Central Perk: Mish's Global Economic Trend Analysis

joi, 19 mai 2011

Mish's Global Economic Trend Analysis

Chris Christie on Sick Pay Payouts: "Only in Government"; What You Can Do To Help
Reflections on the LinkedIn IPO and the Usability of LinkedIn Itself
Mania is Back: LinkedIn IPO Soars as Much as 173% in One Day
Will China Have a Labor Shortage, Sending Inflation Out of Control?
Trichet Goes Ballistic, Walks Out of Meeting Over the Term "Soft Restructuring"; Infighting Over Who Replaces IMF Chief; Some Suggest Trichet

Chris Christie on Sick Pay Payouts: "Only in Government"; What You Can Do To Help

Posted: 19 May 2011 08:10 PM PDT

Most of you know I am a huge fan of Chis Christie. I never tire of listening to what he has to say. Once again he is taking on "big government" with a well reasoned video as to what reform is or isn't.

Please watch Chris Christie on Sick Pay Payouts: "Only in Government"

Partial Transcript

Right now, the total accumulated sick leave liability for governments across New Jersey is $825 million. That is how much we will have to pay out in sick-leave payouts, currently.

If I were to sign a bill that allowed for a $7500 cap, do you know what the bill would be?

The bill would be $3.25 billion. Now, I don't call that reform.

It's not reform when you are going to take the tab you are running up, from $825 million to $3.25 billion.

And how did the number $7500 happen? Just plucked out of the air. So here is the choice the legislature has to make: Are they with you, or are they with special interests?

There is no way to justify paying people cash for not having been sick. Only in government would we do something like this!

If you live in New Jersey, please contact your legislative representative and let them know you are tired of having your taxes raised so that a select few can have benefits that most Americans will never see.

Click here to Contact Your New Jersey Representative.

Alternatively, here is an Interactive Map of New Jersey Legislative Districts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Reflections on the LinkedIn IPO and the Usability of LinkedIn Itself

Posted: 19 May 2011 02:09 PM PDT

In Mania is Back: LinkedIn IPO Soars as Much as 173% in One Day I discussed the mania over the LinkedIn IPO.

I have a few more comments that I also added as an addendum to the above post. ....

Addendum:

People chased the IPO as high as 122.70. After hours the price is down to $92.40. Those who just "had to have it" at any price are now down 24.7%

I suspect insiders will be bailing like mad as soon as the restricted lock-up period is over.

Reflections on LinkedIn

LinkedIn has 100 million accounts. How many are active? How often? For what purpose other than everyone being "linked in" to everyone else?

The key questions are:

How will the growing number of accounts translate into actual earnings?
What valuations will investors place on that growth?

It's fair to point out just because I have little use for LinkedIn at the present time, does not mean others feel the same. Indeed, I may even change my mind and find a use later on.

Merging Profiles

I setup a LinkedIn account primarily because hundreds have asked me to be "Linked In", not because I had a particular need.

In fact, I have two LinkedIn accounts, both in my name, one under an email account I no longer have. I do not know my password for that account. I would like to merge the profiles because people find the wrong (inactive) "Mike Shedlock" profile all the time.

Unfortunately LinkedIn offers no convenient way to merge profiles. Worse yet, I get invites all the time with no real way to reply to them. It is a mess.

People have been bitching about this for something like forever as a search for merging linked in profiles shows.

LinkedIn has a cumbersome solution that involves inviting everyone from one group to another.

Log into your old account and click on My Contacts.
Scroll down to the bottom of that page and click on Export Connections
On the next page make sure that "Microsoft Outlook (.CSV File)" is selected from the drop down menu and then click on Export.
In the pop up window select "Save to Disk" then click on Ok.
Make sure that the file was saved to your computer
Log into your new account and click on "Add Connections" with the green button in the upper left.
On this page click on the link at the top which says 'Import Contacts'.
Choose the source you would like to import from and follow the instructions.
All of your Contacts should now be uploaded. The system will then ask you if you would like to send an invitation to them. Say yes and you have successfully transferred your connections from one account to another.
Then log in to the old account you want to close. Go to "Account & Settings" (top right of page) and select "Close Account" in the right column. Make sure it's the right profile that you want to delete as there is no recovery..
Log into your account - DO NOT change the email at login or you will create a new (different account).
Go to "Account" >> "Personal information" >> "Email addresses".
Add a new email and click on "Verify" so LI will send you an email containing a link.
Then choose the one you want as default. I recommend not using a work email as primary.
Note: If you simply try to change it, you will create a duplicate account.

