Mish's Global Economic Trend Analysis

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• Ron Paul Says Sell Gold to Pay Down National Debt? No Chance
• Protests Mount in Spain; Sovereign Debt Crisis to Follow
• Gallup Pegs Underemployment at 19.1%, Same as 1 Year Ago; Gallup vs. BLS Unemployment Rate; Why is the BLS Consistently Lower?
• China’s Real-Estate Developers Struggle with Debt; Servicing China's Total Debt Load is Problematic; Dramatic Slowdown in China Coming

Ron Paul Says Sell Gold to Pay Down National Debt? No Chance Posted: 17 May 2011 08:54 PM PDT People have been sending me an article all evening that says Ron Paul proposes selling gold to pay down the national debt. The article is nonsense and it took me all of 5 seconds to spot the error. Somehow the New York Sun confused Ron Paul with some clown I have never heard of named Ron Utt. Please DON'T consider Selling Gold at Fort Knox Emerges as Next Big Question in Debate on Federal Debt Limit The next big question on the federal debt limit could be whether to start selling the government's holdings of gold at Fort Knox — and at least one presidential contender, Ron Paul, has told The New York Sun he thinks it would be a good move. The question has been ricocheting around the policy circles today. An analyst at the Heritage Foundation, Ron Utt, told the Washington Post that the gold holdings of the government are "just sort of sitting there." He added: "Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak." His comment came in the wake of not only the government having reached the statutory debt limit of $14.29 trillion but also the release of a report by the Heritage Foundation of a report on asset sales. The report outlined how a "partial sales of federal properties, real estate, mineral rights, the electromagnetic spectrum, and energy-generation facilities" might garner the federal treasury $260 billion over the course of the next 15 years. Amazingly this nonsense is circulating, and even more amazing is the fact that several bloggers believed the story. The most ridiculous of the lot comes from Trader Dan's Market Views Those of you out there who believe that Ron Paul can do no wrong, would be well advised to read his comments proposing that the US sell some of its gold reserves to pay its debts. Chalk up a hair-brained idea from the Congressman from Texas. While we are at it, why not just sell off the Brooklyn Bridge, Yosemite, Yellowstone and the Everglades. And to think that I actually believed he was very solid on monetary matters. The Republican party, which by the way has control of the House of Representatives, could simply refuse to raise the debt limit and insist on obtaining strict spending cuts to get the US economic house in order but that would require something that most of our elected representatives do not have. AFter all, all spending bills are required to originate in the House. If the House does not approve the spending bill, the money cannot be spent. Instead the proposal reeks of the same sort of desperation seen by spendthrifts who end up scouring their old dresser drawers and boxes in their closets looking for family heirlooms and other valuables to go hock at the local pawn shop. The very fact that this idea is actually floating around out there fills me with complete disgust and disdain for the political class. These damn fools spent us all into the toilet and now are considering having to sell what belongs to the US citizenry to cover their rear ends. Ron Paul--Buy Gold The above video is the real Ron Paul. I sense a huge apology coming from the New York Sun and others who actually believed this Ron Paul sell gold to pay down the debt story. The US dollar should be backed by gold and Paul has advocated a 100% gold backed dollar. That is vastly different than selling gold to pay down the national debt. How can you have a 100% gold backed dollar if you sell all the gold? Either the Sun has confused Paul with Utt or it has confused what Paul is saying, and so have others that bit on the story. Addendum: I have read the Sun article several times now looking for other possibilities. The only other thing I can come up with is the possibility Paul may have said something to the effect of wanting the government to mint and sell more gold coins, but that does not equate to selling gold reserves to pay down debt. Thus, I keep coming back to the thesis that the Sun is inadvertently mixing statements of Ron Paul with Ron Utt or the Sun has misinterpreted or worse yet, hugely misrepresented a statement Paul said. 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.

