Mish's Global Economic Trend Analysis

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• European Credit Stress Returns With Vengeance - Irish, Portuguese Bond Spread at All Time High - Yen Soars - Gold Hits All Time High
• NBER Likely to say "Recession Ended" July 2009; Assessing the Real Time Probability US Back in Recession
• B.J. Lawson Pulls Into Lead in North Carolina Over Democratic Incumbent
• Infrastructure Bank: Obama's Desperate Attempt to Win Midterm Democrat Votes; Stimulus Déjà Vu

European Credit Stress Returns With Vengeance - Irish, Portuguese Bond Spread at All Time High - Yen Soars - Gold Hits All Time High Posted: 07 Sep 2010 07:56 PM PDT The risk aversion trade was back in play today with treasuries, the dollar, the Yen, and gold all rallying while the Euro and European government bonds (except German Bunds) were under significant pressure. Please consider Stocks, Irish Bonds Drop, Gold, Yen Rally on Europe Concern Stocks slid, while Greek, Portuguese and Irish bonds tumbled, gold rose to a record and the yen surged to a 15-year high versus the dollar on concern Europe's debt crisis will worsen. U.S. and German bonds rallied. The MSCI World Index slid 1.1 percent and the Standard & Poor's 500 Index lost 1.2 percent at 4 p.m. in New York. The gaps between 10-year German bond yields and Irish and Portuguese debt grew to all-time highs, while the German-Greek yield spread increased to the widest since May. The yen rose to as little as 83.52 per dollar as the Bank of Japan refrained from increasing bank loans. Ten-year Treasury yields lost 10 basis points to 2.6 percent. Gold futures closed at $1,259.30 an ounce. Banks led stocks lower on concern European lenders will require more capital to compensate for holdings of bonds in the region's weakest economies. Germany's banking association said yesterday that the nation's banks need to raise $135 billion and Pacific Investment Management Co. said Greece still faces "substantial" default risk. "The challenges haven't gone away," said James Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, which oversees $103 billion. "The European debt worries that haunted us earlier this year are showing up again. Even as last week we had a couple of economic signals that weren't as bad as we thought, the headwinds have been around." The rally in gold, Treasuries and the yen came as investors sought assets perceived as the safest. Even after a 750 billion euro ($960 billion) bailout for the weaker economies in the euro zone, investors are skittish about sovereign debt of some nations -- and about the banks that hold the region's government bonds. A default by Greece could trigger the collapse of banks with large sovereign-bond holdings, says Konrad Becker, an analyst at Merck Finck & Co. in Munich. The German bund yield dropped 8 basis points to 2.26 percent. Greek bonds plunged, pushing the yield on the 10-year security up 28 basis points relative to bunds to 942 basis points, the most since the European Union and International Monetary Fund crafted the bailout package in May. The German-Irish 10-year yield spread climbed to as wide as 380 basis points, the highest since Bloomberg started compiling the data, from 343 basis points. It was at 372 basis points as of the close of trading in New York. The Portuguese-German spread reached 356 basis points, also a record, from 333 basis points. Wider spreads signaled increased concern that the most indebted European nations will struggle to fund budget deficits. Stocks Rally Halted The S&P 500 dropped for the first time in five days, halting its longest streak of gains since July. Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. dropped at least 2.2 percent to pace a retreat in 77 of 80 financial companies in the index. Oracle Corp. rallied 5.9 percent after naming Mark Hurd, former chief executive officer of Hewlett- Packard Co., as a president. Japan's and Australia's central banks signaled the outlook for U.S. growth is deteriorating, making it tougher for them to set monetary policy. The Reserve Bank of Australia extended a pause in raising interest rates "for the time being" today, even after the nation's gross domestic product rose the most since 2007. The Bank of Japan said it's prepared to add more monetary stimulus after last week's emergency decision to expand a credit program. Dollar, Yen Strengthen The dollar strengthened against all 16 major currencies except the yen and franc. The Dollar Index, which gauges the currency against six major trading partners, rallied 1 percent to 82.827. Gold Record Close Gold futures for December delivery rose 0.7 percent to $1,259.30 an ounce on the Comex in New York, its highest closing price ever. Copper for delivery in December fell 0.8 percent to $3.4705 a pound in New York. Crude for October delivery retreated 0.7 percent to $74.09 a barrel on the New York Mercantile Exchange. Another name for the risk aversion play is the deflation play. There is plenty of room for the dollar, treasuries, gold, and German government bonds to rally while the rest of the commodity complex drifts lower. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