Got that?

How difficult can it possibly be for LinkedIn to automate that?

I did not bother. I do not want to pester people with LinkedIn requests even though I do not mind others asking to be LinkedIn.

By the way, If I do not reply to your request to be LinkedIn, it is because you found my profile that I no longer have access to.

One Final Point on Income

In order to justify the absurd valuation and growth metrics of LinkedIn, expect to see some high-profile announcements of earnings improvements in the first few quarters to come.

These deals will have been arranged in advance, but that will not make the growth sustainable. However, the paced announcement of stacked-up deals will provide time for insiders to unload shares to greater fools expecting the perpetual growth that is priced in.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mania is Back: LinkedIn IPO Soars as Much as 173% in One Day

Posted: 19 May 2011 12:59 PM PDT

Proving that extreme sentiment can always get more extreme, inquiring minds are focused on the LinkedIn IPO that soared from $45 to as high as $122.70 in a single day.

Please consider LinkedIn stock soars in IPO

LinkedIn's stock (LNKD +126.40%) soared more than 140% to $108.25, valuing the company at roughly $10 billion, as the professional-networking site began trading on the New York Stock Exchange.

Propelled by robust demand leading up to its initial public offering, LinkedIn's IPO priced at $45 a share, at the top end of a recently raised range of $42 to $45 a share. Previously, the IPO pricing range had been $32 to $35.

The Mountain View, Calif.–based company is seen as the first in what could be a wave of social-networking IPOs, which could soon include Facebook and Groupon

LinkedIn announced in March that it reached 100 million members, with more than half of its members based outside the United States. The company said it was seeing its fastest growth in Brazil, Mexico, India and France.

100 Million Members - OK - What about Income?

LinkedIn boasts 100 million members. I am one of them. But what is a member worth? More importantly what kind of income does LinkedIn have, and what will the growth in income be?

Reality Lenses takes up that question in IPO Mania — LinkedIn up 100% in 2 hours

So now, the market cap is in the $9-10 billion while company generated $9 million last year, and is hoping to generate $15 million this year. This means we have a price earnings ratio of about 950 and a forward PER of 650? Is my calculation completely wrong? Or are we back in the twilight zone?

Based on revenues Henry Blodget says Sorry, LinkedIn's IPO Is NOT Proof Of A New Tech Bubble

LinkedIn is an established company. It generated nearly $250 million of revenue last year, and it should do more than $400 million this year. It has three strong revenue streams: consumer premium subscriptions, corporate recruiting subscriptions, and advertising. It earns money. And it has a huge growth opportunity. These reasons and others are why many institutional investors are lining up to buy the stock.

That's about 10-times this year's projected revenue.

Is 10-times revenue a high multiple? Sure it's a high multiple. But it's also a multiple that, depending on LinkedIn's growth over the next couple of years, could be well-deserved.

Is This a Bubble?

In a video in the above link, Blodget went on to say "LinkedIn is a profession product. You do not go there because your friends and family are there?"

OK, it's a profession product. What are the earnings? What are the expected earnings? Will the expected earnings pan out?

Betting on Social Networking

A Seeking Alpha Post by Albert Babayev in January 2011 called Betting on Social Networking discusses revenue and earnings.

Facebook, at the latest valuation of $50 billion, is valued at 25x its 2010 revenue and almost 105x earnings (Apple (AAPL) is 22x earnings). To get to the same earnings multiple as Apple, Facebook would have to quadruple its revenues and increase profits by 500%.

The current model values LinkedIn at 11x current revenue and 56x earnings. Such betting on growth would most likely require Facebook and LinkedIn to introduce additional and unproven layers of paid content to its users.

Currently, investors on SecondMarket.com have an Ask price on the LinkedIn stock at $25/share, or $2.625 billion, which would create a 16% increase in a 6 month period. As LinkedIn continues to introduce new premium channels, my forward estimated price target for LinkedIn is $27.50, which is a 28% increase over its current price.

LinkedIn Table of Earnings, Subscribers, Revenue

click on table to expand

The above table with thanks to Albert Babayev.

Assuming the earning's estimate is accurate we can calculate a PE ratio by dividing $10 billion by $48.139 million. I calculate not 950 but 208.

Regardless looking at expected growth that may not happen, I would call this a bubble. That does not constitute a tech bubble but it sure looks like a bubble in the price of LinkedIn.

Buying linked in at $122 is a bet on the Greater Fool Theory, nothing more, nothing less.

