Mish's Global Economic Trend Analysis

---

• Greek Leaders (All 3 Coalition Parties) Oppose New Austerity Measures; Words of the Day: "Hardball", Followed by "Meeting Cancelled" and the Always Popular "Meeting May be Scheduled Later in the Week"
• Nonfarm Payroll +243,000 ; Unemployment Rate 8.3%; Those Not in Labor Force Rose an Amazing 1,177,000
• Providence Rhode Island Faces "Bankruptcy by June" says Mayor; Pension Plan 32% Funded (and About to Get Worse)
• EU says "Strict Application of Budget Rules Doesn't Make Sense"; Spain Kicks Off the Year Destroying 9,000+ Jobs a Day, 283,700 for Month; Impossible Dream

Greek Leaders (All 3 Coalition Parties) Oppose New Austerity Measures; Words of the Day: "Hardball", Followed by "Meeting Cancelled" and the Always Popular "Meeting May be Scheduled Later in the Week" Posted: 03 Feb 2012 06:18 PM PST Shortly after Dutch finance minister, said "We want no further delays" came news of further delays. The reason: Greek political parties all refuse to go along with more austerity measures. Please consider Greece's leaders oppose new austerity measures All three party leaders in Greece's teetering national unity government have opposed new austerity measures demanded by international lenders, forcing eurozone finance ministers to postpone approval of a new €130bn bail-out and moving the country closer to a full-blown default. Representatives of the so-called "troika" – the European Commission, European Central Bank and International Monetary Fund – have demanded further cuts in government jobs and severe reductions in Greek salaries, including an immediate 25 per cent cut in the €750 minimum monthly wage, before agreeing the new rescue. But representatives of all three coalition partners, including centre-left Pasok of former prime minister George Papandreou and the centre-right New Democracy of likely successor Antonis Samaras, said they were unwilling to back the government layoffs. In addition, a Greek government official said the EU and IMF negotiators rejected a counter-proposal that would have frozen Greek wages for three years and cut social security contributions by 10 per cent. Finance ministers from the four remaining triple As – Germany, the Netherlands, Finland and Luxembourg – met in Berlin on Friday where they agreed that Athens must move quickly or they would withhold assistance. "We want no further delays," Jan Kees de Jager, the Dutch finance minister, said after the meeting. The delays in Athens could give new momentum to officials in Germany, the Netherlands and Finland who have been agitating to abandon the cornerstone of the new bail-out – a €200bn bond swap in which private debt holders would accept losses of 50 per cent in the face value of their holdings. A full-scale default would allow Greece to write off all privately held debt. The brinkmanship in Athens became so intense on Friday that a government spokesman was forced to deny reports that the acting technocratic prime minister, Lucas Papademos, was considering resigning if governing parties did not agree to the new measures. Keyword of the Day is "Hardball" In case you missed it here is the key phrase "EU and IMF negotiators rejected a counter-proposal that would have frozen Greek wages for three years and cut social security contributions by 10 per cent." That was a pretty significant offer by Greece in the midst of an economic depression. There was no counter-offer, only a take-it-or-leave-it hardball. For now, Greece said "Leave It" so you can add that to the words of the day as well. As I have said numerous times recently, Germany wants Greece out of the Eurozone. Those actions reinforce my opinion. Germany could easily have said a Greek wage freeze for three years and cut social security contributions by 10 per cent would suffice. Minimum Wage I am not a fan of minimum wage laws at all. However, let's ponder Germany's demand. A "25 per cent cut in the €750 minimum monthly wage" would take the minimum wage down to €562.5, roughly $739 a month. Taxes According to Wikipedia the following Greece Taxes apply. Social Security Tax: 16% VAT: as high as 23% (Category 2 goods 4.5%) Income Tax: Progressive I cannot find a precise description of Category 2, but eating out is category 1 and taxed at 23%. Minimum wage appears to avoid income tax. The after SS-tax income at the proposed minimum wage is $621 a month or $7452 per year. How far will a take-home pay of $7452 per year go? Living Greece discusses Value-added tax (VAT) rates in Greece Greece has the third highest rate of VAT in Europe Second highest gas/petrol tax Third highest tax on social insurance contributions Fifth highest VAT on alcohol Highest property tax One of the worst corporate tax rates