was most disappointing for November, with the three month MA at -0.24, unchanged from October. The monthly index was -0.37, the worst since August, which was -0.38. At this level CFNAI-MA3 does not necessarily imply recession, but does imply weakness:
Definitely not a thing of joy and beauty.
Last, but not least, Q3 GDP was revised down again to 1.8% annualized. Next month we get the first glimpse on Q4. Economists have recently been shooting for the higher 2s; I think it will wind up being around 2.4%.
Over the last year (Q3 2010 to Q3 2011) US real GDP has increased by 192 billion dollars, or by 1.46%. That is a very, very weak performance. Over the previous 4 quarters Q3 2009 to Q3 2010), it had increased by 3.5%. This brings up the awkward implication that we are already in a recession:
If we are not, this time is different.
I still believe we probably now will hit the "skipping" recession thing, based on freight, which has always worked for me. But the other thing that has always worked for me is utilities, and those don't look so positive.
The YoY % change in GDP line for recession has a very long historical basis. Below 2% and you are through, done, burnt flesh, doomed to walk the recession plank.
Am I nuts for thinking that this time will be different? There is so much money in the banks and our lending/deposit ratios have finally gotten back into sane territory that I think it pushes us over the edge and allows us to oscillate between the negative and the positive GDP territory next year - which is what we have really been doing this year. Business inventories haven't been overbuilt so far, which is another positive.
Wednesday, December 21, 2011
A Very Merry MDANGed Christmas To You All
It seems that there are some slight national security problems (the current National Security level is at "taupe"), but we can always count on the Maryland Air National Guard to protect us from enemy air incursions, in whatever form they may occur!
These intrepid souls never fail to interpose their planes, their cell cameras and yes, their very bodies between danger and the civilian population they so dutifully protect.
They have been hard at work lately, with impressive results. One cannot say that the Innovative Readiness Training program has been wasted. It is an impressive example of community outreach.
I know all-too-many craven, superstitious civilians will look at this and go "OMG! Does this mean Santa's not coming this year? Am I not getting my stuff?"
The answer depends. If your idea of Santa is a large national government, then it will certainly be there for you. The administration is already rushing plans for an emergency coal-stocking distribution into action. (They are almost shovel-ready and should be operative about June.) After all, the EPA has about banned using coal to generate power. So you'll get politically correct menorahs and coal. Just don't burn the coal. Write with it. Letters to Santa.
If you feel less than satisfied with that solution, perhaps you should rethink those plans to cut military pensions and Tricare? I'm just pondering that there could be unanticipated results.
But if you are a down-home regular type of person, it is likely you are a Santa to someone else, and some other regular down-home person is a Santa to you, so you can skip the coal-and-candles politically correct Christmas.
Menorahs are very beautiful, though, so maybe you want the candles.
The elves DO seem a bit preoccupied this year. Remember the less fortunate.
I think this sort of Christmas spirit leaves those wussy Toys-for-Tots Marines looking pretty feeble, doesn't it?
It is very comforting to note that the reindeer have found decent forage. That old can-do North Pole spirit still lives. Maybe someone will bring the poor guy stuck in the plane a bale of hay.
Note: Do not write letters of complaint about the Air National Guard. An innovative spirit named Tom Blair did this. You can go see it.
THANK YOU, LANCE!
This is a long time series of interval changes in the growth of US real personal disposable income per capita.
As you can see, we have a problem. The problem is also not heading the right way.
Here's the same sequence broken into two graphs so that it is easier to see the detail. The 60s-80s:
It was quite rare to go below 0%. It occurred in the extremely harsh mid-70s recession.
After that, due largely to high inflation, real income growth remained below trend until the early 80s downturn, after which it rebounded.
Our current malaise is rather easily understood. We're poor.
Far worse is that US per capita disposable real incomes are dropping again. The latest data is that per capita disposable income is lower than it was last year, and indeed lower than it was in Q2 2010.