Addendum:

People chased the IPO as high as 122.70. After hours the price is down to $92.40. Those who just "had to have it" at any price are now down 24.7%

I suspect insiders will be bailing like mad as soon as the restricted lock-up period is over.

Reflections on LinkedIn

LinkedIn has 100 million accounts. How many are active? How often? For what purpose other than everyone being "linked in" to everyone else?

The key questions are:

How will the growing number of accounts translate into actual earnings?
What valuations will investors place on that growth?

Log into your old account and click on My Contacts.
Scroll down to the bottom of that page and click on Export Connections
On the next page make sure that "Microsoft Outlook (.CSV File)" is selected from the drop down menu and then click on Export.
In the pop up window select "Save to Disk" then click on Ok.
Make sure that the file was saved to your computer
Log into your new account and click on "Add Connections" with the green button in the upper left.
On this page click on the link at the top which says 'Import Contacts'.
Choose the source you would like to import from and follow the instructions.
All of your Contacts should now be uploaded. The system will then ask you if you would like to send an invitation to them. Say yes and you have successfully transferred your connections from one account to another.
Then log in to the old account you want to close. Go to "Account & Settings" (top right of page) and select "Close Account" in the right column. Make sure it's the right profile that you want to delete as there is no recovery..
Log into your account - DO NOT change the email at login or you will create a new (different account).
Go to "Account" >> "Personal information" >> "Email addresses".
Add a new email and click on "Verify" so LI will send you an email containing a link.
Then choose the one you want as default. I recommend not using a work email as primary.
Note: If you simply try to change it, you will create a duplicate account.

Will China Have a Labor Shortage, Sending Inflation Out of Control?

Posted: 19 May 2011 09:40 AM PDT

An interesting post by Edward Harrison on the Credit Writedowns website suggests a Labour shortage could spell inflation and trade deficits for China

Informed researchers are asking what happens to China based on the recent demographic shift from rural labour surplus to rural labour deficit. The answer may be slower growth and higher inflation, according to a paper released last month by China's Center for Economic Research at Peking University. But other impacts may also be increased consumption and a deteriorating external balance.

The paper by Huang Yiping and Jiang Tingsong is a very technical and dense work based on macroeconomic modelling. But the results are clear: If China's rural labour surplus evaporates (as seems to already have occurred), we are going to see savings drop and productivity collapse.

The paper is based on the work of Sir Arthur Lewis, an economist from St. Lucia.

What Lewis found is that industrial wages rise very quickly when the supply of excess rural labour is exhausted. This is called the Lewis Turning Point and is where China is right now.

This will have major implications for the Chinese domestic economy and the world economy. The first implication is inflation. Without the endless stream of excess rural labour, wages are going to go way up in China and this means inflation will be a problem.

Shortage of Labor? Now?

The situation Harrison describes is based on the document What Does the Lewis Turning Point Mean for China?

The thesis is interesting, but how probable is a labor shortage in China, and in what timeframe? I certainly see no reason to be concerned over a "Lewis Turning Point " now or for that matter any time soon.

However, inflation can certainly happen for other reasons such as rampant credit growth and malinvestment in infrastructure. That said, the Chinese property bubble is likely to pop at any time, and with it China's credit bubble.

Certainly China is overheating now, struggling to find useful work for its citizens. Malinvestment abounds because of it.

Michael Pettis Chimes In

Wanting another opinion, I pinged Michael Pettis at China Financial Markets about the Labor Shortage theory and Pettis responded ...

I think there are many reasons to be concerned about the rapid decline in the Chinese working population over the next decade or two, but I wonder if the Lewisian turning point is one of them.

As I understand it, Lewis' work was based on countries with very different demographic structures -- much younger, rising population as well as rising work population, and "normal" age distributions (i.e. more younger people than older for nearly every age group).

None of this applies to china. This doesn't mean that china might not see soaring wages per worker, and with it inflation, but it does suggest that we should be very skeptical about applying the Lewisian concept to china.

I always worry when economists apply highly technical econometric models to cases that are structurally very different than the cases on which the model was built. It may make for some great research credits, but it also makes for pretty random predictions.

Michael

Thanks for responding Michael!

Rebalancing Through Wage Increases

Also consider a recent post of Michael Pettis Rebalancing through wage increases

I worry about the reasons for rising wages – I suspect that demand for workers is driven primarily by unsustainable and unhealthy increases in the past two years in real estate and infrastructure development, and so is itself unsustainable.

