Mish's Global Economic Trend Analysis

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• Trichet Hikes, Two More Expected; Bank of England Holds; Fundamental Factors Affecting Currencies; Is Trichet's Move the Right Move?
• Too Many Bureaucrats and They Are Paid Too Much - Part II
• Vibrant to Vacant: Mall Vacancies Highest in 11 Years; Online Retail Sales Hit 12%

Trichet Hikes, Two More Expected; Bank of England Holds; Fundamental Factors Affecting Currencies; Is Trichet's Move the Right Move? Posted: 07 Apr 2011 11:57 AM PDT For the first time in 40 years, the European benchmark rate has risen before the US. ECB president Jean-Claude Trichet is concerned about wage growth fueling inflation. There may be reasons to hike, but wage growth is not one of them. For starters, the only place wages are likely to rise is Germany. Secondly, the idea that wage growth causes inflation is potty. After months of denial, Portugal is asking for a bailout. The next step is negotiating the terms. Like the Fed, the Bank of England is standing pat. BOE Governor Mervyn King has placed recovery ahead of inflation. All of these items have been expected. ECB Hikes Benchmark Rate to 1.25%, More Hikes Expected Trichet hiked rates as expected. He had been signaling the move for months. Moreover, Trichet Leaves Door Open to Further Rate Moves. Inflation risks remain on the upside and the ECB's monetary policy is still "accommodative," Trichet said at a press conference in Frankfurt after lifting the benchmark rate by a quarter percentage point to 1.25 percent. While "we did not decide it was the first in a series of interest-rate increases, you know from our own doctrine that we always do what is necessary to deliver price stability over the medium term," he said. While bonds erased declines and the euro initially fell after Trichet's comments as some investors pared bets on rapid rate increases, markets still expect the ECB to raise its benchmark to 1.75 percent by the end of the year, Eonia forward contracts show. The ECB joins central banks in China, India, Poland and Sweden in raising interest rates even as the Federal Reserve remains reluctant to tighten amid divisions among its policy makers. The Bank of England and the Bank of Japan today left their key rates unchanged at 0.5% and 0.1% respectively. Today's ECB increase is the first since July 2008 and also the first time in 40 years that Europe's benchmark has risen before the U.S. equivalent. "The ECB is setting rates in relation to Germany," said Vicky Pryce, managing director of FTI Consulting Inc in London and a former adviser to the U.K. government. "It's a bold move, but a wrong one," she said, adding Greece, Ireland, Portugal and possibly Spain "need a rate increase like a hole in the head." Is Trichet's Move the Right Move? There is no doubt Trichet has adopted a "One Size Fits Germany" Policy. Is that the right move? The answer to the question depends on whether you look at things from the point of view of Germany or from the point of view of Greece, Ireland, Portugal and Spain. Moreover, and more importantly, Trichet and the ECB should not be making these decisions in the first place. Interest rates should be set by the free market. Bear in mind that bureaucrats, not a free market dreamed up the EU currency union without fiscal controls, thereby ensuring "one size does not fit all". Whatever the ECB does, it is highly likely to screw up one or more European countries. Is this any way to set rates? Portugal Needs $100-$110 Billion Bailout After months of denial, soaring interest rates forced Portugal's hand. Portugal's Socialist prime minister, José Sócrates, bowed to market pressures Wednesday night, requesting a bailout. The New York Times Reports Next Step for Portugal: Negotiating a Bailout Portugal's Socialist prime minister, José Sócrates, bowed to market pressures on Wednesday night and requested a bailout from the European Commission, joining Greece and Ireland. The rescue call, however, comes amid a leadership vacuum in Portugal that might not even be resolved by a general election on June 5. Mr. Sócrates resigned last month when center-right opposition lawmakers led by the Social Democratic Party rejected his austerity package. One estimate by a European official put Portugal's needs at about 75 billion euros ($106.5 billion), but some analysts have suggested that the amount could be as much as 110 billion euros. Last year, Greece secured a rescue package worth 110 billion euros and Ireland 85 billion euros. But consensus among Portugal's political leaders will not be easy. While opposition leaders agree that Portugal needs a bailout, policy makers in Lisbon know they will must get all sides to support the austerity measures that will be demanded by the international lenders. To complicate matters, the negotiations are taking place in the midst of an election campaign that will probably be dominated by the question of who is to blame for Portugal's predicament. The leader of the main Social Democratic opposition party, Pedro Passos Coelho, supported the decision to seek outside help, but he and Mr. Sócrates are blaming each other for forcing Portugal to seek a bailout in the first place. If the pattern of previous bailouts is repeated, it could take several weeks for a team of Brussels and perhaps International Monetary Fund officials to discuss the conditions of a bailout with Lisbon, which will ultimately need to be approved by European finance ministers. Bank of England Holds Rates Bloomberg reports Bank of England Holds Rate, Putting Recovery Before Inflation The Monetary Policy Committee, led by Governor Mervyn King, set the key rate at 0.5 percent for a 26th month, as forecast by all 57 economists in a Bloomberg News survey. It also left its bond-purchase