Mish's Global Economic Trend Analysis

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• China Financial Markets: When Will China Emerge From the Global Crisis?
• Merkel's Official Denial "I will have no part in forcing Greece out of the euro"; Schäuble Starts Salami Tactics on German Participation, Calls for Vote
• Japan Machine Orders Drop 7.1%, Exports Down 3 Consecutive Months; Predicted Growth or Predicted Mirage?
• Consumer Credit "Demolishes Expectations" Really? No Not Really! The "Non-Bounce" in Non-Revolving Credit

China Financial Markets: When Will China Emerge From the Global Crisis? Posted: 09 Feb 2012 10:07 PM PST I am saddened to report that Michael Pettis' site China Financial Markets has been blocked. The link redirects to a site with a one line message "This Account Has Been Suspended". When I have more details, I will post them. Note: I just heard back from Pettis who is unsure of what happened. Hopefully this will be cleared up soon. I am leaving the rest of this post as I originally wrote it. This is really a shame because Pettis is invariably a great read. I am personally indebted because he has taught me most of what I know about trade. Michael Pettis is Professor of Finance at Peking University, and Senior Associate at the Carnegie Endowment for International Peace. When Will China Emerge from the Global Crisis? Via email (this may have been posted on his blog but obviously I cannot tell), please consider snips fromWhen will China emerge from the global crisis? by Michael Pettis. Caixin, one of my favorite magazines, has an interview with Liu Mingkang, former China Banking Regulation Commission chairman. In it Liu says: I've said in the past, that this economic crisis will spread from the United States to Europe and finally land in Asia. Now we can see that it's already begun influencing Asia. In 2008 and 2009 I argued that the crisis we were undergoing would affect every major economy in the world, but not necessarily at the same pace. I suggested that the US typically is quick to adjust and, given the pace of deleveraging that was already taking place, I expected that it would be the first major economy out of the crisis, probably in the next two to three years, as private debt levels continue to decline and public debt growth slows. By now I think the prediction that the US will be among the first and China among the last to escape the crisis no longer seems as eccentric. Others are making similar predictions. There is growing awareness that China has not yet addressed the changes forced upon it by the global crisis, and will have to do so soon. It has certainly become easier to see how the crisis has spread, as Liu points out, first from the US and then to Europe and now to Asia. It is important to note that it is not just Liu who is thinking along these lines. There were for example two other interesting articles last week in Caixin which I think are useful in understanding China. The first article, by Wang Lan, addresses the problem of State-Owned-Enterprises (SOEs) in China. In Stifling the Nation's Vitality Wang addresses one consequence of state investment. The vitality of the Chinese economy is being stifled by SOEs, especially central-level, or top, SOEs, and this is borne out by research. In 2010, the capital of 102 central-level SOEs was equivalent to 61.4 percent of GDP, and their earnings equaled 42.2 percent of GDP.  The second national economic census taken in 2008 reported profits of nearly 900 billion yuan by finance industry central-level SOEs. Banks accounted for 64 percent of that profit.  These gargantuan SOEs have not only failed to lead us toward a new stage of development, but they have actually inhibited the vitality of the Chinese economy by distorting resource allocation. Wang recommends that Beijing begin a privatization process to wean SOEs from their addiction to excessively cheap capital, monopoly power, and distorted governance. This, he says, will force the SOEs to address and resolve their role in wasting capital, stifling innovation, and concentrating wealth. It will also allow China to grow in a much healthier and balanced way. I have always thought that the least painful way for China to rebalance its economy requires that it radically redistribute income and wealth away from the state sector and to the household sector. There are many ways this can happen, some better and some worse, but privatizing SOEs and using the proceeds to clean up the banks (whose Non-Perfgorming-Loans are a future claim on households), to shore up the social safety net, and to permit SME's more scope in which to compete is, in my opinion, the most efficient ways to do so. It would also weaken sectors that are able to restrain change in the economy. Returning to the System For many years we were told that privatization was pretty much out of the question in China. I disagree, and have argued often that within two or three years the constraints imposed by the current growth model will ensure that policymakers and their advisors in Beijing will be discussing privatization much more actively. This discussion actually ties into the second Caixin article, by Tsinghua University sociology professor Guo Yuhua China: A Country Where No One is Secure. Guo starts by referring to a deep malaise in the country: What is the most common feeling in China today? I think many people would say disappointment. This feeling comes from the insufficient improvement in their lives that people are achieving amid rapid economic growth. It also comes from the contrast between the degree to which individual social status is rising and the idea of the "rise of a great and powerful nation." Guo asks for a more robust social system in which the benefits of economic growth are not so heavily skewed towards a political elite and in which members of the various strata below the elite have increased opportunities of participating in the economic process: Power is becoming too formidable and cruel. It is out of control, and without limits. It has kidnapped society and strangled reform. Facing this, finding a solution is a matter of vital importance. In a situation where special interest groups have choked off the possibility of various types of progress, building a just society and enacting reform is difficult. Moreover, there is not a ready-made civil society waiting to settle into the void. Civil society is produced by the participation of citizens. Extrication from stagnation and the restoration of social vitality can only come from the start of civil consciousness and civil action. Only by empowering society and enlightening citizens can the strength to reform be developed. This is becoming a pretty contentious debate. Over the past several months, in fact, we have seen a noticeable surge in articles and reports like this one – often by very prominent academics and policy advisors – criticizing the power of special interests in China. Their main concern seems to be over the constraints these special interests impose on further Chinese development, with the entrenched interests that have benefited over the last decade or two having become so powerful that they are making it increasingly difficult for China to adjust. I apologize for the rather abstract and dry description in this and the three previous paragraphs of what is actually a gripping and very interesting topic, but for perhaps obvious reasons this is something about which I am reluctant to say too much. Still, anyone trying to predict China's economic outlook for the next few years should be very aware of this fierce debate. Reasons Obvious Above emphasis in red is mine. Yes Michael, I am saddened to say the reasons are indeed obvious. In China, when you overly criticize government you are going to run into problems, such as your entire blog being blocked (or something much, much worse). My blog is blocked in China as well. While on the subject of blockage, please consider Country Specific Blog Censorship by Google; Twitter Employs Censorship as Well; Echo Comments Not Working on Redirects. Also, please reconsider paragraphs above in italics by Guo Yuhua, starting with "Power is becoming too formidable and cruel. It is out of control, and without limits. It has kidnapped society and strangled reform. ...Only by empowering society and enlightening citizens can the strength to reform be developed." Is Guo talking about China or the war-mongers, the unions, the banks, and the corporate lobbyists in the US? My vote is all of the above.  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.

