Mish's Global Economic Trend Analysis

Mass Layoffs Rise; One Million Robots to Replace Workers; Looking Ahead: Dismal Job Situation No Matter What Job Report Shows
Asia-Pacific Bloodbath Round II; Australia -4%, Hong Kong -4%, Indonesia -5%, Japan -3%, South Korea -3%, Taiwan -4%; Late-Night Global Headlines
Oil Wipes Out Gains for the Year
Bank of New York Mellon to Slap Fees on Big Deposits Following "Global Dash For Cash"; When was Hyperinflation Supposed to Start?
In Commodities Bloodbath Gold Holds Up Well; Equities Plunge 4%; Dow Drops 512 Points; Crashes Happen When "Oversold"
Another Major Feud Between the German Central Bank and the ECB Over Resumption of Bond Purchases; Will Germany Leave the Euro?
Yields in Spain, Italy Surge After Hope of ECB Intervention Dies; Italy 15-Year Yield Highest on Record; How Much More "Success" Can the ECB Take?
Eighty-Five Australian Building and Construction Firms Go Under in a Month; Crazy to Buy a House in Australia Now
Global Currency Wars Enter New Stage; Brazil Calls Off Truce, South Korea Reviews "All Possibilities", Philippines Threatens "Prudential Limits"

Mass Layoffs Rise; One Million Robots to Replace Workers; Looking Ahead: Dismal Job Situation No Matter What Job Report Shows

Posted: 04 Aug 2011 09:52 PM PDT

A good jobs report on Friday (if we get one) is now meaningless. Looking ahead, the jobs situation is bleak globally, not just in the US. Here is supporting evidence for my statement.

Planned Layoffs Surge In July

Challenger says Planned Layoffs Surge In July

August 3, 2011: For the past three months, American companies have been cutting their workforce in increasing numbers, according to a new report from Challenger, Gray & Christmas, an outplacement consultancy group in Chicago. In July, the number of planned job cuts surged to a 16-month high of 66,414 — a 60 percent increase from June.

"We're beginning to see patterns that are disconcerting, and the really troubling part is this: Nothing is happening in the economy which is going to boost job growth," said Christine L. Owens, executive director of the National Employment Law Project.

With the exception of slight improvement last week, new weekly unemployment claims have topped 400,000 a week for more than three months — the level generally considered the dividing line between an improving labor market and a stagnant one. Likewise, the number of job openings dropped in June and July, according a firm that tracks online job postings. Another telling piece of the puzzle: The number of temporary workers — whose fortunes are closely watched as an indicator of employers' future hiring intentions – dipped between May and June, according to the Bureau of Labor Statistics.

For the record, last week's dip below 400K initial claims was revised up. It has been 17 consecutive week of +400K initial claims.

40,000 European Bank Positions Targeted

Marketwatch reports 40,000 positions are targeted; Swiss firms hit by soaring franc

A running tally of planned job cuts by European banks reached around 40,000 Tuesday, little more than halfway though earnings season, as firms that failed to control costs or were over-optimistic about growth make the deepest cuts.

Most of those cuts are in Europe but a slowdown in Europe means a slowdown in US exports. Moreover, one can expect similar cuts in the US as soon as banks are forced to mark assets to market.

HBSC, Credit Suisse, Goldman Sachs, Morgan Stanley Announce Cuts

The New York Times reports HSBC to Trim 30,000 Jobs in Cost-Cutting Move

August 1, 2011: HSBC, the big European bank, said Monday that it was cutting 30,000 jobs, as part of a wide-ranging cost-cutting program to improve profitability.

HSBC is the latest bank to announce job cuts amid regulatory uncertainty and global economic weakness. Credit Suisse said last week that it planned to eliminate 2,000 positions, or 4 percent of its jobs. Goldman Sachs and Morgan Stanley are also reducing their head counts.

That 30,000 is part of the 40,000 reported above.

Merck To Cut Up To 13,000 Jobs

The Wall Street Journal reports 2nd UPDATE: Merck To Cut Up To 13,000 Jobs, Reports 2Q Net Gain

Merck & Co. (MRK) said Friday that it would widen its cost-cutting measures by eliminating up to 13,000 jobs--on top of the 17,000 layoffs in prior actions--as the drug maker responds to generic competition and other challenges by shifting resources to emerging markets.

