vineri, 8 iulie 2011

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Michael Pettis Warns of "Virulent Political Turn Against Euro", Adds Clarification to "Gold's Honest Discipline"

Posted: 08 Jul 2011 02:01 PM PDT

In response to Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited I received a nice email from Michael Pettis.
Thanks Mish.

My only quibble is that you might have explained that by "Germany" and "Spain" I simply meant countries whose trade imbalances were seriously distorted in the form of surplus (Germany) or deficit (Spain). Otherwise, some of the discussion might seem a little weird.

There is no question that specie money has an automatic adjustment mechanism, but I am very far from being a proponent of a return to gold or any other commodity-backed money.

It seems to me that Barry Eichengreen's argument is about to be proven in Europe.

When workers were effectively disenfranchised and there was a weak popular understanding of the transmission from monetary adjustment to employment, he argued, it was possible for deflationary adjustments under the gold standard, but this involved a huge cost to workers and small depositors in the form of high and persistent unemployment and banking collapses (after all it is very hard to guarantee depositors under the gold standard).

In the case of well-functioning democracies it will be too politically difficult to enforce adjustment. Workers and middle class depositors will turn against it as soon as the adjustment becomes serious. We will see this in Spain. Spanish workers will tolerate at most one or two more years of this before the political system will turn virulently against the euro.

Michael
Generic Germany

This is one of the things that happen when you take snips. I left out a section where Pettis was not referring to Germany per se, but rather surplus countries in general. Here is the clarifying section.
Let me again, following my practice from last month's newsletter, simplify matters by calling all surplus countries "Germany" and all deficit countries "Spain". Germany and Spain jointly have put into place policies that ensure that Germany runs a large current account surplus and Spain a large current account deficit for many years. As I argued three weeks ago, I think that it is far more likely that German policies rather than Spanish policies created the huge distortions, but for our purposes we can ignore the direction of causality.

As long as Germany runs current account surpluses for many years and Spain the corresponding deficits, it is by definition true there must have been net capital flows from Germany to Spain as Germany bought Spanish assets (which includes debt obligations) to balance the current account imbalances. The capital and current accounts for any country, and for the world as a whole, must balance to zero.
The article from three weeks ago which Pettis refers is How to become virtuous and save more

Lack of Enforcement Mechanism a Major Problem

Pettis is working on an idea to fix trade imbalances, one not involving a return to the gold standard. I may have some details later on.

Lack of an enforcement mechanism regarding trade is an enormous problem. Debts pile up forever, with no way to pay them back. History suggests there is no better enforcement mechanism than gold, so it will be interesting to see what Pettis comes up with.

Europe Will Blow Sky High, Gold Will Soar

I believe Pettis is correct regarding the Euro. Spain, Italy, Portugal, Greece, and Ireland are all in serious trouble. Worse yet, bankers demand more austerity so they can pay back debts to French, German, UK, and US banks.

Europe will blow sky high. Major defaults will come when the population gets fed up enough with austerity and demands change.

When things do blow, I look for gold to soar. The issue, as always, is timing the event.

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.

Italian Yields Hit 9-Year High, Spreads Record High vs. Germany; Italy's Finance Minister in Rent Scandal

Posted: 08 Jul 2011 12:19 PM PDT

It's a good thing "Greece is Saved" so we can all turn our attention to something far more important, like saving Italy.

Italian Government Bond Yield 9-Year High

Bloomberg reports Italian Yields Reach Nine-Year High as Debt Crisis Spreads; Bunds Surge
Italian bonds slid for the fifth straight day, driving yields to a nine-year high, as contagion from Greece's fiscal crisis intensified in the region's biggest government-debt market.

German 10-year yields fell the most since April after U.S. employers added less than a fifth of the workers economists estimated in June. The yield on 10-year Italian securities jumped to a euro-era record over German bunds as data showed industrial production in the Mediterranean nation dropped. Spanish, Irish and Greek bonds also fell.

"If you are talking about a default in Greece where contagion spreads through Ireland, Portugal and Spain, then Italy is the next stop," said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. "Italy has an awful lot of debt."

Italian industrial output declined 0.6 percent in May from April, when it rose 1.1 percent, the Rome-based statistics office Istat said today. Economists had forecast a 0.1 percent decrease, according to the median of 22 estimates in a Bloomberg News survey.
Finance Minister Scandal

RTE reports Italian finance minister in rent scandal
Italian finance minister Giulio Tremonti has found himself in hot water after it was disclosed that his former adviser - facing a possible jail term for corruption - had been paying his rent.