The two year change is above zero because we did rebound for a while after Q3 2009.
It is important to keep in mind that this includes the 2% cut in FICA taxes, which raises nominal disposable per capita incomes about 2%. Until we can get personal incomes back up, the economy will be in recession territory. Indeed, by this measure we have already doomed ourselves to recession - the one year change has never fallen like this before without precipitating a recession, except in '05, when recession was prevented by massive credit spending, which did, in fact, delay the recession but produced a more intense recession two years down the road.
And that, by the way, is the choice we are facing once more. We can either goose this by maxing out our federal credit, and then take a much more serious downturn a few years down the road, or we can try to bounce around recession in 2012.
Following the disaggregation principle, it would be much better to let the FICA tax cut expire now. The reason is that we have two strong positive impulses next year. Neither is huge, but both now seem very certain. The first positive impulse is the increase in SS benefits. That will boost personal incomes somewhat. The second positive impulse is the rebound in housing, which is really happening. That rebound is going to turn in some very strong positive feedback. Those two ought to be enough to keep us in skipping or mild recession territory.
Nothing has really changed since the wretched fried-eggonomy graph - the more we try to boost now, the worse the shock in 2014/2015. If we are stupid now, we are likely to go into a frank depression in 2015, not that we'll notice until 2017.
We began 2011 with US Debt Held By The Public at 9.39 trillion. It is currently 10.44 trillion, and will go up more before the end of the year. We do not need to raise our structural deficit any more. Extending unemployment for six months would be a good idea. An MWP tax credit would be an even better idea, with a more rapid phaseout ending at 50K. Both of those moves stand a decent chance of helping more than they hurt. The FICA tax cut will hurt more than it will help.
I am reasonably certain that real personal per capita incomes rose this quarter, not that it has ended yet. This leaves us with enough strength to flounder through necessary adjustments next year without the FICA tax cut. Ending the FICA tax cut, which was a very poor stimulus anyway, will help curb inflation. (The FICA tax cut was acutely inflationary because it increased real higher end incomes far more than it did lower end incomes. The MWP was not.) Curbing inflation will cause more strength in real incomes, which will tend to reinforce the SS/housing positives.
We have been out of good solutions for some time, so now we ought to shoot for least-bad solutions. Next year we ought to try to cut our real borrowing to about 800-825 billion, and the year after that, 700 billion, and then the year after that we'll have to shoot for 600 billion, although we probably can't get there. By 2015 we need to be at about 500 billion. There will be a lot of fireworks.
Tomorrow we get GDP and CFNAI. Since Q3 2010, real GDP as currently calculated has increased only about 200 billion dollars. Eventually, as in by 2016, we are going to have cut average annual deficits down to about 300 billion dollars to control our debt increase. This will require considerable austerity, which will show up in the economy. Spreading this austerity out should be our essential goal.
If you check the archives of this blog, last year in December I was making dire statements about the inflationary effect of the Congressional and Fed moves. I predicted that they would tank the economy. Sad as it is to write, that was probably true, with the only thing really helping us being the disaster in Japan. The disaster in Japan shifted the real pain forward by months, and that pushed a little big of discontinuity into the economy so that we are now in a weak upswing. But we are in a very weak position now, and we shouldn't hide from it.
I am also appalled by what a theoretically Democratic administration has brought to the table. Under Bush, most economic stimulus measures were at least distributed equally, and some were distributed to the bottom rung of incomes. Thus they worked a lot better. Obama's administration has shifted, economically speaking, into hyper-Republicanism. It's dire.
When you have little money to spend, spending it pushing up lower end incomes (esp. economic casualty incomes) provides far more economic stimulus per dollar than pushing up all incomes by the same dollar amount. But the Obama administration isn't even trying for that. The Obama administration keeps trying to give more money to higher-income people. This appears to have converted big hunks of economic stimulus into economic drags. There is a Republican/Democratic Axis of Economic Idiocy which is almost leveling this country, and it must end.
