MaxedOutMama

Hah, An Inventory Build

2012-01-27T05:39:00.000-08:00

GDP Q4 increased by 90.8 billion. Admittedly, this is an advance number and it can and will change.

What we have so far is that personal consumption increased by 47.8 billion compared to the prior quarter's 40.8. Almost all of that was in durables (44.9 billion). Cars up 28.6 billion. Recreational goods and vehicles up 12.3 billion. Furniture and durable household goods up 5.7 billion. Non-durables were only up 8.5 billion, SA. These are all supposed to be price-adjusted numbers.

Gross private domestic investment increased 83.2 billion compared to the prior quarter's 5.8 billion. Unfortunately most of the difference was in inventory build (+58 billion compared to the prior quarter's -41.1 billion).

Net exports of goods and services was a subtraction at -3 billion compared to the prior quarter's +13.6 billion. There was almost no change in exports; imports, however, increased 23.6 billion compared to the prior quarter's increase of 6.5 billion.

Government spending plummeted at -29.1, compared to the prior quarter's -0.6 billion. The bulk of the change was in defense spending, which fell 23.5 billion. Federal non-defense expenditures rose 3.6 billion. State and local expenditures continued to decline, falling 9.7 billion. In the prior quarter it fell only 5.7 billion.

The best thing about this report was the equipment and software portion of Gross Private Domestic Investment, which increased 14.6 billion. This was significantly lower than the prior two quarters (+104.7; +42.2) but it was positive.

How you feel about Q1 has something to do with the inventory build. That is likely to slow; a lot of it is probably cars and trucks, which was mostly rebound from depressed production levels, largely because of the Japanese disaster and its effects. Ward's is projecting an improvement, but not a huge improvement in production levels:

Assuming this is true, quarter by quarter wouldn't necessarily show big increases. However most manufacturers are pretty upbeat in their outlook, and inventory levels didn't rise. Article.

I do have some hesitancy about the situation, because it seems as if auto dealers are focusing advertising on finance, as in finance for those who are having trouble paying for a new car. The supply of the marginals tends to exhaust quickly. I have been most unimpressed by the evolution of the auto loan portfolio at Compucredit. Despite hugely whittling down the portfolio, their delinquent/current ratios are barely improving. (See page 14 in this document, and then go to the next page and look at the unrecovereds.)

On the brighter side, deposit levels at banks are excellent and consumer credit is pretty stable, with some increases on car loans. But then I look at stats on food purchases, and I realize that the average consumer still must be very tight indeed. Just how tight?

Two variables describe the economic experience of most of the US population, and those are Food at Home and Gas & Energy (lines 9 & 11) from Table 2.3.3 at BEA:

That's hard to see. Here's the same graph with just the "both" categories:

Open these two graphs up and take a good look at them.

Most of the country is in recession, and that's occurring even though we have huge food stamp supplementation on the food.

Mind you, per capita consumption is dropping faster. This is absolute, but price-adjusted. What you are looking at are US households falling into increasing levels of economic distress.

Claims Much Better, Money Flow Brooding

2012-01-26T05:53:00.000-08:00

Not the headline, of course, but the whole thing. The headline is that claims increased from 356K to 377K. But that's totally misleading - raw claims were rather high last week, and this week they look much better. Seasonal adjustments are a bit off here due to calendar changes. At 377,000 initial claims this week are right in line with the four week moving average of 377,500.

It appears likely that some of the seasonal hiring was retained due to better business and lower initial staffing levels. That does not square with what I have seen walking around, so I am iffy on that. There are probably some good regions out there. California is doing better, which is a big help.

Durables are good. Not great, but good. As long as primary metals hold out we know we have a few months of cushion. Some of the optimism over the US economy is overblown. Supermarkets and electronics look awful, for example. People really do not have much spare cash, and some stores are light stocking.

BUT I think we have finally seen some more balance sheet recoveries at smaller companies. This is a huge help that could be durable. Our weather is highly favorable - probably adding 3/4s of a percentage point to US GDP in Q1, so I am more positive. The reason for the huge surge is that a lot of the potential upside in the US this year is in construction/reconstruction, and that is unfortunately weather dependent. Everyone has to get lucky now and then, and this was our lucky winter. The last two were most definitely not. I expect better conditions in the US to help Canada and Mexico also in Q1.

Each year I go through my personal economic calendar and mark down anomalies - times when odd things have happened that will make the current period not directly comparable to the same period next year. Last year, for the first time, I have a nearly total annual coverage of anomalies, and for months at a time, they cover areas of the globe that exceed 50% of world economic output. By the time we got to the Thai floods, I was mentally staggered by the extent and continuity of the economic disruptions.

My conclusion is that I need three months of data this year to achieve certainty levels normally seen with one month's.

The flip side of that is that last year it was mostly negative anomalies, which strongly suggests that we get help this year from less in the way of negatives. We need that help.

Friday's rail data will be the first marginally comparable data this year. The first week of February will be the first reasonable petroleum data this year. I won't feel sure about claims until the middle of March. I will start to become more confident about employment data in February.

With those cautions, China appears to have a pretty big problem. Japan's problems shouldn't be sudden this year, but may diffuse into the region. When I look at data like this for Indonesia, I experience great bouts of thoughtfulness. Malaysia's still hanging in there, but Singapore is oscillating between negative and positive quarters. India's got a problem, and the problem is not really improving at all. The Japanese debt now becomes a real issue. The fix is for the yen to depreciate. That is the only possible fix, so I assume it will happen.

I am guessing that the flood of money inserted into the global economy by the European money toss will cushion the Japanese pull-back for a while this year. After that issues may emerge. China has built up a huge cushion in recent years, but I think it will need to use much of it to stabilize itself internally. Therefore I am sitting here thinking that global money flows may change quite dramatically over the next few years.

This BIS paper on global liquidity seems timely. Perhaps Chinese banks and trusts will be able to pick up some of the global slack. Perhaps not. European banks were tremendous funders of growth in peripheral countries.

Ah, Well, I'm A Heretic

2012-01-25T17:36:00.000-08:00

We are talking about a cultural as much as an economic divide. I think Assistant Village Idiot's post and the links within provide a much more serious set of questions than any asked or recently answered in the political realm.

I read AVI's post and all the links, and to my surprise the thing my mind picked out was the changed societal role of men as the determining factor. I have a theory, I'll sleep on it, and then I'll reconsider tomorrow.

The post is really worth reading. At least it asks a worthwhile set of questions.

On another question of determined unrealism, it looks like the Greek thing is gonna bust quite soon, because the ECB was running around stating very loudly that it wasn't going to take losses on the Greek bonds. The Germans were in favor of that position.

However, it is this exact position that makes most of the bailout fund theory of Italian/Irish/Portuguese salvation so unlikely. They are playing with fire, and the ECB doesn't have much to lose now in this case, but it has a huge problem if its money-throwing exercise can't be used to leverage an exit from the economic brink for Italy. In effect, the ECB has chomped up a bunch of sovereign bond assets as collateral from banks. There was no option, because banks in both Italy and France would have been in extreme danger if they had not done it.

Perhaps the ECB now believes that its money-throwing exercise is enough. It isn't. They can throw all the money they want, but if the private bondholders get out, several of these nations are doomed, and the ECB won't be able to get out. So the ECB and the IMF have to take the hit now. They already promised that Greece would be a unique case, and that private bondholders won't be forced to take all the hit on the other nations. There is no reason to insist on Greece being a unique case, especially since it eventually forces all the loss on the private bondholders.

For over a year, the European approach to dealing with the sovereign insolvency problem has been to generate a massive cloud of plausible deniability. That is going to end. Certainties will emerge either way. It is best if the certainties emerge with the largest possible pool of indebted. If that does not happen, Italy and Ireland may fold up very quickly. I think Germany is the sole real roadblock now, and I suppose Germany will fold on this one.

But He Tells Such Inspirational Lies!

2012-01-24T20:08:00.000-08:00

Tonight's SOTU - I listened to it on the radio while neurotically scrubbing things down with bleach - struck me as tragic.

It was a great speech, backed by little cohesive policy, imbued with lofty ideals and high hopes, sounding genuinely inspirational notes. It was a tragic speech, because if Obama had ever bothered to sit down and engage with reality during his presidency, he could have been a truly great president.

It was a very American speech. I think we elected Obama because we were not yet prepared to deal with reality, and we wanted him to reinforce our delusions. This man has truly impressive political skills and no idea whatsoever as to what to do to make things better. None of his proposals ever add up, and now he has really almost stopped making them.

I suspect that the American public, which generally is wading hip deep in smelly reality, is in the mood to move on from our delusions, provided that the adjustment to reality isn't too painful. The strong response to Ron Paul's candidacy among the young implies that something has changed.

Mitch Daniels is someone who would tell the truth in a campaign. It would have been interesting to test the contrast between the two and see whether the American public is prepared to deal with it.

Added reactions:
1) DU, top thread when I went to the General Discussion forum:
Is Obama not the best looking President We've Had In Decades?

2) Ann Althouse noticed the weird pronounciations also. Reggalations? I don't know what Obama was trying to do with that.

3) Robert Samuelson in an earlier article on the Keystone decision summed up the laundry list in tonight's speech:

It isn’t often that a president makes a decision that has no redeeming virtues and — beyond the symbolism — won’t even advance the goals of the groups that demanded it. All it tells us is that Obama is so obsessed with his reelection that, through some sort of political calculus, he believes that placating his environmental supporters will improve his chances.

I was playing the constituency game with this one.

4) If Obama really wants to fix the "reggalations" problem, he might want to change a few things at EPA. His line about opening up public lands was pure BS - you can't get a permit to do anything. You can get a lease, but you won't get permission to use it. As Carl carefully explained in a prior post, all that "clean fuel" stuff is getting weirder and weirder day by day.

5) One of my brothers claims that we are doomed to growing acrimony between the parties not because of political spin but because we've pushed things to the point at which there can be no middle ground on many issues.

6) The Anchoress, writing on a very different topic:

You want the truth? You think you deserve it? The press can’t handle the truth; they can’t bring it to you. The New York Times just ignores inconvenient truth, entirely.

Obama's very much a creature of his times. But so are we, and that's why he's in the White House! Mitch Daniels just appealed to a nation of adults. Are we that nation?

There Is Such A Thing As Telling Too Many Lies

2012-01-24T17:28:00.000-08:00

Especially in your fourth SOTU speech:

Since Obama took office, U.S. natural gas production averaged 1.89 trillion cubic feet a month through October, 13 percent higher than the average during President George W. Bush’s two terms, according to Energy Department data. Crude oil production is 2 percent higher, the department said.

“To be sure that is not because the White House meant for that to happen,” said Pavel Molchanov, an analyst at Raymond James & Associates Inc.

He's really pissed some people off with this one. Mitch Daniels is supposed to be giving the equal-time thingie. This will just flood us Daniel-ites with nostalgia for the best candidacy that never was.

I think I'll scrub the bathroom down tonight. Last night I watched the GOP debate. There was not huge realism on the fiscal situation there, either. Also Romney was acting weird. About 40 minutes in I decided that he was trying to be Ronald Reagan. Maybe I'm wrong. I do admire the man for his impressive donations to charity. He is not a hypocrite like so many; I also don't get the sense that he has much in the way of real answers for our social and fiscal dilemmas.

In the meantime, George Soros wants us to embrace the "Age of Fallibility"? Huh?

Found it. His book.

Quick Note On US CPI

2012-01-19T07:25:00.000-08:00

The combination of December CPI (release) and ongoing commodity increases imply that overall consumer inflation is likely to shift up again. Gas prices are rising and while steep cuts in the more frivolous food categories can be seen in some grocery stores, the underlying trend is up now.

As of December, CPI-U was 3% YoY; CPI-W was 3.2% YoY. Food at home for the wealthier consumers was still up 6% YoY; food at home for the lower-income bracket was up 6.1%.

The ECB's program is likely to notch prices up world wide - there should be a pretty rapid dissemination around the world in commodity buying. If sexpectations about the Chinese money-hurling operation pan at at all, you can expect a strong surge of consumer inflation over the first half.

The ECB ops are truly massive, and they have a very fast follow-through. Prices will be unresponsive to demand shifts for months to come, and many companies are still recouping earlier inflation-inflicted losses. So be wary.

Initial Claims, Hmmph, Seasonal Adjustments

2012-01-19T06:13:00.000-08:00

At first I was very happy, and then I looked at the data and went "WHAT????".
Here's the release. Last week the SA number increased, but the YoY raw claims number looked really good, so I didn't think it meant anything bad. The raw initial number last week was 642K versus the prior year's 773K, and that is a big decrease. This week the pattern reversed - the raw initial number is 521K versus 549K in the prior year. However the SA number last year was reported at 415K, and this year it is reported at 352K. So this fluctuation is attributable at least partially to seasonal adjustment factors. This can happen at this time of year as seasonal employment fluctuations hit a high and calendar shifts of a day can make a difference in seasonal adjustments.

The raw numbers don't look bad. The real trend now is probably for a slight increase in initial claims, but again, it's no big move that I can see. That is good since the traveling trend is for weekly seasonally adjusted claims under 400K.

What I normally due for this period is to add a four-week series of raw claims and compare those to the prior year's:

2011:
12/25/2010: 525,710
01/01/2011: 578,904
01/08/2011: 773,499
01/15/2011: 549,688
Total: 2,427,801

2012:
12/24/2011: 497,689
12/31/2011: 540,067
01/07/2012: 646,219
01/14/2012: 521,613
Total: 2,205,588 (-9.2% )

It looks okay to me! The next two weeks the claims shift down, so we've passed the bulge.

The latest adjustment for covered employment shows a nice uptick - the last quarter was 126,188,733, and when the states reported new data it came to 126,579,970. In the first quarter of 2011 we were still declining, and as of the second quarter of 2011 we started inching up again. This was a nice gain!

For comparison purposes, as of Q1 2010 we were still in the 130,000,000 range, so it has been a long time coming and we have very far to go. The peak covered employment in the last business cycle was 133,902,387 in Q3 2008. Still 7.3 million down. The civilian labor force level is slowly diminishing, so that accounts for dropping unemployment:

I noticed some Fed heads predicting that unemployment would rise. That normally does happen, but I think in this cycle demographics overcomes the enthusiasm effect and the labor force doesn't rebound. One striking effect is the rise in US employment of those who are 65 and older:

The striking correlation between the claims base increases and this graph makes me think that Americans 62 and older account for most of the employment gains in the last year. I think older Americans are going on SS (often early) and then picking up part-time jobs to make ends meet. Usually there is at least a year or two difference between the ages in older couples, and in any case almost all of the gains have been in part-time employment.

The labor market's never been worse for teens and early 20s. I think it may be worse now than during much of the Great Depression.

Forget Utilities, What About Seattle?

2012-01-18T15:45:00.000-08:00

Snowmaggedon may be less than feared, but one inch of snow in Seattle can create havoc.

The nicest part of this video is the bit where some kind soul shares the theory and practice of tire chains with a benighted traveller:

If you have to drive in Seattle, don't despair. Driving in Portland would be SO much worse:

This particular one is from Seattle. I think they need pedestrian/snow insurance in Seattle:

You may be as confused as I at how they manage that. It turns out - they practice!

I Smell Something Dead Somewhere

2012-01-18T07:37:00.000-08:00

Industrial Production came in +0.4 after November's -0.3.

What I was waiting for in this report was utilities. Think Christmas lights, etc. Maybe some of this is in municipal lighting, but there's a dead rat in the basement of the economic good news edifice, because utilities began to fall in August, and haven't stopped.