program at 200 billion pounds ($327 billion), as predicted by all 32 economists in a separate poll. U.K. gross domestic product rose 0.7 percent in the first quarter after a 0.5 percent drop in the previous three months, the National Institute of Economic and Social Research estimated yesterday. The group, whose clients include the Bank of England and the U.K. Treasury, said underlying growth remains "weak." The British Chambers of Commerce this week said first- quarter growth was probably between 0.6 percent and 0.7 percent. It said this is weaker than expected and adds to the argument that the Bank of England should delay raising its key interest rate, which has been at 0.5 percent since March 2009. At the Bank of England's March meeting, Andrew Sentance called for a 50 basis-point increase, while Martin Weale and Spencer Dale voted for a 25-basis-point move. Adam Posen maintained his call to expand stimulus with more bond purchases. The minutes of today's meeting will be published on April 20. Investors have priced in a 25 basis-point jump in the rate by July, according to forward rates on the sterling overnight interbank average, or Sonia, compiled by Tullett Prebon Plc. "The MPC is in a very cautious mood, but it will have been a very close call," Joost Beaumont, an economist at ABN Amro Bank NV in Amsterdam, said before the announcement. "I still hold on to the view they will hike in May. Data have been relatively upbeat recently." Mute Market Reaction All of today's actions were expected. Currencies are essentially flat across the board but the Euro is down slightly. Fundamental Factors Affecting Currencies Should the ECB not hike twice more as expected, or should the sovereign debt crisis renew with concerns about Spain, expect the Euro to weaken. I believe a sovereign debt crisis led by Spain and Ireland will resurface. Timing is unknown. Should the Bank of England delay rate hikes past May, expect the British Pound to weaken. Expect the Yen to weaken if Japan does not pass tax hikes to raise money to pay for earthquake, tsunami, and nuclear damage. Expect the Australian dollar to weaken if the Reserve Bank of Australia cuts rates. I do expect rate cuts as the Australian housing bust picks up steam. Should Republicans manage to cut the US deficit or the Fed to signal a change in stance, expect the dollar to strengthen. A Bernanke signal for QE III would certainly be dollar bearish and very bullish for gold. Terminating QE policies would likely be dollar bullish. Finally, sentiment, is amazingly bearish towards the US dollar (I believe unjustifiably so). Extreme sentiment is seldom rewarded, but once again timing is unknown. 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.

Too Many Bureaucrats and They Are Paid Too Much - Part II Posted: 07 Apr 2011 10:36 AM PDT In response to Too Many Bureaucrats and They Are Paid Too Much I received an email from reader "Kurt" saying "Please get a grip". Kurt thinks the size of government is not a problem. Here is the video Kurt was responding to. The video is from Daniel J. Mitchell, Ph.D. Senior Fellow, The Cato Institute. I am a big fan of the Cato Institute. They stand for Individual Liberty, Free Markets, and Peace. Those are three admirable goals. Proving that some people can neither read nor think, Kurt sent a graph from Calculated Risk regarding Government Employment Since 1976. Interestingly, the Cato video posted a similar chart then went on to dispute it three ways, first by salary, second by mentioning quasi-government employees, and third by pointing out figures do not include military employees, postal workers, subsidy recipients, or contract jobs. Here is a chart from the video. Those numbers are from 2005. Care to guess where those numbers are now? Here is another way of looking at things Manufacturing and Construction vs. Government Employment Quasi-Public Jobs Bear in mind the government employment numbers do not include "Quasi-Public" jobs. Please consider Current Decade of Job Losses vs. Great Depression; How Did Quasi-Public Jobs Fare? Who is Whining? Public and Quasi-Public Jobs vs. Everything Else Please see Mandel's article for a state-by-state breakdown. Who is Doing all the Whining? Who is doing all the whining and all the pissing and moaning? The answer of course is those who fared the best in the last decade: the police and fire unions, the teachers' unions, transit unions, and public unions in general. Many in private sector fields have been hammered silly with rapidly rising healthcare costs and lower paychecks (assuming they have a job at all). Meanwhile those with the most benefits and those who have suffered the least are the ones unjustifiably bitching to high heavens about how unfairly they are being treated. The above chart is from A Decade of Labor Market Pain by Mike Mandel. March 2000 vs. March 2011 Let's look at this one final way. Let's compare Establishment Data from March 2000 to Establishment Data March 2011. Government workers in 2000: 20.944 million Government workers in 2011: 22.547 million Private workers in 2000: 109.080 million Private workers in 2011: 107.360 million In the last 11 years government employment rose by 1.603 million In the last 11 years government employment rose by 7.65% In the last 11 years private employment fell by 1.72 million In the last 11 years private employment fell by 1.58% Once again, recall that government jobs exclude military, post office, and contract work. Amusingly the person who wrote me said I need to "get a grip". No Kurt, you need to listen to what the video said, then think. Anyone who thinks government bureaucracy is not massive is simply not thinking. The same applies to anyone who thinks government workers are not overpaid. 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.