There is one thing we can say with a little more assurance. If wages are rising and interest rates are declining, then there should be transfers of wealth within the economy. Specifically, wealth is being transferred from corporates to households in the form of higher wages, and is also being transferred from households to corporates in the form of lower interest rates. This means that labor-intensive industries are bearing more than the full cost of the adjustment and capital-intensive industries are bearing a negative cost.

If this is the case, we should expect to see a shift in China from labor-intensive growth to capital-intensive growth as the former get squeezed out and the latter profit. Unfortunately that is exactly what seems to be happening.

China isn't yet rebalancing. The way that its growth model works suggests that it cannot happen except with a sharp contraction in investment growth, something we are not seeing, and the empirical evidence so far seems to support the theory. It will probably take a couple of years of this kind of unbalanced growth before this point is more widely recognized, but I suspect that another year or two of stagnant consumption as a share of GDP is finally going to convince policymakers. Until then, expect more of the same, and with it rapidly rising debt levels.

Interesting Questions and Replies to the Article

"RS" had three questions for Pettis.

Do you expect wage 'give-back' in China in the future if indeed home prices fall and input prices go down?
Do you feel that there is beginning to be growing acceptance among the mainstream economists and financiers/investors that China does have a "growth problem" and either growth must slow or the bubble must pop?
Do you think that the commodity markets a signalling anything about Chinese/world growth in the near future?

Pettis Replied ...

1)Yes, but not yet. It will take a decline in investment growth to reduce labor demand.

2)Yes, an increasing if still-minority number of economists now recognize that the growth model is unsustainable, although I am not sure all of them fully understand why it is unsustainable and the role of rising debt. For that reason, I think they misunderstand the nature and difficulty of the adjustment process. I suspect that after another year or two in which consumption growth continues to remain below GDP growth, there will be much greater awareness of how intractable the problems are.

3)This is hard to say, but a Chinese copper trader told me that the recent decline in copper prices was caused at least in part by the decision by the Peoples Bank of China to go after the copper financing schemes.

Lewisian Model Incorrect or Premature

Even if the Lewisian model was reasonable, China's structural problems are currently so great, its infrastructure building so excessive, and its property and credit bubbles so massive, that rather than running out of workers, China's next concern will be how to rebalance and keep its population employed in the slowdown on the near-term horizon.

Global Economy Cooling

The entire global economy is cooling as noted in Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected

China and the US will slow too. I believe a recession is highly likely, yet few see it.

Pettis has been calling for a Chinese slowdown as well. For details, please see China's Real-Estate Developers Struggle with Debt; Servicing China's Total Debt Load is Problematic; Dramatic Slowdown in China Coming

Scapegoating China

However, one reference in Harrison's article caught my eye that I completely agree with. Please consider Roach: GD II awaits if China bashing rhetoric turns into protectionism.

Stephen Roach is pulling no punches now. After quipping "I think we should take the baseball bat out on Paul Krugman" regarding pro-protectionist statements Krugman made earlier this month, Roach has launched a blistering attack on the protectionist rhetoric in America.

In an opinion piece released today in the Financial Times, Roach blamed America's problems on a deficit of savings and warned "scapegoating of China could take the world to the brink... [of a crisis which] would make the crisis of 2008-09 look like child's play."

Of course, Roach is entirely correct. The United States has been living beyond its means for a generation, running up enormous private sector debts and running large current account deficits as investment outstripped savings. America's problem is America, not China.

As Roach points out, the US has a multilateral problem as it is in deficit with 90 countries around the world.

As for protectionism, Michael Pettis makes very good points when dissecting a recent US-China Business Council report. They validate Roach's view that tariffs would just shift the US deficit to other producers. Pettis says:

The failure to recognize that adjustments are more likely to occur via shifts in multilateral trade than shifts in bilateral trade is, I think, the basic problem.

The tariffs or exchange rate change do not necessarily change anything about the US's own aggregate trade imbalance except that the protectionism transfers wealth from domestic consumers to protected producers and decreases consumption demand. This is one reason why protectionism doesn't work.

But the most important reason that protectionism is poison is retaliation. Tariffs, export quotas, subsidies, competitive currency devaluations via quantitative easing and low interest rates and the like all serve to erode the collective sense of mutual dependence. It ends in the kind of spectacle we witnessed in the 1930s with protectionism as a major contributor to economic and social upheaval which ended in a long depression and world war.

On that score I agree with Roach, Pettis, and Harrison. Tariffs, protectionism, and QE I through QE X will not solve a thing.