Weather has less of an effect on utilities than people think. We are now down 6.6% over the year. I'd buy 3%, maybe 4%, but not that much.

Over the long term, the correlation between utilities and GDP is - here, evaluate it yourself:

Blue line is utilities, red is real GDP, and green is real PCE.

The yellowish/orangish thing is real PCE divided by real GDP, with the result multiplied by a hundred to scale well on a 100-point scale.

That last basically measures the contribution of personal consumption to GDP. I do think production is beginning to contribute slightly more to the economy, but increased production should show up in utilities. A five month negative run worries me.

The one year change is pretty steep, and it started in the summer.

At the very least, I suspect that there might be some downward revisions to GDP at a later date.

Some of this is due to conservation at municipalities and homes. That degree of conservation would have something to say about the strength of the economy, though.

Is this the wood stove/kerosene lamp economy now for the lower third?

Occasionally It Happens

2012-01-16T15:47:00.000-08:00

I never know quite what causes it nor what will happen, but I have entered the Plak Tau of M_O_Mish monetary theory, its relation to credit cycles, and business cycles.

It may have something to do with all the wood I've been splitting. An alternative explanation is that it was somehow sparked by all the Freudish stuff I've been reading. The insanity going on in Europe drove me to read a book about the evolution of Freudian psychoanalysis, but fortunately the book only goes up the 50s so it is less jargonized. I now understand more of the vicious accuracy of the Shrink's comment that Europeans were infantile.

he problem is that I really can't do anything else until I've worked this out. Anything else intellectual, that is. I'll be back soon. The wood pile is growing very rapidly.

I have about had it with modern IDonomics (the science of believing what you want to about the economy as long as you dress up your fantasy with a lot of equations).

PS: As you can see, I also become nearly illiterate when this happens!

Gold Bonds - Taxing Matters

2012-01-14T14:51:00.000-08:00

I begin with the thesis that we cannot possibly raise taxes sufficiently in the near term to stop a federal borrowing disaster from forming.

However, in deference to people's sensibilities, the normal humn reluctance to accept unpleasant truths, and all the nonsense in the media, I think I should support that thesis rather solidly. That will require more graphs, although I hate them. So:

Most of the media does not define terms and in some cases willfully obscures the problem.

This graph shows four indicators.

Indexed on the left as percent change over the year are:
A) Thin blue line = Gross Federal Debt. That is rather meaningless, but it is the number often cited.

B) The thin green line = Real GDP.

C) The red line = Federal Debt Held By The Public. This is "real" federal debt. It is debt that has been issued, on which interest is paid, and which has been sold to ex-government entities. As you can see, it took a wild hop upward as a result of the Great Recession, but it does take a big hop up in every recession.

The black line, which is indexed to the RIGHT, is a long time series of Federal Debt Held By The Public divided by Real GDP. This is the important number going forward. Until you have to float your debt, creditors are not bothered by it. Creditors could not care less about theoretical debt, because they are not competing with it for repayment. As of the end of Q3 2011, it was about 77-78% of Real GDP. What matters is not so much the level of FDHBTP, but the ratio to Real GDP.

It is important to compare publicly-issued debt to real GDP rather than nominal GDP, because interest has to be paid on that debt, and the ratio of debt to GDP plus interest rate demanded determines when it becomes difficult to pay interest on it.

Inflating the dollar, regardless of what numerous hopeful idiots write, is of little use when a high proportion of public expenditures are spent on funding basic needs of the population. As inflation goes up, so do those expenditures, and worse yet, inflation-adjusted social spending tends to rise faster than real incomes of the working population, which gets you in fiscal trouble damned quick. Real incomes for the working population drop, real consumer expenditures go down, and the ratio of public spending to tax collections tends to rise. This is one reason the Germans are so afraid of inflation.

Whether inflation is a cure for high levels of government debt depends on several variables, most specifically demographics, the health of the economy (will drops in real income induced by higher real taxation produce more workers seeking to earn more or reduced real spending by workers, and thus a decline in GDP?), the ratio of social spending to total government spending (including interest), the ratio of "easily cut" government spending to total government spending (including interest), the ratio of social benefits available without working or by working minimally to real income increase potential by working, and the total societal debt-to-income ratio. As society-wide debt-to-income ratios rise, the ability to withstand higher real levels of taxation declines - there is, to state it simply, less money to spare to invest and to potentially lose. The need to save rises.

Let us proceed further:

This graph shows the previous black line, which is the ratio of Federal Debt Held By The Public to Real GDP, two employment levels.

The two employment levels are indexed to the right and include (blue) total employment as a number, and (green) not in labor force as a number.

The red line - deeply significant - is the ratio the total number of employed persons to the persons not in the labor force. These persons may not be in the labor force because they are too young, too old, are disabled, have enough resources to live without working, or because they cannot find work.

Please note that I did not use the more accurate level indicator for persons working full time. Those persons are essentially those who can support themselves from their labor plus pay significant total taxes (federal, state and local) - most of the part-time workers are receiving significant government transfer benefits, and are net subtractions. The red line would look much worse if I had used full-time number, and I really should have used it, but I've recently referred to it and I don't want to be accused of being alarmist. So what you are looking at here is not just grim reality, but grim reality viewed with a rose-colored lens. Please be aware of this as you continue. The error bars are all to the negative (more fiscally insecure).

If you will double click on this graph or open it up in a larger detail, you will notice that the red line has trended downward for over a decade, but took a big drop associated with the recession. Since, it has not recovered. This is substantially due to demographics (retirements) plus poor employment opportunities. It is reducing our official unemployment rate without greatly improving our economic structure.

This red line is also very important, and so both it and the black line will travel with us to our final graph in this series. I call this one the Trinity of Taxing Terror:

The final member of the trinity is the orangish/burnt umber line sort of traveling in wavy fashion straight across this graph.

I included the other lines to show total state, local and federal receipts.

The last member of the trinity is nominal total US government receipts (at all levels) divided by nominal GDP.

BURNT umber indeed. Despite all the chatter about lower taxes, the ratio of total taxes/GDP just hasn't moved much in four decades. In fact, it only takes one glib glance at this thing to see that the strong bumps seem to be associated with (cough) bubbles. Do we need more bubbles? No, because they keep causing more recessions.

I strongly encourage readers to view a larger version of this graph and look carefully at the non-bubble inflections. Put on your non-Krugman lenses and really look at this thing. Look carefully at all the lines on this graph. Lookat how they move together.

If your non-Krugman lenses are working, you should see:
A) Taxes at the state and local level didn't drop like like federal taxes did as the result of the recession. Instead, they rose. Now if you are Krugman, you can totally ignore this fact and wail loudly about the horrible effects of states cutting real spending, but it appears obvious that they were forced to do so, and not cutting real spending would have forced them to raise taxes even more, and raising taxes is just as much a subtraction from the economy as cutting spending, and may be more of one.

B) The 1970s were considered to be a high-tax era, but if you look at the ratio of taxes to GDP now compared to then, you see it is actually the same or higher. This is largely because of state and local real tax increases, and it therefore the pension problem at the state and local level is just about impossible to solve without cutting vested pension benefits and/or cutting promised medical benefits in many plans.

C) If we made all those changes in tax policy and never succeeded escaping from the 30-32% bound, we are not suddenly going to jack up taxation to 40% of GDP and see growth in the economy. No, instead we would see a collapse in the economy, which the graph tells us reduces the ratio of tax receipts to GDP. Also, if we enter a recession we have to expect Federal Debt Held By The Public to jump up, so raising taxes too much appears to be a self-defeating strategy. For further detail on that, we can refer to Spain, Greece and Italy. Call them laboratories of dire debt in action.

The last piece of this Gordian knot is of course social spending by governments. That will be the next post in this series.

Friday The 13th?

2012-01-13T11:35:00.000-08:00

The surprise is not France's downgrade. Everyone really expected that. But Italy goes to BBB+. That's not a surprise, but under the circs I guess it really won't help.

By Monday the question will be the ratings on the joint European debt facilities. Monti is pushing hard for Eurobonds, but what would the rating on them be?

Gold Bonds - Because Reality Always Wins

2012-01-13T05:42:00.001-08:00

If reality always wins, then you have to be on the side of reality, and your planning has to be rooted in reality.

Ugly truth number 1:

By many measures, the US economy is already in a recession. It isn't quite in one yet, because the correlations haven't totally formed a controlling downward interaction.

Take a good look at this graph. It has YoY changes for real retail sales (through November, blue), real disposable personal income (red, through Q3), and government current receipts (gross, not real, in green).

Real disposable personal income is at 0% increase over the year. This doesn't usually happen in the run-up to a normal US recession, much less in a recovery. It's a dire signal.

Here is a long time series of government current receipts and real disposable personal income:

Reminder: real disposable personal income is calculated by subtracting taxes from income plus adjusting for inflation.

The mid 1970s recession is kind of similar, and it was caused mostly by high structural inflation which cut real incomes. One of the problems was energy. That accounted for a lot of the problem. Another problem was that tax brackets weren't pegged to inflation, so many persons ended up with constantly declining real incomes.

Thus, during the 70s sequence you see the apparent paradox of very high growth in government current receipts while growth in real personal disposable income lagged and then collapsed. Both the mid-70s recession, which was a very deep one, and the early 81 recession were caused by falls in real disposable personal income.

Usually in the US big drops in real disposable personal income are at least partly the result of the recession, with two counter-balancing factors coming into play - costs tend to drop as consumption and spending drop, which raises real incomes for all the people who don't lose employment or income, and many people do lose employment or income, which causes a drop in real personal income.

One of the major factors in the last recession was that as inflation dropped out, early in the recession real incomes rose sharply. That helped a great deal, but as the housing and credit bubbles kept popping, the downward drag took over again. However it was not until late 2010, when the misguided QE2 pumped a lot more money into commodities, that inflation really took off and choked off the slow recovery in real personal income.

Now it should be obvious that the FICA payroll tax cut has impaired government revenues, although it did support real disposable personal income. Therefore, without increasing the federal deficit, real personal disposable incomes would look worse since late 2010.

Inflation will remain in the system through the next year. It may in fact be boosted by efforts to deal with the European debt crisis and the ripple effects, plus structurally slower real global growth.

US real retail sales do not show the normal pre-recession pattern of either continuously falling down to zero or getting stuck at no real growth. This is largely because of the FICA tax cut, which has to be one of the most ill-designed economic stimulus packages the US ever instituted post WWII. The FICA tax cut gave thousands in additional real income to a very small portion of the US population that already accounts for a disproportionate amount of personal consumption (because they have the money). This masked the fact that most of the population was seeing declining real incomes:

No problem at all, right? Or maybe it is.

The problem in the US is not wealthy people - it's that job creation has just stopped, and this plus inflation is depressing real incomes for most people. You don't have income mobility without jobs.

Living wage jobs have dropped over the course of a decade.

That red line is the number (absolute, not as a percent of working-age population) of full-time jobs. In eleven years, it hasn't increased.

The blue line is all jobs. We have added many part-time jobs, which diffuses the same level of income among a larger number of people who have less in the way of benefits.

Needless to say, we are supporting personal consumption with income transfers to the population. That's the black line.

The fundamentals for job creation have shifted slightly positively, despite the best efforts of our national government to destroy the economy. We cannot approach a real jobs recovery in less than 10 years, and if Obama gets another term make it 15 years.

The really strong element in the US economy preventing another recession is simply increased government transfers to the population.

So that's the structure. The government financing gap I guess will go in another post.

All The Chirpy EconoNews Doesn't Matter A Bit

2012-01-11T08:31:00.000-08:00

When you are looking at stats like this:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 5.0 million barrels from the previous week. At 334.6 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories increased by 3.6 million barrels last week and are above the upper limit of the average range. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories increased by 4.0 million barrels last week and are in the middle of the average range for this time of year. Propane/propylene inventories decreased by 0.9 million barrels last week and are in the upper limit of the average range. Total commercial petroleum inventories increased by 9.4 million barrels last week.

Total products supplied over the last four-week period have averaged 18.4 million barrels per day, down by 6.5 percent compared to the similar period last year. Over the last four weeks, motor gasoline product supplied has averaged 8.6 million barrels per day, down by 4.8 percent from the same period last year. Distillate fuel product supplied has averaged about 3.8 million barrels per day over the last four weeks, down by 2.2 percent from the same period last year. Jet fuel product supplied is 1.4 percent lower over the last four weeks compared to the same four-week period last year.

This should start to pick up a bit, because the unusual activity late last year seems somewhat linked to construction and an easier winter causing seasonally high construction activity. There is also more southern activity than in previous years relative to the whole, so winter means less. Anyway, they often knock off over the holidays, and it will pick back up now. Some of the build is due to milder weather, especially propane.

Nonetheless, this week net imports were 5.2% down compared to the first week in January last year, and they are more than 10% down YoY over the last four weeks. Domestic production is up 4.7%. US electricity production was weak in the second half, so I am not that optimistic. I remain convinced that the best-case outcome for the US economy in 2012 would be a skipping recession.

There is more trauma in Europe, mostly of the financial variety, but today the Germans claimed that their economy shrank in the fourth quarter of 2011, and absolutely no one expects Q1 to be much better. Trying to make the case that the European economy is not in recession just got hugely more difficult. It probably requires drugs to fuel the effort, or perhaps buckets of liquor combined with major caffeine.

The German statement, which is an estimate, does explain why we're seeing the PMI weaknesses in the Eastern bloc countries the last couple of months. Several of those economies are tightly linked to the German economy.

Hey! Have I mentioned lately that I remain pretty positive on US Treasuries this year? When the US economy is holding up the world economy, and the US economy is weak on electricity and fuel, ya gotta a whole lot of weakness going on.

I do not mean to be cruel, but when you are a manufacturing economy, and you decide to rework your whole energy supply, and you don't even bother to build the transmission lines to link up the windfarms, you have no one to blame for the result but your own delusional self. The Germans are suing themselves into recession.

PS: And Monti is revolting. The 3 year Treasury auction soared.

LOL!!! It Only Hurts When You Laugh

2012-01-09T15:38:00.000-08:00

Breathless Bloomberg headline -

U.S. Consumer Credit Rises by Most in Decade

Go ahead, click on that sucker. You'll discover that consumer credit in the US is just surging! Consumers are borrowing their butts off! The sky's the limit! And it's all epic comedy, financial reporting style.

The consumer credit release (G.19) is here. If you take three deep breaths and read the release carefully, you'll note that the non-revolving credit mostly grew at the federal government (education loans). Now for a parity check on the rest, let's look at H.8 consumer credit, which you can find at this page (FRB's been playing with their bleeping website, so now it's hard to find these releases).

Here's a helpful graph of consumer lending (non-RE, non-revolving and consumer revolving) going through the end of December. Note that G.19 only goes through November:

The step function in there occurred when banks were forced to take their pools of securitized assets back onto their balance sheets.

Does this look earth-shaking to you? The red line is the credit cards (revolving). The amber/yellow line is other consumer non-RE, and it includes car loans and student loans, which are eventually offloaded to government. The shift into slight growth has been going on for months, but nothing much is accelerating here.

The main difference between consumer credit (G.19) and consumer credit (H.8) is that consumer credit G.19 includes other sources of financing, including the federal government, finance companies and such riff-raff. Credit cards are mostly issued under the umbrella of national banks, because national banks have immunity from state lending laws, so there isn't a whole lot of CC's in finance companies and the like. Therefore H.8 shows you what is happening with CC lending, and it ain't what the Bloomberg story says.