To my mind, the Obama administration has been a tragic failure. However Republicans in Congress haven't managed to do any better. We are still smoking ganja and hanging out in margarita land. What the prospects are for real change next year I don't know. We are running out of time and money quite quickly.
Total products supplied over the last four-week period have averaged nearly 18.5 million barrels per day, down by 5.8 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged 8.7 million barrels per day, down by 4.7 percent from the same period last year. Distillate fuel product supplied has averaged nearly 3.9 million barrels per day over the last four weeks, up by 2.4 percent from the same period last year. Jet fuel product supplied is 0.5 percent lower over the last four weeks compared to the same four-week period last year.It seems we are close to another economic ledge down. I don't think it is a collapse into total recession, but first quarter is going to be raw and nasty. Trucking is still holding out. Rail is showing that carloads have recently rebounded slightly. The YTD YoY for carloads is 1.9%; last week's, for example, was 3.7%. Autos is a big reason for that, and construction-related is another big reason. So we have something to carry us through a bad first quarter.
Businesses managed inventories very, very carefully this year - we don't seem to have any backlog at all in industry that would produce a synchronized downturn. Services are hurting far more. I think autos is getting close to max, but I'm not sure that any significant downturn is really in the works.
Friday, December 16, 2011
Yea, Verily, For I Wish We Had Not Done This
It is of the percent changes in covered employment over different time frames. Covered employment stats are obtained by the Department of Labor directly from the states. The states report the active unemployment insurance accounts on file, so it is a way to count total employees. You can get these numbers at this page.
Yes, this time IS different - just not in a good way.
Those orange and yellow lines are yes, indeed, really reporting 2 & 3 year drops of over 5% in covered employment. I'm just sayin'. Currently the 1 year series low is -4.75%.
Thursday, December 15, 2011
Call Me A Skeptic, But....
If you go to the Bundesbank website you can get the list of all the Bunds at this page. Click on the particular issue and you get a page with the time series, which you can switch to the graph. I kind of like the daily diff graphs.
I have been spending a lot of time over there, looking at different issues and pondering what it says about money:
Exchange listing. 7 year.
Interpolating. Exchange listing. 2.4 years.
Who wears short shorts? Exchange listing.
Nothing says "I love you and I believe in you" like negative yields.
Let's see. The great Euro deal turns out to be nothing much. Spanish bonds are doing better, but then the concern with Spain is the future trajectory, not currently high debt levels. Italy, which has the very high accumulated debt, is not experiencing much help. Italian 10 year bond yield; Italian 5 year bond yield. The real moving part to what was announced was the plan to give banks unlimited access to cash from the ECB for three years - the theory being that banks can borrow low, invest in sovereign bonds for a high yield, and pocket the difference. This all falls down if there is real risk of default or currency change in the bonds - if you take a loss on the bonds, you won't be able to repay your loan to the ECB, and it will turn out to have been a tragic, potentially bank-destroying mistake.
Probably because the latest European deal to end all deals did not seem to solve much, US Treasuries are galloping along. They seem to have an implicit Fed guarantee; they have the potential of currency appreciation against the Euro, US current debt levels are not at the eye-popping Italian levels, and the US economy is doing better. Further, Asia as a whole is sliding somewhat, with Chinese PMIs hardly stellar and Japanese indicators at best stagnant. Nor is India doing well. Therefore money is exiting the Euro and probably China, definitely India, and some of it is landing in US laps.
The 30 year US Treasury auction was just remarkable, with the bid/cover ratio at an eleven year high of 3.05. The yield awarded was 2.93 (rounded up). Earlier auctions this week were quite similar, with very high demand across most maturities. The three year was most notable, with a stellar bid/cover ratio of 3.62. The four-week ratio was 7.47, which is only slightly less than the previous week's 7.6 something. In general, it looked like increased demand this week shifted to the longer maturities with higher yields, which is NOT a good indicator for Europe.