Protests Mount in Spain; Sovereign Debt Crisis to Follow Posted: 17 May 2011 12:41 PM PDT My friend Bran emails from Spain... Hello Mish Street protests are starting in Spain. Protesters call for real democracy and an end to corruption and big corporation rule, amongst other things. Organizers estimate the protest yesterday in Madrid was around 25,000. Now there are protests planned in twenty main cities with camp-ins. It seems this is a non-union, non-partisan protest movement, particularly youth. All the best, Bran. Protests Mount Via Google Translate please consider a page of Spanish Protest Articles. Here is a clip from one of them. The protesters who have come on Tuesday to the Puerta del Sol called for 'Real Democracy Ya' have started at 21 hours a meeting to decide if, like yesterday, just camping tonight with tents and bags for their refusal to denounce the political class in general. As "outraged" the demonstrators, mostly young, want to show they are not resigned to the current political parties do nothing against the crisis, and although it is forbidden to camp in the Square Kilometer Zero to be considered illegal occupation of public roads, do not hesitate to repeat the attempt to stay tonight. In the early hours of the night, all that is heard among the audience is screaming "We're not going" as servants of the Security Forces and closely monitor the concentration is carried normally. Video of One Protest Link if embedded video does not play: http://www.youtube.com/watch?v=ar2nmOQZEjw&feature=player_embedded#at=18 10-Year Government Bonds Every week I keep wondering "When will the financial markets turn on Spain?" Every week the answer has been "Not Yet". I strongly suspect this is about to change. 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.

Gallup Pegs Underemployment at 19.1%, Same as 1 Year Ago; Gallup vs. BLS Unemployment Rate; Why is the BLS Consistently Lower? Posted: 17 May 2011 09:52 AM PDT The most recent Gallup survey pegs US unemployment at 9.2%. That is not significantly different from the BLS report at 9.0%. However, the Gallup numbers are not seasonally adjusted the BLS unemployment rate is. Comparing not seasonally adjusted numbers, Gallup shows a .2 percentage point drop in the last year while the BLS reports an improvement of .8 percentage points. Month after month the BLS is consistently lower. Counting part-time workers the Gallup results are even worse. Gallup Pegs Underemployment at 19.1%, Same as 1 Year Ago Please consider Gallup Finds U.S. Unemployment at 9.2% in Mid-May Unemployment, as measured by Gallup without seasonal adjustment, is at 9.2% in mid-May -- down slightly from 9.4% at the end of April. It is also slightly lower than the 9.4% of mid-May last year. Underemployment Down Slightly, but Still High in Mid-May Underemployment, a measure that combines the percentage of unemployed with the percentage working part time but wanting full-time work, was at 19.1% in mid-May -- down from 19.3% at the end of April. Underemployment remains as high as it was in mid-May 2010. Government's U.S. Unemployment Rate Shows Year-Over-Year Decline While Gallup's not seasonally adjusted U.S. unemployment rate suggests little improvement (0.2 percentage points) compared with the same time in 2010, the government's unadjusted results show a year-over-year decline of 0.8 points. Interestingly, Gallup's monthly measures tracked closely to those the government reported in early 2010 but the two trends have diverged since January 2011. The government's not seasonally adjusted unemployment rate is down from last year, even while its data show a total increase between 2010 and 2011 of about 360,000 in the number of Americans employed. This relatively small increase seems closer to what might be expected given Gallup's estimates of the year-over-year change in the unemployment rate as opposed to the government's. Overall, it appears that much of the reason for the decline in the government's unemployment rate over the past year has to do with the approximately 1 million workers who left the workforce -- that is, they stopped looking for work -- between April 2010 and April 2011, and the government's re-benchmarking in January 2011. Gallup's data were not similarly affected by that re-benchmarking. Re-Benchmarking Mirage Re-Benchmarking is nothing more than a euphemism for figuring out ways to exclude people from the workforce, artificially lowering the unemployment rate. The number of people in the BLS category "not in the labor force" has been soaring for years. Gallup Goes on