Mish's Global Economic Trend Analysis

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• Recovery Fades in UK; UK Trade Deficit Hits Record; US Trade Deficit Shrinks; Jobless Claims Drop or Not?
• Goldman Marks Top in Municipal Bond Market?
• Weekly Claims Drop to 451,000, 4-Week Moving Average at 478,000; Where to From Here?
• 65% Fear Double-Dip, 71% Say US is Fundamentally Broken, Net 32% Expect to Reduce Spending

Recovery Fades in UK; UK Trade Deficit Hits Record; US Trade Deficit Shrinks; Jobless Claims Drop or Not? Posted: 09 Sep 2010 07:47 PM PDT The recovery in the UK has faded, with manufacturing, housing, and services all weakening in August. In response the BOE Mulls 'Second Wave' of Stimulus Bank of England Governor Mervyn King may have to embark on a new round of bond purchases as Britain's rebound from the worst recession since World War II fades. Manufacturing, services and construction all faltered in August and the housing market weakened, surveys showed last week. That suggests 200 billion pounds ($309 billion) in bond purchases by the central bank since March 2009 and record-low interest rates may not be enough to keep up the economy's momentum in the deepest budget squeeze in more than six decades. "They are more likely to loosen policy further before they tighten it," Alan Clarke, an economist at BNP Paribas in London, said in a telephone interview. "The danger is acting too late and not soon enough." BNP economist Clarke says Bank of England officials could probably justify further bond purchases using their new forecasts, though the current strength of price pressures makes it less palatable for them as they seek to preserve their inflation-fighting credentials. "Clearly they are concerned that loosening in an environment where the latest GDP figure is 1.2 percent and the latest inflation figure is above 3 percent would undermine their credibility," he said. "That's the trap they're in." Quantitative easing did nothing for the US, nothing for Japan, and nothing for the UK (at least for the real economy). Yet central bankers seem committed to the strategy. UK Trade Deficit Hits Record Economists in the UK were disappointed to see U.K. Trade Deficit Widens to Record The U.K.'s trade deficit widened to a record in July as purchases of chemicals and oil drove imports to the highest level in two years. The goods-trade gap widened to 8.7 billion pounds ($13.4 billion) from 7.5 billion pounds and June, the Office for National Statistics said today in London. The median of 13 forecasts in a Bloomberg News survey was for a 7.5 billion-pound deficit. Exports fell 0.9 percent and imports rose 3.1 percent. While the jump in imports may signal strength in domestic demand, weakening exports suggest the economy is failing to benefit from the weakness of the pound, which has fallen by a about a fifth on a trade-weighted basis since the start of 2007. US Trade Deficit Narrows Economists in the US were surprised to find US Trade Deficit Narrows, Unemployment Claims Drop The trade gap shrank 14 percent, the most since February 2009, to $42.8 billion, the Commerce Department said today in Washington. The deficit was less than the lowest forecast in a Bloomberg News survey of economists. Overseas shipments increased 1.8 percent to $153.3 billion, the highest since August 2008, while purchases from abroad declined 2.1 percent. Economists projected a deficit of $47 billion, according to the median of 73 estimates in the Bloomberg survey. Forecasts ranged from $43 billion to $52 billion. Trade subtracted 3.37 percentage points from growth in April through June, the most since record-keeping began in 1947. The Commerce Department on Aug. 27 lowered its estimate for second-quarter growth to a 1.6 percent annual rate from the previously projected 2.4 percent. A final estimate for the quarter will be released Sept. 30. Increased exports vs. imports will be a positive factor in GDP, so perhaps we will not see a negative 3rd quarter GDP. Nonetheless I expect surprises to be to the downside. Jobless Claims Drop or Not? Weekly unemployment claims fell this week as did the 4-week moving average as noted in Weekly Claims Drop to 451,000, 4-Week Moving Average at 478,000; Where to From Here? One thing I missed was 9 states including California did not track claims because of Labor Day. From the preceding Bloomberg article... Nine states didn't file claims data with the Labor Department in Washington because of the Labor Day holiday, a department official told reporters as the figures were released. California and Virginia estimated their claims, and the U.S. government estimated the other seven. Because of the holiday and more importantly because nine states made estimates, I do not think anyone can trust this drop in claims at all. Look for big revisions next week. 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.

Goldman Marks Top in Municipal Bond Market? Posted: 09 Sep 2010 10:45 AM PDT History shows that whatever Goldman is peddling in a big way to cities, counties, or retail investors, be it interest rate swaps or derivatives, or advice, those investors would be better off not taking it. With that in mind, please consider Goldman in Bond Deal Goldman Sachs Group Inc. is about to start selling municipal bonds directly to mom and pop. The New York company plans to enter a partnership this week with Chicago securities firm Incapital LLC to sell bonds issued by U.S. states, cities and towns to individual investors, according to a person familiar with the situation. The arrangement will make billions of dollars of municipal bonds underwritten by Goldman available for sale by at least 85,000 brokers in Incapital's distribution network of broker-dealer firms. The move allows Goldman to branch out into a lucrative area of the fixed-income markets, a haven for retail investors scared off by volatility in the stock market and riskier corporate credit markets. While some municipalities are facing budget crises, it is rare for municipal bonds to default. Such securities yield more than certificates of deposit or other ultra-safe investments and are tax-free in most cases, making them a staple in retiree savings accounts. Ultra-Safe? Words like "ultra-safe" portend a hint of disaster. Remember when home prices could never go down? Now retail investors are plowing into municipal bonds and municipal bond funds as the next safe-haven. Even if there is not a series of municipal bond disasters coming up, yields are so compressed, that investing in municipals makes little sense. The timing of Goldman Sachs into such offerings is icing on the "best to stay away" cake. Look for Goldman to bet against the worst of the crap they intend to feed to retail investors. 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.