Euro-woe: A flight of money never does much for a regional economy, and Europe is no exception. Eurozone PMIs improved slightly on Germany and France this month, but are still contracting at 47.9. I am getting more worried about Germany next year, because of signs of potential trouble in German construction. Residential has been carrying it, and I thought this would continue. But new orders are slack so I may be wrong. German services activity improved overall in the latest survey, but manufacturing was still contracting and if there is potential weakness for construction in the months ahead, services are unlikely to continue much of an expansion.
India has a host of problems - inflation is way too high after the CB has completed its tightening cycle, and there seems little chance that it will abate until the rupee starts gaining. But I think the whole thing has fueled an exodus of money, so the rupee is weak and destined to remain weak, and could become much weaker. The trade deficit is too high. India's industrial output fell strongly in October.
China is seeing a pause in the inflow of money from foreign sources. This is a big issue for China; China appears much dicier than most seem to believe. I suspect it will be loosening quite quickly. China claims it is not reversing its housing policy moves, but I question whether it can sustain that. However I don't think it will work when they try to reverse - the impetus is in building/selling, but the economic function is collateral for further borrowing, and this has never led to "quiet" corrections. A military buildup is about all that can save them now, but it would be of temporary help only and I think it would lead to a permanent case of foreign investment nerves. Right now they are rattling sabers for trade advantage, but they may end up rattling them in earnest.
US industrial production fell slightly in November, but the weakness in manufacturing was far more pronounced, at -0.4. This is the first negative for US manufacturing in a long while, and it may represent a trend change. The weakness was mostly in non-durables:
Manufacturing output decreased 0.4 percent in November, and the factory operating rate dipped to 75.3 percent, a rate 10.9 percentage points above its trough in June 2009 but still 3.7 percentage points below its long-run average.In durables autos were the prime mover.
The output of durable goods slipped 0.1 percent in November but was 7.1 percent above the level from 12 months ago. Decreases of more than 1.5 percent in November occurred for wood products; electrical equipment, appliances, and components; and motor vehicles and parts. Gains of more than 1.5 percent were recorded for primary metals and for aerospace and miscellaneous transportation equipment.
The index for nondurable manufacturing declined 0.4 percent in November. Among the major components of nondurables, losses of more than 0.5 percent were reported for textile and product mills, apparel and leather, printing, and chemicals. Only the indexes for paper and for petroleum and coal products moved up.
The best world disaggregator is in the peripheral Chinese investment prospects. Countries like Thailand, to some extent Vietnam, Malaysia, etc. These should all be the beneficiaries of Chinese price/allocation problems, and they should help Asia as a whole.
We just have to hope that we can maintain, on a global basis, differences in economic rhythms. Generally world inventories are not too overloaded except for ships and some commodities, so maybe we can. If we can't, it kind of looks like war lies ahead.
Tuesday, December 13, 2011
US - Fundamentals 2012.
It's improving, but still damaged.
The NFIB optimism index improved, but is still significantly below where it was in January (94.1 -> 92.1), which just about sums up what a skipping recession is all about.
You go through a series of ups and downs, and you just hope that the longer trend down is so gradual that life takes over. It usually does.
One notable stat in the NFIB Small Business Outlook report is that in October and November, employment at small businesses moved into non-negative (0, 2; see page 11) for the first time since January 2008.
However this doesn't mean that the US economy is in a strong expansion - it really isn't. NFIB shows that the outlook for small business conditions six months from now remains in double digit negatives (see page 7), having been there for six months! It is improving, but it is 22 points less than January and 28 points less than November 2010. There are constraints to this system. NFIB almost always is about six months to the future of the general economy - what this is telling us is that we are about to enter a second downturn, hopefully ending in April.