I would be very surprised to see this "contained" to Merck. Should Congress do something rational, such as allow drug imports from Canada, there could be a bloodbath in pharmaceuticals.

Mexicans Return Home

The jobs situation in the US is so bleak in California, Mexican economy draws undocumented immigrants home

There are fewer undocumented immigrants in California – and the Sacramento region – because many are now finding the American dream south of the border.

"It's now easier to buy homes on credit, find a job and access higher education in Mexico," Sacramento's Mexican consul general, Carlos González Gutiérrez, said Wednesday. "We have become a middle-class country."

Mexico's unemployment rate is now 4.9 percent, compared with 9.4 percent joblessness in the United States.

An estimated 300,000 undocumented immigrants have left California since 2008, though the remaining 2.6 million still make up 7 percent of the population and 9 percent of the labor force, according to the Public Policy Institute of California.

Mexican citizens returning home is a good thing. That they are returning home because of exceptionally poor economic conditions in the US is not.

One Million Robots to Replace Workers

Please consider Foxconn to replace workers with 1 million robots in 3 years

Taiwanese technology giant Foxconn will replace some of its workers with 1 million robots in three years to cut rising labor expenses and improve efficiency, said Terry Gou, founder and chairman of the company, late Friday.

The robots will be used to do simple and routine work such as spraying, welding and assembling which are now mainly conducted by workers, said Gou at a workers' dance party Friday night.

The company currently has 10,000 robots and the number will be increased to 300,000 next year and 1 million in three years, according to Gou.

Foxconn, the world's largest maker of computer components which assembles products for Apple, Sony and Nokia, is in the spotlight after a string of suicides of workers at its massive Chinese plants, which some blamed on tough working conditions.

The company currently employs 1.2 million people, with about 1 million of them based on the Chinese mainland.

Manufacturing Jobs Vanish in "Creative Destruction"

People blame China for stealing jobs. While that is partially true, the bigger picture is "creative destruction".

Many manufacturing jobs are simply vanishing period. They no longer exist. Robots and technology do the work.

Flashback August 27, 2009: Creative Destruction

[My friend] BC writes:
See chart 5 illustrating the conditions persisting during Japan's slow-motion, deflationary, debt-deleveraging depression from the mid-to-late '90s when the Japanese Boomer demographic drag and persistent price deflation took hold. I strongly suspect that we will experience a similar pattern between private and public debt/GDP.

We could see bank lending/GDP return to the 30% long-term average area from today's peak of 50-51% (and bank real estate loans/GDP of 27% vs. the long-term average 10-11%).

If so, we are likely to see little or no bank lending growth, which in a debt-money economy means little or no GDP growth and further mass-consolidation of capacity and debt defaults or gradual pay down.

Instead of "recovery" or "expansion", we should think in terms of a Schumpeterian Depression phase of the Long Wave trough, characterized as a debt-deflationary, deleveraging, demographics-induced no-growth regime.

Long-term 3.3% real GDP growth has decelerated to ~1.5%, and I expect average growth from the '00 peak to the mid- to late '10s to decelerate further to 1% or below.

The bottom line is that private debt-based growth is simply not possible, whereas any "growth" we do experience will be as a result of incremental government borrowing and spending, most of which will be in the form of war spending, bailouts, and social service transfers at very low GDP multiplier.
Schumpeterian Depression

Inquiring minds might be interested in concepts like Creative Destruction.
The economic concept of creative destruction was first introduced by the Austrian School economist Joseph Schumpeter.

Theory and Examples

Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs. Wal-Mart is a recent example of a company that has achieved a strong position in many markets, through its use of new inventory-management, marketing, and personnel-management techniques, using its resulting lower prices to compete with older or smaller companies in the offering of retail consumer products.

Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward, FedMart, Woolworths) were eventually undone by nimbler and more innovative competitors, Wal-Mart faces the same threat. Just as the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, itself being undercut by MP3 players, the seemingly dominant Wal-Mart may well find itself an antiquated company of the past. This is the process of creative destruction.

Other examples are the way in which online free newspaper sites such as The Huffington Post and the National Review Online are leading to creative destruction of the traditional paper newspaper. The Christian Science Monitor announced in January 2009 that it would no longer continue to publish a daily paper edition, but would be available online daily and provide a weekly print edition.