to say ... Gallup's U.S. unemployment data suggest little improvement in the jobs situation from mid-May 2010 to mid-May 2011. This contrasts sharply with the government's not seasonally adjusted unemployment data, which show about a one-point decline. As a result, the question arises as to whether there is significant underlying job growth taking place in the U.S. More important than the year-over-year change in the U.S. jobs situation may be the lack of overall job growth during the first several months of 2011. Gallup data suggest that the improvement in the jobs situation from February of this year through mid-May could be largely due to seasonal hiring factors, given the similar unemployment patterns of 2010 and 2011. This seems consistent with government data showing a seasonally adjusted unemployment rate that began at 9.0% in January 2011, dipped in February and March, but ended up at 9.0% once again in April -- reflecting essentially no improvement in the jobs situation over the first four months of this year. My Analysis Consistent with Gallup I have talked about those "not in the labor force" on numerous occasions, most recently in Digging Still Deeper In Friday's Jobs Report; What's the Real Unemployment Rate? Definition of Unemployed Logically, one might think one would be unemployed if they want a job and do not have a job. However, the official definition of unemployed is you do not have a job, you want a job, and crucially, you have looked for a job in the last 4 weeks. Every month the government reports "alternative" numbers but even though many of the alternate numbers are a more accurate representation of the unemployment rate, the media focuses on the headline number, ignoring millions who have "dropped out of the labor force" simply because they stopped looking for work. 244,000 Jobs Added Last Month, So Why Did the Unemployment Rise? Last month many were surprised to see the jobs report claim 244,000 jobs were added yet the unemployment rate ticked up 2 tenths from 8.8% to 9.0%. The fact is, employment fell by 190,000 according to the Household Survey and another 131,000 people dropped out of the labor force last month or the unemployment would have been even higher. Fewer people (131,000 to be precise) wanted a lob and looked for jobs in April than in March. In the last year, the civilian population rose by 1,817,000. Yet the labor force dropped by 1,099,000. Those not in the labor force rose by 2,916,000. In January alone, a whopping 319,000 people dropped out of the workforce. In February another 87,000 people dropped out of the labor force. In March 11,000 people dropped out of the labor force. In April, 131,000 dropped out of the labor force. The 4-month total for 2011 is 548,000 people dropped out of the labor force. Many of those millions who dropped out of the workforce would start looking if they thought jobs were available. Indeed, in a 2-year old recovery, the labor force should be rising sharply as those who stopped looking for jobs, once again started looking. Instead, an additional 548,000 people dropped out of the labor force in the first four months of the year. Were it not for people dropping out of the labor force, the [U3] unemployment rate would be well over 11%. What's the Real Unemployment Rate? My analysis with what is happening is consistent with Gallup except I have the base unemployment rate higher still. In my article (click on preceding link for details), I factored in various percentages of people "not in the labor force" and put them back in the labor force and come up with a range of unemployment of 10.6% to 11.6%. Of course if you factor in part-time workers the number is higher still. Gallup's estimate of 19.1% seems reasonable. Seasonal Hiring Many make the mistake in translating fewer layoffs following a robust Christmas season as the beginning of a huge turn-around in hiring. I propose something different. In Reflections on the Jobs Report on March 4, 2011, I said "It is very questionable if this pace of jobs keeps up. I rather doubt it in fact. Looking ahead I strongly doubt the reports will be this good over the course of a year." So far, the Household Survey on which the unemployment number is based, agrees. The Unemployment rate ticked up .2 percentage points last month. Time will tell if this uptick is an outlier or the start of a trend. I suspect a trend change. Many factors suggest a rapidly slowing economy. Please see Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected for details. 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.

