MaxedOutMama

Practically speaking, that is. Initial claims are rough. The official number for this week is 386K, but last week's number was revised up to 392K, perilously close to new recession levels. The four week moving average creeps ever higher on a like-to-like basis. 

Well, well, well. What would Candide say about this worst-of-all-possible-worlds scenario?

Words fail us. The Eurozone is heading for the rocks at blinding speed, and all the proposed solutions will solve nothing. That's why they are in trouble - they keep coming up with proposals that cannot possibly work. By now the proposals (such as Eurobonds) are getting insane enough to come close to outright rejection, which will speed up the financial flux cycle for Euro sovereign debt.

Ignore all the verbiage. What happened last week made it clear that if Germany does agree to Eurobonds, the German sovereign bond yields are going to rapidly jack up, and if Germany doesn't agree, Italy and Spain will continue to march toward the abyss.

So either way Doom Is Certain, because no matter what happens this week, the Germans will never agree to cover enough Eurobonds to bail out Italy, and Italy is that mammoth in Euroraum. This week's Schauspiel is about the timing of the collapse, not whether collapse can be avoided.

Germany is now going into recession. Manufacturing is too low, and the bad construction PMI means that no internal forces can keep the services sector up.

But what about the US? Are we doomed to recession this year, or can we continue to skip? It really depends on cars. A relatively minor downshift in the auto production trajectory is showing up pretty strongly as an economic negative (see CFNAI). But this was minor. If car sales fall a bit more, things get rough quickly.

Over the last few months, we have followed a very similar trajectory to 2011, and the reason is somewhat similar. Autos. Auto production. See Philly Fed.

The cause, however, is quite different and should give everyone pause. Extremely easy credit has been sustaining car sales, in part because used-car prices were so high that they sustained bad loans because bad loan losses were very limited. This may have worn itself out based on auto advertising I am hearing. If so, then we are in for a sustained deceleration in sales and auto production will shift toward a minor negative in the next few months.Last month's downward sales surprise hinted at this.

If that does happen, then all the negatives, which include external and internal factors (Euro tragedy and global deceleration, the domestic erosion of real incomes due to inflation, political uncertainty causing caution in business spending) start to pull us steadily down. Even if car sales stay up for the next few months, we probably will see some tax increases next year and therefore will go into frank recession then.

The current pace of unemployment initial claims implies that we are close to a controlled flight into terrain. If the Obama administration were not so witless it could have proposed something politically plausible to Congress to keep the economy up this year. But state and local funding is politically unfeasible, and in any case it would not work. State and local finances are so challenged by retirements that throwing more money in just slows the pace of cuts rather than forestalling cuts, much less boosting hiring.

In terms of Fed intervention, not much is currently possible. The core rate of inflation remains high, because US margins were compressed. Gas prices aren't coming down nearly fast enough to give money back to the consumer, and grocery prices are too high for the six-month expected spending in households to be covered by incomes alone. So there is very little of a counter trend innate in this economy. The Fed already has historic lows on mortgages. If the Fed were to launch another asset-buying program, it would immediately boost consumer inflation and cause further economic weakness, so I think even the normal Fed suspects will hold on this until after prices come down far more and core inflation begins to fall off.

Treasuries remain your friend.There is mild support on manufacturing from insourcing, some support in fracking/energy, and a basic North American (Canada, US, Mexico) strength that really does help us. So far rail seems to confirm that we are staying above the surface. However, last year's summer slowdown was exogenous, and this year's summer slowdown was endogenous, and so the end of year will not see the same type of acceleration out of the abyss. Last year the result was basically to move about one percentage point of growth toward the end of the year. This year it looks like we will just lose three quarters of a percent of real GDP growth. Since we were looking at 2%, that's a very dangerous position indeed.

ROW: Here things get grim.
The Euro-rim is deeply impacted. There are trade financing issues now for some countries. Needless to say structural demand issues are emerging and will not be quickly resolved. European car registrations are now down about 8.7% YoY. Commercial registrations are down 11%. Auto factories are going to be closing. At least one should be closing in Germany. This has legs

China is in deep, and sliding further into the abyss. In Q1 the economy was supposed to resurge in Q2 per CW. Well, it's almost the end of Q2 and we are hearing that the economy will resurge in Q3, but no data whatsoever supports that theory, and instead it looks like inventory overhangs are developing on the domestic side.And worse, some of the efforts to stimulate will probably increase overcapacity. China has a much steeper potential decline than anyone is admitting right now. The smaller manufacturers are being hurt by margin compression. The financing problems that developed last year were largely due to poor profits rather than an evaporation of money, and therefore they are very difficult to redress. Government efforts are largely aimed at slowing the decline. The epic flood of money that sustained very strong Chinese growth over the last decade is just quietly contracting for very strong fundamental reasons, and this must continue. Asset inflation cannot carry business financing any longer. You can use accumulated power production as a proxy for real Chinese GDP; the last accumulated was a 4.7% over 2011. Go to the very bottom of this release.