The Seattle Post-Intelligencer became online-only in March 2009. Traditional French alumni networks, which typically charge their students to network online or through paper directories, are in danger of creative destruction from free social networking sites such as Linkedin and Viadeo.

In fact, successful innovation is normally a source of temporary market power, eroding the profits and position of old firms, yet ultimately succumbing to the pressure of new inventions commercialized by competing entrants. Creative destruction is a powerful economic concept because it can explain many of the dynamics of industrial change: the transition from a competitive to a monopolistic market, and back again.

Creative destruction can hurt. Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.

I do not know what Friday's jobs number will bring, but at this point, assuming it is good, it is more likely to be a last hurrah than anything else. My guess is for jobs to be under 100,000 and for unemployment to "unexpectedly" rise .2%.

Regardless, consumers have tossed in the towel, most of Europe is in an outright recession right now, and the US is headed for a recession if not in one now. Global stimulus has worn out. It always does.

No structural problems have been fixed by central bankers, they just bailed out the banks and the bondholders at the expense of taxpayers, sending taxpayers deeper into the hole.

There is no reason at all for businesses to want to expand in this environment, so they won't. That's all you need to know.

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

Asia-Pacific Bloodbath Round II; Australia -4%, Hong Kong -4%, Indonesia -5%, Japan -3%, South Korea -3%, Taiwan -4%; Late-Night Global Headlines

Posted: 04 Aug 2011 08:37 PM PDT

It's another rough night for Asia-Pacific equities as show in the following chart.

click on chart for sharper image

This second Asia-Pacific rout in three days follows a rout of US equities on Thursday.

For details of the US rout, please see In Commodities Bloodbath Gold Holds Up Well; Equities Plunge 4%; Dow Drops 512 Points; Crashes Happen When "Oversold"

Here are some late-night headlines to consider:

RBA Cuts 2011 GDP Growth Target to 2% From 3.5%

RBA Cuts 2011 Growth Outlook, Raises Inflation View in Two-Speed Economy

"Conditions are expected to remain very strong in the mining industry, as well as those parts of the economy benefitting from high rates of resource-sector investment," the central bank said today in its quarterly monetary policy statement. "In other sectors, the high exchange rate and subdued levels of retail spending mean that the trading environment is likely to remain difficult."

The RBA forecast growth in 2011 will average 2 percent, down from its May 6 estimate of 3.25 percent, while in 2012, gross domestic product will accelerate 4.5 percent, stronger than the prior estimate for a 4.25 percent expansion.

What the hell is the RBA smoking with this upping of GDP estimate for 2012. Australia housing is crashing, China is slowing and you have to be a dunce to not see it.

11-Month Low for China

China's Stocks Slump to 11-Month Low as Economic Concerns Spur Global Rout

China's stocks fell, driving the benchmark index to the lowest level in 11 months, as global equities markets plunged on concern slumping U.S. growth and Europe's debt crisis will push the world economy into recession.

"China's already-weak stock market can't find shelter from the global rout," said Tu Jun, a strategist at Shanghai Securities Co. "Negative factors like the European debt crisis and U.S. growth concerns have accumulated and kept adding to investors' pessimism. That has hammered markets worldwide.'"

The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, tumbled 61 points, or 2.3 percent, to 2,622.98 at 9:39 a.m., the lowest since September 2010. Only three stocks among the 947 in Shanghai Composite advanced. The CSI 300 Index (SHSZ300) declined 2.4 percent to 2,889.64.

Australia Equities Biggest Drop in Three Years

Australian Stocks Set for Biggest Drop in Almost 3 Years Amid Global Rout

Australia's S&P/ASX 200 Index fell 4.4 percent to 4,088.20 as of 11:20 a.m. in Sydney, set for the biggest drop since Nov. 13, 2008. Energy, material and consumer companies declined the most among the gauge's 10 industry groups and all but three of the index's 200 stocks dropped. New Zealand's NZX 50 Index (NZSE50FG) slid 2.4 percent to 3,297.33 in Wellington, set for the steepest decline since March 3, 2009.

"It's a panic attack from fear that growth is dropping off a cliff," said Prasad Patkar, who helps manage the equivalent of $1.7 billion at Sydney-based Platypus Asset Management Ltd.