Without the quality of living or competitiveness to match Bear in mind that was from 2010. On the assumption that everyone earning minimum wage is spending every penny of it, subtract another 10% to 20% in actual purchasing power. Keep Talking Greece has a humorous (to those not from Greece) article on Greek VAT Insanity: 6.5% for Foreigners, 23% for Greeks That Greece is an absurd country I knew the moment I decided to return from living abroad over some decades. But it was beyond my vivid imagination that I will have to experience this, day by day – and even moment to moment. With a decision that touches the limits of European constitution because of discrimination against the citizens of this hapless country, the Finance Minister announced that the increased VAT of 23% on catering goods will be paid only by the Greeks -meanwhile known also as money-spewing machines! Earlier on Monday, Finance Minister Evangelos Venizelos clarified that the increased VAT from 13% to 23% will apply to restaurants, taverns, cafes and hotel restaurants. However if you buy an All-Inclusive package abroad, you will have a 6.5% VAT. Greeks who will buy similar packages in the country will pay 23% VAT. The new increased VAT regulations are as complicated as they can be: there is a different VAT for consuming sitting or standing (restaurant/cafe), different for take away (but only if you take it yourself, not through delivery boy). In short a pizza has four different VAT depending on whether you sit, stand, walk or lay (hotel room/all-inclusive). Tortured to Death The point of this discussion is not about minimum wage, but about absurd taxes on top of a reduction in minimum wages at a time the Greek economy is already imploding. I am 100% in favor of work rule changes, pension changes, etc., but the tax hikes and tax structures are insane. Furthermore, I fail to see how increased taxation and further austerity measures can possibly help Greece in the short-run. And by the way, the short run has now been extended to 2020 from 2013.  Greece is imploding. It's really too bad Greece did not exit the Eurozone three years ago instead of now smack in the midst of a depression. Moreover, this is exactly what Spain and Portugal ought to be thinking about as well. 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.

Nonfarm Payroll +243,000 ; Unemployment Rate 8.3%; Those Not in Labor Force Rose an Amazing 1,177,000 Posted: 03 Feb 2012 09:09 AM PST Quick Notes About the "Falling" Unemployment Rate In the last year, the civilian population rose by 3,565,000. Yet the labor force only rose by 1,145,000. Those not in the labor force rose by 2,420,000.   In January, the Civilian Labor Force rose by 508,000.   In January, those "Not in Labor Force" rose by an amazing 1,177,000. If you are not in the labor force, you are not counted as unemployed.   Participation Rate fell .3 to 63.7%, taking out a 1984 low   Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%. Some of those labor force numbers are due to annual revisions. However, the point remains: People are dropping out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Jobs Report at a Glance Here is an overview of today's release. US Payrolls +243,000 - Establishment Survey US Unemployment Rate Declined .2  - Household Survey Average workweek for all employees on private nonfarm payrolls was +.1 to 34.4 hours The average workweek for production and nonsupervisory employees on private nonfarm payrolls edged higher 0.1 hour to 33.7 hours in November. Average hourly earnings for all employees in the private sector rose by 4 cents to $23.24 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. January 2012 Jobs Report Please consider the Bureau of Labor Statistics (BLS) January 2012 Employment Report. Total nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment changed little over the month. Unemployment Rate - Seasonally Adjusted Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted Actual employment is about where it was in 2001. 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. The January employment gained in total nonfarm brings the number of net jobs recovered since a trough in February 2010 to 3.2 million jobs, or 36 percent of the 8.8 million jobs lost between January 2008 and February 2010. Statistically, 127,000 jobs a month is enough to keep the unemployment rate flat. The average increase in 2011 was of 152,000 per month, barely enough make a dent in the unemployment rate. Nonfarm Employment - Payroll Survey Monthly Details - Seasonally Adjusted Average Weekly Hours Index of Aggregate Weekly Hours In January 2012 the index of aggregate weekly hours stood 4.8 percent below its peak in January 2008. Average Hourly Earnings vs. CPI "Success" of QE2 and Operation Twist Over the past 12 months, average hourly earnings has increased by 1.9 percent; while in December, the CPI-U had a 12-month percent change of 3.0 percent.   