The real story here is that credit-worthy consumers are using credit cards as a payment mechanism - they seem to charge and pay off. November showed a surge just because of the timing - consumers had started holiday shopping and didn't get their bills yet. Car loans continue to rise because consumers are buying cars at a higher rate, but if you look at G.19 non-revolving, you see that the category rose 8.3 billion, and 6.4 billion of that was to the federal government. So it's still mostly student loans.

What's interesting about 2012 holiday purchasing is Other Deposits in H.8:

Note that even though consumers seem to have been paying down their CCs as they got their bills, Other Deposits kept growing over the holiday season, just as they did even as consumers began to borrow a little more over the last few months.

The strong implication is that consumers are still being very careful about credit. Another strong implication is that restoring the FICA payroll tax will cause a downshift in consumer spending, as will drops in real incomes induced from other causes.

By now almost everyone realizes that a lot of the tuition loans are not going to be paid back. Still, the total keeps rising, and before hyperventilating over US consumer largesse, it's wise to look at the detail.

Over the course of 2011, there were several spates of stories about how consumers were borrowing more with their credit cards. But they aren't - not in a real sense. Consumers buy gas, and when gas prices go up, the monthly totals seem to jump - but their balances don't rise over time. A lot of consumers pay for winter heating bills with CCs, but again, they seem to be paying them off. Consumers pay for food with CCs, so the monthly totals seemed to rise as YoY food at home inflation hit 6% - but again, card balances don't rise much. In a "real" sense, they are still dropping.

Financial types should be dealing with the consumers we've got rather than the consumer of fantasy. We've got some consumers who are doing well, but it appears they don't feel like wasting their money on CC interest. If you save at 1% and borrow at 7%, paying off your CCs provides a much better return on your money, and then if you get into trouble you can always use the CC. This provides very little return for CC companies who let needy consumers run up their CC's much, which is how we get those high interest rates reported on G.19.

The Fed has created a situation in which the rewards for saving money even without a return are extremely high - probably the highest they've been in over 30 years. Having a substantial downpayment on your first home, or paying down your mortgage to refinance, gives you a very strong payback right now. Casual borrowing is remarkably expensive, and costs of living are rising.

This is a state change compared to the last 25 years, though. It appears persistent, and it will mean that the US consumer economy will be more sensitive to changes in real incomes than it has been for almost 30 years. That's the real lesson consumer credit is imparting, and it is one that policy-makers and WS types need to absorb.

Since we are on the topic of real incomes, here's some data from Table 2.1 of BEA GDP releases, extending through third quarter 2011:

This is real personal income disposable (taxes deducted), excluding personal transfer receipts. We recovered for a while after the recession ended, but we got hit again last quarter. If we restore FICA taxes, this will go down almost 2%.

This is the percent change in real disposable personal income. As you can see, the recent trend has not been our friend, and that includes the FICA tax cut. This graph would look much uglier without it.

This last is per capita real disposable income, including personal current transfers (welfare, SS, food stamps, Medicare, unemployment) and the FICA tax cuts.

It's not trending the right way either.

These graphs explain a lot about why Americans are continuing to save. They have to do so. The standard of living continues to decline, and any US fiscal adjustment will show up immediately in the consumer economy.

With the FICA tax cuts, the US abandoned any pretense of fiscal responsibility - but in just a few years, Mr. Market will begin to impose fiscal responsibility. The reason why the economy seems so confusingly weak is just that Americans have abandoned the borrowing habits of the last few decades, which suddenly returned us to demographic growth patterns.

When we have to endure fiscal adjustment, which is going to hit in just a few years, the consumer side of the economy will take another big hit, because right now the federal government is compensating for the money that Americans aren't personally borrowing by borrowing and giving money to Americans to spend. Eventually, we will have to shift to mostly taxing and giving money to Americans to spend, and that's when things suddenly get real. By then Americans will have built a little more cushion from their personal austerity regimes, but this is a long slow consolidation process, and the effect is greatly magnified by demographics.

Q1 Isn't Looking That Great

2012-01-09T05:18:00.000-08:00

There's an uptick in inflation coming - hopefully not too large, but it's there just on fuel/transport.

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.

Is Employment Really Improving?

2012-01-07T22:05:00.001-08:00

This comes from St. Louis Fed Fred, of course.

The thick green line is core employment level (right axis). In other words, the number of persons aged 25-54 who are employed.

Such persons are the least likely to be disabled or retired, and most have finished their schooling.

The sustained drop in this measure of absolute jobs cannot be accounted for by retirements, because very few in this age bracket are retired.

The thinner blue and red lines (left axis) are labor force participations for men and women of all ages. Unfortunately, participating in the labor force doesn't mean you have a job - it means you are either working or looking for work. Those rates should be slightly affected downward by retirements.

I look at this green line, and I think that the happy talk is missing the mark completely. We're not gaining much.

Here's the same thing with a bit more slices on the ages:

The bottommost line is 55 and over employment, which has been increasing. This is easily explained by older people working longer - 22% of those aged 65 and up are still working. If you turned 65 last year, you have to wait until 66 for full retirement, so it's not surprising. Also a lot of retired people are unable to make ends meet and are working part-time, if they can.

The top blue line is just full-time workers. Note that we are having trouble climbing back on that measure as well.

The red line second from the bottom is 45-54 workers, which has declined a little but not much. This means that the 25-45 bracket has sustained huge job losses without recovery as a result of the Truly Bad Recession That Is More Like A Depression, henceforth to be referred to with the acronym TBRTIMLAD. There is nothing "great" about what we are experiencing.

You can't explain this by demographic movements - here are US population pyramids for 2006 and 2011:

The really big 2006 bracke between 45-49 moved in the 50-54 bracket.

The lower age brackets increased more than is immediately obvious, due to immigration and a move up of a larger group that were 20-24 in 2006.

The bottom line is that the young are seeing vicious levels of unemployment, which has a huge amount of impact on the future economy.

I really wonder what younger people are thinking as they wander around trying to deal with this. I don't think Obama can get reelected without their votes, but an increasing number of younger people must be desperate.

Update: Adding a new series to show just how rough it really is for so many out there:

One of the aspects of this that seems to be masking a real problem is higher employment among those of retirement age:

We've gained close to a million jobs right there.

Which is most of the gains for the 25 and older population? Aggh. Uggh. Gut punch.

Odd, Very Odd

2012-01-06T06:10:00.000-08:00

Okay, I fixed the blogging problem. New address maxedoutmama2 @ gmail.com.

I cannot yet make heads nor tails out of the US employment report, but it looks like we have trouble ahead. If you look at government jobs on Table B-1 vs. government jobs on Table A-8 you can see the difficulty. Table A-8 (household survey) has seasonally adjusted private sector jobs dropping and seasonally adjusted private sector jobs rising. Not good. Table B-1 shows the opposite.

Embrace the error bars! Confusing data means something.

In December, the seasonal adjustment factors are updated, which you can read at the end of this link to the html employment report. No shift in these factors seems to account for the difference. Table A (household survey) shows that the labor force shrank in December. In a way, this makes sense - a lot of people retire in November and December, and these retirements are probably biased toward government jobs. The not-in-labor force number grew by 194,000 in December, which also makes sense given US demographics. The unemployment rate fell to 8.5% from November's upwardly revised 8.7%, which makes sense. The big drop in unemployment (only 176,000 new jobs are reported) thus probably comes mostly from retirements. Older people have a horrible time finding jobs in this labor market.

You absolutely cannot explain the disparity on the Birth-Death adjustment for the Establishment survey - if anything, it works the other way. The B-D number is negative for December, which I believe to be substantially wrong.

On the other hand, ISM services showed marginally dropping employment.

After looking at petroleum, especially gas, I think that the establishment report is showing the winner-take-all effect, and a much stronger seasonal effect on changing shopping patterns. Unless the petroleum reports are FUBAR, which I have no reason to believe, Americans are shopping online a whole lot more.

The temporary gains in courier and messenger (42.2 thousand) and about 18K of the retail gains are going to drop right out. They are not "real". The real gain in construction will reach its low in the first quarter. Auto manufacturing has probably come close to peak, and won't add much if anything in the first quarter. The big add in accommodation and food services, almost all of which was in restaurants, is probably going to retract a bit. Temporary help services fell considerably, which is not that favorable a reading, but is consistent with much else.

My first hunch is that the variance between government jobs in the establishment survey and in the household survey is probably closer to the reality in the household survey; I'm basing that on samples of advertising.

Over the course of the year, most of the differences between the two surveys are inconsiderable. We have gained between 1.5 to 1.6 million private sector jobs. This is much better than losing jobs, but barring the retirements of boomers, it does little to correct the employment gap, because the civilian non-institutional population grew by almost 1.7 million. But the civilian labor force grew by less than 300,000 over the course of the year, because the boomers are aging and retiring - the not-in-labor-force number grew by more than 1.4 million.

So we do have a slowly improving economy, combined with dropping or stagnant real incomes for probably about 50% of households. One completely depressing statistic is that over the course of the year, the unemployment rate for blacks did not change at all. Last December it was 15.8%, and this December it is 15.8%. As you would expect, part-time for economic reasons fell hard in December, but that is going to reverse.

If fuel costs rise sharply, the odds of the US going into a longer downturn this year rise sharply. This is rather tightly balanced income-wise, and I have already figured in the FICA tax cut and the COLAs for retirement/disability. I am counting on the warmer winter weather boosting GDP by about 0.3-0.4% in the first quarter, annualized.

The major wild card I see over the first quarter are commodity prices. The ECB is throwing money. Banks are putting the excess money back on deposit at the ECB. However the non-excess is going to pay off bank loans, and a good chunk of that money is going to find its way into commodities. Should fuel prices rise much more, it will shave 0.3% at least from GDP. That would be quite bad.

ADP Employment For December

2012-01-05T05:25:00.001-08:00

This report, which only covers private sector businesses, shows a big jump of 325,000 in December. Since Challenger layoffs were in line with the trend, and government has moved down the list of job-shedders in Challenger, December's BLS Employment report should be good tomorrow.

If you go to the link and go to Chart 4, you'll see one of the trends I have been watching. Construction employment has taken its first strongly positive hop since this whole thing started in 07. This marks a state-change for the US economy which I believe keeps us out of frank recession in 2012 - unless, that is, the authorities do something idiotic.

Now there is one caveat on this - the weather is such that I would expect seasonally-adjusted construction employment to show up as higher than normal regardless, but another fact is that the jobs can't show up if the work isn't there.

Another positive in this report is found in Chart 1, which tracks employment in goods-producing industries, which has now exceeded its post-recession previous high. It's nothing hugely expansionary, but the US is still hauling hod on this one, and it is hugely important. Autos are doing well, and from freight data I am convinced that both the goods numbers and the construction numbers are real.

Singapore, Not So Good

2012-01-03T08:44:00.000-08:00

This is an advance estimate for Singapore Q4 GDP:

3 January 2012. The pace of growth of the Singapore economy eased in the fourth quarter of 2011. According to advance estimates1, the economy grew by 3.6 per cent on a year-on-year basis in the fourth quarter of 2011, compared to the 5.9 per cent growth in the third quarter. On a seasonally-adjusted quarter-on-quarter annualised basis, the economy contracted by 4.9 per cent, following the 1.5 per cent gain in the previous quarter.

Singapore tends to expand and contract pretty intensely, but still this result is disappointing. The three quarter trajectory is now -5.9% -> +1.5% -> -4.9%. If you are wondering how you get YoY growth out of that, Q1 was 26.6%. Let's just say there was a state change in the economy. The advance estimate for Q4 manufacturing is -21.7%, which is only marginally better than Q2's -22.3%.

China is clearly still slowing, as are South Korea, Taiwan and probably Japan. Brazil might be coming off the bottom, and India revived, but Europe's Eastern bloc is developing real holes. Markit PMIs. JPM Morgan Global Mfrg PMI shows us pretty much at a standstill. Europe is really not helping.

From here on in it is a battle of attrition, and if fuel prices rise that will pretty much take the thing out. The significance of the flat quarter may be less investment in plants, which cuts into another level of manufacturing and will probably hurt Japan and Germany. It won't help the US either.

It kind of looks like more drag than lift at this point, but we'll have to see what replacement orders go through for holiday sales. Maybe the optimism will do it, but probably not. I have a hunch based on inventories that we are looking at a two-month lift, but overall this seems to be weaker than I thought. The thing about inventories is that they are sensitive, so what looks like controlled inventories can change into overstocking surprisingly quickly in a lot of industries.

Happy New Year!

2011-12-31T17:33:00.000-08:00

But will it be?

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.

Deadly Flue Germs?

2011-12-29T22:30:00.000-08:00

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

2011-12-29T06:29:00.001-08:00

I'm still alive, having given away almost all the Christmas cookies. Indeed, I think I have lost a few pounds, because although I am having a very good Christmas, it has also been terribly busy.

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.

Merry, MERRY Christmas!

2011-12-24T15:59:00.000-08:00

It is also the fifth candle of Hannukkah! Things really worked out this year.

My favorite Christmas carol:

Well, Claims Are Good

2011-12-22T05:50:00.000-08:00

Quite good. The four-week MA for initial claims is down to 380,250. The four-week MA for continuing claims (six-month) is down to 3,631,750.

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.

A Very Merry MDANGed Christmas To You All

2011-12-21T16:30:00.000-08:00

Or is that MDBANGed? Whatever.

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!

About Disaggregation

2011-12-21T07:27:00.000-08:00

But in the meantime, and tragically akin to my last:

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.

Crude Inventories:

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.

Yea, Verily, For I Wish We Had Not Done This

2011-12-16T00:23:00.001-08:00

A picture is worth a thousand words in presidential nominee debate. I'd like them more if I thought they would be able to predict what this graph looks like.

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%.

Call Me A Skeptic, But....

2011-12-15T19:19:00.000-08:00

... I don't think the Euro deal really worked (Exchange listing.): 1 Year.

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.

Looking Around....

2011-12-15T06:35:00.000-08:00

US initial claims continue low. The four week MA is 387,750, this week's headline is 366K However that is much less important than the fact that SA continuing claims are dropping! We are down to 3,666,250. What usually determines the employment direction is less firings than reduced hirings, and so far the undoubted slack in larger service firms is being compensated by increased activity in smaller firms and manufacturing.

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.

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.

In durables autos were the prime mover.

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.

US - Fundamentals 2012.

2011-12-13T06:22:00.001-08:00

The story of this economy is basically summed up by this sales graph from NFIB's monthly report from December:

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.

I'm Really Awed Into Silence

2011-12-08T23:03:00.000-08:00

There are no words to express what I think about what is happening in Europe. Admittedly it gives the US a temporary boost, but at what a cost!

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.

“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.”

So now they are getting the central banks of the countries to give the IMF money, and sending creepy letters to China about funding:

Dear China,

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.

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:

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.

“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.

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.

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.

Well, It IS A Landing

2011-12-04T21:00:00.000-08:00

Whether it is a soft one or not is highly questionable. I am, of course, referring to China. Here is HSBC Composite Output Index for November below 49. Go look at the graph.

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.

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.

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.

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.

US Employment: The Wood Stove Economy Kicks In

2011-12-02T06:50:00.000-08:00

There are a number of ways to describe what is happening. The scavenge economy, the wood stove economy, the scratching-a-living economy. Nonetheless, it is here and it is providing some much-needed economic strength.

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.

US, Proudly Finishing The Job

2011-12-01T06:26:00.000-08:00

The moment I saw the Obama quote, I thought "How you take that is predictive of how you'll vote next year."

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.