I am encouraged by the relative improvement in November to -12, but a series of double digit negatives in NFIB means significant trouble for the US economy. In November of 2007 we moved into double digit negative territory, which continued with some abatement until July of 2008. From there it shifted briefly into positive territory (drop in inflation), and then jumped sharply negative in December of 2008. Sorrow ensued, but by the spring of 2009, it clambered back into positive territory, where, with some fluctuations, it remained until summer of 2010. That dip, which was short, predicted the relative weakness in the first half of 2011.
This dip is telling us something, so don't get overconfident. We are still trying to haul coal to Newcastle, and while there is some life in this system, it will be quite some time before this will be a truly profitable venture:
The US economy is clearly cash-on-hand constrained. It has to fund its economic growth mostly from earnings, and the Fed's great misadventure in the glorious land of QE2 threw one heck of a spanner into the gears of commerce.
Small businesses really do not have the earnings to expand safely and profitably, and demand is far too constrained for them to borrow the money to do it. Small business spending is one of the huge determinants of US economic strength, and they can't really push the train along up the incline right now. The train is chugging and puffing up the hill, but it isn't going to really accelerate for quite some time yet. The strength in the Household Survey for the November Employment report was real, and shows up in the NFIB employment stat. But it is not a sustained surge.
US conditions aren't too bad, although they are still constrained by the cash/debt ratios in small businesses and households. Those ratios have improved (on average) a lot over the last two years. It will take years more to truly work off the errors of the past.
There is more life in the small business sector than it appears, but large services are still trending down. The last ISM services report showed a decline in employment, which is correct for their sample. So what we now have are off-phase trends:
- Large services, declining.
- Small services, mixed.
- Manufacturing still trending up, but cycling with spending.
- Government sector, still declining.
Of these sectors, the large services is by far the largest net in the economy. The deciding factor for next year should be the relative boost imparted by a cautious climb off the bottom in housing. Most of the life and action will occur at the bottom level in smaller firms.
Retail is not bad - December's report shows money being spent on autos and general discretionary, but off-balanced by constraints at groceries, pharmacies and restaurants as consumers pinched pennies to pay for holiday purchases. Consumers seem to be spending cash, not credit, and one suspects this will continue:
To be continued - we need to get to rail, taxes and the like.
Thursday, December 08, 2011
I'm Really Awed Into Silence
This is epic. The Dragon feels like he got this letter after his Sarkozy date. The only feasible way of replying is with a blunt email linking to Robert Palmer's "I Didn't Mean To Turn You On", which Draghi pretty much did:
Still, ECB President Mario Draghi signaled no intention to expand the bank’s 207 billion-euro bond-purchasing program and said it would be “complex” to engineer a way for national central banks to recycle funds through the IMF.So now they are getting the central banks of the countries to give the IMF money, and sending creepy letters to China about funding:
“One cannot channel money in a way to circumvent the treaty provisions,” Draghi told a Frankfurt press conference. “If the IMF were to use this money exclusively to buy bonds in the euro area, we think it’s not compatible with the treaty.”
Dear China,Etc. It's all beginning to seem more than a bit desperate. It is not as if there are not concrete measures - the European leaders are promising that they won't hand losses to private bondholders. Link:
You have not replied to my last 47 attempts to contact you regarding the 700 billion Euro loan we discussed. I have tried to contact you by phone, via Federal Express, various Ambassadors, a US destroyer with a party of EU diplomats concealed on the aft deck, and E-cards with pictures of big-eyed European Finance Ministers holding their hands out. I am very disappointed in you - I felt that we were developing such a beautiful relationship when you started buying Greek bonds. It is obvious that we have so much in common - you have money and we need money.
But I am getting mixed signals from your top officials. For example, when you said you would not hesitate to start a third world war over Iran, you really meant that you liked me more than the US, right? And that you wanted to buy my bonds and bear my babies, right? Now to suddenly begin playing hard to get is very misleading and dishonest, and I suggest that you should apologize to me for your behavior and immediately wire me the 700 billion Euros, which, if you prefer, you may send to the IMF marked #EuroRescue.