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 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 Birth Death Model Adjustments For 2012 Birth-Death Notes Once again: Do NOT subtract the Birth-Death number from the reported headline number. That is statistically invalid. Household Survey Data click on chart for sharper image In the last year, the civilian population rose by 3,565,000. Yet the labor force only rose by 1,145,000. Those not in the labor force rose by 2,420,000. That is an amazing "achievement" to say the least. 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 Part-time status shows little improvement vs. a year ago. 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 The official unemployment rate is 8.3%. 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. U-6 is much higher at 15.1%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years. Grossly Distorted Statistics Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers. Digging under the surface, the drop in the unemployment rate is nothing but a statistical mirage. In January, those "Not in Labor Force" rose by a staggering 1,177,000. Things are much worse than the reported numbers indicate. 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.

Providence Rhode Island Faces "Bankruptcy by June" says Mayor; Pension Plan 32% Funded (and About to Get Worse) Posted: 03 Feb 2012 07:12 AM PST Untenable pension promises made by corrupt politicians to corrupt unions in an unholy alliance is about to sink another city. Please consider Providence is facing bankruptcy Rhode Island's capital city will be in bankruptcy by June if it doesn't get help resolving its financial crisis. That was the dire warning from Providence Mayor Angel Taveras during a Thursday morning news conference at City Hall. With five months left before the end of the fiscal year and the capital set to run out of cash by the start of summer, the city still faces a $22.5 million deficit in its budget for the current fiscal year, which ends June 30. The budget shortfall was projected at $110 million last March, when Taveras declared a "category five" financial emergency in Providence. It was reduced after he negotiated new contracts with unions, laid off workers, cut spending and won increased state aid. "Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe," the mayor said. "However, not everyone has sacrificed. The failure of our tax-exempts to sacrifice has left a $7.1 million hole in our budget." Taveras said the city's retirees must accept reduced pension and health care benefits to save the city from financial ruin. A decree signed in 1991 by Mayor Buddy Cianci pushed the city's pension liability "into the stratosphere" by giving annual cost-of-living increases of 5% and 6% to more than 600 retirees, he said. "These retirees have refused to sacrifice and are costing Providence taxpayers tens of millions of dollars a year," Taveras said, calling the increases "raises," not adjustments to keep up with the cost of living. The mayor will hold a meeting with retirees on March 3 where they will be asked for concessions. Taveras's office released a list showing that the city's highest-paid pensioner, former Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin's pension will total roughly $796,871 if he lives to the age of 100. Specter of Central Falls The tiny city of Central Falls became the first Rhode Island municipality ever to file for bankruptcy last August. East Providence's finances were also placed under formal state oversight in November. Woonsocket and Pawtucket recently disclosed surprise deficits, and two-thirds of local pension plans in the state are "at risk." Retired police officers and firefighters in Central Falls recently reached a tentative agreement with former R.I. Supreme Court Justice Robert Flanders, the city's receiver, that would see their pension payments reduced by as much as 55% if state lawmakers agree to augment that with supplemental payments over the next five years. Taveras urged Providence's retirees to learn a lesson from what happened in Central Falls, warning he would find a way to reduce the cost of their pension benefits "one way or another." As of June 30, Providence's city pension system was 32% funded with a shortfall of $901 million, and the city also had a $1.2 billion unfunded liability for retiree health benefits, according to its most recent audit. The entire city budget is roughly $619 million this year. Unions, Politicians to Blame Check that out: The entire budget is $619 million, and the city has a shortfall of over $2 billion. Taveras is barking up the wrong tree arguing "Our firefighters, police officers, teachers and taxpayers have all sacrificed in the last year and helped Providence avoid catastrophe". It is the firefighters, police officers, and teachers unions (and of course corrupt politicians willing to buy votes) that are responsible for this mess. The only group that can claim to have sacrificed is non-union taxpayers. However, much of the rest of Taveras' comments ring true.  