China’s Real-Estate Developers Struggle with Debt; Servicing China's Total Debt Load is Problematic; Dramatic Slowdown in China Coming Posted: 16 May 2011 11:58 PM PDT Inquiring minds are digging deeper into China's bank credit bubbles, fixed asset investment bubble, and property bubbles. Please consider Closer Look: 100 Trillion Yuan in Banking Assets on Caixin Online. As of 2010, the total assets of China's banking industry have grown to 2.39 times the amount of national GDP, breaking records once again at nearly 100 trillion yuan. In comparison, according to OECD data, Japan's banking assets in 2008 stood at US$ 9.81 trillion, 2.27 times the amount of its GDP, which was US$ 4.32 trillion. Germany, another country representative of economies that rely on banks for financing, had 6.6 trillion euros for banking assets and 2.48 trillion euros for GDP in 2008. Its 2008 banking-assets versus GDP ratio was 2.66, almost the same as it had been in previous years. The surge in China's banking assets, which took off in 2009, was attributed to political directives rather than monetary policies. In 2009, huge amounts of loans were made at the order of government. The central bank did not cut interest rates; in fact, it conducted a net absorption of liquidity from the market through its open market operations. Meanwhile, the market capitalization of domestic stock exchanges more than doubled from a year earlier, an indication of too much capital flowing around. China's Real-Estate Developers Struggle with Debt MarketWatch reports China's Real-Estate Developers Struggle with Debt The debt carried by China's real-estate developers jumped 41% in the March-ended year from the same period 12 months earlier, according to a report by Chinese state media. The value of unsold houses was up 40.2% to CNY903.5 billion, the Xinhua report said. Average profit was down 4.9% to CNY54.65 billion yuan. Chinese government measures designed to cool the housing market have made it harder for real-estate companies to replenish their working capital by quickly selling apartments. China's Unsustainable Growth The above links are thanks to Michael Pettis at China Financial Markets. Pettis commented on those articles, the unsustainable nature of China's loan growth, and the painful rebalancing that must happen in his latest weekly Email. Pettis writes ... The fundamental imbalances are all in place and are not beginning to reverse. They will not reverse until there is a radical change in the growth model, and investment comes down sharply. Unfortunately that will also mean a sharp decline in growth. My friend Wei Liao from Paridon, in Singapore, sent me a reference to an interview in 21st Century Business Herald (a well-regarded local newspaper) with Zhu Bailiang. Zhu is the chief economist at the State Information Center of China, a policy think tank affiliated with the NDRC, and in the interview he argued that the government shouldn't introduce tighter monetary policies because existing limits on car and home purchases will hurt the economy. Zhu is not a policymaker but he is a senior advisor to the very powerful NDRC, an entity usually considered less focused on correcting domestic imbalances and more focused on maintaining high growth and redistributing income to the poorer sectors of the economy. As Wei Liao points out, it is pretty rare that someone from China's economic policymaking circle makes such a comment in the midst of what is supposed to be a tightening cycle. I am also hearing, by the way, that there is a lot of opposition from local and municipal borrowers towards raising interest rates even further – even though in real terms interest rates have decline quite substantially. This shouldn't be a surprise since they have a lot of outstanding debt and are expected to borrow even more this year and next. Servicing the debt is unlikely to be easy and they want more, not less, relief. I would argue that Zhu Bailiang's comments and the rumors of opposition to further interest rate hikes probably indicate that the very intense debate within policy-making circles continues unabated. In fact, on that note, for me the most interesting thing that happened during the SED meetings in Washington this week involved Monday's much-commented interview on the Charlie Rose show with Wang Qishan – who is expected to be named Vice Premier next year. The gossip that I have heard in Beijing is that both Wang and Li Keqiang – expected to be named Premier next year – understand China's debt position, worry that the current growth model is unsustainable, and want to move quickly towards an economic growth model that de-emphasizes investment and exports. They also recognize that this will result in a sharp slowdown in growth – although not nearly as sharp as I expect. But they will not be able to do so without a pretty complete consensus within policy-making circles. A lot of very powerful constituencies – the export sector, local and municipal borrowers, SOEs – have benefited from distortions, like the currency and the interest rate regimes that have created the imbalances. They are likely, not surprisingly, to be loathe to give these up, and so it will not be easy to arrive at a consensus. I have many times argued that historically one of the key indicators that the high-growth investment-driven model has reached its limits as a wealth creator (i.e. is no longer allocating capital efficiently) is when we see an unsustainable increase in debt. Of course whether or not we have reached this point is still much debated, but I would argue that we started to see this at least five years ago. The surge in banking assets doesn't give much comfort. Dramatic Slowdown in China Coming China is going to slow, much more than anyone thinks. The commodity producers and commodity producing countries like Australia and Canada will take a hit. In contrast, the US, Japan, and Europe will benefit from falling oil prices. However global trade in general will slow, as will employment, and corporate profits. We are starting to see a global growth slowdown already. When China joins the siesta, the slowdown will accelerate. For more on the global slowdown, please see Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected The pertinent question now is whether or not the market forces China's hand before the Chinese leadership change next year. I think it is possible, however a sustained drop in oil and commodity prices might be enough to forestall such an event. Regardless, the markets will likely react in advance of that slowdown, whether forced by the markets or by plan of China's new leaders. 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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