Is it a fear growth is dropping off a cliff or a simple statement of reality that it is happening as I type?

Japan Warns on Yen

Japan Looks to Warn Investors Away From Yen

Japan escalated its campaign to convince investors that the nation's post-earthquake challenges mean they shouldn't pile into the yen as a haven from the turmoil over U.S. and European debt.

On his third day in the job, Takehiko Nakao, vice finance minister for international affairs, oversaw currency sales that sent the yen down the most against the dollar since September; it recouped some of the loss today. With Nakao's boss Yoshihiko Noda this week referring to mid-1990s style intervention as a useful reference, investors may need to brace for further action, according to Gareth Berry, a strategist at UBS AG in Singapore.

As I have mentioned before, currency intervention is useless.

US, Japan, Australia, Germany Government Bonds Soar

Treasuries Poised for Biggest Weekly Advance Since Fed Rate Cut in 2008

Treasuries headed for their steepest weekly gain since the last time the Federal Reserve cut interest rates in 2008 as stocks tumbled around the world on concern economic growth is slowing.

Bonds surged from Japan to Australia to Germany this week as investors sought the relative safety of government debt. The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, widened to 26.9 percentage points, the most in a year.

"Hot money is flowing into U.S. Treasuries in a flight to quality," said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $37.9 billion and is a unit of Japan's second-largest bank. "There's a flight from riskier assets into bonds. All bonds are benefiting."

No, Not All Bonds have benefited. Italy, Spain, Belgium government bonds were hammered.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Oil Wipes Out Gains for the Year

Posted: 04 Aug 2011 08:06 PM PDT

Bloomberg reports Oil Heads for Biggest Weekly Drop Since May

Oil fell in New York, heading for the biggest weekly decline in three months and wiping out its gain for the year, on speculation fuel demand will falter as the U.S. economy weakens and the European debt crisis worsens.

Futures dropped as much as 1.1 percent after slumping 5.8 percent yesterday. U.S. consumer confidence slid to the lowest in more than two months, a report showed. Italian and Spanish bonds surged to records amid speculation Europe will fail to contain its sovereign-debt crisis.

Crude for September delivery dropped as much as 95 cents to $85.68 a barrel in electronic trading on the New York Mercantile Exchange at 11:38 a.m. Sydney time. The contract yesterday tumbled $5.30 to $86.63, the lowest settlement since Feb. 18. Prices are down 10 percent for the week and 6 percent in 2011.

"Economic worries in the U.S. led to fears that oil demand will soften dramatically," Peter Beutel, president of Cameron Hanover Inc., an energy adviser in New Canaan, Connecticut, said in an e-mailed note today. "Traders were buffeted by fears that the global economy is slowing, nations are embracing austerity and the euro-zone debt crisis is spreading."

Petroleum Usage Shows Definite Economic Downturn

In case you missed it, please consider my timely report two days ago: Petroleum Distillates Demand Shows "Definite Economic Downturn Starting April/May 2011"

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

Bank of New York Mellon to Slap Fees on Big Deposits Following "Global Dash For Cash"; When was Hyperinflation Supposed to Start?

Posted: 04 Aug 2011 02:17 PM PDT

The BNY Mellon apparently does not want money, not to lend, not at all. In a mad dash for cash Mellon has been flooded with it. Overnight lending rates went negative.

Please consider BNY Mellon to Slap Fees on Some Big Deposits Amid Global Race to Cash

Bank of New York Mellon Corp. is preparing to charge some large depositors to hold their cash, in the latest sign of the worries roiling global markets.

The big U.S. custodial bank said this week in a note to clients that it will begin slapping a fee next week on customers that have vastly increased their deposit balances over the past month.

The bank cited the heavy dollar deposits it has received over recent weeks, as investors and corporations retreat from financial markets amid Europe's debt crisis and the recent debate over U.S. government borrowing.

BNY Mellon's decision sent money-market mutual funds and financial institutions scrambling to put their cash to work in short-term markets Thursday, sending rates falling across many investments. Treasury bill prices rose, pushing down their yields down sharply, and interest rates on overnight securities repurchase, or repo, agreements tumbled.

The cost of borrowing overnight in this market tumbled below zero Thursday, after starting the day at around 0.08%.