NBER Likely to say "Recession Ended" July 2009; Assessing the Real Time Probability US Back in Recession Posted: 07 Sep 2010 12:03 PM PDT One problem with the NBER recession dating analysis is that it is months and sometimes years late in making its assessments. Marcelle Chauvet, professor of economics at the University of California addresses those shortfalls in an interesting article called Real Time Analysis of the U.S. Business Cycle Although careful deliberations are applied to determine turning points, the NBER procedure cannot be used to monitor business cycles on a current basis. Generally, the committee meets months after a turning point (that is, the beginning or end of an economic recession) has occurred and releases a decision only when there is no doubt regarding the dating. This certainty can be achieved only by examining a substantial amount of ex post revised data. Thus, the NBER dating procedure cannot be used in real time. For example, the NBER announced only in July 2003, twenty months after the fact, that the 2001 recession had ended in November 2001. Some models, however, can gauge how weak or strong the economy is and date business cycles in real time. In particular, the dynamic factor Markov switching model (DFMS) in Chauvet (1998) has been very successful in dating business cycles in real time and in closely reproducing the NBER dating. The model yields a monthly indicator of the U.S. business cycles and probabilities of recessions and expansions when applied to the same series used by the NBER: nonagricultural employment, real personal income, real manufacturing and trade sales, and industrial production. What does the DFMS nonlinear probability model tell us about U.S. recessions? Since 1959 the U.S. economy has experienced eight recessions. Figure 1 shows the business cycle indicator, and Figure 2 shows the smoothed probabilities of recessions obtained from the DFMS model and the NBER recession dating. The probabilities are obtained using full sample information (that is, all information available from 1959 up to now). As Figure 2 illustrates, the probabilities increase substantially at the beginning of recessions (peaks) and decrease around the end of the recessions (troughs). Recessions are generally short, lasting on average a year, whereas expansions are much longer, averaging about five years. The 1990s experienced the longest U.S. expansion (ten years) in the past 150 years, while the 2007–09 recession was the longest in the past 50 years. Current probability of recession Because of a two-month delay in the availability of the manufacturing and trade sales series, the probabilities of recession are also available only with a two-month delay. The most recent probability of recession from the DFMS model is for June 2010, which uses information up to September 2010. The probability that the U.S. economy is in a recession in June is 24.7 percent. The Beginning and End of the 2007-2009 Recession Inquiring minds are reading the Center for Research on Economic and Financial Cycles article dating The Beginning and End of the 2007-2009 Recession The Figure shows the real time probabilities of recession from the Dynamic Factor Model with Regime Switching (Chauvet 1998). The probabilities indicate that the U.S. recession started in December 2007. The NBER only announced that the recession began in December 2007 twelve months later, in December 2008. Review of the Odds Over Time - To Date Marcelle Chauvet updates the odds we are currently in recession in his blog Real Time Probabilities of Recession U.S. Recession ended in June/July 2009 Probability of Recession in June 2010 INCREASED to 24.7% after being below 10% for the last 7 months and below 50% since July 2009. 2009 January 100.0 -4.4 February 98.7 -2.8 March 96.1 -2.6 April 82.8 -0.9 May 77.2 -1.1 June 66.2 -1.6 July 27.9 0.4 August 21.9 0.4 September 18.6 -0.3 October 11.0 -0.2 November 3.1 1.1 December 2.2 0.8 2010 January 1.4 0.8 February 0.9 0.8 March 0.5 1.3 April 0.8 1.6 May 2.5 1.4 June 24.7 0.2 That is a partial table. Marcelle Chauvet shows the odds starting in October 2007. Notice how the odds the US is currently in recession have risen from 2.5% in May to 24.7% in June. Odds Higher Today Than June We will see the odds for August in a couple months. Those odds will be higher than today because of all the recent grim economic data. Bear in mind Chauvet posts the odds we are already in recession. When the current odds are soaring at an amazing rate (which they are), the odds of a going into recession at a future time, will be much higher. Some don't see it that way. Here is a snip is from Bloomberg as discussed in Nonsense from NBER on Odds of Double-Dip Harvard University Professor Martin Feldstein, who sits on the Business Cycle Dating Committee of the National Bureau of Economic Research says "There's still a significant risk, maybe one chance in three, that there will be a double dip." Fellow panel member and Princeton University Professor Mark Watson said those odds are "way too high" and puts them instead at "one in 10 or maybe one in 20." Double-dip odds of one-in-10 or one-in-20? When the odds are roughly 1-in-4 we are already in recession as of June? If Marcelle Chauvet's model is accurate (and assuming the recession is over, his model is the most realistic model I have seen to date), then the above snip was indeed nonsense, not from the NBER per se, but rather from one or two economists who sit on the panel, most notably Princeton University Professor Mark Watson. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

