Monday, January 09, 2012
Q1 Isn't Looking That Great
A lot of the December establishment gains looked very seasonal. NFIB claims that small businesses didn't have a great December job-wise (we'll get the full NFIB report tomorrow):
“Unfortunately, December’s jobs numbers fizzled, with the net change in employment per firm turning negative again; small businesses lost an average .15 workers per firm. Seasonally adjusted, 13 percent of the owners added an average of 2.6 workers per firm over the past few months, and 12 percent reduced employment an average of 3.5 workers per firm. However, the majority of owners (75 percent) made no net change in employment. Forty-five percent of owners hired or tried to hire in the past 3 months, but 34 percent of them reported few or no qualified applicants for the position(s).I'm guessing that the establishment data was biased a bit upward on the "winners" effect. Still, the jobs trend for small businesses retains some underlying positives. If fuel goes up very much those may be undercut, and I do believe housing will be a net positive for the US in 2012, although the situation will be quite spotty across the country.
I am pretty positive on US Treasuries for most of 2012. The Euro problems are snowballing a bit, although the "unlimited money" policy of the ECB is helping the marginal countries. But the Greek issue can't be deferred much longer - as Spiegel acknowledges, the latest plan to end all plans is essentially ludicrous:
A study by economist Henning Klodt of the Kiel Institute for the World Economy shows how unrealistic the troika's assumption was. Klodt calculates the amount by which current revenues must exceed expenditures in the Greek budget to get the country's debt under control. He concludes that even if there are significantly lower interest rates combined with very optimistic assumptions about the economy, the surplus would have to amount to more than 10 percent of GDP -- a value that, as Klodt notes, not a single industrialized country has ever achieved in recent decades.Spiegel's article calls the troika "dishonest". Perhaps a more tactful way to phrase it would be "almost infinitely unrealistic". This year it looks like push comes to shove on that issue very quickly. The backroom attempts to mitigate the situation all require private creditors to take huge cuts now - something on the order of 75 to 90% - but even that may not do it. Greek debt needs to be about halved. Therefore there is really not much of an incentive for the private creditors to accept what is being shoved down their throats by the nomenklatura, and they are balking.
Italy's 10 year remains at 7% or thereabouts. There is some relief on the short-term bonds, because the ECB is throwing money with a three-year timeframe. But the 5-year remains over 6%, and that three-year deadline poses problems of its own. The two-year is sticking around 5% currently. This year Italy has to refinance a lot of debt, and Italy appears to be in recession. It seems clear that Italy has no path toward cutting debt/GDP ratios this year, because how ever much it cuts, the increase on bond payments is going to put it under. At the end of this article you'll find a table with 2012 scheduled issues (computed privately).
The first hit for Italy came in 2008, when buyers got nervous. The government fought that one off, but how much further can they go? The thrown-money gambit has been more successful for Spain, but Spain does not have that much accumulated debt.
The story for this year with regard to Europe will be at best a series of continued marginal impacts, with several possible shocks greatly shifting the picture to the worse. If Ireland cannot continue with marginal growth it becomes a problem. The Iranian controversy has the possibility of shifting Europe into a deeper recession, most especially in Italy and Spain. Spain will have another traumatized year, and the Spanish people have probably had about enough by now. France is quite marginal, and faces a credit downgrade.
The UK is profiting, and should hang out in decent territory all year. It faces no problem with its bonds, and is helped by the uglies elsewhere. Japan has a day of reckoning coming, but need not face that day this year. The major problem for Japan is China. Ireland is probably going to wander stoically through the battlefields this year.
However 2012 is iffy, with the high probability of global growth impetus slowly walking down. You can see the problem in JPM's Global Combined PMI. We begin on a cheery note for December
At 53.0 in December, up further from October's 27-month low of 51.4, the JPMorgan Global All-Industry Output Index rose to a nine-month high. Growth of global economic activity has now been sustained for almost two-and-a-half years.How lovely. How did that happen?
The main factor driving the faster rate of global economic expansion in December was the US, where growth of all-industry activity hit a nine-month peak.Gives you a crestfallen feeling, doesn't it? This is true, but the US economy isn't strong enough to carry that load internally, and it needs external growth to continue to keep treading this path. I recommend looking at the link and the graph - world economic growth is occurring, but at an historically low rate. Any global economic factor that serves as a correlating vector is capable of taking this puppy down. Thus I would assume that there is much discussion over Iran right now in various international capitals.
One major factor that may take this down is simply commodity speculation. The money being thrown in Europe to banks is not going to circulate much, it appears. But a lot of that money is going to pay off maturing debts banks owed to other parties, and that money paid back to those creditors has to go somewhere. I figure that it will go into commodities at about a 2/3rds split until the thing gets to be a farce. I figure we already channeled 200 billion Euros into commodities, and the ECB is still handing out the Secret Santa bags. I don't think we can sustain 500 billion Euros added to commodities, and maybe considerably less.
I have a link to a paper on commodities and futures markets for you. Commodities markets are like other markets - none of them sustain big new amounts of money without price distortions. In the absence of that factor they tend to work pretty decently, as long as the markets are open (disclosed) and actively traded by parties with a multiplicity of interests. But a surge of money induces a reliable upward swing in prices. I do not believe there is any possibility that a lot of the extra Euros won't end up in commodities. There is no way that world bond markets can absorb it, and money has tended to walk out of the great China Attractor lately. Where else can it go?
If the Fed tries another QE, the results might be quite literally explosive. I don't think the Fed will - I think the Fed will concentrate on controlling pricing for bonds.
We'll run out of borrowing power before we can possibly implement that much in the way of fiscal adjustment.
You were thinking that the government would have to confiscate gold in order cover the bonds, but I'm not sure how much gold they'd actually recover that way. This isn't like the 1930's, when almost everybody kept their gold in a safe deposit box at the bank.
I think we're likely to see confiscation of IRA and 401k accounts, disguised as conversion to a "government-guaranteed annuity". This idea has been floated already, but the total IRA + Keogh + 401k only covers maybe $1 Trillion. But if they covered the other $1T with the gold reserve, that only implies a gold price of $5K, which might be a little more reasonable.
For example, if we were not trapped by ideology, we could capitalize on government-held shale and tar sand resources leasing. That would directly raise government revenue, but you could also roll over debt by issuing securities backed by those lease payments, etc.
Right now the Chinese are willing to pay big money to get in on US shale, and it is really helping the US economy because it's increasing the pace of development, and thus domestic investment.
Seizing 401Ks is not likely to help the situation, especially if it requires selling stocks. Seizing IRAs, most of which are in bank or money market funds, has negatives of its own, as it cuts money in circulation. A government-led bank run is not likely to help the economy.
I'll have to keep watch for trial balloons being floated about that. The only one I've seen so far was to require all retirement funds to be "invested in a government-guaranteed annuity". Because it's safer than that nasty old market, donchaknow. That didn't turn out to be very popular, but they weren't desperate yet, either. I'd still bet on that before gold confiscation, but they're not mutually exclusive.
We'll have to see what comes down the pike.
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