Gott Sei Dank

2011-11-30T05:47:00.000-08:00

The US is flailing away, keeping its economic head over water and actually getting closer to the shore.

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.

Dems and WaPo: Screamingly Dumb And Proud Of It

2011-11-28T14:31:00.000-08:00

You know, a republic that cannot add, subtract, divide and multiply is doomed to fail. Perhaps we have reached that point.

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.

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.

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.

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:

132,558,457

77,370,065

185,228,891

98,352,775

241,634,252

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.

Good Golly

2011-11-25T05:24:00.000-08:00

Portugal and Hungary got cut to junk. Mr. Market has apparently thought it all over and Italy paid 6.% on six month bonds this morning, with 2 year Italian bonds yielding 7.82%? I think I'm not hallucinating - read the article yourself. Long Italian bonds are lower, although not by much. That implies hard recession in Italy and a near term debt instability.

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.

Happy Thanksgiving!

2011-11-24T05:12:00.000-08:00

I hope all of you are spending it with your dear ones. The world may be a miserable place (right now), but it doesn't mean you have to be miserable!

Nice To Start The Day With Comedy

2011-11-23T06:05:00.001-08:00

Stiglitz sees a "risk" that the Eurozone may slide into recession. Admittedly he's a lot more realistic than the commentator, but Europe is already in a recession, and Germany can't fund another massive stimulus to short cut it.

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.

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.

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.

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.

GDP , OMG Spain

2011-11-22T06:29:00.000-08:00

I guess from here on now the economic news will be like standing in a boxing ring serving as someone's practice partner. Mr. Market has no mercy on beginners.

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.

There Is No Doubt That America Is Declining Economically

2011-11-21T10:31:00.001-08:00

But it's not this dog's fault.

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!

2011-11-21T05:43:00.000-08:00

Sigh. We seem to be in the everything-goes-splat mode. It's not clear how this develops from here - a few more cards are going to have to be turned face up on the table before we figure out just how bad Chinese banks really are, for example, and most of all, just how broke those local Chinese governments are.

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.

This Would Be Funny If It Weren't So Dire

2011-11-14T07:01:00.000-08:00

Update: Shoot, I forgot. Eurostat industrial production September - takes it to about no growth since May. End update.

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.

Iran?

2011-11-11T07:31:00.000-08:00

It's not from Japan. IAEA says similar levels are found elsewhere in Europe, so it's not localized.

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.

Ten Year US Auction Yesterday Was Light

2011-11-10T05:12:00.001-08:00

Update: The 30-year auction did not go well. See WSJ. Bloomberg economic calendar summed it up this way:

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.

Ciao, Italia!

2011-11-09T03:23:00.000-08:00

Italy is gone:

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.

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.

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 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.

NFIB - The Swedish Movie

2011-11-08T05:33:00.000-08:00

Well, now. After staring at this thing in dismay and sorrow I started thinking about Swedish movies. You know, the kind of thing where the people are just sitting around staring. Every once in a while they utter a word, and just when you are about to die of boredom they get up and look at a clock or break a mirror or something like that. It is supposed to be deeply symbolic. I don't know what happens next because I never last that long.

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.

And Somewhat Pricey

2011-11-07T09:42:00.001-08:00

EFSF issued the bonds (the 3 billion destined mostly for Ireland), but the pricing wasn't that cheap.

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.
...
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.

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.

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

2011-11-07T04:59:00.000-08:00

Some of the theme is wrong, but enough of the facts are there so you can get a glimpse of it.

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.

Comic Gold - The New Proletariat

2011-11-05T03:34:00.000-07:00

Has masters degrees in puppetry and demands adequate compensation in return. Clearly it is a big bankers' conspiracy!

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.

Pretty Good Employment

2011-11-04T05:41:00.000-07:00

Release here. Headline unemployment is at 9.0%, but that is misleading.

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.

Eurozone PMIs Out

2011-11-02T05:52:00.001-07:00

I'm still catching up with my reading here after being powerless for days.

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.

This isn't good

2011-11-01T19:29:00.000-07:00

Honda NA:

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.

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.

Diesel YoY came up in August after auto production ramped back up.

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

2011-11-01T07:57:00.001-07:00

That's the name of the game in the new era - numerous countries and trading coalitions have reached the end of their ability to continue faking it until they make it.

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.

Mr. Sensitive Wins The Pool

2011-10-28T07:53:00.000-07:00

Italy sold bonds:

The Rome-based Treasury sold 3.08 billion euros ($4.36 billion) of 2014 bonds to yield 4.93 percent, the highest since November 2000, and up from 4.68 percent on Sept. 29.
...
Italy sold a total of 7.93 billion euros of bonds, less than the maximum 8.5 billion-euro target, after
Prime Minister Silvio Berlusconi vowed in a letter to the European Commission this week to boost growth and cut debt to fight the sovereign crisis. Also auctioned were 2.98 billion euros of 2022 bonds to yield 6.06 percent, 871 million euros of 2019 bonds to yield 5.81 percent and 1 billion euros of floating-rate bonds due 2017 to yield 5.59 percent.

But it makes sense if you think about what just happened - pushing all the losses on private holders has to nullify the effect on private investors of ECB bond purchases. Also see this article on Eurobank finances.

I Don't Know Whether To Laugh Or To Cry

2011-10-27T04:46:00.000-07:00

The numbers on the Euro deal sound big and impressive and all that, but look:

Europe’s leaders took the unusual step of summoning the banks’ representative, Managing Director Charles Dallara of the Institute of International Finance, into the summit to break the deadlock over how to cut Greece’s debt to 120 percent of gross domestic product by 2020 from a forecast of about 170 percent next year.

The 50% write down on of the bonds applies only to the private holders, and as protected entities like the ECB and the IMF get a larger and larger percentage of the outstanding bonds, it's clearly not enough to return Greece to paying status. Debt needs to be written down to 80-90% of GDP, because the Greek economy is now so weak it's close to becoming a humanitarian catastrophe. A goal of 120% by 2020 just guarantees further defaults.

You have increasing hunger among the Greek population and a shortage of medicines. This is ridiculous. They cannot pay the debt. No country really could.

The theory behind the trillion Euro stability fund is that current allocations will be levered up. That means that someone has to ante up the money. They are either guaranteed or not. If not guaranteed, those investing will want high returns which will make the fund sort of useless. If guaranteed, the creditworthiness of those nations providing the guarantees will be impacted. I assume that the real plan is to get China to ante up in order to preserve their exports to the Euro area, which China really needs at this point. Thus, the idea is to stiff China by not providing guarantees, which China will theoretically not demand because at this point China is looking at spending money that it cannot regain to support smaller businesses anyway.

At this point, I would think that Italy will have to leave the Euro within a couple of years - they cannot go on as they are for very long - they are close to snowballing. It has to be obvious that this kind of deal is structured to pretend that Italy is just fine, but Italy is not fine and cannot withstand another downturn.

One good feature of the last week's negotiations is that some sort of deal was made to prevent banks from pulling out money from their Eastern bloc subsidiaries. This will lessen the general economic decline.

The nervous collegiality of the EU leadership is now failing very publicly - in particular, the German population appears to recognize that the situation of the Greeks is untenable, but the leadership does not. It is one thing for a country to fail on its own. It is another thing to take control of another country's finances and then let it fail to provide the basics for the people. That sows the seeds of war.

For the first time, I wonder if the EU is doomed.

Oh, G_d, Have Mercy On Us

2011-10-24T08:39:00.001-07:00

Those are some wretched European PMIs. Europe. Germany.

At first glance you'd think Germany improved a bit, but it's not so. Manufacturing moved into contraction - all the improvement was in services, and the service outlook fell again.

Manufacturers pointed to a particularly sharp drop in new orders, with the rate of decline the steepest since June 2009. Anecdotal evidence suggested that deteriorating confidence in the economic outlook contributed to weaker client spending and, in some cases, the cancellation of outstanding orders in October. Worsening export demand continued in the latest survey period, with manufacturers indicating the steepest fall in new business from abroad since May 2009

Still, in comparison to the overall European numbers Germany is still good. A European composite of 47.2 is sort of Halloweenish. It's also quite strongly into recession territory. The French composite fell to 46.8. French manufacturing improved a bit to 49.0, but that's almost a standard oscillation.

This, of course, makes the inadequacy of the Euro-crisis Bailout V 7.3.04 almost a non-story. But of course it cannot work, and of course another round of recession makes the task of bailing out banks much harder, and much more of strain on government finances.

What's the next round? Well, at this stage some of the Eastern Euro bloc gets hit pretty hard, and banks there are going to continue to struggle. This will hit some European firms again.

Sitting down to make some realistic calculations over the last week, I figured that Greece could actually become a paying creditor if its sovereign debt were reduced to 80% of GDP - almost a 50% reduction. However since ECB and IMF are privileged, that would require the private sector holders to accept over an 80% write off, and that would extraordinarily hard for France to swallow. It would have to dump enough money into several larger banks to earn itself a credit downgrade, IMO. So they are not going to do this.

The US economy is not crashing out like the European economy, but we aren't on a good trajectory either. Nor does the European Sturm und Drang help us over the long run on Main Street. China is sort of in line with the US, having shown a slight improvement in output. China, however, does export a lot of products to Europe, so China is going to feel the impact.

The main driving force for Europe is real household incomes, exemplified by this from the UK. Unfortunately, they are not improving, thus it is hard to see a trend change in the near term.

The main driving force for the US is real household incomes. Unfortunately, they are not improving. The poor Q3 performance in emerging economies globally points to the slow accumulation of barnacles on the global trade hull. I suspect that India is going to be a big contributor to general slackness; India cannot seem to get its internal pricing maladjustment under control. But we have some additional unfortunate shocks - the Thai flooding is going to have something of a regional economic impact. Singapore's economy often flags the regional trend, and it was slack last quarter (1.3%) after contracting the previous quarter, but September exports didn't look too hot, and August retail sales show that weakness may be accumulating.

There are two possible outcomes for the US. The first is a skipping recession, probably with three lows (kind of like what Singapore is seeing). That would be a good outcome overall, but it requires the Fed NOT to act further. That now seems unlikely - I think this round of PMIs will scare Bernanke into action within a couple of months. Commodity prices are already responding to the expectation that the Fed will launch QE3. The US consumer will respond to these increases with great spending restraint this winter, and that alone may be enough to drop us below the skipping recession zone.

So far CFNAI is still in skipping recession territory. But I think it will fall through by Q1 2012.

The US PTB cannot restrain themselves from an irresistible urge to meddle with things better left alone, and may meddle enough to blow the thing totally up. Stuffing bad debt into pension funds is not the best tactic right now.

So Busy I Don't Have Time To Sleep

2011-10-21T07:12:00.000-07:00

Much less blog. Sorry.

This European thing isn't looking good. No matter what they decide to do, it's abruptly going to become clear that someone is in more credit trouble.

So far the ECB is refusing to take any losses on the Greek bonds, but that would deliver a massive loss to the banks because the ECB now has a big chunk of them. Even another 300 billion in the rescue fund is going to put France underwater after it funds its banks. It's not pretty.

Can "It" Happen Here?

2011-10-16T08:03:00.000-07:00

I would urge readers to see John Mauldin's latest column Can "It" Happen Here. If you aren't subscribed you will have to enter your email address to read the full thing.

There are several very important points in that article.

The first is about Barney Frank's bill to New-Yorkify/DCify the Fed. That's covered in enough detail to be self-explanatory. It would be a disaster of the greatest magnitude - in fact what Barney Frank thinks is democratic would be the destruction of the democratic process. The regional bankers are voicing worries because employment and trade in their regional economies are dependent on a somewhat stable currency. They are representing the full-employment agenda. But Barney isn't the brightest bulb in the DC closet, so he probably really believes in the justification suggested to a somewhat feeble mind by his own wealth constituents who are not exactly the average American.

The second is that incidents of hyper-inflation have historically been prompted not just by printing money but by printing money and big government deficit spending of that money. This is important, because US expenditures funded by deficits were 36% of net expenditures for fiscal year 2011, and Obama's proposed "jobs" bill would be doomed to make fiscal year 2012's ratios worse. This is so close to the historical danger line for hyperinflation episodes that it must be taken very seriously.

The third is that 2013 is probably the line. That's seriously true.

Hyperinflation occurs when the people who do most of the bottom-line trading, selling and servicing in any economy are forced to exit the monetary system. They usually do this by barter. The result is vicious, and it sets up a self-reinforcing cycle that can't easily be contained by CB activity. Instead, to correct it, central banks are forced to inflict nothing less severe than an acute recession on the hyperinflating economy, and in severe cases it has to be a depression. China is in a state of near hyperinflation, which is why it has to be so carefully watched.

The early symptoms of impending hyperinflation are difficult to diagnose. Money velocity slows because common individuals can't buy necessary commodities and services. Eventually barter networks emerge, and they probably already have in the US among many service businesses. As these networks emerge, demand for money in the real economy drops, and those who have money either have to bid up commodities or dump their money into equities. And then, if the deficit spending continues, the whole thing topples. But the earliest marker is always going to be when the average participant in an economy becomes less and less able to buy the basic goods and services with money.

HSBC Emerging Market Index Q3 2011

2011-10-13T05:25:00.000-07:00

Not good news. Backlogs of work are contracting, exports are contracting, It's a grim picture - read the report:

Emerging market output growth (covering manufacturing and services) eased to a nine-quarter low in Q3 2011. Additionally, the EMI reading was the fourth-lowest in the series history, only surpassing levels registered between Q4 2008 - Q2 2009.

In other words, we're in a global downturn. If world growth were to fall to the 2-2.5% level, that would qualify as a global recession. It appears we're very close to that, and we may be there.

Services follow manufacturing!

This is so bad that it makes the US look pretty decent by comparison. US initial claims don't look too bad - hardly an expansionary number, but not a collapse into the gutter either. Covered employment is 126,188,733, an increase from the summer quarter's 125,807,389. This also marks a YoY increase, with the low having been reached in the first quarter of 2011 at 125,560,066. Covered employment in the summer quarter of 2010 was 126,763,245.

Previous week's claims revised POSITIVELY. SA kicks in right about now - NSA claims of course increased strongly. The 4-week MA is now at 408K. The 4 week MA for continuing claims has been cycling in the same range for some time - a lot of recently unemployed are getting seasonal jobs.

August international trade balance didn't degenerate:

Still, it is time to bring in the brass monkeys. Input prices cannot fall quickly enough to change the overall trend; the problems in Europe are real and will not be isolated from private sector. India's clear downturn is not going to reverse quickly, and it is the game-changer. Also of concern is that as this wears on, eastern Europe is inevitably going to get dragged in somewhat. The new Chinese plan is to extend subprime loans to smaller private companies, and you all know how that ends.

Tomorrow, Singapore.

PS: The Europeans are thinking of tougher stress tests, but if they do them a whole bunch of banks are going to fail. That means governments would have to pour money into them. This is not going to resolve quickly!

Something About Massachusetts

2011-10-12T06:04:00.000-07:00

Stuck in a corn maze at a farm, a Massachusetts couple calls police for rescue. A modern-day Green Acres:

Husband: "I see lights over there at the place, but we can’t get there, we’re smack right in the middle of the cornfield."

Woman: "I don’t know what made us do this. It was daytime when we came in. We thought if we came in someone would come in and find us... We can hear (the police officers) ... Oh, my goodness. The mosquitoes are eating us alive, and I never took my daughter out, this is the first time. Never again."