BNY Mellon said that it will charge 0.13% plus an additional fee if the one-month Treasury yield dips below zero on depositors that have accounts with an average monthly balance of $50 million "per client relationship," according to a letter reviewed by The Wall Street Journal. The charges will take effect on accounts held on Aug. 8, and will be charged in the subsequent billing cycle.

The torrent of cash looking for a safe place continues to grow. The Bank of Japan this week intervened in currency markets, essentially printing yen and buying dollars. "Those dollars need to find a home and it's probably going to come to the Treasury market," BofA Merrill Lynch's Mr. Smedley said.

Everyone Hoarding Cash

Everyone is looking to hoard cash. Let me ask a simple question.

Does this happen in hyperinflation or does it happen in deflation?

In its grand QE experiment the Fed pushed rates to zero, flooded the world with cash, then expected banks to lend and businesses to expand. Did it work?

Clearly not. No one wants to put that cash to use. If you were a business would you be hiring here? I wouldn't, and neither are businesses. Instead cash sits in banks or short-term treasuries earning zero or even negative percent.

When was hyperinflation supposed to start?

Oh, I just remembered: 2011, a year chosen by at least a couple people. Others expect it next year.

Hyperinflationists simply do not understand the role of credit in a global economy. China has a huge inflation problem and various property bubbles because credit growth is soaring 30% annually.

In the US, banks want credit-worthy borrowers. However, credit-worthy borrowers are parking cash, not asking for more of it.

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

In Commodities Bloodbath Gold Holds Up Well; Equities Plunge 4%; Dow Drops 512 Points; Crashes Happen When "Oversold"

Posted: 04 Aug 2011 01:19 PM PDT

Nearly everything was smashed today except much despised US treasuries, the US dollar, and the Swiss Franc. The latter held up in spite of Swiss central bank intervention.

The Dow closed down over 500 points, about 4.12%. Percentage-wise the S&P 500 performed even worse, down 4.5%. The Nasdaq 100 Index was clobbered nearly 100 points or 4.23%. The Nasdaq composite was down 137 points, slightly over 5%.

Here is a screenshot right after the close.

Equities Bloodbath

click on chart for sharper image

ES and NQ are the symbols for the S&P 500 and Nasdaq futures.

The only thing green on my screen were the $VIX, TLT (the Lehman long-term treasury fund), and DUG (an inverse energy ETF).

The following screen shots were taken about a half hour before the close.

Energy Futures

Currency Futures

Note that the Swiss Franc was green in spite of currency intervention. See Quantitative Easing Begins in Switzerland to Counteract Soaring Swiss Franc, Central Bank "Aims to Bring 3-Month LIBOR to 0%"; Gold Soars for details.
Grain Futures

Metal Futures

The $HUI was blasted 5.59% but Gold was down less than 1%. It continues to act like a currency. Silver continues to act like a derivatives plaything, down 7.2%.

Last evening in an interview with Chris Martenson I said "This is not a prediction Chris, but markets does not crash on overbought conditions, they crash on oversold conditions."

This is not a crash yet, but it could very well be the start of one.

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

Another Major Feud Between the German Central Bank and the ECB Over Resumption of Bond Purchases; Will Germany Leave the Euro?

Posted: 04 Aug 2011 11:28 AM PDT

ECB Resumes Bond Buys; Open Feud Between German Central Bank and the ECB; Implications of "Trichet Out, Draghi In"

Yet Another Open Feud Between German Central Bank and the ECB on Bond Purchases;

A feud between former Bundesbank president Axel Weber and ECB president Jean-Claude Trichet over the purchases of government bonds led to the resignation of Axel Weber who was opposed to the purchases.

Another Open Feud Between Germany and the ECB

A regime change did not change Germany's opposition to bond purchases. Jens Weidmann, the new Bundesbank president also opposes ECB's purchasing of government bonds. Another major feud between Germany and the ECB is in the works.

Please consider Bundesbank Opposed To ECB Resumption Of Bond Buy

Germany's Bundesbank opposed a resumption of the European Central Bank's bond buying program at this week's governing council's meeting, a euro-zone central bank source told Dow Jones Newswires Thursday.

The Bundesbank wasn't the only central bank to oppose a resumption of the program, the source added.

