Mish's Global Economic Trend Analysis

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• California Nears Automatic Education Spending Cuts With Revenue $705 Million Short (Making the Dream Act Signed by Brown Look Even Sillier)
• Portugal Central Bank Warns of Fiscal Deficit Slippage and Recession; Greek 1-Year Yield Tops 150%
• Chicago Natural Resources Expo October 14th and 15th; It's Free, Join me for Discussion and a Drink
• Bank of England Rejects All Offers, Quantitative Easing Fails to Lower Yields in UK
• Hypothetical Employment and Unemployment Charts from the Atlanta Fed; Mish "What If" Scenarios

California Nears Automatic Education Spending Cuts With Revenue $705 Million Short (Making the Dream Act Signed by Brown Look Even Sillier) Posted: 10 Oct 2011 02:34 PM PDT Today the "Dream Act" Became Law in California. In California, illegal immigrants enrolling in college will be eligible for state scholarships and financial aid beginning next July. Over the weekend, Gov. Jerry Brown signed the second portion of the state's Dream Act into law. The legislation allows illegal immigrants who graduate from high schools in California to apply to the state's public universities as residents, granting them a reduced tuition rate. (Students must prove themselves to be "on the path to legalization," meaning that if they are undocumented, they must apply for lawful immigration status or swear to do so.) The law also affords such students the right to both private loans and public aid to help in paying for their education. California Nears Automatic Education Spending Cuts In light of the "Dream Act" passage, please consider California Nears Automatic Spending Cuts With Revenue $705 Million Short California's revenue for the fiscal year that began three months ago has fallen $705 million below what Governor Jerry Brown and Democrats projected, approaching a level that may trigger automatic university spending cuts and higher community college fees. The $86 billion general-fund spending plan Brown signed in June included a series of cuts activated if higher revenue doesn't materialize by mid-December. The first, if the shortfall is $1 billion, would trim University of California and California State University budgets each by $100 million and increase community-college fees by $10 million. Under a $2 billion gap, the contraction would mean a seven- day reduction in the school year to save $1.54 billion and an end to $248 million in home-to-school busing subsidies. "The potential for revenue shortfalls is precisely why the Governor and Legislature included trigger cuts in this year's state spending plan," Chiang said in a statement. "September's revenues alone do not guarantee that triggers will be pulled. But as the largest revenue month before December, these numbers do not paint a hopeful picture." Education costs are poised to rise for everyone in California except illegal aliens who get a reduced rate. Is this a dream or a nightmare? The answer depends on whether or not you are an illegal alien (or a politician who gets elected pandering to them). 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.

Portugal Central Bank Warns of Fiscal Deficit Slippage and Recession; Greek 1-Year Yield Tops 150% Posted: 10 Oct 2011 10:52 AM PDT Via email, Barclays Capital offered thoughts on "Potential Fiscal Slippage" in Portugal. The Central Bank of Portugal warned the economy might fail to meet budget deficit targets set for this year and next under the EU/IMF programme (5.9% and 4.5% of GDP, respectively), unless it takes "significant additional measures". Contraction Two More Years According to the report, lower-than-previously projected GDP growth and lack of implementation of structural reforms (as opposed to one-off actions) would be responsible for the anticipated fiscal slippage in 2012. The Central Bank expects GDP growth to contract 1.9% this year (BarCap: -2.0%, EU/IMF: -2.0%) and 2.2% next (previous forecast: 1.9%, BarCap: -1.7%, EU/IMF: -1.8%). FM Cavaco Silva had also warned that Portugal needs "tough and relentless budget discipline" adding that a failure to control public spending and introduce reforms might trigger the request of additional support, the FT reports this morning. In September, the 'troika' (EU, ECB, IMF) identified a potential fiscal slippage of 1.3pp of GDP due in part to to the electoral cycle. Later, hidden debt in the Madeira region (worth 0.3% of GDP) was also disclosed. In a note published earlier this week, we had flagged the risk of potential fiscal slippage in Portugal. According to our own seasonal adjustment, general government budget deficit data for H1 were off-track, suggesting a tracking budget deficit of 9.8% of GDP for this year (for more please see: Portugal: H1 national accounts fall behind 2011 budget deficit targets). We expect Portugal to reach a budget deficit of 6.3% and 5.0% of GDP this year and next. Weak Domestic and External Demand While we share the view that the main risk faced by public finances is related to potential weak GDP performance this year and next, we think that it refers more to 2012 than 2011. In fact, the government has already announced additional measures to tap the potential fiscal gap this year such as bringing forward the VAT rate increase on petrol prices and the re-direction of bank pension funds to the state social security system. For next year instead, the clouds of weak domestic and external demand are likely to cast a shadow on the Portuguese economy. In fact, net exports have been the main contributor to real GDP growth over the past few years. A slowdown of growth in the economies of key trade partners could make it difficult for Portugal to contain the magnitude of the recession next year, implying significant downside risks to its public finances. Portugal 10-Year Government Bond Yield Italy 10-Year Government Bond Yield Greece 1-Year Government Bond Yield The bond market does not think anything has been fixed in Europe and neither do I. More Sovereign