Naples prosecutors revealed late yesterday that Marco Milanese had been paying €8,500 a month for an apartment in Rome that was used by Tremonti.

Tremonti's right-hand man, Milanese resigned from the ministry at the end of June after being implicated in an alleged corruption ring known as 'P4'. The ring involved high-profile figures from the world of politics and economy.

Naples prosecutors called for Milanese - a member of Prime Minister Silvio Berlsconi's People of Freedom party (PDL) - to be imprisoned for his involvement in alleged corruption uncovered during an inquiry.

According to the magistrates, Tremonti's former adviser had received large sums of money - at least €450,000 in cash - as well as jewels, luxury cars and other gifts from a businessman who was being hounded by the law.

Milanese allegedly received kickbacks from two people in exchange for jobs within companies run by the finance ministry.
Tremonti's Future in Doubt

The Financial Times reports Italy's finance minister under fire
Giulio Tremonti's future as Italy's finance minister appeared in doubt on Friday after Silvio Berlusconi, prime minister, launched a public attack on his handling of the centre-right government's proposed austerity package.

The open criticism followed disclosures that Mr Tremonti had been dragged into a widening corruption investigation by magistrates who on Thursday requested the arrest of Marco Milanese, a member of parliament and until recently political advisor to the finance minister.

Friction between Mr Berlusconi and Mr Tremonti has been a constant theme since the centre-right government came to office three years ago, with the latter seen as one of several contenders to head a new government should the prime minister be forced to resign as a result of his personal scandals and court trials.

Tensions have come to a head over Mr Tremonti's insistence on austerity in eliminating the budget deficit, and his reluctance to endorse tax cuts demanded by the prime minister. Mr Berlusconi's attempted use of the budget law to insert a clause potentially favouring his Fininvest media empire has also soured relations between the two.

"You know, he [Tremonti] thinks he's a genius and that everyone else is stupid," the billionaire prime minister said. "I put up with him because I've known him for a long time and one has to accept the way he is. But he's the only one who is not a team player."
Italy 10-Year Government Bonds



Germany 10-Year Government Bonds



Widening Spread

Spread is easy enough to calculate: 5.27 - 2.83 = 2.44.

Italy has nearly as much debt as Germany, in an economy nowhere near as big.

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.

Payroll Stunner Full "Pathetic" Jobs Report - Many Charts

Posted: 08 Jul 2011 10:08 AM PDT

Thoughts on the Jobs Report Thoughts on the Jobs Report

Last month I commented things are awful at first glance and simply bad beneath the surface. This month things took a huge turn for the worse.

Three months ago I commented "It is very questionable if this pace of jobs keeps up." Clearly it didn't, for the second straight disastrous month. Certainly this cannot all be blamed on the Tsunami in Japan. The entire global economy is slowing rapidly as I have commented numerous times.

Economists projected a drop in the unemployment rate, I called for a rise to 9.2%.

Few were prepared for today's grim numbers.

  • US Payrolls +18,000
  • Last Month Quietly Revised Lower to +25,000 from +54,000
  • US Unemployment Unexpectedly Rises +.1 to 9.2% Despite Drop in Participation Rate
  • Since March, Number of Unemployed Rises by 545,000
  • Household Survey Number Unemployed Up 173,000
  • Household Survey Number of Employed Down 445,000
  • 272,000 people dropped out of the labor force, reversing the labor force gain of 272,000 last month.
  • Average Weekly Workweek Drops by .1 Hours
  • Average Manufacturing Hours Drops by .3 Hours
  • Average Private Hourly Earnings Decrease 1 Cent
  • There has been virtually no improvement in part-time employment in a full year. 8.5+ million workers want a full time job and cannot find one.


Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

Digging deeper into the Household Survey, we see some more interesting data. In the last year, the civilian population rose by 1,799,000. Yet the labor force dropped by 263,000. Those not in the labor force rose by 2,063,000.

Last month the labor force rose by 272,000. This month the labor force fell by 272,000. How's that for symmetry?

The 6-month labor force total for 2011 is +4,000.

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, the labor force is not expanding at all.

Were it not for people dropping out of the labor force for the past two years, the unemployment rate would be well over 11%.

June 2011 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) June 2011 Employment Report.

Nonfarm payroll employment was essentially unchanged in June (+18,000), and the unemployment rate was little changed at 9.2 percent, the U.S. Bureau of Labor Statistics reported today. Employment in most major private-sector industries changed little over the month. Government employment
continued to trend down.