India: Clearly in trouble, because inflation is running much higher than GDP increases, and the fiscal gap is far too high to offer easy alternatives to the government. The central bank is struggling with high inflation and is limited in its stimulative capacity, and currency trends make it very difficult to cope with the fiscal gap or to control inflation internally. These forces really aren't showing up in the PMI data yet, but India will be struggling for a couple of years. The weak currency will tend to support manufacturing, but the trade gap is a genuine problem.

Hopping around to various countries:
Australia. Household debt did its damndest, and now the internal forces in the Australian economy are quite negative. Thus Australia is more dependent than ever on the Asian economies. Oops!

Singapore.http://www.singstat.gov.sg/ It's hanging in there, but things are getting tougher. A strong Asian expansion is not in the cards; Singapore net growth over the last year has fallen to the point that inflation is close to outstepping growth, so a bad year is to be expected. It probably won't be excruciating, but it will be weakening.

Indonesia: So far this year it has been supported by rising costs in China, which tend to shift a little more over to Indonesia. Growth is not brilliant, but they began this year marginally better than in 2011. I think the trajectory will shift lower in the second half, but that they'll hold up until the end of the year. Lower oil prices have the potential to help them.

Overall, I think the global economy would do okay if it were not for the Euro trauma. It wouldn't be stellar, but it would be okay if it weren't absorbing so much nonsense money all the time.

However the apparently chaotic nature of what is due to evolve in Europe over the next two years poses many questions for global trade. European banks have traditionally had tremendous involvement in external financing, and I have to believe that the massive uncertainty developing around Italy's fate is going to have long term effects on capital flows internationally.

Eventually, Europe will hurt us. But not today. Not next month. What is hurting us now are fundamentals, and price drops are the only cure. 

Italy is currently being sandbagged by Mr. Market - it paid close to 4% to sell one year sovereigns at the auction today. OUCH! Note that most of the reporting about Italy's debt position is badly off. They ended 2011 at 123% or 124% of GDP. Tax receipts have been lagging despite tax increases, and the economy has been contracting, both of which upset the debt cart. They'll end 2012 at around 127% or 128% of GDP, it appears. The jig is almost up there. 


Greece votes next week. Let's just say that the first reaction of the Greeks to the news of the apparently merciful Spanish bank bailout was fury, and a demand that the Greek terms be modified. This was met with harsh German rebuffs, so the political parties pushing for a renegotiation on debt terms have been strongly externally supported by recent events. 

This is from BEA. Corporate profits compared to compensation paid to employees:




"Profits" here are adjusted for taxes/inventory/capital consumption, but honestly they have to be.  


Another way to look at it is in BEA Table 1.11, which lists everything as a percentage of national income. Git yo' NIPA Tables here.

Even Snarky Mark can be wrong - sometimes.  




 

This graph shows all this in relation to federal debt held by the public. We're running out of room.

Seen in this light, the process of communalizing the debt of the EU's members states brings to full circle a project that the French have always viewed as something directed more against Germany than at uniting the Continent. Nicolas Sarkozy, Hollande's predecessor, believed that the best way to pursue this traditional goal was by using the novel approach of fostering a sense of solidarity with German Chancellor Angela Merkel. But Hollande is returning to the tried-and-true method of weakening the Germans by undermining their economic strength. 

The next stage in the crisis will be blatant blackmail. With their refusal to accept money from the bailout fund to recapitalize their banks, the Spanish are not far from causing the entire system to explode. They clearly figure that the Germans will lose their nerve and agree to rehabilitate their banks for them without demanding any guarantee in return that things will take a lasting turn for the better. 

This is the ultimate call-your-sister-up-late-at-night-DNC-voice. Note the trace of lisp? Really getting this one down should greatly increase your hit rate. 