Credit Rating Downgrades – When It Rains It Pours Pater Tenebraum has plenty of comments on Spain and Portugal in The ECB's 'QE Lite' and New Downgrades of Euro Area Sovereigns and Banks Late on Friday, Fitch piled on more pressure, by further downgrading Spain and Italy. Spain was taken down two notches to AA minus, while Italy was downgraded by one notch to A plus. In its downgrade of Spain, Fitch specifically mentioned the financial troubles of Spain's regions, which are responsible for a large portion of government spending. With this, Fitch has basically cut through the veil of creative accounting used by Spain's central government, which propped up its own budget deficit by simply cutting payments to the regions by 16%. In essence, this means that the hole in the budget has been moved from the center to the regions, but it has not gone away. In addition to the rating action by Fitch, Moody's downgraded nine Portuguese banks, citing specifically their holdings of Portuguese government debt. It also downgraded a number of UK banks, due to rule changes that allegedly make government support for these banks less likely in the future (in our opinion that's wishful thinking). Moody's also intimated it may soon lower Belgium's credit rating due to the Dexia collapse, which has morphed into a full-scale bailout, namely the failed bank's nationalization over the weekend. As we have mentioned previously, we think that both Portugal and Spain represent the most immediate new threat to the euro area after Greece, in spite of the fact that the markets have lately become more sanguine about Spain. Spain is one of the euro-area's economic wastelands. It is undergoing a 1930's style depression, with the recent weak cyclical recovery already giving way to contraction again. The burst housing bubble has brought the banking system to the brink, which has so far kept the true extent of the damage under wraps by means of creative accounting. Occasionally a caja or two will blow up and admit to sudden vast losses en lieu of the previously reported meager profits, prompting the Bank of Spain's intercession. Since the government has so far been activist with regards to keeping the banking system afloat, the ultimate cost remains undetermined but is almost certainly far higher than the blue-eyed estimates that have been circulated by officialdom up until recently. What we wrote in April about Spain (scroll down to 'Spain, A Case of Crisis Fatigue – Is It Justified?') is still applicable, only the situation has since then deteriorated. While the government has met its official deficit reduction targets, the markets have repriced both Spain's debt and CDS on its debt markedly in the meantime. Lately Italy has been the market's main focus, but we think Spain's economy is far more suspect, not least due to high indebtedness of the country's households and its vast external debt. The downturn has practically paralyzed what was one of the domestic economy's biggest sectors, the construction industry and industries related to it. The hitherto successful Spanish export sector is too small to matter, and is currently faced with falling demand as well. Construction is fairly labor-intensive and its downfall has contributed to an extremely high unemployment rate above 21%. Regional governments from the central down to the municipal level are all struggling financially, taking down the businesses that cater(ed) to them. 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.

Chicago Natural Resources Expo October 14th and 15th; It's Free, Join me for Discussion and a Drink Posted: 10 Oct 2011 09:02 AM PDT Those in the greater Chicago area are welcome to attend the Chicago Natural Resources Expo on October 14th and 15th for a discussion about gold, silver, hard assets, inflation, currencies (or whatever else is on your mind). You also have the opportunity to meet with various natural resource company executives. Once again, I am pleased to announce the magic words: "It's free". Originally known as the Chicago Natural Resource Conference and Exhibition, this is one of the oldest natural resource conferences in the United States. The conference is a semi-annual event and offers opportunities to learn about new and undervalued companies in the natural resource industry. The event is directed by Rich Radez, who started the conference back in 1977. Rich, and his son Eric, created the unique format which focuses on resource companies and provides maximum exposure to both investors and sponsors. Please pre-register to help the organizers know how much food to prepare. There is a nice buffet Friday evening and Saturday afternoon at no cost. The Expo is held at the Rolling Meadows Holiday Inn and Convention Center in Rolling Meadows, IL. The Holiday Inn is located at 3405 Algonquin Road, Rolling Meadows, IL 60008. The hotel can be reached at 847.259.5000. It is a two day event that starts on a Friday afternoon, and ends on Saturday afternoon. The Exhibition Hall, featuring some of the top companies in the resource industry, opens at 4pm. A buffet which includes jumbo shrimp, and smoked sockeye salmon, is served at 5pm. Following the buffet, company presentations begin. Friday night features a Q & A Session hosted by Rich Radez and a panel of industry experts, the discussion is based on topics that are fueled by the audience's interests. The event resumes on Saturday morning. Attendees enjoy a continental breakfast, and browse the exposition hall learning about companies. In the meantime, individual company presentations begin in the presentation hall. These presentations are a great way to hear each company's story. Lunch buffet is served around noon, and accompanied by the second panel discussion. After lunch, presentations and expositions continue for the remainder of the day. I will be on the panel Friday evening and Saturday afternoon along with Jay Taylor, Robert Ian, Clyde Harrison, and others. Saturday lunch is also free. 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.