Absurd Benefits This statement says it all "Fire Chief Gilbert McLaughlin, now receives an annual pension of $196,813 a year. He retired with an annual salary of $63,510. At the current rate of growth, McLaughlin's pension will total roughly $796,871 [annually!] if he lives to the age of 100. To double-check my $796,871 annually claim, I used this Compound Interest Calculator. At 6% per year, it would take about 24 years to grow to a benefit of $196,813 a year to $796,882.97. Thus I conclude McLaughlin is 76 years old. If he lives another 10 years, his annual pension would be $352,462.11 based on an career ending salary of a mere $63,510. With this kind of absurdity, it is foolish to attempt to resolve this mess outside of bankruptcy. Those pension contracts should be declared null and void. Restoring Equity I would like to see a bankruptcy judge reduce McLaughlin's pension to the average of his last 10 years' salary. Teachers and others on the low end of the benefit scale should be the hit the least. That would be reasonably equitable. Spare me the sap about legal contacts and promises. Those contracts and pension benefits were bought with bribes and dishonesty with no one looking out for the taxpayer. Fraudulent, self-serving contracts with no one representing the taxpayer should not be legally enforceable (and indeed they weren't for Central Falls). More Cities, Major Cities Will Follow Without even looking at the details, it's easy to speculate East Providence, Woonsocket, and Pawtucket are going to follow Central Falls and Providence into the bankruptcy gutter. Moreover, it's only a matter of time before Oakland, Huston, LA, San Diego, Newark, Cincinnati, etc, go under. Bankruptcy is the only way to wipe out preposterous pension benefits, so expect to see more of them. As with Detroit, Michigan (see Deal Reached to Prevent Michigan Takeover of Detroit; Really? No, Not Really; What's Best for Bankrupt Detroit?) bankruptcy would be the best possible outcome for taxpayers. Bankruptcy is the only way to shed absurd union contracts and pension benefits. Thus, taxpayers should be rooting for Taveras to ask for concessions so big the unions say "no deal". It is taxpayers' best hope of settling the mess in one shot without devastating tax hikes. Inquiring minds might also be interested in American Airlines Went Bankrupt in November; Are Taxpayers on the Hook for Pension Benefits? What is the Equitable Solution? 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.

EU says "Strict Application of Budget Rules Doesn't Make Sense"; Spain Kicks Off the Year Destroying 9,000+ Jobs a Day, 283,700 for Month; Impossible Dream Posted: 03 Feb 2012 12:22 AM PST On January 30, 25 of 27 nations signed the Merkozy accord calling for strict budget discipline and "quasi-automatic sanctions" for nations that violate budget rules. Only the UK and Czech Republic refused to sign. Following that ceremonious signing it took precisely two days for European bureaucrats to propose "Application of the rules in a strict manner in the face of a downturn doesn't make sense". Spain Poses Six-Pack Rules Challenge Please laugh along with Spain poses six-pack rules challenge Spain's deteriorating economy poses the first challenge to Brussels' commitment to enforce tough new budget rules intended to repair credibility with financial markets and ease the debt crisis. "Application of the rules in a strict manner in the face of a downturn doesn't make sense," said Andre Sapir, a senior fellow at Bruegel, a Brussels think-tank. "One has to find a compromise." Olli Rehn, the economics commissioner, threatened to "fully use this powerful set of new tools from day one". But the EU's executive arm is also sympathetic to Spain's plight. Following a meeting in Brussels on Monday with Mariano Rajoy, the Spanish prime minister, José Manuel Barroso, the European Commission president, suggested that a debate was now under way on whether to make some accommodation for Madrid. "Efforts should be made to contain the deficits for 2012," Mr Barroso told reporters. "However, it would be convenient now to have a discussion ... about this situation." It also risks drawing the ire of fellow member states, which have