Merkel's Official Denial "I will have no part in forcing Greece out of the euro"; Schäuble Starts Salami Tactics on German Participation, Calls for Vote Posted: 09 Feb 2012 01:40 PM PST Germany's "Official Denial" If you seek confirmation that Germany is actively trying to force Greece out of the Eurozone, strong evidence appears in the form of an "Official Denial" Please consider Merkel Says Won't Force Greece Out of Euro German Chancellor Angela Merkel said on Tuesday she did not want to see Greece being forced out of the euro, warning that this would have "unforeseeable consequences." "I will have no part in forcing Greece out of the euro," she said in response to a question from a Greek student at a meeting with young people in a Berlin museum. "We don't do it to make things difficult for people, what would be our interest in doing that? But we want to reach a point where Greece can, with European help, live off its resources," said Merkel. "Nobody wants to force reforms on them from outside," she said. "Official Denial" Theory For a discussion of the "official denial" theory, please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied) Cede Budget Sovereignty Roadblock Right in line with "official denial" theory, Germany started placing as many roadblocks as possible on Greece. On January 27, Merkel demanded Greece to Cede Sovereignty to Eurozone "Budget Commissioner". Unfortunately for Germany, French president Nicolas Sarkozy shot down the idea. However, Germany would not let it drop and two days ago Merkel floated a similar idea disguised as a Spaghetti-O. Spaghetti-O Roadblock For details of the Spaghetti-O loop proposal, please see New Merkozy Proposal "I will Give You Money If You Give It Right Back"; Mathematical Scam to Prevent CDS Triggers Schäuble Starts Salami Tactics In addition to the Spaghetti-O loop, Eurointelligence discusses the "Salami Roadblock". According to Financial Times Deutschland, Wolfgang Schäuble now wants the Bundestag to vote only on a fraction of €30bn out of the total cost of the second Greek rescue package of €130bn. He is supported by the finance ministers of the Netherlands and Finland who met as part of the secret meeting AAA-rated ministers. The reason for this unexpected move is that the coalition has reason to fear that the general exasperation about the lack of progress in Greece made it uncertain that it would be unable to get the necessary parliamentary for the whole package. Also the coalition wants to keep up maximum pressure on Greece. In Brussels the Berlin, the move was greeted with surprise and irritation, the paper reports. Finance Minister Wolfgang Schäuble Calls For Vote Courtesy of Google Translate, please consider Finance Minister Wolfgang Schäuble Calls For Vote Greece is waiting for € 100 billion - but in the coming days, the federal government wants to release a maximum of 30 billion. This announcement Schäuble irritates the Euro Group. The federal government wants to delay the comprehensive aid package for Greece. Finance Minister Wolfgang Schäuble (CDU) announced in the coming days initially provide only 30 billion euros to cover for banks, which suffered a cut debt. The release of an additional € 100 billion envisaged for the salvation of Greece to the Bundestag will not until further submitted to a vote. Greece should get even more money? Thus, Germany could once again gain time - either to wrest Greece in the meantime, further cost-cutting efforts, or even prepare a subsequent bankruptcy Greek Deal Done? Earlier today we heard Greece accepted a deal. Not so fast. The Washington Post reports German FinMin: Greek deal on spending cuts appears to not yet fulfill bailout conditions That title was the entirety of the article. IMF Says No Deal Zero Hedge reports Greek Deal Done? Not So Fast Says IMF IMF SAYS IT'S NOT FORCING AUSTERITY ON GREECE AS TALKS CONTINUE - BBG RICE SAYS IMF "WELL AWARE HOW DIFFICULT' IT IS FOR GREECE - BBG IMF'S RICE SAYS IMF MINDFUL OF `HARDSHIPS' IN GREEK PROGRAM - BBG RICE DECLINES TO SAY WHAT IMF SHARE OF NEXT GREEK LOAN WILL BE - BBG IMF SAYS 'PRIOR ACTIONS' LIKELY TO BE REQUIRED BEFORE FUND OK OF NEW GREEK LOAN PROGRAM - DOW JONES Read that first bullet point carefully. We now have an official denial from the IMF. However, it is of secondary importance because it pertains to austerity measures and not a eurozone exit. Also read the last bullet point closely. Now the IMF is placing roadblocks. Zerohedge jumps to conclusions regarding the last bullet point "By the way, dear US taxpayer, the IMF - that's you." My take: Congress is not going to allocate any money for this boondoogle. Greece Forcefully Seeking to Dump Greece In spite of denials, it is quite obvious Germany wants Greece out of the Eurozone. However, France and other countries do not. The IMF appears to be siding with Germany, and that is a big change. If there is a deal, don't expect it to last. Greek elections are coming up, and even if they halt those elections (quite likely if a deal is reached), Germany will simply place more and more demands on Greece as soon as Greece misses budget targets (almost immediately). Why These Games? Germany seeks to absolve itself of any guilt for what happens to Greece. It wants Greece to make the exit choice, while placing as many roadblocks as possible to force Greece to do just that. 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.