Unemployment Rate - Seasonally Adjusted



Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted

Notice that employment is lower than it was 10 years ago.

Nonfarm Employment - Payroll Survey - Monthly Look - Seasonally Adjusted



click on chart for sharper image

Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

Ignoring the effects of the census, in the last 9 months of a recovery 2 years old, the economy is averaging 130,000 jobs a month. That is very poor as recoveries go.

Statistically, 127,000 jobs a month is enough to keep the unemployment rate flat.

Nonfarm Employment - Payroll Survey Details - Seasonally Adjusted



Average Weekly Hours



Index of Aggregate Weekly Hours



Average Hourly Earnings vs. CPI



"Success" of QE2

  • Average hourly earnings of all private-sector employees declined by 1 cent in
    June to $22.99; over the year, the series has increased 1.9 percent.

  • The consumer price index for all urban consumers (CPI-U) was up 3.4 percent
    over the year ending in May.


Not only are wages rising slower than the CPI, there is also a concern as to how those wage gains are distributed.

BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The BLS has moved to quarterly rather than annual adjustments to smooth out the numbers.

For more details please see Introduction of Quarterly Birth/Death Model Updates in the Establishment Survey

In recent years Birth/Death methodology has been so screwed up and there have been so many revisions that it has been painful to watch.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011



BLS Back in Outer-Space

Do NOT subtract 131,000 from the headline number. That is statistically invalid. However, in my estimation the BLS is back in outer-space.

It is clear the economy is slowing and the BLS model has not picked it up. The model is horrendously wrong at economic turns.

Household Data



click on chart for sharper image

In the last year, the civilian population rose by 1,799,000. Yet the labor force dropped by 263,000. Those not in the labor force rose by 2,063,000.

Last month the labor force rose by 272,000.

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Table A-8 Part Time Status



click on chart for sharper image

There has been virtually no improvement in part-time employment in a full year. 8.5+ million workers want a full time job and cannot find one.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.



click on chart for sharper image

Distorted Statistics

Given the total distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is hard to discuss the numbers.

The official unemployment rate is 9.2%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

While the "official" unemployment rate is an unacceptable 9.2%, U-6 is much higher at 16.2%.

Things are much worse than the reported numbers would have you believe, and for the second consecutive month the beneath the surface numbers were bad-to-awful.

Note that U3 rose from 9.1% to 9.2% while U6 rose from 15.8% to 16.2%. Thus, the official measure rose .1, while the alternative measure rose .4.

This is an "artifact" of 272,000 people dropping out of the labor force this past month.

Also note that the unemployment rate is barely better than it was a year ago. It would actually be worse than a year ago were it not for people dropping out of the labor force.

This was a pathetic jobs report.

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.

Payroll Stunner: Unmitigated Disaster, US Payrolls Rise 18,000; Unemployment Rate Unexpectedly Rises to 9.2%; Grim Details

Posted: 08 Jul 2011 08:03 AM PDT

I will have a full report later the morning but in the meantime, here are a few grim details of Friday's jobs report.

  • US Payrolls +18,000
  • Last Month Quietly Revised Lower to +25,000 from +54,000
  • US Unemployment Unexpectedly Rises +.1 to 9.2% Despite Drop in Participation Rate
  • Since March, Number of Unemployed Rises by 545,000
  • Household Survey Number Unemployed Up 173,000
  • Household Survey Number of Employed Down 445,000
  • Average Weekly Workweek Drops by .1 Hours
  • Average Manufacturing Hours Drops by .3 Hours
  • Average Private Hourly Earnings Decrease 1 Cent


Take The Way Under

Two days ago, in "Hamster Wheel Economy" I said ...
Going Nowhere Fast

Despite the alleged "improvement" in jobs, TrimTabs describes the economy as a "Hamster Wheel Economy" -- the hamster runs faster and faster in its wheel but goes nowhere.

Don't Count on a Big Rebound

The "rebound" in employment will only cheer the markets if there is a significant rebound. Last month the BLS report was +54,000 jobs.

I except to see a rebound above that anemic total. However, I will take the "way under" line on Trimtabs +171,000 jobs estimate for Friday's jobs report. Anything under +125,000 and the unemployment rate is likely to tick up, perhaps significantly.
It looks like the "way under" was correct. Indeed, the way, way, way under was correct.

Proving once again what an optimist I am, I thought we would beat last month's total. We could not even beat last month's revised lower total.

My usual report will follow shortly.

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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