Bank of England Rejects All Offers, Quantitative Easing Fails to Lower Yields in UK Posted: 10 Oct 2011 08:25 AM PDT The Bank of England threw a Quantitative Easing Party today, but no one showed up with acceptable bids. Please consider Bank of England Rejects Offers Against 8.75% 2017 Gilt After Yield Move The Bank of England rejected all bids against the 8.75 percent 2017 gilt that it planned to buy today as part of its quantitative-easing program. "The Bank has decided to reject all offers against UKT 8.75 25/08/17 following significant changes in its yield in the run up to the auction," the central bank said in a statement today. UK Yields UK Yield Curve Chart and Table courtesy of Bloomberg Government Bond Rates. 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.

Hypothetical Employment and Unemployment Charts from the Atlanta Fed; Mish "What If" Scenarios Posted: 10 Oct 2011 02:05 AM PDT Inquiring minds are checking out an interesting "what if" post by Dave Altig, senior vice president and research director at the Atlanta Fed. Please consider Two more job market charts Payroll employment growth has averaged about 110,000 jobs a month since February 2010, the jobs low point associated with the crisis and recession. This growth level compares, unfavorably, with the 158,000 jobs added per month during the last jobs recovery period from August 2003 (the low point following the 2001 recession) through November 2007 (the month before the recent recession began). One hundred and ten thousand jobs a month compares favorably, however, to the 96,000 job creation pace so far this year. Are these sorts of differences material? If the economy can find its way to creating jobs at the same rate as the last recovery—which nobody remembers as particularly off-the-chart spectacular—we would be back to the prerecession level of overall employment by spring 2015. If, on the other hand, we can only eke out the sub-100k pace we've seen this year, that date moves out to 2017: click on chart for sharper image With a few assumptions, such as the presumptions that the labor force will grow at the same rate as census population projections (for the aficionados, my calculations also assume that the ratio of household employment to establishment employment is equal to its average value since January of this year), the unemployment rates associated with job growth of 158,000, 110,000, and 96,000 per month would look something like this: click on chart for sharper image These paths are just suggestive, of course, but I think they tell the story. The same jobs recovery rate of the prerecession period would get the unemployment rate down below 7 percent in four years or so. But at the pace we have been going this year, things get worse, not better. Good Starting Point for Discussion I think those charts are an good starting point for discussion, but there are many other factors to consider. Right now it takes about 125,000 jobs a month to keep up with demographics (birthrate, retirement, and immigration). 125,000 is Bernanke's estimate and I accept it as reasonable. Because of boomer demographics, by 2016 or so it may take far less than that (perhaps 90,000 jobs a month or so) to keep up with demographics. Then if the demographic trends hold, the number may rise through 2020. Unfortunately, it is not as simple as that. One must also factor in the ability of workers to retire when they had planned. Many boomers are very underfunded and thus unable to retire when they thought. Also consider involuntary retirement. Many of those who exhausted all of their unemployment benefits and are approaching retirement age, so desperately need money that they may retire, just to get something from social security. They did not want to retire, but did so out of necessity. Such factors are a significant reason for the plunge in the participation rate. Participation Rate click on chart for sharper image The falling participation rate is the primary reason the unemployment rate is 9.1% instead of 11% right now. The civilian labor force offers another look at the current sorry state of affairs. Civilian Labor Force click on chart for sharper image Civilian Labor Force Detail Since 1990 click on chart for sharper image Here is one of the assumptions made by Dave Altig "With a few assumptions, such as the presumptions that the labor force will grow at the same rate as census population projections the unemployment rates associated with job growth of 158,000, 110,000, and 96,000 per month would look something like ..." Had Altig made those same assumptions two years ago, the projected unemployment rate for today would not be 9.1% but rather something much higher. Pent-Up Demand for Jobs As of September 2011, the civilian labor force was 154.017 million. In September of 2008 it was 154.613 million. In three years, the labor force fell by 596,000 workers when the expectation would have been 125,000 a month or an increase of 4.5 million workers. Demographics accounts for some of that drop (to the extent there was voluntary retirement). However, most of that, in my opinion is people dropping out of the labor force unwillingly. Let's do the math based on projected labor force and current employment of 140.025 million. Labor Force at Hypothetical Growth Rates Since September 2008 At 125,000 persons per month the labor force would now be 159.113 At 100,000 persons per month the labor force would now be 158.213 At 075,000 persons per month the labor force would now be 157.313 At 050,000 persons per month the labor