B.J. Lawson Pulls Into Lead in North Carolina Over Democratic Incumbent Posted: 07 Sep 2010 10:47 AM PDT On Sunday, I received an email from B.J. Lawson saying he has pulled into a small lead over incumbent David Price. B.J. Writes ... Dear Friends, This election will be proof positive that public sentiment has shifted towards shrinking the size of the federal government, restoring the Constitution and returning to fiscal responsibility. This shift is essential -- not just for my campaign -- but also for the future of our country. My opponent, David Price, has been described as a "true blue liberal" who has fought his entire career for single payer healthcare and other big government, big spending programs. That would explain why Mr. Price has voted with Nancy Pelosi more than any other congressman. They also entered Congress together in 1987. Washington is broken and voters are waking up. Washington takes too much and spends too much in an attempt to be all things to all people. I am running for Congress to end runaway government spending, balance our budget, cut taxes and restore the Constitution. If we don't change directions in 2010, our children and future generations will suffer immensely. Our race is the perfect opportunity to send Washington D.C. a message: It's time to stop mortgaging our children's future and get our nation's financial affairs in order. I hope you will support us in this effort. There are too many issues needing our attention for us to remain silent and divided, and I hope you'll join us in this historic race to take back our government, and our future. Yours in Freedom, William "BJ" Lawson Republican for Congress North Carolina's 4th District Sentiment has indeed shifted. I am starting to expect a blowout in the midterm elections as Voters Strongly Favor Non-Incumbent GOP Newcomers in Midterm Elections. B.J. Lawson Profile Inquiring minds will want to check out where Lawson Stands on the Issues Cut Taxes to Stimulate Job Growth Reduce the Size of Government Reform the Federal Regulatory Burden Reduce Spending to Restore Fiscal Balance Empower Local Education Restore Trust in Government Those are highlights. Click on the above link for details. David Price, his Democratic congressional opponent in the upcoming election admits to not reading or understanding health care legislation before voting. Lawson says "Passing legislation that is not fully understood, or understandable, is simply legislative malpractice. We must demand better of our elected representatives if we are to restore the trust and legitimacy of our federal government." Charles Goyette Interview Please click on this link to download and play this B.J. Lawson Interview with talk show host Charles Goyette. Money is always welcome, but so is your time and energy! Please click here to Volunteer Time or Services to B.J. Lawson. Please do what you can to support B.J. Lawson. He is of a rare Ron Paul mode, and we cannot afford to let any opportunities to elect such candidates slip through the cracks. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Infrastructure Bank: Obama's Desperate Attempt to Win Midterm Democrat Votes; Stimulus Déjà Vu Posted: 06 Sep 2010 11:40 PM PDT The president's pandering to public unions has backfired and now he wants to create an "infrastructure bank" which would be run by the government but would pool tax dollars with private investment. The New York Times reports Obama Offers a Transit Plan to Create Jobs. President Obama, looking to stimulate a sluggish economy and create jobs, called Monday for Congress to approve major upgrades to the nation's roads, rail lines and runways — part of a six-year plan that would cost tens of billions of dollars and create a government-run bank to finance innovative transportation projects. Central to the plan is the president's call for an "infrastructure bank," which would be run by the government but would pool tax dollars with private investment, the White House says. some leading proponents of such a bank — including Gov. Arnold Schwarzenegger, Republican of California; Gov. Ed Rendell, Democrat of Pennsylvania; and Michael R. Bloomberg, the independent mayor of New York — would like to see it finance a broader range of projects, including water and clean-energy projects. They say such a bank would spur innovation by allowing a panel of experts to approve projects on merit, rather than having lawmakers simply steer transportation money back home. "It will change the way Washington spends your tax dollars," Mr. Obama said here, "reforming the haphazard and patchwork way we fund and maintain our infrastructure to focus less on wasteful earmarks and outdated formulas, and more on competition and innovation that gives us the best bang for the buck." Mish Comment: What a bunch of crock. If the president was genuinely interested in keeping costs down he would ask Democrats to scrap Davis Bacon and collective bargaining. The White House did not offer a price tag for the full measure or say how many jobs it would create. If Congress simply reauthorized the expired transportation bill and accounted for inflation, the new measure would cost about $350 billion over the next six years. But Mr. Obama wants to "frontload" the new bill with an additional $50 billion in initial investment to generate jobs, and vowed it would be "fully paid for." The White House is proposing to offset the $50 billion by eliminating tax breaks and subsidies for the oil and gas industry. Mish Comment: If the bill was fully paid for the the President ought to have the balls to say how. In