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Tuesday, April 10, 2012

NFIB Not Too Good

Rather disappointing. The takeaway for others may differ, but what worries me the most about this report are the credit indicators. Interest rates are falling, but satisfaction is falling too. Along with the other data, this seems to imply that some businesses are having trouble maintaining profits and so are having trouble getting credit.

Compensation for workers is up more than planned and is outrunning price increases, but the relatively large fall in loan availability might be a bad harbinger for the next few months.

Next month is the bigger sample; we'll have to see how things look then. Hiring plans fell back to zero, which is a turn from Jan/Feb. From the Dunk's commentary:
The March survey results were bad news, ending what promised to be steady, albeit glacially slow, improvements in the small business sector of the economy. Nothing much happened in March to make owners more optimistic about the future and that seems to be a problem, the status quo. Europe was quiet but somber, uneasy, as if waiting for another shoe to drop. Consumer confidence and spending remains depressed. And health care is in the Supreme Court creating more uncertainty, either way the decision goes.

Inflation pressures are building and reports of rising worker compensation are the highest since 2008. The percent of owners reporting “inflation” (rising costs for inputs) as the #1 business problem are the second most frequent since 2008, the highest since 2008 occurred a few months earlier in 2011. Reports of increases in average selling prices are rising and net 21 percent of the owners plan to raise their selling prices in the coming months.
When you start to see signs of compression like this, it generally means small business hiring is not going to add much to the economy. The collapse into double digit negatives last year for general business conditions never did bode well for this year. If you look at page 7, you'll see the chart. Then look back at 2008. That one number tends to precede turns in the economy. The calibration is always a bit different, but it's usually the six month warning. The thing that saves it this time is that actual sales changes are still in the positive range.

At this point in the cycle small businesses were still in the rebound/rebuild stage, so I don't think a pullback in their spending will have the normal repercussions. Call it more of a stagnation/slow drain than a real contraction. Maybe next month will be a bit better. These folks have been running tight for some time, and they may be able to push through this without too much change in actual purchasing patterns - if credit holds up.

Europe is just wallowing forward into the next phase of their interminable sovereign credit crisis. The next step is that they will actually have to set up and use the special fund to buy bad bonds, but that means certain countries, who will not be mentioned by name, stand to take future losses. I think the ECB will stop throwing cash to make everyone actually ante up.

If those certain countries don't ante up, the ECB probably will start the money throw Olympics again, which will cause those certain countries higher domestic inflation. This would be much more of a problem for several of those countries than it was last year - last year the world economy was better and they could hope to make up the impact on exports and more jobs. Not this year. So I really do expect those countries to ante up, because they don't have to recognize the losses until later, and ECB is going to be mulish about this - ECB has all that lovely bad-bond collateral, and it never intended to be the last-dollar lender. Oh, no!

The problem is that last year the promise was made to private lenders (buyers of sovereign bonds) that the next round of purchases were going to be on an equal recovery basis with private buyers. So now we sit and wait for the inevitable backing and filling. Because you are going to lose a percentage of that money you put into the fund, and it's going to make your domestic debt rise.

There are limits to all things; the Mississippi Company ain't doing all that well, and the European PTB need to act quickly to support the notes. We've got a year or so to run on this one, and it is going to be entertaining.

Financial history really does repeat itself. Essentially Europe managed to fund its "bailout" of Greece mainly by robbing Greek bondholders, especially retirement funds. It wasn't a very nice or ethical thing to do, but it did work in terms of the balance sheets of the main players. This next round of the game is going to play out very differently. The French riot, the Italians shoot, and Spain is a grape that has already been squeezed. The Irish rebuff of the property tax levy is going to have legs. I don't have any feeling for how that will work out, but I am convinced that a lot of homeowners won't be able to pay it - so what happens next? You can bulldoze Portugal, but soon this stage of the plausible deniability will expire also.

US inventories still don't appear overdone, but when these builds happen they tend to happen suddenly, so that's not totally reassuring.

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Comments:
I think additional printing of money by the ECB is inevitable. Its just a question of when at this point. After yesterday, we are clearly nearing a tipping point where the next shoe will drop. I'd bet on Portual.
 
Anthony Newley's old hit song, "STOP THE WORLD, I WANT TO GET OFF," seems quite appropos now.
 
Yeah. ECB has to trot out and talk about buying bonds again.

It's intimidating.
 
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