It is impolite and immature to behave in this way, and after you apologize I will show you that I forgive you by accepting your money, for which, may I remind you, I am willing to offer many fine and creditworthy sovereign bonds. If you do not want to send me the money, I would gain utility if you came to Brussels immediately to discuss it and explain your decision to a roomful of adorable big-eyed European Finance Ministers. That would be the mature and developed way to handle this situation.
In a climbdown by Germany, the permanent fund will follow IMF practices on imposing potential losses on holders of bonds of debt-ridden states. Merkel had championed “private sector involvement” as a way of lessening the bailout burden on taxpayers.Yes, that might have been a downer on the first date, but now Europe says it will never happen again. However, without iron-clad guarantees, China will buy very little more European funny money, and will continue building up its fleet to try to corral more fossil fuel resources in the South China Sea, and is quite content to leave Europe navel-gazing while China gazes at naval bases, and India discusses trade barriers with Australia's Defense Minister, who just happened to wander over there.
“To put it more bluntly: our first approach to private sector involvement, which had a very negative effect on the debt markets, is now over,” EU President Herman Van Rompuy said.
It is not that nothing is being done in Europe. The IMF has been talking about buying European bonds for a while, and will certainly do so. The ECB cut interest rates and will cut again, and is providing an unlimited flow of money to banks for three years. It will now accept used socks and underwear as collateral. Of course all this is a violation of treaties, but the fiscal portions of these treaties have been abrogated by non-enforcement for some time, so how is this different? I guess the real theory here is that the IMF will impose conditions to buy bonds, but how can some of these countries meet them?
In the end it's about how much money, and who guarantees it all. 267 billion Euros is not very much money when you look at the funding needs of Spain and Italy, and then there's Ireland, Portugal and Greece. And Italy is not solvent. There is no way it can pay all it owes. There seems just about no hope that it can pay down its debt, with the yield curve it's got, the spreads it has to pay, and a slumping economy.
For the rest of the world, all of this does have implications. For example, India's yield curve just inverted again, not that it hasn't been doing this in and out stuff since the summer, but then Brazil was there also. You have a flight to safety of impressive and depressive proportions, and this surely must mean a world shortage of money. The European banks lend around the world, and compensatory lending will pick up in areas around the world. However that really increases correlation, and should have a kickback down the road.
You can sum up Caruana's recent speech as a plea to reduce correlations rather than increase them; every crunch has another plus side SOMEWHERE until aggregate correlations increase to between 0.7 and 0.8, and then the system is grossly unstable. Changing who owes what to whom does not alter the instability; the instability is a function of high debt or high base costs reducing income margins, which causes small real world changes to be magnified and have non-linear effects. The only cure is to write down debt. The entire European approach to this problem has been to create a shell game, but it cannot work.
Suppose China decided to lend a trillion Euros to the European Stability Mechanism (once the bond sale failed, we needed a different set of letters, so now we are talking the ESM - the EFSF is so last-week). Does it change anything about the system? The only way it does is if the debtors then default, and the default shock then occurs outside the system, thus reducing internal correlation. This implies that if China does buy in, it gets the bulk of the shock.
I will continue this, because it has huge implications and they go far outside Europe.
Sunday, December 04, 2011
Well, It IS A Landing
It's the sudden fall in input costs that's most impressive:
The rate of input cost inflation in the Chinese service sector eased to a 13-month low during November, and was slower than the long-run series average. Largely due to a sharp fall in average costs faced by manufacturers, input prices at the composite level fell at the fastest rate since April 2009.This is going to be interesting. HSBC has been banging away on the theme that it's a soft landing. They seem a little less certain now, but still claim that the government can institute policies to create one.