ECB President Jean-Claude Trichet indicated at Thursday's press conference that the ECB is ready to restart its Securities Market Program, which has been on hold since March, following a spike in Italian and Spanish bond yields.

Trichet Overrides Weidmann

Trichet foolishly ignored the advice of Weber and is making the same mistake again. For details of the feud, please see the Financial Times report ECB warns Spain and Italy

Jean-Claude Trichet on Thursday overrode opposition from Germany's powerful Bundesbank to send a different signal: that the euro's monetary guardian would help governments if they took steps needed to tackle the eurozone's escalating debt crisis.

The ECB's surprise decision to restart intervening in bond markets – but limit its action to buying Portuguese and Irish bonds – made clear to Rome and Madrid that it still thought they had to do more to bring public finances under control.

Separately, the ECB further downgraded expectations of further interest rate rises later this year, warning that risks to economic growth "may have intensified". The ECB has already raise its main policy rate twice this year, most recently to 1.5 per cent in July.

But investors' immediate reaction to the ECB plan was overwhelmingly negative. Economists warned the limited revival of the ECB's bond purchase programme fell short of the broad response needed to calm investor nerves. "It is the right move, they had to do it – but if it is on-off, as in the past – it will not pacify markets," warned Paul De Grauwe, economics professor at Leuven university.

In an apparent criticism of the ECB, Giulio Tremonti, Italy's finance minister, said that when he talked to Asian investors, they said: "If your central bank doesn't buy your bonds, why should we buy them?"

In fact, there were clear limits to how far Mr Trichet's could – or wanted – to go. Eurozone financial stability was "the responsibility of governments," he said. The Bundesbank opposed the launch last year of the ECB's bond purchase programme a year ago because it feared mixing fiscal and monetary policies would create long term inflation threats.

Jens Weidmann, president, who interrupted his holiday to attend Thursday's meeting in Frankfurt, is thought to have been joined by at least two others in voting against its reactivation on Thursday. But the council was anyway wary: intervening in Spanish and Italian bond markets at this stage would have been premature, the 23-strong governing council decided.

Jens Weidmann is unhappy that the ECB will buy any government bonds, but Giulio Tremonti, Italy's finance minister is upset the ECB will not buy Italian bonds. Said Tremonti "If your central bank doesn't buy your bonds, why should we buy them?"

Since when is it the duty of the ECB to buy sovereign government bonds? In reality, doing so is in clear violation of the Maastricht Treaty. Trichet broke the treaty on a technicality.

Jean-Claude Trichet is Out, Mario Draghi is In

Greek bonds blew up in Trichet's face and complete fools are clamoring for more of the same.

Bear in mind that Trichet steps down in October. Mario Draghi, head of the central bank of Italy takes over.

Will Germany Leave the Euro?

Will Draghi rebuff Italy's Finance Minister? The answer to that question turns our focus to the major unresolved question:

"Does Germany accept the monetization of foreign bonds at German taxpayer expense or does Germany leave the Euro?"

Recent Summary

Lots of significant news is flying the past couple days. Here is a quick recap of links to the most newsworthy stories.

Yields in Spain, Italy Surge After Hope of ECB Intervention Dies; Italy 15-Year Yield Highest on Record; How Much More "Success" Can the ECB Take?

Global Currency Wars Enter New Stage; Brazil Calls Off Truce, South Korea Reviews "All Possibilities", Philippines Threatens "Prudential Limits"

Quantitative Easing Begins in Switzerland to Counteract Soaring Swiss Franc, Central Bank "Aims to Bring 3-Month LIBOR to 0%"; Gold Soars

Japan Intervenes, Yen Plunges; What's Next?

ISM says "Business Conditions Flattening Out"; Why Services Number Worse Than It Looks; Unsustainable Conditions

Bill Gross says "Fed Approaching Dead End Unsolvable Dilemma"; Feldstein sees 50% Chance of Recession; Three Cardinal Rules of Stimulus

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

Yields in Spain, Italy Surge After Hope of ECB Intervention Dies; Italy 15-Year Yield Highest on Record; How Much More "Success" Can the ECB Take?

Posted: 04 Aug 2011 09:15 AM PDT

Early this morning I was watching yields on European government bonds. Italy and Spain were lower. I was wondering if the ECB had stepped in. However, in what will be billed as a "successful" auction, rates headed North.