Note the impressive rhetoric and the stunningly logical exposition:

Average inventory carried at Chinese dealerships bloated to a level exceeding two months of sales by the end of May, compared with more than 45 days at the end of April, Luo Lei, deputy secretary general of the state-backed China Automobile Dealers Association, said in an interview yesterday. That’s forcing dealers to deepen discounts and sell cars at a loss to meet mandatory sales targets set by automakers, he said.

 ... 

In the showrooms, surging inventory will lead to intense price competition, forcing out weaker dealerships that can’t absorb losses, Luo said. There were about 21,000 dealership outlets in China as of the end of 2011, compared with 16,000 the year before, according to Luo. 

Voters in two major California cities overwhelmingly approved cuts to retirement benefits for city workers in what supporters said was a mandate that may lead to similar ballot initiatives in other states and cities that are struggling with mounting pension obligations. ...

In San Diego, 66 percent voted in favor of Proposition B, while 34 percent were opposed. Nearly 97 percent of precincts were tallied by early Wednesday. The landslide was even bigger in San Jose, the nation's 10th-largest city. With all precincts counted, 70 percent were in favor of Measure B and 30 percent were opposed. 

There will now be lawsuits, but courts are more accepting of initiative-based cuts. Both of these measures affect current participants as well as future participants. 

I've been reading DU GD, sort of laughing about the Walker threads. They're so surprised! 

However, in this one, reality emerges:

OP: looks like Barrett only got the Union vote (and their friends maybe)

..

6. 39% of union families were FOR Walker. 

Remember that. These are the foolish "Reagan Democrats" otherwise known as useful idiots, dupes and masochists.

Researchers from the University of South Florida and the University of Miami say the case control study provides the first direct evidence that caffeine/coffee intake is associated with a reduced risk of dementia or delayed onset. Their findings will appear in the online version of an article to be published June 5 in the Journal of Alzheimer's Disease. The collaborative study involved 124 people, ages 65 to 88, in Tampa and Miami. 

 "These intriguing results suggest that older adults with mild memory impairment who drink moderate levels of coffee -- about 3 cups a day -- will not convert to Alzheimer's disease -- or at least will experience a substantial delay before converting to Alzheimer's," said study lead author Dr. Chuanhai Cao, a neuroscientist at the USF College of Pharmacy and the USF Health Byrd Alzheimer's Institute. "The results from this study, along with our earlier studies in Alzheimer's mice, are very consistent in indicating that moderate daily caffeine/coffee intake throughout adulthood should appreciably protect against Alzheimer's disease later in life." 

Go for it, baby!  Just slurp the precious, life-giving fluid down.

“Based on these numbers, it would not be surprising to see GDP for the region contract by 0.5% in the second quarter, though an even steeper decline could be seen if the June data disappoint.

“There is some convergence among member countries, but unfortunately only in the sense that all of the largest are now experiencing downturns.

Although, let us face it, any speech given at anything purporting to call itself the "Festival of Economics" is a fertile ground for mental masturbation. Festivals and economics just do not go together.  Still, here it is.

In particular, his observation that the de facto process of separating the Euro currencies by country is well underway is important. Because Germany cannot foot the bill for a European bank deposit guaranty scheme, Soros' suggested fix is impossible. 


To keep the Eurozone, Berlusconi's suggestion is probably more feasible. Allow countries to issue their own scrip, and go to a dual currency system. The Bundesbank would hugely prefer that solution, and it may be the only one now possible.  

PS: Singapore is weakening again. 

... in his lame way, Romney got at Obama’s problem: The Moviegoer prefers to float above, at a reserve, in grandiose mists. 

 As Maraniss recounts, Obama said he liked reading Hemingway because of Papa’s “integrity of grasping for those times, those visions, that are ones of true magnificence and profundity.” 

 Cook told Maraniss that she thought Obama’s desire to “play out a superhero life” was “a very strong archetype in his personality.” 

Just about there:

Well, we've talked about this in some detail this year, but May auto sales are definitely not going to be anything to cheer about. And I have never yet known a US auto buyer who worried about whether the Greeks were going to stay in the Euro when considering buying a car, so that excuse is not available.

So Neil is wondering whether commodities take a dead cat bounce? Nah. 

China is the big factor here. India is slumping badly, but China looks to have a very steep incline to fight with no real underlying positive factors. The only thing the authorities can do is cut taxes and give local governments a lot of money to spend, and this is both a costly and risky measure.