simple terms he is either disingenuous or a blatant liar. Is there not even $50 billion in military spending he could cut? Nothing? After months of campaigning on the theme that the president's $787 billion stimulus package was wasteful, Republicans sought Monday to tag the new plan with the stimulus label. The Republican National Committee called it "stimulus déjà vu," and Representative Eric Cantor of Virginia, the House Republican whip, characterized it as "yet another government stimulus effort." But Governors Rendell and Schwarzenegger, and Mayor Bloomberg, who in 2008 founded a bipartisan coalition to promote transportation upgrades, praised Mr. Obama. And in policy circles, the plan, especially the call for the infrastructure bank, is generating serious debate. Mish Comment: Schwarzenegger and Mayor Bloomberg both have no backbone. Bloomberg panders to unions and until recently Schwarzenegger refused to play hardball. All there are hoping for a large share of the transit plan. There is no shortage of projects in search of money. The problem, analysts say, is that Congress, which would create the bank, is not known for its ability to single out strategic priorities for growth. Instead, it traditionally builds broad support by giving a little something to everybody — Montana, for instance, would get a small amount of Amtrak money in return for its support for improvements along the Northeast corridor. Samuel Staley, director of urban growth and land-use policy for the Reason Foundation, a libertarian research group, said the best way to spend money efficiently would be to establish the bank as a revolving loan fund so that money for new projects would not become available until money for previous projects had been repaid. Mr. Staley expressed concern that in their zeal to spur growth and create jobs, Congress and the Obama administration would not impose such limits. "With the $800 billion stimulus program, they were literally just dumping money into the economy," he said. "There was little legitimate cost-benefit analysis." Mish Comment: There is never a shortage of ways Congress can and will waste taxpayer money. This will not change unless and until there is balanced budget amendment. Until taxes have to be raised to fund projects, Congress and any Business Tax relief In addition to the Infrastructure Bank, Obama to Propose Business Tax Relief, Spending to Spur Growth Obama tomorrow will announce an expanded tax incentive to encourage business investment, an administration official said on condition of anonymity. Obama also will urge Congress to extend permanently and expand a research-and-development tax credit for businesses, costing about $100 billion over a decade. He began the rollout of initiatives yesterday in Milwaukee, calling for $50 billion in the first of a six-year program to fix roads, railways and runways and modernize the air-traffic control system. Elections in less than two months to decide U.S. House seats and about a third of the Senate are focused on unemployment near 10 percent and a budget deficit swelled by the government's financial-system bailout. Obama is traveling this week to Midwestern states where joblessness is hurting some Democratic candidates' chances of getting elected. At an event tomorrow in Cleveland, Obama will propose allowing companies to fully deduct the cost of purchasing equipment such as tractors, wind turbines, computers and solar panels, the official said. In 2008 and 2009, companies could deduct 50 percent of their costs using so-called bonus depreciation. The latest proposal would increase the tax break to 100 percent through the end of 2011 and would make it retroactive to Sept. 8, 2010, the official said. The bonus depreciation measure would cost $30 billion over 10 years. It and the proposed permanent extension of the research tax credit have garnered the support of the business community. Speaking to union members and their families on the Labor Day holiday in the U.S., Obama called for an "infrastructure bank" and requested money to rebuild 150,000 miles (241,400 kilometers) of roads, construct and maintain 4,000 miles of rail and overhaul 150 miles of runways. Senate Republican Leader Mitch McConnell, of Kentucky, responded in a statement that the "latest plan for another stimulus should be met with justifiable skepticism," and "Americans are rightly skeptical about Washington Democrats asking for more money." "Infrastructure programs are always popular for stimulus talk but disappointing in practice," Douglas Holtz-Eakin, president of the Washington-based American Action Forum and a former adviser to the 2008 presidential campaign of Senator John McCain, a Republican from Arizona. Holtz-Eakin also questioned whether Congress will agree to more spending, given signs of growing voter opposition to a deficit that the Congressional Budget Office estimates will reach $1.3 trillion in the fiscal year ending Sept. 30, near last year's record shortfall of $1.4 trillion. 'Politics' "The ratio of politics to substance in this effort is infinite," Holtz-Eakin said. Things are looking very bleak for Obama in the midterm elections, and even Democrats are starting to shy away from many of his policies, including healthcare. For more on Labor Day pandering, please see Labor Day Insanity from Clinton's Secretary of Labor Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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