At 8:02 AM Reuters reported Italy,Spain bonds stabilise on ECB support speculation.

Italian and Spanish bond yields came back off 14-year highs on Thursday due to a well-bid Spanish debt auction and speculation that Japan's intervention to weaken the yen will inspire the ECB to revive its dormant bond-buying programme.

"There's been speculation the ECB's waiting in the wings to calm the market, which we think it is highly unlikely," Citi interest rate strategist Steve Mansell.

"The ECB is going to be a very reluctant participant to any kind of market turbulence that's a direct result of sovereigns not stepping up and doing the required amount in terms of fiscal adjustment and negotiating more credible support packages."

That is a vastly different tune than we heard yesterday from Citigroup Chief economist Willem Buiter who said "The ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday. If the ECB doesn't come in, the Italian bond auction is likely to fail."

My reply to Buiter was harsh: "The act of intervention will not turn a failed auction into a successful one. What the hell is the matter with chief economists who do not understand simple economic principles?"

"Eye-Watering Yields Following Successful Auction"

At 7:54 AM (different writer), Reuters had this story to tell: Yields jump at Italy bond auction

5-yr yield rises to 4.93 pct highest since June 2008
15-yr yield highest on record
Italy sells 4.97 bln euros of bonds vs max target of 5 bln

The premium investors demand to hold Italian 10-year bonds instead of safe-haven German Bunds rose above 300 basis points after the sale, from around 294 basis points before the auction.

That spread widened to a euro lifetime high of 353 basis points on Tuesday, before narrowing back as moves by the Italian government to speed up passage of a 47 billion euro austerity package helped calm markets.

Still, current levels compare with a spread of 220 basis points a week ago, before the market sell-off started.

"A look at the outright yield levels is eye-watering," said David Schnautz, a rate-strategist at Commerzbank in London.

"While the auction will most likely be spun as a success, there are some worrying signs and Italy won't be able to continue to have debt auctions like this indefinitely," said Kathleen Brooks, Research Director UK EMEA at Forex.com.

Italy 10-Year Government Bonds

Spain 10-Year Government Bonds

How Much More "Success" Can the ECB Take?

Please note that yields in Italy are about to surpass Spain.

The only thing "Successful" about the auction was the ECB did not intervene. I am now wondering: How Much More "Success" Can the ECB Take?

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

Eighty-Five Australian Building and Construction Firms Go Under in a Month; Crazy to Buy a House in Australia Now

Posted: 04 Aug 2011 08:28 AM PDT

The implosion in Australian housing is now in full swing as Eighty-five building and construction firms go under in a month.

The building and construction industry seems to be bearing the brunt of the brittle Australian economy, with more than 85 companies either entering administration, liquidation or being hit by a winding up notice over the past month in Victoria and New South Wales alone.

Over the past fortnight, Safi Brothers Constructions, Port Melbourne Building Supplies, Coastline Bricklaying and Blue Hills Bricklaying have entered administration. Others to have collapsed of late include plumbers, plasterers and landscape gardeners.

Registered company liquidator, Cliff Sanderson of Dissolve Pty Ltd, says while the building sector always features pretty heavily in the collapse lists, the numbers have increased over the past three to five months.

The reasons, according to Sanderson, are the relatively recent downturn and increased aggression from the Australian Taxation Office.

"An awful lot of tradies couldn't pay their bills during the GFC, and now the ATO is coming to get them," Sanderson says.

"Whereas other industries might continue to limp on, small tradies might not have the ability."

Master Builders Australia chief economist Peter Jones says uncertainty over where the economy is headed is not helping the sector, which has a higher number of SMEs than other sectors.

"Uncertainty over interest rates and lingering debt issues in the US and Europe are also playing a role," Jones says.

Uncertainty? What Uncertainty?

Peter Jones at Master Builders Australia is blaming "uncertainty". The irony is that it would make far more sense to blame "certainty".

It is quite certain that Australia's housing bubble is now in crash mode. It is equally certain there is not a damn thing the Reserve Bank of Australia or any of the home builders can do about it.