I'm not sure if this couple just didn't realize they could walk through the corn towards those lights they saw or whether they just couldn't take the mosquitoes. Fortunately they did not need to bring out the choppers - a K-9 team found them.

Why does that make me think of this, and, embarrassingly enough, our current president?

Overnight

2011-10-12T03:08:00.000-07:00

ECB's emergency lending program is seeing heavy use:

A total of 4.16 billion euros was borrowed from the ECB's instant-access overnight facility, which charges 2.25 percent interest as opposed to the 1.5 percent banks get money for at its mainstream operations.

This is hardly reassuring. Unless a lot of it went to the Dexia bailout, it implies that some big banks are cleaning out the vaults. ECB is extending pretty much unlimited liquidity, so the sky's the limit! I'm thinking numbers this big have to show up in French bank vaults somewhere! Ah, well, time to start reading ECB's site every day.

Harrisburg, PA filed for bankruptcy. In a controversial move, several ratings firms have put Harrisburg on negative outlook. (Just joking!!!!) What's really funny about this is that it probably isn't legal. They did it to prevent state takeover.

Bloomberg article:

Asian stocks rose, with a regional benchmark index posting its biggest five-day advance since March 2009, amid speculation that China will boost support for the equity market after valuations dropped to record-low levels.
...
Chinese stocks listed in Hong Kong advanced, with banks extending yesterday’s rally after Central Huijin Investment Ltd., a state-run investment arm, began buying shares of the top four financial institutions.

The classic warning about being careful of buying stocks with very strong institutional holdings probably applies. ...
Transport continues to be dicey. In other news, Japan's balance of trade continues to deteriorate. Income from foreign investments was all that kept August from being in deficit in its current accounts. The picture across most of greater Asia is not thrilling, and it is not going to bail either the US or Europe out of their current malaise. India.

Singapore advance Q3 GDP will be released on the 14th. Singstat.

A further cautionary note: When I see trading patterns like this (Brazil, BOVESPA), I am not happy. Brazil's CB cut rates in October, and August retail sales were released:

The Bovespa stock index climbed to a two-week high as homebuilders and consumer stocks gained after Brazil retail sales declined more than forecast, signaling the central bank may continue to cut interest rates.

Sigh. More detail. IP is down too. Inflation is running over 7%.

As I look around the world, I see that many ocean shippers are taking a loss, consuquently that industry has to consolidate and downsize to adapt to make money. I see that fundamental consumer costs have outrun consumer incomes in many of the large economies that have generated demand growth. I see that weaker outlooks and various factors, including the flood of money inserted into the global system as a result of 2008, prevent commodity prices from dropping meaningfully. And I see further baked-in inflation until trading conditions can adjust.

All these things point to the market being very unlikely to adjust in a smooth manner, which means that everything will be driven to its breaking point, and then, when enough damage has been done, prices will adjust and world trade will be able to pick up again. But we are a long way from resolution, and in some countries, this will mean revolution.

I cannot see where the ending point is this time, but getting there will not be pretty and the agonizing eternal focus on the Euro obscures the reality that conditions in many economies are degenerating pretty rapidly. This is important, because as underlying conditions in these economies slowly weaken, the likely global floor keeps falling. But money does not reflect this, so trade and pricing isn't adapting to reality, which is creating a weakness feedback loop that I don't like.

I Am Going To Bravely Watch the GOP Debate

2011-10-11T16:29:00.000-07:00

I'm not saying that I am going to comment on it, just that I am going to watch it. I'm making coffee right now. Such is my burning enthusiasm.

I will be curious to see how Cain handles himself tonight. SuperDoc decided long ago that Cain was his candidate - Cain may have far more staying power than most think. But if Cain is unstable his ego will trip him up starting about now!

Update; my impressions: A decent lot with some ideas. The moment when Romney impressed me the most came with his comment about the banks and small businesses - it seemed like he really got it. He was quite evasive at points. A good talker, but can he deliver? Glibness is out of favor with me.

My weirdest moment came when Romney tossed a softball to Bachmann. I got the impression that he has already decided to pick her as his Veep. He shouldn't be so obvious about assuming he's got the nomination.

Overall Santorum did the best on the economic issues, but he has not a chance. Ron Paul was enjoyable but has not a chance. Gingrich, as always, is a great talker and genuinely does have a lot of ideas, but I don't think he has the background to understand how to deliver. I did feel acute sympathy when he went off on a rant about the Debt Limit bill. Romney has experience, but is a bit of an equivocator. Perry would probably be best as president IMO in general, but he has not done well in these debates and he would have to be more explicit about his economic plan.

I felt most depressed about the truth of Gingrich's statement at the end - any one of these people would be better than Obama. Obama has been a failure.

Regarding Cain and his 9-9-9 plan, he is the most likely to change things. I plan to write more about Cain and his plan, so I'll leave the rest for later. Cain is a bullheaded man with a surprising depth of background, and he should be taken seriously. Romney clearly does not take him seriously. This is a very severe mistake. Romney is running a polished campaign, but does he grasp just how serious our economic situation is?

NFIB October - The Buck Stops Here

2011-10-11T07:35:00.000-07:00

Small businesses do seem to be the center of job creation right now. But this is not a very healthy mule, and I can't see it taking us very far:

Here's the full report. Note the minor blip up for this month. Note also that this only takes us to about a severe recession low, and the long, grim fall that preceded that nice little blip. Employment was a bit disappointing - over the summer it had moved up to -2, and in this report it fell to -5. On page 16 you can see the reported interest rates for regular borrowers. Small businesses aren't seeing any benefit from lower interest rates. Over the last couple of months, average rates have ticked up rather than down.

Finally, let me post this snippet from page 7. This series is one of the reasons that I have been such a woebegone, worried blogger of late:

I have always found this series to be a pretty good indicator of economic gates - times when the overall economy hits a diffusion point.

Look at Nov/Dec of 2007, and the huge change between March and May of 2009. According to this series, by July we had shifted into the "ice-cracking" recession wave.

Every "ground-level" indicator that I know of says that we are in a recession now. We probably entered it in April, definitely by June, and the question is when do we get out?

I am rather unhappy right now, and I have to lick my wounds a bit. I expected the "-22" in the above chart for September to be more along the lines of "-17", so I'm twitching and angsty. The next NFIB survey is the "big" sample, so maybe it will show up then.

Supermarkets are terrible, radio advertising is extremely worrisome, service consumer businesses are in trouble - and oh, yeah, consumer credit is definitely not bailing us out. H.8 chart:

Light vehicle sales were pretty good, but it isn't showing up here.

China - The Next Wave

2011-10-10T05:08:00.000-07:00

Things seem to be far more difficult in China than they should be. China's property sales seem to be declining, and second hand property sales turnover prices suggest that a real problem impends. The crash may end up being deeper than I thought - the Chinese banking restrictions and the willingness of developers to pay 16-25% for working cash loans has blown up financing for smaller firms in China, and in some areas, the damage is obvious:

In Wenzhou, one-fifth of the 360,000 small and mid-sized businesses have stopped operating due to cash shortages, according to the city's council for small and medium-sized enterprises.

Of the 855 companies surveyed by the Wenzhou Economic and Information Commission, more than 76 percent said they are almost out of money and are struggling to continue production.

Unfortunately, I think that many of those business owners who are now so pressed bought property as an investment, and now will be twice whacked. It's certain that the property development whirlwind sucked a lot of ongoing investment out of other businesses. It's certain that far too many local governments became dependent on the developer market for ongoing spending - they were basically confiscating property from the holders and selling it to developers, in many cases financed by guaranteed loans.

It's the 1920s in China, and it will take perhaps a decade or even 14-15 years to fully unwind the current coil.

China's manufacturers aren't going to get any help from the international scene, that's for sure. The Chinese government has to unwind the property/local government financing coil, deal with the accumulation of bad banking debts (once again), try to restore the business environment for smaller businesses to keep employment up, and deal with what may be an epic outflow of capital as the class of very wealthy Chinese turn toward investing outside their own country. The pace of building has not slowed, and a lot of property is still lined up to come on the market.

Before this point I thought the likely outcome was for a downshift in the rate of Chinese expansion to 4-5% a year for 3-4 years, then an oscillation around the 6% point. But now I am not sure of that. I am very uncomfortable with the way things have moved over the summer. I'm still not seeing the necessary price adjustments in inputs! The system is not moving into the phase of internal regulation at all.

As the danger signs mounted over the summer (declining auto sales, for example), more unfilled jobs due to wages that didn't pay living costs, and growing production problems based on low sales prices and high input prices, the financial fever continued to mount. At this point, it seems as if many companies and wealthy people are buying assets outside China and are beginning to invest in production outside China, so I think all bets are off. Continuing electricity supply problems are another factor - hydro production is down in many regions due to drought/near drought conditions, and coal won't make up the difference.

In both China and India, the weakness is shown mostly in the first-time consumer buying market, with larger/luxury sales doing far better. This is a bad indicator.

Try this article. Hayek would have known what to make of this.

Dexia Nationalized

2011-10-09T14:01:00.000-07:00

Or so the NY Times reports. Belgium and France are coming up with the dough. This will not help the situation of either nation, but it does remove one weight from Monday markets.

Sarkozy and Merkel are promising that they will come up with some sort of Euro solution by early November. Given that Merkel recently promised her party not to further cut Greek debt and given that the July haircut on Greek debt is conceded to be too little, it is difficult to imagine what they will propose.

Clearly any package that would soothe the markets would have to include a significant bank rescue fund. What's at stake now is the creditworthiness of the rescuers! I don't see the way forward.

This is a long article from FAZ linked via Google Translate. There has been increasing discussion in Germany about adopting a Glass-Steagall approach to bank regulation, i.e. separating commercial and investment banking. In order to prevent vicious financial contagion, you have to keep commercial bank lending going. Then it is easier to let investment banks go BK.

Reading between the lines in a number of foreign newspapers, it seems to me that European policy makers are slowly coming to the consensus that they cannot bail out all the nations that will default on their sovereign debt, so they are now trying to figure out how to set up a financial structure that can tolerate the necessary losses.

This really does not look good for many large European banks. The Euros going to be there, because both France and Germany desperately need it. Devaluation of the Euro is very good for the German economy, and France cannot go it alone with its own currency. By the end of the bailouts it seems likely that France's debt load will be more akin to Italy's, so they may be willing to deal with some sort of debt compromise at the end of five years. But can Italy wait that long?

The smaller countries are going to be in a world of hurt, because at this point it looks like the best deal anyone could possibly get on the Greek debt would be a 70% default, and it would take aid offers to get Greece to agree to that and perform. This implies severe funding problems for many smaller countries.

Everyone expects Ireland to eventually get a 30% write off on its assumed debt, so somewhere, buildings will be falling. The UK is going to have to bail out some more banks, I think. We are looking at some major financial shocks, and it's unlikely that the Euro economy as a whole will get through without a significant downturn. I also think this has implications for India. India's growth is okay but its underlying fiscal position is not and we are about to enter an era of international financial caution.

This is from France's official treasury site:

So far this year these projections for debt/GDP ratios have seemed overoptimistic:

The planned budget deficit for 2012 was 95.5 billion Euro; it looks like France will have to be adding to that with funds for banking shore-ups. French GDP is not reaching the growth targets built into the forecasts above.

Hope Meets Mr. Market, Dies Ignominously.

2011-10-07T07:46:00.000-07:00

Below, there is a substantive economic post.

If I were a cartoonist I'd have fun with this. While Mr. Hopey-Changey is running around talking up his health care magical mystery reform (women will have no costs for contraception - utopia!), the issue of required coverage is causing certain canaries to stop chirping in the health-care mines:

An advisory panel of experts on Thursday recommended that the Obama administration emphasize affordability over breadth of coverage when it comes to implementing a key insurance provision of the 2010 health-care law.

Obama officials charged with stipulating what “essential benefits” many health plans will have to cover should make it a priority to keep premiums reasonable, even if that means allowing plans to be less comprehensive, counseled the committee of the National Academy of Science’s Institute of Medicine (IOM).

So basically what this means is that your free contraception comes at the cost of actually getting treatment for cancer. This committee was commissioned by HHS to guide HHS in its regulations. Try the Kaiser health care reform calculator - you can rapidly see that if comprehensive coverage is mandated, many employees will drop coverage and pay the fine, because it will be far cheaper. Then the public will be stuck with huge health care subsidies the public can't pay.

Next Year In Jerusalem?

2011-10-07T05:43:00.000-07:00

Sigh. BLS employment for September is out. It's a little worse than I thought it would be, but thank heavens not much going by the Household Survey.

The good news - the employment/population is up to 58.3%. The bad news - in September of 2010 it was 58.5%. The good news - Table A shows that we added 398,000 jobs in the month. The bad news - the YoY change is 647,000 jobs, which doesn't of course keep pace with new entrants. Table A-9 reports that over the year we have added just 595,000 full-time jobs on an NSA basis (comparing Sept 10 to Sept 11).

Employed persons at work part time for economic reasons rose 444,000 in the month. Discouraged workers increased by 60,000 in September. Workers unemployed by 27 weeks and over increased by 208,000. The participation rate for older workers without a disability (over 65) increased again to 23%. That's a pretty high number!

There is a basic consistency here - we are seeing stronger job growth in smaller businesses, which was foreshadowed by NFIB surveys earlier in the summer. But some companies are slacking off in production.

I expected this to be a bit better because there was quite a bit of storm-related construction and utility work added in the heavily-populated Midlantic to NE regions.

Temporary employment increased by 19.4%, which is a better indicator (Table B-1). Local government dropped 35,000 jobs, two-thirds of which were in education.

The problem I have with this is that inflation should be tailing down somewhat, but we're in a bad income trend that employment cannot redress:

This is through August. Real disposable personal income looks a bit better, but that's only because of the surge at the beginning of the year from the discounted FICA tax rate. Disposable personal income is personal income less taxes.

So either we continue to drop further behind on funding the already-unfunded SS program, or we take another whack in personal income at the beginning of the year.

The only way to get out of this without too much more pain is for inflation to step downwards quite significantly, but it has to happen rather quickly. Realistically, interest income will continue to tail down as a result of the international angst and the Fed's efforts. Taxes need to go up.

Since the GD, we haven't had a period this long when RPI had not increased:

Right now we are moving sideways economically, but there's quite an undertow. The US economy is pretty heavily biased toward consumption and services, and the income does not seem to be there to support much in the way of growth. These periods of stagnation have not historically ended well:

When both real personal income and real GDP growth over the year drop below 2.5%, the US economy is, well, in recession.

Historically, that is. One or either can fall below that line for a bit, but if both do, it's time to turn out the lights and go light on the commodities and stay light on inventory.

This is why I was so steamed up last year over the Fed's move, because at that time we were emerging into a less-than-brilliant recovery, which is all we could ever have expected. But we still had to face the Euro crisis this year, so it wasn't a time to be getting fancy. It was a time to plod sturdily along ignoring the bear, who was gaining on the folks in our rear on the other side of the pond.

I spent a ridiculous amount of time the last three weeks walking through stores, and it certainly LOOKS like we are in recession, somewhat masked by desperate machinations.

The nice part is that we do have a lot of pent-up demand out there. We do have some rebuild of manufacturing helping. We do have a little strength in light-heavy vehicles, although I suspect that's a transitory pop. Manufacturers have not built up inventory unduly. So I can still argue for a skipping, milder recession. The US domestic situation is not going to be assisted by foreign events, although certainly the current panic is helping us with our unwieldy public debt load.

Inflation should be falling pretty hard about now on commodities, which I believe it is. But inflation in services costs is still going up, which is not good for incomes.