Vibrant to Vacant: Mall Vacancies Highest in 11 Years; Online Retail Sales Hit 12% Posted: 07 Apr 2011 02:35 AM PDT Online retail sales keep climbing, big box retailers keep wondering what to do with all their space, and small stores struggle to survive at all. As a result of that nasty brew, Malls Face Surge in Vacancies. Mall vacancies hit their highest level in at least 11 years in the first quarter, new figures from real-estate research company Reis Inc. showed. In the top 80 U.S. markets, the average vacancy rate was 9.1%, up from 8.7%. The outlook is especially bad for strip malls and other neighborhood shopping centers. Their vacancy rate is expected to top 11.1% later this year, up from 10.9%, Reis predicts. That would be the highest level since 1990. In the Denver suburb of Westminster, Colo., city officials are negotiating to buy and raze the 34-year-old Westminster Mall and redevelop it into offices, homes and stores. The 1.2-million-square-foot mall, once home to a Macy's, Trail Dust Steak House and Mervyn's, has seen its sales-tax generation plummet in recent years, to $1.5 million last year from $8.5 million in 2000, city officials say. The mall went "from a place that was once vibrant to something that is now virtually vacant." Shopping Center Economic Model In 2005, the mall-vacancy rate hit a low of 5.1%. For strip centers the boom-time low vacancy rate was 6.7% that same year. On April 18, 2008 I wrote Shopping Center Economic Model Is History Lease rates are going to sink, vacancies are going to soar, and the oncoming supply of mall space with no tenants is going to bankrupt many regional banks that funded such construction. The shopping center economic model will soon be history. Bank Failures Inquiring minds may be interested in a recap of Bank failures in the United States 2008–2011 2008: 25 2009: 140 2010: 157 2011: 26 Only So Many Shoppers A couple weeks ago I was contacted by a reporter in Las Vegas about a new mall going up in the city. I told him the obvious: There are only so many shoppers. What good can a new mall do? During construction it will provide a few jobs. Then what? Then instead of shopping at the old mall people start shopping at the new mall. No one buys any more stuff. Shopping Center Dynamics Ironically, is quite common for city councils to give huge tax breaks to new businesses that "create jobs". Mayors love ribbon-cutting events like mall openings. Then a few years down the road if not sooner, everyone wonders where the jobs are and why expected sales tax revenues did not materialize. There is no need to wonder. The answer should be easy to spot in all the vacant strip-malls and closed stores elsewhere. To be sure, there are some city revivals, but those come at the expense of shoppers staying local rather than driving to the nearest town . The reverse also happens. People travel to the new mall in the neighboring city rather than shop local. This dynamic ensures that malls and strip-malls go up everywhere until there is a crash, which is precisely where we are now. Online Sales Compound the Mall Problem A few years back online sales were about 6% of total sales. Online sales hit 12% this past Christmas. State and local governments are more than a bit upset about the lost sales tax revenue. Malls and big box retailers are upset too. Everyone hates Amazon, except Amazon customers. Big box retailers have a glut of space and many are starting to shrink the number of items they carry. However, every item they do not carry that someone wants to buy, is another item someone will decide to buy online. Yet, every online purchase is one less trip and fewer miles on the car. Thus online shopping also impacts gasoline sales, gasoline tax collection, and car maintenance. Demographics The population is getting older. In advanced years, much of what people buy is health- or food-related, not gadget-related or travel-related. A certain set of people never became comfortable with the internet and internet shopping. Younger generations have no aversion to buying online or not buying at all. Those fresh out of college are deep in debt and struggle to pay that debt off. As boomers head into retirement many are scared half to death about insufficient savings. Their peak shopping years are now well behind them. One bright spot lately has been a revival in luxury items. However, that has largely been a result of the stock market revival. Should there be a sustained relapse in the stock market, luxury sales will take another dive as well. In light of the above, I see no sustainable revival in the shopping center economic model for years to come. 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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