Crazy to Buy a House in Australia Now

If you live in Australia and are thinking about buying a home, here is everything you need to know in a single sentence: It's still a crazy idea to buy a house in Australia at the current prices.

By all measures of value, house prices in Australia are at or near the highest levels they have ever been.
Recent tiny house price falls are meaningless in the most overpriced housing market in the world - long term housing slumps can take years, or even decades.
Recent short term interest rate falls are also meaningless. Buying a house is for the long term, so it is the long term average real (inflation adjusted) interest rate that matters.
A typical Sydney house costs $400-500 per week to rent, or $ 1200-1500 to own. Buying at the current prices, you would have to have real capital gains of $800-1000 per week (or around 5% of the purchase price per year) just to not lose money. It may well be worth paying something for the pride of home ownership, but three times the price of renting? You can buy an awful lot of nice decorations for your rental property with a small proportion of the cost difference between renting and owning.
Think it through. Even if house prices do not fall, rents have to at least triple for renting a normal house in an Australian city to cost the same as owning one. Half of renters already pay more than a third of their income in rent. Rents tripling simply cannot happen without large increases in wages, which implies high inflation and thus high interest rates over a prolonged period of time. Without their fantasy rent rises, or their fantasy price rises, long term ongoing losses will crush real estate speculators.

There are many more excellent bullet points in the article. Those who step in here "buying the dip" will regret it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Global Currency Wars Enter New Stage; Brazil Calls Off Truce, South Korea Reviews "All Possibilities", Philippines Threatens "Prudential Limits"

Posted: 04 Aug 2011 01:25 AM PDT

Fighting the Fed has reached a new stage: all out currency wars.

The Fed is desperate to tank the US dollar to stimulate exports and further fuel a stock market that is clearly back in bubble territory. However, central bankers in other countries have had enough.

Japan and Switzerland intervened heavily in the forex markets on Wednesday. Other countries, fed up with Fed policies and a weak dollar now threaten to do the same.

For a recap Wednesday's intervention news, please see

Quantitative Easing Begins in Switzerland to Counteract Soaring Swiss Franc, Central Bank "Aims to Bring 3-Month LIBOR to 0%"; Gold Soars

Japan Intervenes, Yen Plunges; What's Next?

What's next is already at hand: Currency Wars Enter 'New Stage'

"We seem to be entering a new stage of the currency wars where it's not just the emerging markets that are responding to broad dollar weakness," said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore, who has written books on currency markets. "Expect much more intervention in the future and further acrimony in terms of how the U.S. dollar is doing."

Here are some highlights from the article.

Brazil Calls Off Truce, South Korea Reviews "All Possibilities", Philippines Threatens "Prudential Limits"

Japan sold yen today, causing the currency to weaken as much as 3.1 percent against the dollar after rising 5 percent last month.

Brazil's Mantega said Nov. 30 that his nation's currency was trading at a reasonable level as Europe's worsening debt crisis brought a "temporary truce" to a global currency war. Since then, the real has gained about 10 percent against the dollar, and Mantega said last month that the so-called "war" was still on.

South Korea's government is reviewing "all possibilities" on curbing capital inflows, Finance Minister Bahk Jae Wan told reporters in Seoul today, adding that he's "closely monitoring" the situation, while declining to comment on the impact of Japan's intervention.

The Philippines is prepared to impose controls to cap volatility in the peso after its currency rose to a three-year high this week, central bank Governor Amando Tetangco said in an e-mail late yesterday. The bank "will not go against the fundamental currency trend but will not hesitate to use tools, including imposing prudential limits on certain transactions of banks," he said.

Asia-Pacific Reversal

Asia-Pacific Equity Markets initially responded to the intervention in a positive manner. That action has now reversed.

Bloomberg reported "Yen Slumps After Japan Intervenes to Curb Rise; Most Asian Stocks Advance" but "Most Asian Stocks Advance" is now missing from the title.

Asia-Pacific Snapshot

Australia, South Korea, and Taiwan are all down well over 1% each. Nothing is up by even .25%. US S&P 500 futures we up over 10 points but are now slightly red although Europe is slightly green.

To update the chart click on Yahoo Finance Major World Indices

Time For Decisive Action

At times like these, there is only one thing to do: Call out Tim Geithner for a reiteration of the "US Strong Dollar Policy".

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

joi, 4 august 2011