Anyway, here's the detail on that graph:

If you look at the longer term series above, you'll note that RPI used to be a lot more chained to GDP. The unchaining is not a good sign; it means that more of our incomes are dependent on fluffy credit.

Finally, I believe the Fed was chasing a chimerical problem. CPI-W has a long history, which is one reason I use it by preference. You take a look at tell me where the deflation was - show me the danger the Fed was averting:
Seriously, click on that graph and contemplate it in detail - sort of like your financial life depended on it.

Go back and study the pre-GD period. You can see it then. I figure that Uncle Ben has a 50-50 chance of putting us into an honest-to-God depression in the next six months. He has certainly killed off another three hundred banks with Operation Twist.

Roaring With Laughter

2011-10-05T09:56:00.000-07:00

The Occupy Wall Street "Joy of Outraged Incoherence" crowd have met their match, Chicago Style:

The protesters are making signs about being the 90% or the 99%, so these boys hung signs out the window announcing "We are the 1%".

One admires their willingness to state it as it is, although many of the workers at the CBOT aren't the 1%. But they are at least aspiring to get there, and frankly by now I am more in sympathy with them than the protesters.

I had enough of incoherent wild-eyed demonstrators when I was growing up. By the 70s it was all drugs, alcohol and "how dare you make me work for a living or get good grades to get a good job", so the romance of the 60s never took hold in my unredeemed little heart.

I think the Occupy Wall Street gang is rolling votes from the Dems to the GOP by the millions. If they can just keep it up for another two or three weeks, the Senate will go over 60% GOP, and we'll have a solid GOP federal government in 2013. It all depends on the weather - one good cold snap and these hippies will have to move to SF and boycott the local head shops for their outrageous pricing cartel.

The popular anger at the financial gurus is so very great that I would have sworn that nothing could defuse it, but NPR's desperate attempts to make the OWS (Occupy Wall Street) crowd look, well, sane have convinced me that the specter of the 70s is still haunting the country. I think the OWS crowd also has a lot to do with Cain's rise in polling - people want the country to work again, and you don't have to contemplate the wild-eyed or vacantly smiling, tattooed free-food crowd milling around urban centers for very long to realize that whatever their goals may be, they do not constitute anything most would describe as "working for a living".

So the JOIsters (Joy of Outraged Incoherence-sters) are rolling the country red in a big way. From Mr. Punch-A-Hippie to the Anchoress, a broad swathe of ordinary Americans are staring at the Occupy Wall Street crowd and recoiling in distaste. They want to get as far away as they can from That Sort Of Thing, and as far as they can get is pretty much Herman Cain at the moment and most definitely not another vote for Obama. I suppose Romney is really the leader, and Perry has a very good chance, but the reality is that Americans are fed up with the current powers that be and would like to put some more ordinary people in office, and Cain is the type of ordinary American most ordinary Americans aspire to be.

Americans really aren't that conservative, but they do want this era of misery to end! It's tremendously hard to follow even favorable coverage of the whacked-out movement without developing the suspicion that these people only agree about wanting to get their hands on Other People's Money, and Main Street has had some experience as to how that really works out. They can feel hands in their own pockets already, and those hands are sort of grubby and disgusting hands that they don't even want to shake.

The Hippie-Marxists on DU are roaring with joy and breathless anticipation over this, but they are not in touch with reality or the popular psyche.

Challenger, Et Al

2011-10-05T07:09:00.000-07:00

The headlines on the Challenger layoff report are pretty bad, but over half of the announced total is from army force reductions and the BofA 30K layoff. So it is unlikely to be a continuous trend. Not that cuts like these are positive for hiring and the unemployment rate!

ADP employment report: ADP notes that its headline job add at 91K is not very consistent with a "stable employment rate", i.e. we are seeing signs that unemployment could go up. This report only covers private sector hiring and the trend for state and local, plus armed forces, is not that strong. Plus you have new entrants. A lot of people went back to school because of the recession and a wave will be building of graduates with loans seeking employment, so the picture for next year is not that hot. Job cuts occurred at large companies; job adds were concentrated at small companies.

The fiscal problems at the state and local level are intense. Look at CA alone. In the first two months of the fiscal year, the cash deficit (revenues - expenses) was 5.37 billion, compared to the previous year's cash deficit for the same two months of 3.93 billion. A tremendous amount of the problem exists at the local level (see Stateline.org article) and it can't be resolved easily. Mr. Push is shaking hands with Mr. Shove right before the wrestling match begins, and it promises to be an ugly bout.

Then consider a state like Illinois. Although its economy is in relatively better shape than CA's (CA state motto - "The New Michigan"), Illinois passed a very large tax increase to deal with its finances. And sure enough revenues have come up - note the very large increase in personal income taxes, which derives mostly from the very large increase in personal income tax rates. Still, the current fiscal year deficit is projected to be along the line of 8 billion dollars:

In all, the state will be $8.3 billion short on June 30 if nothing is done, according to the report. The majority of that money, roughly $5.5 billion, will come in the form of unpaid bills from companies that provide everything from meals for the elderly to toilet paper for prisoners. Another $1.2 billion is composed of Medicaid payments the state will push off until the next budget year, while the remaining $1.6 billion is owed to companies for tax returns and health insurance bills for state workers.

The third "recovery summer" in a row is not going to bail them out. They can't keep increasing taxes. Illinois' state unemployment rate was actually a tiny bit higher in August 2011 compared to August 2010, according to BLS - a sharp change from July's YoY pace, although the unemployment rate did not increase this summer - it's just that last year it rapidly improved. CA is at least notching improvements in its unemployment rate although its current rate of 11.9% is higher than Michigan's rate of 11%, which is not something of which to be proud.

The final solution for Illinois is going to have to involved cutting retirement benefits and probably services. More tax increases are unlikely to increase revenues much at this point. So once again, Mr. Push shakes hands with Mr. Shove.

Michigan's economy is growing after its long depression - it is increasing high-tech hires and unemployment continued to fall over the summer. So it is not all grim news.

Without a stronger pace of private job growth over the country, weaker states are going to have a very difficult time over the next year.

To properly understand the full impact, I recomment this Rockefeller Institute briefing on state and local taxes. On page four you will find a graph showing the real change in taxes over time. Note that sales tax (the early warning system) fell right through the recession floor between the second and third quarter of 2007, meaning a recession had started.

Although tax receipts have been rebounding, they still haven't gotten back to where they were in real terms in 2006 except for property taxes, which of course kept growing. But in a real sense, property taxes are now probably not keeping up with inflation (see page 5 in the review). With high inflation this year, the nominal growth being reported over the last few months doesn't look very good in real terms, and it is obvious that many of these states cannot keep raising tax rates. Sooner or later you create Camdens and Detroits if you keep doing that, and a nation of Camdens and Detroits would be a tragedy.

Still, the tighter tax picture, especially for localities, wouldn't be that much of a threat if it were not for demographics. It is really pension and retirement medical benefits costs that are destroying the the budgetary outlook in so many places. Despite any reasonable adjustments that can be made, there will be decades of high expenses and low current investment and hiring - that is inescapable.

EPA Watch - If You Want To Eat

2011-10-04T07:06:00.000-07:00

API (American Petroleum Institute) produces really good stats at a very high price. This is not relevant to my readership on balance, I suspect.

Another thing they do is highly relevant - they monitor the rules and regs of those delightful fairy dust people at the EPA. Read this, and read this, and be aware that US chances of sneaking through the current round of economic troubles with relatively little impact are deeply endangered by these projected EPA rulings.

The EPA has turned into a genuine threat to US economic stability, and this is an issue that warrants contacting your Critter. Overall energy production (including oil) and refinery production has been one of the underlying bright spots in a necessary US economic restructuring. Gasoline demand is weak, but diesel demand remains relatively strong, and increased production has dropped our import dependence and is helping economic growth fundamentals.

The reason I am currently for Herman Cain is that I think he is the only possible candidate likely to take a seemingly radical approach that has the potential to back us away from the abyss. Maybe Christie, who is not running, would be better at dealing with the federal retirement crisis, but Cain is the only candidate who truly seems to understand that we can shift the fundamentals by making some real changes.

But regardless of what happens, the EPA's actions are going to have to be clipped ASAP or the end of 2012 and 2013 could be uglier than sin. Congress has to do it; the public needs to place intense pressure on Congress to get off its butt and change some laws to get EPA out of the CO2 regulating business and stop the current round of rulings. EPA is under pressure also, and they have to conform to current law. Congress Critters are attempting to evade their responsibility in this.

The EPA has recently changed some stances, but pressure groups have the power to sue and force EPA action, so they are in a dual squeeze and in a bad position overall - getting shot at no matter what they do. Congress seems to like EPA as a scapegoat but doesn't want to clarify the rules under which EPA is operating. Overall these are big money decisions, and Congress needs to make them.

I'm fighting off a virus so blogging will probably be light for a bit (unless I end up sitting around and doing nothing because I am really sick, in which case I will probably be so bored that the result will be a blogging blitz).

The FERS Media Dam Breaks

2011-10-02T10:41:00.000-07:00

While everybody is getting excited about a few thousand nutcases running around on Wall Street, the real domestic news of significance is that the media wall over federal retirement pensions broke last week.

USA Today:

Retirement programs for former federal workers — civilian and military — are growing so fast they now face a multitrillion-dollar shortfall nearly as big as Social Security's, a USA TODAY analysis shows.

The federal government hasn't set aside money or created a revenue source similar to Social Security's payroll tax to help pay for the benefits, so the retirement costs must be paid every year through taxes and borrowing.

It's a good article - read it. Now everyone's jumping on the bandwagon. ABC's picked up the story.

The most basic problem is the same as the SS/Medicare problem - there ain't no funds in the Trust Funds. I've mentioned the Treasury Direct Debt to the Penny website before. Here's a subpage that explains the funds for federal retirement programs. Those "special-issue Treasury securities" are the same type of instrument used to "save" all the SS excess payments.

To actually follow this, you need to go to this page, which has all the monthly statements of the public debt reports. Then click on the year/month you want. August 2011 is the last available. I download the excel file for primary dealers, which allows you to track exactly what is out there. Once you open up that file, you click on the sheet names "GAS" (short for Government Account Securities). Here you want to stop, check your BP, take antacids and that sort of thing. If you do not have a heart condition and are not a federal retiree, you may continue without making your will.

So now we are reading GAS, first column. The second column shows you retired securities, and that happens when the trusts are being drained. The amounts listed are in millions of dollars - add six zeroes. And you find here 139 billion in the Thrift Savings fund, Federal Retirement Thrift Investment Board. 828 billion for the Civil Service Retirement and Disability Fund, OPM. 162 billion DOD Medicare Eligible Retiree; 334 billion DOD Military Retirement Fund. DC Federal Pension fund, only about 3.2 billion. Deposit insurance right above that. Employees Life Insurance and Health Benefits funds, OPM, 18.6 billion and 39.6 billion.

Now we come to some of the general public entries: DI (SS Disability) 171 billion, dropping fast. Medicare HI (Medicare Part A) 259 billion, also dropping quite quickly. SS Old Age (SS retirement), 2.579 trillion, or 2,579 billion. A 102 billion for Medicare SMI, which includes Part D and Part B.

Now back to the government employees - 16.4 billion for the Foreign Service Retirement and Disability fund. Postal Service Retiree Health Benefits fund, 43.7 billion.

Anyway, the point is that ultimately all the accrued savings that people were led to believe were there have all vanished into the Great American Money Hole, a la The Onion. There are no funds there. Treasury will have to borrow all this money from the public - some public - in order to give back the money, or we will have to raise taxes. We literally cannot raise taxes enough, so we are going to default on a significant portion of these promises. The rich simply don't have nearly enough money to close the deficit, although there is room to raise their taxes. But it won't cover that much.

This is one of the huge reasons for our deficit, but it interests me that the very large retirement obligations for federal or military retirees have only just come into the discussion. If SS benefits are to be cut, Federal employee benefits should be cut also, and so should Federal retirement health benefits. If we are going to default, let's default on everyone equally!

Person by person, our liabilities for federal employees are much greater than our SS/Medicare liabilities, and any meaningful discussion of fiscal reform should included very significant cuts to federal retirement benefits for higher-income federal retirees. But this has not yet even been discussed, and my congratulations to USA Today.

My bottom line over fiscal reform is that whatever reforms are imposed upon the general public should also be imposed upon the government employees. They should have the same retirement age for full benefits as the general public, be eligible for retirement medical benefits at the Medicare eligibility age, have higher premiums imposed for medical retirement benefits on the same scale as for Medicare, etc.

And Now The TGIF Good News

2011-09-30T06:57:00.000-07:00

The case for a slower, more restrained US downturn lies in two reports today, not to mention the hope for next year in housing. Chicago PMI (concentrates on heartland production) is PDG, and so is NACM.

Neither of these reports show anything that can prevent the US from entering a downturn - far too much of our economy is based on consumer spending at levels disassociated with increases in real incomes and government spending at levels disassociated with the levels of taxation that the real economy can bear without buckling. In short, our only long-term hope is to restructure.

Nonetheless, the relative strength in these two reports does suggest that there are some underlying positives that could limit the scope of a downturn and also tend to suggest that there is enough base-level strength in low financial costs and a slow reindustrialization to support a non-catastrophic restructuring.

We should not do the jobs thingie - we should look at the relative strengths we have and try to accentuate them. We probably should raise FICA withholding back to its normal level in 2012, restore and increase the MWP to $500 with all other terms left. This would represent a large tax increase on the higher income households, but they can stand it and the relative strength it would insert into the economy from the lower levels would greatly help.

The Euro crash will not last forever - trying to pretend unpayable sovereign debt will be paid is a parasite that will either kill its host or be killed. The situation cannot drag on for more than the middle of 2013, and as soon as it is resolved the US will come under fire.

We need to make sure we are strong enough at that time to reassure investors. I think we can pull it off if we just use some common sense. Common sense in an election year in the US is hard to come by, but perhaps we've suffered enough to fall back to something that will work.

So to our feckless president I would say "If you can't lead then follow, and if you can't follow then get out of the way."

2012 will be a tough year for the global economy, but price adjustments will happen and at the end of the year the situation will look different. It's up to us whether we are willing to put aside the fantasy phase of US politics and buckle down to achievable real-world progress.

With A Whimper?

2011-09-30T05:53:00.000-07:00

Let's see: I stayed up late to catch the Markit PMIs for China and Japan. They weren't good. Chinese manufacturing is still in contraction with input price increases accelerating(!!!!) and Japanese manufacturing fell to 49.3 from 51.9 in August. The report notes weakness in Chinese orders as one of the causes of the fall in Japanese new orders. Japanese retail sales in August fell hard. Falling retail sales plus falling manufacturing presents a pretty difficult growth picture! So I then grumped my way off to bed.

This morning, I got a big fat stinking three-day-dead mackerel in the face in the form of Personal Income and Outlays for the US, which executed a real -0.3 negative for income on the month and a real 0.0 for Personal Consumption Expenditures (PCE) on the month. I thought from Treasury Receipts that nominal incomes (reported a 0.0) should be higher for August, although the high inflation is still cutting into real incomes. I will go back and look at receipts as soon as I have time. Maybe I missed something, but my first impulse is to say that this will be revised up (although still not to a real increase).

The preliminary benchmark revision for the establishment survey is out. This is still not real-time - it is picking up pulses from when the economy was stronger and employment was picking up in March - but it is certainly closer to current figures. This revision is deployed in February of 2012. See the release for more details.