Service providers raised their output charges in response to higher average cost burdens, although the pace of inflation was marginal. Similar to the trend seen for input prices, manufacturers recorded a marked reduction in charges at the factory gate during November. As a result, composite data signalled a monthly reduction in average tariffs for the first time since July 2010.
I don't see any great big fluffy clouds underneath the fall zone. I think the Chinese government can toss down some gym mats, and maybe throw some trampolines in there, but you know, nowadays all the trampolines are made in China, and they're not the most durable items.
Japan's composite output index came in below 49 also. Hong Kong's still slumping. I think I forgot to mention it before, but JPM's global manufacturing PMI fell below 50 in November. The Thai floods definitely have something to do with that, but it's not the only explanation.
Friday, December 02, 2011
US Employment: The Wood Stove Economy Kicks In
Note that the Fed would have to be nearly insane to launch another QE program right now - if it did, the bad effects would be rather destructive to this trend. The biggest surge in activity right now is in low-margin stuff that is acutely affected by inflation.
As I pointed out several times recently, in 2011 the Establishment Survey was not going to be a very good guide to what was happening in employment. A lot of activity is in self, casual and small business, and the Establishment survey cannot pick up those changes in real time.
Unfortunately, next month the Census changes show up in the Household survey, and the survey will be discontinuous. It will take several months before we can really look at trend again. So whatever trend we postulate from the current release, it will be March until we can pick up and compare.
Now to the release and the numbers. Retirements continue to pick up pace. That's hardly a surprise given our demographics. The Household Survey reported a seasonally adjusted 278,000 more people working. This is consistent with ADP, and the fact that it is higher than ADP is internally consistent as well. This brings our employment/population back to 58.5%. Last year at this time it was 58.2%.
From September to November, the Household Survey picked up 555,000 new jobs. It's important to look at where they are, however. Going to Table A8, we see that almost 300,000 new jobs showed up in the "self-employed, unincorporated" bracket from September to November. On a YoY (non-seasonally adjusted basis) for wage and salary workers, we show almost exactly 2 million more private wage and salary jobs (this November compared to last November).
The number of persons employed part-time because of economic reasons dropped over 750,000 from September to November. Admittedly a lot of that is in retail, and seasonal. Still, it shows more life on the ground.
But there's more to this than meets the eye - let's go back to Table A-1, and look at men vs women. From September to November, employment in men over 20 increased by 534,000, seasonally adjusted. For women over 20 for the same period, employment decreased by 43,000. On a YoY, NSA basis, the employment/population ratio for men over 20 has increased from 66.7 to 67.6%, which is a very healthy move. For women over 20 during the same period, the emp/pop ratio fell from 55.6 to 55.1.
Teens are still doing very badly. Over the year the 16-19 NSA emp/pop ratio rose only from 24.8 to 25%. That's really poor.
The real ugliness comes in Table A-2, which splits by race. The Nov NSA emp/pop ratio for whites is 59.7, having increased over the year from 59.3. For blacks, it is 52.1, having fallen from 52.7% over the previous year. Because the black population is smaller, the error bar is much higher, but on a seasonally adjusted basis, the emp/pop ratio has fallen from 52.1% in September to 51.7% in November. This is not good. It may be partly attributable to declining local government employment and population concentrations in metro areas, but any way you look at it, not good. Table A-3 gives you Hispanic rates and ratios. The Hispanic emp/pop ratio on an NSA basis rose from 58.8 to 59.4% over the year.
These remarkable divergences suggest that high-tech/skilled employment is still pretty strong, that the open labor force is still pushing teens out of the labor market, and that job growth is really limited to skilled blue-and-white collar workers. Probably many of them are working for themselves or doing contracting.
One striking difference in the US is access to casual capital (usually in-group savings). Hispanics and whites tend to have more. Metro populations are generally the least "handy", with trade occupations being concentrated in traditionally unionized populations. It's very hard to account for the black/ white-hispanic-asian divergence in employment ratios without such an effect.