Weekly Claims Drop to 451,000, 4-Week Moving Average at 478,000; Where to From Here? Posted: 09 Sep 2010 10:10 AM PDT Weekly Claims fell this week to 451,000 but that number is still consistent with an economy losing jobs. Please consider the Unemployment Weekly Claims Report for September 9, 2010. In the week ending Sept. 4, the advance figure for seasonally adjusted initial claims was 451,000, a decrease of 27,000 from the previous week's revised figure of 478,000. The 4-week moving average was 477,750, a decrease of 9,250 from the previous week's revised average of 487,000. Unemployment Claims The weekly claims numbers are volatile so it's best to focus on the trend in the 4-week moving average. 4-Week Moving Average of Initial Claims The 4-week moving average is still near the peak results of the last two recessions. It's important to note those are raw numbers, not population adjusted. Nonetheless, the numbers do indicate broad, persistent weakness. 4-Week Moving Average of Initial Claims Since 2007 No Lasting Improvement for 8 Months There has been no lasting improvement since December 2009, eight months ago. The above chart is slightly off, the Fed has not updated the series yet today. The last data point is at 451,000. To be consistent with an economy adding jobs coming out of a recession, the number of claims needs to fall to the 400,000 level. At some point employers will be as lean as they can get (and still stay in business). Yet, that does not mean businesses are about to go on a big hiring boom. Indeed, unless consumer spending picks up, they won't. Questions on the Weekly Claims vs. the Unemployment Rate A question keeps popping up in emails: "How can we lose 400,000+ jobs a week and yet have the unemployment rate stay flat and the monthly jobs report show gains?" The answer is the economy is very dynamic. People change jobs all the time. Note that from 1975 forward, the number of claims was generally above 300,000 a week, yet some months the economy added well over 250,000 jobs. Also note that the monthly published unemployment rate is from a household survey, not a survey of payroll data from businesses. That is why the monthly "establishment survey" (a sampling of actual payroll data) is not always in alignment with changes in the unemployment rate. At economic turns the discrepancy can be wide. With census effects nearly played out, It may be quite some time before we weekly claims drop to 400,000 or net hiring that exceeds +250,000. Want to know why some businesses aren't hiring? Please consider Creating Jobs Carries a Punishing Price Where To From Here? Three weeks ago there was a weekly claims print above 500,000. That number will roll off the 4-week moving average next week. Assuming another 451,000 print next week, the 4-week moving average would be about 465,000 - a decline of another 12,000 or so. Even still, the number will nothing to crow about. Moreover, I am still expecting lots of state cutbacks so that could have an impact. However, claims have been generally in 450,000 range for 8 straight months of sideways movement so we can easily see more of the same. 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.

65% Fear Double-Dip, 71% Say US is Fundamentally Broken, Net 32% Expect to Reduce Spending Posted: 08 Sep 2010 11:59 PM PDT It is quite clear the US economy is sliding back towards recession, if not still in it. The average consumer understands that, yet the average economist doesn't. How is it that the average consumer has a better grip on the economy that the average economist? Regardless of the answer, here are some interesting survey results from Americans Fear "Double Dip" Recession & European Financial Problems. 92% say the US is still in recession 65% fear a 'double dip' recession 57% are fearful about running out of money in the next year 44% could easily see their family slipping into bankruptcy if things get worse 42% say they will spend less money than they did over the last 3 months, while just 10% will spend more. 48% report their personal spending will likely stay even 09% say the US is in a 1930s style economic depression 72% say Europe's financial problems likely to hurt US 42% say that they or their spouse has had wages or salary reduced 34% say they or their spouse lost their job or has been laid off 33% have taken on more hours or another job to try and make ends meet 28% dipped into a planned retirement account like an IRA or 401K because they needed the money 09% have had their house foreclosed on 08% had their child delay college (or graduate school) or drop out to save money 20% expect their personal finances will recover by the end of 2011, 27% say after the end of 2011, 24% say their personal finances won't ever fully recover "Attitudes towards the current economic climate should be very concerning for those who sell consumers goods and services. The perception that the economy is likely slowing down again is leading consumers to tighten their belts and keep their wallets and purses closed. Consumer marketers will need to figure out how to best dial up the perceived value of what they are selling in order to stay on track", said Bradley Honan of StrategyOne. For a discussion of whether or not the recession has ended, please see NBER Likely to say "Recession Ended" July 2009; Assessing the Real Time Probability US Back in Recession At this juncture, the debate as to whether the recession has ended or not is actually moot. The pertinent factor is: If there was a recovery, it now seems over. Looking ahead, attitudes rule. With consumer spending weak and weakening, and now that the stimulus has run its course, the odds the 3rd and/or 4th quarter GDP numbers will be negative are quite high, as are the odds of double digit unemployment numbers by the end of the year. 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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