Let's see - we have some other goodies here in the economic report grab bag. Eurozone inflation was reported to have jumped from 2.5% in August to 3.0% in September. This seems likely to delay any ECB move to cut rates, but most people think that the ECB will cut rates before the end of the year. It depends partly on inflation IMO. German retail sales were reported down 2.9% on the month. German unemployment keeps falling - it is currently below 7%!!!!! That's got to be the lowest since reunification. But Germans are experiencing increasing inflation, so it is reasonable perhaps that they are spending less in real terms. Unlike US retail sales, Germany reports inflation-adjusted retail sales.

The Euro is dropping and this may add to inflation. Normally you fight that with rate increases, not decreases. I think if I were the ECB I'd raise rates, because lower rates overall won't get through to the debt-troubled countries, and if the Euro drops more German unemployment will keep dropping, but everybody may just keep spending less. With a weakening market for exports, eventually that will tail off anyway. If you raise rates and cut inflation, there may be more spending oomph overall in the Eurozone. Just a thought. At this point a lower Euro is helping economies like Germany's, but it will over time still feed consumer inflation.

I think Germany's current fall in retail is cyclical and highly related to heating oil purchases for winter. So I expect this to improve later in the year. Or do I just hope for change? Well, anyway I expect the first shock to wear off and more Germans to hit the stores by November.

New Zealand got downgraded. This will not shake world markets. However the blinding fall in coffee on commodity markets shows what kind of downdraft we can expect in pricing. Part of the reason for the fall were reports that warehousing for green beans was quite well stocked indeed, and harvests were looking pretty good. But the truth is that earlier in the year no one cared about these stats, and now they do, which shows a change in trading methodology. These sorts of shifts generally last for at least six months, so risks are on the downside for all such commodities.

I also believe that while prices will adjust, they will not adjust quickly. There is too much money out there looking for a home, and with the equity markets doing poorly, especially in Asia, there is no other home. Therefore we are still not in a trading economy at which prices are adjusting on trade flows and supply, but rather still in a financial economy at which prices are adjusting for changes in money flows and supply. Given the choice of accepting a negative real rate of return on bonds and being chained to the fate of one currency, accepting a possible negative real rate of return with the option of being able to shift currencies smoothly still makes commodities look somewhat appealing even with high downside risks. Personally I would not do this, but I think producers will continue to stockpile supplies and so there is some near-term support for use commodities.

Such trading schemes generally produce nasty, sudden disruptive adjustments that hurt real trading of goods, so I expect the current sorrowful trend to continue. I also think that trading in such commodities has a much higher downside risk than the market believes. Oil now has no real support at almost any price level; I don't THINK it will go much below $45, but it could. It could go below $20 in a year, and that's more than a 5% probability. It all depends on how fast the global economy can adjust. I do think we have some slow adjustments in order for a while, because oil has a high psychic comfort level at this point. Note that abruptly the high copper stockpiles have emerged as a pricing factor; this is an example of the same evolution.

I do not think the Chinese manufacturing figures are quite as bad as they seem. As far as I can tell, Chinese manufacturing output is being dragged down by the inability to finance large buys of input costs. So manufacturers have shifted toward caution and lower output levels in order to try to retain the ability to finance new production runs on received orders. This does imply that there is further trouble ahead. I have to believe that part of the problem is construction and development companies that are borrowing money in the 15-25% range. This surely must shut out a lot of self-financed industrial investment!

I Think I'll Bother

2011-09-29T19:32:00.000-07:00

Of late I have gotten really apathetic and depressed about pointing out the nonsense in many news reports, but this one was kind of over the top:

One in five homeowners whose mortgages were modified under a program aimed at reducing foreclosures defaulted again within a year after their payments were cut, the U.S. Comptroller of the Currency reported today.

The report is OCC's Mortgage Metrics for Q2. A picture is worth a thousand words, so this chart from page 45 should be worth at least 500:

The important column is the "Current" Column. Very few of the mortgages exit via pay-off, although probably a lot are written down on short-sale or DIL - (most of rightmost column).

Now needless to say, as time rolls on more and more modified mortgages will default. For 2008, less than 29% of these mortgages are current or paid off. For mortgages modified in the first quarter of 2011, ONLY 77.7% are CURRENT. This is still an appallingly bad performance after at most five modified scheduled mortgage payments.

Beginning on page 5 you can see a breakdown of performance by 60 day delinquency rates at 3, 6, 9 and 12 months by year of modification, beginning with 2008 and ending with Q1 2011. The quality has improved overall, but still is pretty bad considering how much the payments have been dropped (see page 36 for 30 days plus after a year), but now delinquency rates on the overall mortgage portfolio have started rising again.

I really hate this report, because it seems to me that there are elements of dishonesty and, well, spin in the way the data is presented. I guess I'll write more on this tomorrow - I've shut up all these months, but I'm really irked now.

At This Point We're Just Looking To Slow The Bleeding

2011-09-29T06:59:00.000-07:00

Markit Retail PMIs. Italy's still in deep, France is doing better, Germany's not really, Europe as a whole is falling more slowly. Because inflation is the problem, a slower pace of fall gives a chance for prices to come down. But Europe seems to be seeing increasing inflation rather than the alternative.

US initial claims are lower this week. Four-week average at 417K, but that isn't very encouraging for employment.

GDP Q2 reported at 1.3%. GDP Q3 ought to be at least 1.7-1.8%. We'll see. The US seems to be entering another few hard months based on the early store/services data I'm getting - but maybe this is just temporary based on BTS spending. A lot of households might be tight this month.

I think the US restructuring will take quite some time. It's focused on the states and localities at this point, but that will surely take another five-six years?

Census publishes estimates of state and local tax revenues. The numbers are not necessarily directly reflective of the economy, because tax increases abound, and on occasion in good times sales taxes and so forth will be cut. In particular, looking at the data through Q2, it's remarkable how much Q2 property tax revenue has risen in a few years. Needless to say it is not because of massive building or value increases; it's because of higher millage rates. In most states, when the value of the property goes down, the locality just increases property tax rates. Home values are reported by Case-Shiller to be back at 2003/2004 levels. In Q2 2004, property tax receipts were 61,509. In Q2 2011, property tax receipts were 88,518. In Q2 2001, property tax receipts were 51,249. Call me Ishmael, but I don't see how this is not creating a further impact for would-be homebuyers in some areas.

I was flipping through Zillow looking at their estimates, and in some of the high-tax areas, you get properties with an estimated total housing payment composed 70% of property taxes. This is reaching the breaking point, surely?

An Ugly Landscape When You Look Up

2011-09-28T06:56:00.000-07:00

Roubini said yesterday in some panel discussion or another that the US was already in contraction and most other developed economies were heading into one. On that chirpy note, we start our Wednesday with a raft of reports about the Euro problem. The longer they play with this Greek thing, the larger the eventual loss.

The UK is clearly thanking its stars that it never went Euro. German inflation is up again, and this is not going to fill the Bundesbank with optimism and the urge to send Euros elsewhere by assuming more debt. Schäuble's conflict with Geithner is of long standing (that link is from May), and the positions have hardened. Attempting to build a huge Euro bailout fund would in fact denigrate Germany's credit rating, so success appears impossible over a couple of years time frame.

My guess is that the Greek question will break very soon, although apparently they are now opting for a property tax. That may prove suicidal - it looks like everyone who can is bailing out of Greece, so the country is going to be left poor with no investment.

While currently the rate isn't that bad - maximum 16 Euro a square meter - the chance of it being raised is high as the economy gets worse. )One square meter is about 10.76 square feet, so a 1,100 sq ft dwelling would be taxed about 102 Euro, or around $140 USD.] Bad numbers - could be be up to $2,200 or so. If you confiscated all residential property in Greece you could just about clear up Greece's debt - that is, if you could turn the property into money. But you couldn't do that, because once the government starts confiscating property no one will buy property. So Greece is on its last legs. Whatever it can get from measures such as this might be sustainable (and certainly collectible), but ultimately it needs a big debt writedown to start rebuilding its economy.

US durable orders for August looked good. There was a slight drop in new orders, but when you look at things a bit more deeply, most of the summer pop was in response to the clearing of the Japanese supply line block. Still, capital goods and machinery show that the US manufacturing recovery is still creeping along. At this pace, it is not enough to overcome the immense consumer drag, and it is still dependent on external sales for support. Any minor change in housing investment on the positive side will add a big relative boost.

Most of the basic economic flux (aside from the issue of government policy) derives from uncertainty about the pace of auto sales in the next year.

So I am marginally more comfortable with US prospects. I think we are in a recession, but it is a restructuring recession and not a cartwheeling-into-the-abyss recession. Unfortunately commodity prices will have a huge effect on the US economic trajectory over the next year. We have to get to the point at which real incomes for the bulk of working people aren't declining.

Note: Petroleum:
On a YTD YoY basis, petroleum products supplied are -0.7%, gas is -1.1%, and total imports are -10.2%, compared to a 4-week MA of -1.8% for products supplied, gas at -2.4%, and total imports at -12.3%. Current crude inventories are just above the average range for this time of year, so supply is good. Gas supplies are above the upper limit of the average range, and diesel supplies are near the upper limit of the average range. The average range is a five-year construct, so that is good strong supply, considering that total petroleum products supplied have been down consistently for years:

Nonetheless I think you will see petroleum prices only walk down, because there is just too much money out there chasing too few investment vehicles. I find it impossible to look at this graph and claim that we are not in recession. Unfortunately it is not just us, so I really wonder what Q1 of 2012 will look like globally. The global economic environment isn't going to get any better for a while.

Lalalalalalaaaaa

2011-09-26T18:43:00.000-07:00

What can one do but party hearty? The Chief keeps walking around making comments about "putting on your marching shoes" and advises me to "stop complaining". I'm glad he's getting a charge out of this, because I am less than amused.

There's an article up on Drudge about the AMA, ObamaCare and actual doctors. SuperDoc quit the AMA in disgust years ago. The article is fine as far as it goes, but it doesn't go far enough.

In 2012, Medicare physician reimbursements are scheduled to drop 29.5%. The final rule is due November 1st, but the proposed rule gives a good feel for what this is going to cost doctors. That's 176 pages and hard going, so try this short article to get a feel for things. Excerpt chart:

Needless to say this sort of thing provokes either limitations on patients seen or cost-shifting to other patients.

Paying $16.53 for an X-ray is a bit ridiculous, don't you think?

SuperDoc is going to make about $48 per office visit on Medicare patients in 2012. This is not enough to keep the lights on (older patients are far more complex to deal with, require more time spent with them, and require far more follow-up), and he may have to limit Medicare patients, because if you don't keep your non-gov/gov ratios up, you're dead. This causes him great agony, because he is already 70 (working six days a week) and he keeps wandering around woefully wondering who is going to care for these people, and then, evincing considerable angst and threatening to leave the country. He claims Australia is the best bet, but his wife is holding out for Canada.

But this is the first of many projected Medicare cuts under ObamaCare. Five years from now things are going to get much worse.

I don't think the average person realizes how the medical industry works. Aside from the fact that SuperDoc does a tremendous amount of research on each patient with complex conditions (and many of the elderly have complex conditions), the administrative staff often does hours of work behind the scenes to get the required testing and medications through.

SuperDoc maintains a list of doctors he likes and thinks highly of, and over the last few years I called some of them to find out what they were doing. Almost all of them are cutting the vast majority of Medicare patients out of their practices, because they just can't practice quality medicine any more. The bitch of it is that many of the elderly respond superbly to good medical care (ultimately SuperDoc's way of practicing medicine is cheap), so that by shunting these people into practices that provide a much lower standard of care, we are probably costing the system a lot more.

Another problem is that as our arsenal of weapons against various conditions grows, the interactions between the weapons and the living being grow ever more complex. Without carefully balancing out risk factors, the risk of doing real damage to the patient grows. SuperDoc and I have been working on a project to apply some of the P-Nat risk-mapping techniques in the medical field, and so far it is promising. But I am also finding it terrifying, because he'll hand me a medication or condition to analyze, and I keep coming up with these risk holes (if you don't pay attention to them you run a very high risk of harming the patient), and then I take this stuff and the data back to SuperDoc and he gets very excited and tells me it is right.

If SuperDoc is correct, then medicine has reached a point at which it must learn to manage complexity in a different way and at an individual level. There seems no hope of doing that with the direction our current system is taking. The other "good" doctors I have spoken to all reiterated one of SuperDoc's worries - that they were seeing a high incidence of what they regarded as malpractice by specialists, due to a failure to take into account all the patient's conditions.

It seems pretty obvious that assessing general risk is going to be important in delivering workable medical care, and I don't see how we can do it on our current path. You can't defund primary care and basic diagnostics without fubaring the whole darned thing. Also we have to be realistic about the costs of medical care for the non-governmentally covered patients - these costs are going to show up in medical care costs for 40 year-olds, and that is neither fair nor sustainable.

Hah, Numbers, Meaning, Punt

2011-09-26T09:55:00.000-07:00

It kind of bugs me that the press keeps reporting numbers without statistical significance as if they mean anything.

New Home sales:
The August monthly change and the YoY change are so far below statistical significance that it is not worthwhile thinking about the numbers. The monthly is negative and the YoY is a larger 6.1% positive, but the 90% confidence range on the YoY is 18.8%, so just ignore it and throw it in the "nothing happening here" bucket.

The only number on this report that has statistical significance is the YTD YoY comparison, which is unfortunately negative at -8.3%, but this is influenced by housing credits, so again, ignoring it is the wisest course. The 90% confidence interval on that is +/- 4.4%. However revisions over the summer have been up, and this can be viewed as a moderately positive sign. When series like this drop out of statistical significance, I place more weight on revisions patterns than the numbers themselves.

Both median and average sales prices were down in August, but I think this is a mix effect. Not that I don't believe home prices are still dropping, but the new homes being built are mostly smaller and more modestly constructed, and as the older ones move off the market it is inevitable that offerings will shift downward in price.

CFNAI-MA3 for August came in at -0.28, which leaves June, July and August all below the -0.25 line. Monthly for August was -0.43. In March/April we took the big hit - the March monthly was +0.43 and then April was -0.84. Since then we seem to have marked out a new negative plateau, but unfortunately it is probably not permanent. At these levels, CFNAI-MA3 is consistent with either slow economic growth or the beginnings of recession.

The bummer about this is that it occurred during the period when we had something of production rebound due to clearing of the Japanese supply line blockages. So from here on we get more of "pace" effect in this stat, and it probably isn't going to look that good. I'm not looking forward to this index next February.

On Thursday we get the GDP revision (maybe up a notch or two) and on Friday we get Chicago PMI. There's housing chaff in the interim, none of which really is going to make a difference. Wednesday we have durable goods orders, and I do want to see that one.

If you are wondering about the equivocal nature of CFNAI, look at this graph:

IMO, it's got "double dip" written all over it.

The MI Consumer Confidence is not an emotional reading - according to the retail reports, it's because people are spending more for necessities and constraining spending on stuff like pharmaceuticals, not to mention eating out, electronics, etc.

I just got back from the cardiac hospital, where the Chief got the coveted "Most likely to live if continues good behavior" award, and I have to head out again. So see you later.

PS: Of all the potential presidential candidates, I like Herman Cain the best. Take a look at his 9-9-9 plan. I have some issues with it, but this type of thinking is necessary if we are to have a chance of escaping pure economic ugliness. We are forced to restructure or stay in our death spiral. History says that restructuring can work, but we have to start moving on it quickly. I wish Obama were more economically literate, but by now it is clear that he isn't and has no intention of studying.