already been exposed to tough consequences because of the six pack. Belgium, for example, earlier this month cut more than €1bn from this year's budget in a frantic weekend exercise in order to avoid fines – an experience that led a top minister to lash out at Mr Rehn. Meanwhile, Hungary was threatened last week with a freeze on its EU development funds for next year if it does not comply with the rules. But such considerations may be overwhelmed by the severity of Spain's situation. Even local business leaders who favour harsh curbs on public spending now say that sticking to the original 2012 deficit target of 4.4 per cent of gross domestic product is almost impossible and risks plunging the economy into depression. Precise Targets Go Out the Window Already Mr Rajoy's ministers have recently been careful not to reaffirm their commitment to the precise 2012 deficit target of 4.4 per cent of GDP – although they reiterate their austerity pledges in general terms – and are evidently hoping that the Commission and Angela Merkel, the German chancellor, will accept the need for softer targets provided Spain launches its promised economic reforms. "Once Merkel has the certainty that these [southern European] countries are doing the right thing, the stance of Europe may be relaxed," says the banker. The head of another leading Spanish business said: "The important thing is that the path to a lower deficit should be credible and coherent." It should not take too long for Portugal and Ireland to find it "convenient" to also request a variance in the "Application of the rules in a strict manner". Spain Kicks Off the Year Destroying 9,000+ Jobs a Day Courtesy of Google Translate from El Pais, please consider The economy started the year destroying more than 9,000 jobs a day As reported to the Ministry of Employment, Social Security membership fell by 283,700 people in January, about 9,000 jobs a day. The average number of employed fell below 17 million (16,946,237) for the first time since the beginning in 2005. Courtesy of Google Translate from Libre Mercado, please consider Employment has Worst Start Since Fateful Year of 2009 Spain Social Security Membership [Mish comment: Judging from the January numbers (all negative), the data is not seasonally adjusted.] The total number of employed fell below 17 million (16,946,237) for the first time since 2004. Very negative balance According to the Foundation for Applied Economic Research (FEDEA), "after four years of crisis, employment continues to be destroyed, and what is worse, the intensity of this destruction increases." Meanwhile, according to the Association of Large Temporary Work (Agettes), the January data show that "we continue down the wrong path. We are witnessing a dramatic scene again that, unfortunately, is unknown to us because we have four years assisting new negative record. The global economic situation continues to drown our perspective, while our own labor market tightens further the bit oxygen that remains." Spain Unveils EUR 50bn Bank Sector Clean-Up EU Business reports Spain Unveils EUR 50bn Bank Sector Clean-Up Spain's government unveiled reforms Thursday that will oblige banks to clean up their bad loans by building up provisions and capital reserves totalling 50 billion euros ($65 billion). The banking sector is weighed down by a mountain of soured loans and property assets that are losing their value after the collapse of the Spanish property market in 2008. According to the Bank of Spain, the sector had 176 billion euros in problem loans and seized real estate in June 2011 -- a figure which has probably increased since, as the economy has weakened. The sector has undergone a major restructuring since 2008 but the government considers it still to be at risk despite banks putting aside a third of this amount to cushion the blow when they sell off the bad assets. The new reform aims to "generate mergers to form viable entities" out of struggling ones so that "the clean-up will be quick and deep", De Guindos said. Impossible Dream There was 176 billion euros in problem loans last summer. What is total now, 250 billion? Banks are somehow supposed to come up with $50 billion in capital (when? how?) after which they merge struggling banks and via some undisclosed magic process  "the clean-up will be quick and deep" forming viable banks. This is an easy call, especially in light of employment trends: That plan is doomed and Spain is in deep trouble. 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.

You are subscribed to email updates from Mish's Global Economic Trend Analysis To stop receiving these emails, you may unsubscribe now.	Email delivery powered by Google
Google Inc., 20 West Kinzie, Chicago IL USA 60610