Nor will all the denials in Europe (Please see Trichet Goes Ballistic, Walks Out of Meeting Over the Term "Soft Restructuring"; Infighting Over Who Replaces IMF Chief; Some Suggest Trichet)

However, Roach's suggestion of taking a baseball bat to Krugman certainly has merit.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Trichet Goes Ballistic, Walks Out of Meeting Over the Term "Soft Restructuring"; Infighting Over Who Replaces IMF Chief; Some Suggest Trichet

Posted: 19 May 2011 01:01 AM PDT

The ECB comedy show continues. Jean-Claude Trichet went ballistic and walked out of a meeting over Jean-Claude Junker's use of the terms re-profiling and "soft restructuring".

Adding to the tenseness, huge infighting is in progress over who will replace Dominique Strauss-Kahn who just resigned as IMF chief. Some suggest outgoing ECB president Jean-Claude Trichet.

IMF Head Strauss-Kahn Resigns, Succession Fight Begins

Bloomberg reports Strauss-Kahn Resignation Kicks Off Succession Fight at IMF

Dominique Strauss-Kahn's resignation as the 10th leader of the International Monetary Fund kicks off a contest on his successor, as European officials seek to retain the job amid a lack of unity among emerging-market nations.

European officials, who have picked the IMF heads for 65 years under a deal that gives the U.S. the lock on running the World Bank, moved to retain their privilege. Sweden's finance minister endorsed his French counterpart Christine Lagarde, while Dutch central bank Governor Nout Wellink suggested outgoing European Central Bank President Jean-Claude Trichet.

South Africa and Russia said yesterday the next head of the IFM should come from an emerging economy. Trevor Manuel, head of South Africa's National Planning Commission, is "highly respected in the world," Finance Minister Pravin Gordhan said in an interview in Pretoria.

Russian central bank Deputy Chairman Sergei Shvetsov said a developing country should be given the chance to run the IMF to better reflect the role of those economies in global trade. South Korea's central bank governor made similar remarks before the announcement late yesterday that Strauss-Kahn would resign.

Trichet Goes Ballistic Over Junker's Reprofiling Suggestion

Euro Intelligence reports ECB goes ballistic on reprofiling

The confusing debate about "reprofiling" or soft restructuring pays testimony to the sheer incompetence of eurozone's finance ministers, who are now effectively talking Greece into a damaging, and most likely contagious default. The FT reports that Jean-Claude Trichet walked out of a recent meeting chaired by Jean-Claude Juncker in protest at Juncker's proposals to reprofile Greek debt.

FT Deutschland reports this morning that Trichet told finance ministers on Monday night that the ECB would respond to a reprofiling by refusing to buy any new Greek debt instruments (meaning it will not be part of any voluntary arrangement in respect of its own Greek debt portfolio). Furthermore, the ECB would refuse to supply the Greek banking system with any further liquidity. (This is something we suspected would happen. A reprofiling would be considered by the rating agencies as a default, which would lead to an instant downgrading of all Greek securities, government and banks, to C, which would make them no longer acceptable to the ECB.) This means that the ECB will effectively boycott Juncker's silly plan. That, in turn, would force Greece to quit the eurozone within days.)

Other ECB executive board members also went nuclear on this issue. Jürgen Stark said a restructuring would destroy the capital of the Greek banking system, and Greek bond would no longer count as acceptable collateral. Lorenzo Bini Smaghi called the term "soft restructuring" an empty slogan.

Trichet the Ostrich

Euro Intelligence thinks Junker's idea is silly. I disagree. The terms reprofile and "soft restructuring" are silly, but the idea Greece will default is certainly isn't. Suggesting default is one of the more sensible things Junker has said recently.

Greece is going to default and the longer the ECB and IMF attempt to forestall that event, the worse the situation will become.

For further discussion, please see ECB Ostrich Maneuver; Euro-Zone Comedy Show: Junker Proposed "Re-Profiling" Greek Debt, Now He Wants "Soft Restructuring"; Targeting Short-Selling

Trichet's Poor Sovereign Debt Decision

Trichet made a huge mistake buying sovereign bonds of Greece. The idea was to "show support" for the bonds and suppress yields. The strategy worked for about a week. Now the ECB is stuck with a pile of garbage and the yield on 10-year Greek bonds is close to 16%.

Former German central bank head Axel Weber warned Trichet about buying sovereign debt but Trichet went ahead anyway. Instead of admitting mistakes, Trichet wants to kick the can down the road one more time. Unfortunately for Trichet, the bond market says "no".

The real fireworks begin as soon as market participants shun Spanish government bonds . That can happen at any time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

joi, 19 mai 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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joi, 19 mai 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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