CBO Testimony About Budget Options

2011-09-24T11:34:00.001-07:00

Worth a read!

Thus, according to CBO’s projections under current law, even with the new constraints on discretionary spending, federal spending excluding net interest will grow to 19.9 percent of GDP in 2021—compared with the 40-year average of 18.6 percent. And the composition of that spending will be noticeably different from what the nation has experienced in recent decades: Spending for Social Security and the major health care programs will be much higher, and spending for all other federal programs and activities, except for net interest payments, will be much lower. Alternatively, if the laws governing Social Security and the major health care programs were unchanged, and all other programs were operated in line with their average relationship to the size of the economy during the past 40 years, total federal spending excluding net interest would be much higher in 2021—nearly 24 percent of GDP. That amount exceeds the 40-year average for revenues as a share of GDP by nearly 6 percentage points—even before interest payments on the debt have been included.

SuperDoc has me doing research on various aspects of breast cancer, which is making me twitch. Thus, I find reading such as the above less troublesome in contrast. This may not be true for all, so if you are having a good weekend you might want to postpone that link until Monday!

CA Unemployment Is At 12.1% - What Does It Mean?

2011-09-23T07:25:00.000-07:00

And August CA state sales and use taxes were substantially below 2010's (7%), as were the July/August figures. It's hard to raise revenue in this environment.

For comparison, look at GA. Its economy is hurting, yet sales tax collections are still eking out a rise. One thing I always look at is the alcohol tax receipts - they tend to flag turns in state economies. Both are dropping YoY.

I have the sense that we are committing an eerie reprise of 2008, with a somewhat lesser amplitude but following a very similar curve. Last time we were crashing in from inflation-cut real incomes and the effects of cutting off the circulation of money gained from unsustainable private debt increases. This time we are folding up from inflation-cut real incomes and the effects of cutting off the circulation of money gained from unsustainable public debt increases. The more things change....

This year the 2007/2008 cycle is collapsed into one year.

There's a lot of talk about losses in government jobs, but look at the longer time sequence:

This is total private. As you can see, the number of private jobs is below where it was 10 years ago, not to mention 2007.

And here we have government jobs.

Relative to private jobs, government jobs are still far above the number a decade ago, and just about where they were in 2007.

Clearly the government sector cannot keep growing at the expense of the private sector - something is going to give. And it will give soon, because the revenues aren't there and now the really big government expenses for government retirees kick in.

The numbers:

2001 Aug:
Total private (nonfarm): 110,544,000
Total government: 21,218,000
Ratio gov/private: 19.2%
2011 Aug:
Total private (nonfarm): 109,170,000
Total government: 21,962,000
Ratio gov/private: 20.1%

There's another way to look at this. Table 2.2B contains a breakdown of wage and salary disbursements so that you can get total government versus total private. In 2001 Q2, government wages and salaries were 815.4 vs private sector's 4,146.0, for a gov/private ratio of 19.7%. In 2011 Q2, it was 1,192.2 versus 5,466.2, for a gov/private ratio of 21.8%. These numbers do not accurately reflect relative costs; payments for benefits (retirement, insurance, etc) are recorded separately, and there government employees receive far more relatively.

From Table 2.1 we can add in another piece of the load the economy must carry, and that's government social benefits to persons. In Q2 2001 those amounted to 1,134.6 versus total wages and salaries of 4,961.4. In Q2 2011 these amounted to 2,308.6 versus total wages and salaries of 6,658.4. Respective ratios of 22.9% and 34.7%. Thus our fiscal problems.

Inflation does not help the fundamental imbalance there, and it's the big one. Also not included are all the unfunded expenditures, mostly in state and local, for government retirees. Very few of the systems accrued for retirement medical benefits, for example, and those must be paid out of current revenue each year.

People say we won't default on our debt, but I think we will. Inflation doesn't help the fundamental imbalance unless we cut benefits by not adjusting for inflation. People believe that we can inflate our way out of this, but we can't.

In that regard, we should remind ourselves that of all the government social benefits paid in 2011 Q2, Medicaid and Medicare amounted to significantly more (991.5) than the total of SS benefits (712.2). Note that these amounts are annualized on a seasonally adjusted basis. Clearly we would cut SS to nothing quite rapidly if we tried to compensate for medical increases by deflating SS payments. Also, Medicaid and Medicare benefits will become somewhat useless if reimbursements keep dropping - eventually, if the government doesn't pay for the service it will not be available. Further, let us not forget the greatly expanded Medicaid benefit and the new subsidy for private insurance that go into effect in 2014 under current law. These will make the picture far, far worse by 2017.

So we are going to default. How deeply we default depends on how quickly we can expand the private sector. And, to be realistic about it, a lot of that default may be inflicted on retirees, but most of it will hit the wealthier/comfortable retirees. Jimmy J. got uncomfortably close when he commented on a retirement income of 36K. By 2025 that may be about right.

Twisted!!!

2011-09-22T18:53:00.001-07:00

Because nothing says "I love you" like Japanese-style long rates.

Look at that 30-year, (she wrote reverently).

You can get the Treasury charting function here, but let me advise you not to try the longer terms at home. It was a true labor of love to get this. While I was waiting for the data to load, stars collided, galaxies were born, my dog nearly died of boredom and my patience almost ran out.

According to Treasury, the 30 year closed at 2.78% and the 10 year at 1.72%. The 7 year is at 1.24%. CPI-U is at 3.8%.

It will be interesting to see what happens. This is mostly produced by the combo of the bad economic news, especially the travails of Europe, reinforced by the Fed's announcement of Operation Twist. One can't feel confident about the economic trajectory we are seeing, and it is hard to imagine Italy's situation improving so the Euro angst is doomed to continue until it breaks into reality. That will happen within a year or two, and then Lord only knows what happens to Treasury rates.

You have to think there will be a wave of refinancings, although the net return for many will be low. For older people currently in good financial shape but with mortgages, the opportunity to refi into a 15 year at incredibly low rates might be enticing. With equity and good credit, 15 year rates should drop below 3%.

From my POV, this is a deflationary move. The rewards for saving money (or begging your parents for an equity handout) to qualify for loans at low rates are brilliant, but with rates so low underwriting criteria are surely going to tighten further. As rates fall,
rate risk increases and the relative percentage of loss risk rises, so underwriting criteria tend to tighten. It's hardly an easy money environment.

If that seems obtuse, let's consider FHA mortgage insurance premiums. Currently, the upfront premium is 1%. The annual premium varies according to downpayment and loan term.

Term > 15 years:
DP = or > 5%: 1.1% (110 basis pts)
DP < 5%: 1.15% (115 basis pts)
Term 15 years or less:
DP = or > 10%: 0.25% (25 basis pts)
DP < 10%: 0.50% (50 basis pts)

BUT there's a kicker - if you have a 15 year term or less, and your Loan to Value ratio is under 90%, you don't have to pay any annual premium - just the one-time upfront 100 basis pts.

This raises interesting economic scenarios. For example, good mechanics are in short supply right now. A lot of skilled tradesmen could end up in far more decent economic shape in 10 years than the person who racked up a lot of debt for an expensive secondary education, even if that education paid off. Racking up a 40K-80K joint debt for a young couple has a lot of implications, whereas a young couple that is more stereotypically "working class" could save money, live at home for a few years, get married and buy a starter house with a good DP and a very low 15 year mortgage in many areas by the time they were in their mid 20s.

This is the reason I think we are going to emerge from this with an economy that looks much more like that of the 50s and than any time later.

Initial Claims, Unexpectedly

2011-09-22T06:48:00.000-07:00

See, these babies unexpectedly rise or fall, depending on how you look at it, but there are too many of them no matter which way you look at it. Last week's figure was initially reported at 428K, which was revised up to 432K. This week's initial figure is 423K. The four-week moving average is now at 421K, up from last week's first-reported figure of 419,500.

Among the bummers here is that it is hard to get much of a drop of unemployment with claims in this range and indeed they are more consistent with increasing levels of unemployment. The 4 week MA for the comparable week in 2010 was only 37K more than this year's.

The 4-week MA for continuing claims was initially reported last week at 3,741,000. This week it is at 3,742,000, but through the magic of upward revisions that is reported as a slight decline. August 27 continuing claims were at 3,729,000. Although the damage is slight, the trend is bad and basically unaffordable with large companies tending to announce layoffs and declines in real average wages.

BLS reports 26 states plus DC having jobless rate increases in August, 12 having drops, and 12 with no change.

The FOMC announcement of Operation Twist (only) seems to have produced substantial selling fervor, most notably in oil. Further bank downgrades haven't helped Mr. Market develop the itch and the twitch in the buying finger. Gold prices are in sync downwards, completing the panic pattern. But the bad news is widespread at this point, with Europe in trouble, China sliding quietly down, India compromised, and many peripheral Asian economies seeing signs of a downward shift

The Fed could not notably improve matters by announcing QE3. It would drive asset prices up, but only temporarily. Mr. Market is quite capable of calibrating prices to spending power and maybe we'd just better let Mr. Market do his work for a while. The reason we are seeing the very strong global coordination is because prices have gotten out of sync with ability to consume (and therefore produce) at these prices. A price fix before the global downturn gets out of hand is the quickest medicine for this malady.

Note: The extent of the global contraction can best be seen in the PMIs, which have taken a remarkable turn for the worse over the last quarter. Markit's flash releases today only confirm the trend, with the Eurozone sliding into outright contraction, and France and Germany continuing expansions, but with declining trends and returns to levels last seen in the summer of 2009. Clearly, these Atlases will not continue to hold up the starry firmament of Euro prosperity. China does not enthuse either, although projections are for continued growth on growth in internal demand. These rates of internal expansion are causing continued inflation, which, if anything, appears to be still accelerating.

PS: The House voted down the spending authorization again. If you listen to the Dem talking points, this is a move by hidebound conservatives. But in fact, almost no Democrats voted for it and quite a few Republicans didn't, so the real picture is more complicated. However the fiscal year is almost over, and something has to be done by the end of September, so this is not going to soothe roiling markets. The debt limit is not a factor now, but spending authorizations (the US hasn't had a budget since the Dems took Congress in 2006) are a necessity also. US Treasury Debt to the Penny.

Further: Reuters article about the "unexpectedness" of the Eurozone PMI result.

Under Construction

2011-09-20T06:35:00.001-07:00

I have another busy day ahead. Quick notes:

Parts of the new residential construction report are statistically significant, and parts aren't. Under construction is down from July, but not to a degree that's statistically significant. YoY is down 7.9%, and that is statistically significant. However the authorizations side offers more hope of some rebound off the bottom next year, with August authorizations up 7.8% YoY, which is most definitely statistically significant. So right now, we're not seeing economic boost, but the case for next year is more optimistic. One has to wonder what effect our current economic troubles will have on that, but with the pace of housing activity being so remarkably low viewed against history, it's not hard to argue that there is space for improvement.

Struggling for optimism, this Bloomberg article starts out by suggesting shipping companies could be helped by a last minute surge to restock if consumers all of a sudden start to spend like gangbusters for the holidays. I started snickering on the first paragraph with the comparisons to 2009 and the theory that retailers are just taking this terrible risk by understocking for the mad rush of consumers hellbent on spending their last dollar. Further in, the article gets more realistic:

Shipping data currently show retailers preparing for a “muted” holiday season, Hartford said. The combined inbound- container volume at the Los Angeles and Long Beach ports fell 9.4 percent in August from a year earlier, following declines of 2.3 percent and 4.6 percent in July and June, according to Bloomberg data. These ports, the two largest in the U.S., account for about 40 percent of total imports, Hartford said.

Heh. You read all that about the shipping at Snarky Mark's first.

I don't think retailers are taking a fearful risk. In 2009 we were months out of recession and real incomes were rebounding. Consumers with jobs felt a lot more confident about keeping them by the end of 2009, and having a bit of extra money, they spent it. That's the reason I posted all those graphs! Neither holds true this year:

Tomorrow we get existing home sales. I note in my driving around that there is tremendous inventory out there. If consumers want to buy a home and can qualify, they have plenty of options. It seems to me that the housing crash has diffused and spread to new areas and homes at higher price points. We'll see, but I am not that optimistic.

We also get the FOMC meeting announcement tomorrow, with the big bet being on Operation Twist (Fed shifting Treasury purchases to push long rates down). I don't think that will do much if any good, but I don't think it will do much harm either. Another round of quantative easing would produce another round of Main Street strangulation.

I do have some good news for you - we are not going to die from CO2 levels, the negative feedback effect from clouds is real, rather than the IPCC's assumed positive feedback. Of course, if you are truly a dedicated pessimist you can still work yourself up into a fit over this - you could assume that the sun's lower activity levels continue, that we go into a Maunder-type minimum, that CO2-engendered warming doesn't save us, that northern grain harvests fail and that the world endures another round of starvation-induced global warfare.

I am worried about the sun's lack of activity, but I would argue in mitigation that Maunder-type minimums seem to be somewhat rare, that aridity often goes along with cold spells, and that lower cloud formation might help the CO2 kick back in. Still, at this time it might be wise to stop burning the corn and stockpile it, just in case.

If you would - prayers for Carl of NOFP. He's had some severe health challenges and is facing another; he's in very real pain now. Pray for guidance for the doctors and Carl, and good healing.

Yikes - S&P, Italy,

2011-09-19T17:51:00.000-07:00

Moody's was supposed to make a decision this fall, but S&P jumped in first. I understand their POV:

S&P said it lowered its outlook for Italy’s growth to a 0.7 percent annual average for 2011 to 2014, from a prior projection of 1.3 percent. “We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve,” it said

The reaction will be interesting. Outlook negative. I guess the Fed and ECB will huddle and throw some more dollars into the ring tomorrow. I wonder if this will come up in FOMC? You would think so.

BIS Quarterly Review Is Out

2011-09-19T07:06:00.000-07:00

I always read these things, but right now they are particularly essential. Sept 19th issue. Even if you read nothing else, don't miss the brief recap of the events (only 13 pages). In particular, rates on junk corporate bonds escalated painfully. The syndicated loan feature is excellent from a risk standpoint also.

The article on trade sensitivity to real exchange rate changes provides something to discuss from a US standpoint. Low sensitivity to rate exchanges means that the real economy in a low IIT nation will experience high rates of economic drag (lower growth) when costs of imports rise. Applying this analysis to the tariff question and the wild inflation theory (just print money) shows up the limitations of US options:

Based on this intuition, the sensitivity of the trade balance to movements in real exchange rates should be much lower in a country with a low level of intra-industry trade (low IIT) than in a country with high IIT. Its imports are unlikely to fall significantly following a real exchange rate depreciation because no domestic industry can easily replace the imports that have become more expensive. Low IIT countries are typically those where raw materials or natural resources like oil account for a major share of imports. They could also be countries that have specialised in particular industries in order to benefit from a comparative advantage in some sectors. By contrast, imports fall much more in a high IIT country that depreciates its real exchange rate, as the country can more easily provide domestic substitutes for imports that have become more expensive. The sensitivity of the trade balance to the real exchange rate should therefore depend positively on IIT.

The article also considers import content of exports (ICE). If exports have a high import content, it is not reasonable to assume that depreciating your currency will redress your trade deficit much. So IIT measures the degree of overlap between import and export products (0 IIT if a country imports just products A & B and exports just products C & D; 1 if a country imports products A, B, C & D and exports the same products), and ICE measures dependency of exports on imports.

There's a table with different assessments of the two measures by countries, and it explains why Greece is staggering along without already going to its own currency. The rewards for Greece of being able to print money in the short term are not great.