force would now be 156.413 Unemployment Rate at Hypothetical Growth Rates Since September 2008 At 125,000 persons per month the unemployment rate would now be 12.0% At 100,000 persons per month the unemployment rate would now be 11.5% At 075,000 persons per month the unemployment rate would now be 11.0% At 050,000 persons per month the unemployment rate would now be 10.5% Had the labor force grown by a mere 75,000 per month vs. expected 125,000 per month, the current unemployment rate would be 11%. If jobs become available, what subset of the 4.5 million workers who would have expected to be in the labor force (but vanished) start looking for jobs? Assume 33%. That is 1.5 million jobs or 62,500 jobs per month over two years, or 50,000 jobs a month over three years. If so, even if the economy adds 158,000 jobs per month and only 100,000 of them are needed to keep up with demographics, the unemployment rate will essentially be flat if as few as 33% of those who dropped out of the labor force over the past three years start looking. The irony is that the better the economy the more people will be tempted to come back into the labor force and the more upward pressure on the participation rate and unemployment rate as well. Thus, we cannot assume that 158,000 jobs per month will necessarily take the unemployment rate to 7% by 2017. Moreover, I highly doubt the economy averages 158,000 jobs a month in the first place. Monthly Job Growth 1999-2009 click on chart for sharper image I posted the above table in November of 2009. The key years are 1999, 2005, and 2006. Chart courtesy of BLS. Annotations by me, numbers are in thousands. The areas in deep blue mark recessions. At the height of the internet bubble with a nonsensical Y2K scare on top of that, the economy managed to gain 264,000 jobs a month. At the height of the housing bubble in 2005, the economy added 212,000 jobs a month. At the height of the commercial real estate bubble with massive store expansion, the economy added somewhere between 96,000 and 178,000 jobs per month depending on where you mark the peak. Neither the housing boom, nor the commercial real estate boom is coming back. Nor is there going to be another internet revolution. Therefore, I suggest 158,000 jobs a month is highly unlikely on a sustained basis. September 2011 Data In September, the number of employed rose by a whopping 398,000! The only reason the unemployment rate did not collapse is the labor force rose by an even larger 423,000 workers. I am not sure what to make of those numbers but if the labor force continues to jump, and employment does not, the unemployment rate will soar. Likewise, if the number of jobs jump and the labor force does not, the unemployment rate will plunge. Here are the numbers. Household Data click on chart for sharper image Table A-8 Part Time Status click on chart for sharper image In the last month, the number of people working part-time for economic reasons jumped by 444,000. Since there was an increase in 398,000 but also an increase in 444,000 were part-time 46,000 full-time jobs were lost last month. Extrapolation Highly Error-Prone Even if the economy miraculously produces 158,000 jobs a month I suggest pent-up demand for jobs will prevent the unemployment rate from dropping as fast as the chart by Altig suggests. The point is moot because that number of jobs is highly unlikely in the first place. Should Congress do something really stupid, like pass protectionist legislation that the president signs, I expect it will cost 2 million jobs. Please see Ben Bernanke Fans Fires of Protectionist Legislation to Senate Joint Economic Committee; Expect Global Depression if Obama Signs On for my reasoning. Factors Number of jobs to keep unemployment rate flat (all other things being equal) should decline to 90,000 or so by 2015 or 2016 then start rising. Boomers eligible to retire many not want to because of insufficient funds Boomers may retire involuntarily to collect social security after unemployment benefits expire There is a pent-up demand for somewhere between 1 million and 4.5 million jobs. That number will act as a huge force preventing a rapid decline in the unemployment rate should the economy improve Protectionist legislation Potential jobs bills unlikely until after the next election Mish Projection vs. Obama Projection All things considered, I see no reason to change a forecast I made just over two years ago: Expect Structurally High Unemployment for a Decade. Harsh Reality From Bernanke In the Incredible Shrinking Boomer Economy I noted a harsh reality quote of Bernanke: "It takes GDP growth of about 2.5 percent to keep the jobless rate constant. But the Fed expects growth of only about 1 percent in the last six months of the year. So that's not enough to bring down the unemployment rate." Pray tell what happens if GDP can't exceed 2.5% for a couple of years? What about a decade (or on and off for a decade)? If you have come to the conclusion that we are going to have structurally high unemployment for a decade, you have come to the right conclusion. In contrast, here is the Obama estimate. Note that Obama projected the unemployment rate to be under 6% now according to projections of the the American Recovery and Reinvestment Act of 2009. The only reason the unemployment rate is not 11% (or higher) is because 4.5 million people dropped out of the labor force vs. expected demographic gains. 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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