You can, if you have skills, probably pick up maintenance-scavenge type work in a number of areas right now. If you have the capital and you have the skills, you can probably make something buying old cars, fixing them and reselling them, because there are a ton of people who need better transportation and don't have the money to get it. But if you have no capital and no such "dirty" type skills, you are at the mercy of the private/government labor market right now, and in some areas, it is still pretty grim.
Thursday, December 01, 2011
US, Proudly Finishing The Job
Initial Claims: Initial claims are still good in comparison with recent history, headlining at 402K. But this report has really been slightly weaker than it has appeared over the last month, with continuing claims rising. The four week running average rose again, and it looks like it will rise considerably over the next couple of weeks due to two low weeks dropping out. But not dire or alarming yet, although it raises questions. NACM combined declined very slightly in November, but I think overall strong Chicago PMI show that it's not a pending cartwheel. Still, the long term pace for the US is weakening.
Persons claiming benefits in all programs is rising again also - it's back over 7 million. This has to be watched carefully - remember, I'm still thinking we are in a skipping recession pattern, and much of our ability to remain in the skip zone is based on the theory that there are out-of-sync waves in our economy so net employment isn't going to drop that much. If I am wrong and the situation is more serious, the first notification of my stupidity will probably show up in the continuing claims numbers, which would indicate a stronger degree of correlation than I believed existed. I expect to see some temporary rises, but they should be short-term.
Global manufacturing PMIs are truly not encouraging. I only see some strength in the Americas, really, although India is still hanging in with marginal, weakening growth and Russia reported strength - see the comments in the release for some skepticism. Canada, which is always correlated with US auto, is hanging in there. Brazil, which has been in outright contraction for months, is improving a bit. The Aussies are strongly linked to Asia, and as you might expect, their manufacturing PMI is still under 50.
China jumped off the diving board, and you have to read the comments to detect that the weakness was not in export orders! Taiwan continues in strong contraction. Manufacturing in South Korea is in strong contraction. Japan is more stable but still hanging down there in the marginal contraction zone; the increasing dependence of Japan on exports to China do not make me optimistic on this one. On the other hand, inflation in China seems to have been addressed. They will have one hell of time getting over 6% growth next year IMO, which seems to be quite negative compared to all the experts. I hope the experts are right but I don't see how they can be. China can hurl tons of resources into building masses of low-income housing, but it is doubtful they can get the uptake where they are trying to build them. There is such a load of debt that has to come off that economy that it's intimidating.
As for Europe, the recession continues, and the strange sovereign attractors of weakness seem to be strengthening; Spain at 43.8 illustrates the difficulty that the new regime over there has, and is matched by Italy's 44. Austria went below 48. The Netherlands fell to 46. Poland fell below 50. The Czechs are now declining fast, falling three flipping points in one month to 48.6. In one effing month. These last two are highly worrisome. In the slightly stronger category, Germany's final was 47.9. France, 47.3. This leaves Eurozone PMI at 46.4, and the steepness of the declines in most countries as well as the current level indicate that there are months more in the barrel.
My conclusion from the above is that the Austrian line of financing has fallen down, and that Europe now enters the crash-o-rama zone. The only thing that will produce these high rates of correlation are massive natural disasters or a shortage of operating cash, and in this case it is the shortage of operating cash. ECB needs to be buying bonds to boost the money supply back up - it doesn't need to worry about neutralizing excess money supply from those purchases, because the real money supply is apparently collapsing.
Now, my original theory that Germany could maintain some marginal GDP growth next year appears called into question. And it's not subtle. Germany's either going to be close to 1 or even 1.5% real growth, or it is going to contract more than 1%. Kind of a big gap between the either-or!
Anyway, there are airy reports that the auctions in Europe did well. France was okay, but Spain is still in the barrel. Given the strong real-world evidence of recession, one would expect a flight into sovereign bonds, but clearly this isn't able to take place very efficiently.