Japan Machine Orders Drop 7.1%, Exports Down 3 Consecutive Months; Predicted Growth or Predicted Mirage? Posted: 09 Feb 2012 09:49 AM PST Bloomberg reports Japan Machine Orders Fall More-Than-Estimated 7.1% as Yen Climbs Japan's machinery orders fell at the fastest pace in three months in December as a faltering global economy and gains by the yen dimmed the outlook for exporters. Bookings, an indicator of capital spending, decreased 7.1 percent from the previous month, the Cabinet Office said in Tokyo today, after surging 15 percent in November. The median estimate of 29 economists surveyed by Bloomberg News was for a 5 percent decline. Japan's exports fell for three straight months through December as European leaders grappled with the debt crisis that is driving the euro region into a recession. Spending may rebound as earthquake reconstruction work kicks in and today's report showed companies forecasting a 2.3 percent increase in orders this quarter. Japan's lower house of parliament on Feb. 3 approved Prime Minister Yoshihiko Noda's 2.5 trillion yen ($32 billion) recovery package from the earthquake and tsunami, the fourth supplementary budget since the disaster. The government forecast in December that Japan's economy will grow 2.2 percent in the year starting April after a projected 0.1 percent contraction this fiscal year. The International Monetary Fund estimates that Japan's economy will grow 1.7 percent this year, compared with a likely 1.8 percent expansion for the U.S. and an estimated 0.5 percent contraction for the euro area. Predicted Growth or Predicted Mirage? Spend enough money and you can get GDP to rise. But what about that deficit to the tune of 230% of GDP? To solve the deficit problem, Japan proposes massive tax hikes. What would tax hikes do for consumer spending? If Japan does pass tax hikes, it could strengthen the Yen. What would a strengthening the Yen do to exports? Simply put, the estimated growth is a mirage, if it happens at all, and increased government spending is going to cause other problems. For further discussion, please see Japan Faces Moment of Truth: First Annual Trade Deficit Since 1980; New Trend or Simply the Tsunami Effect? 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.

Consumer Credit "Demolishes Expectations" Really? No Not Really! The "Non-Bounce" in Non-Revolving Credit Posted: 08 Feb 2012 11:26 PM PST Joe Weisenthal writing for Business Insider reports Consumer Credit Demolishes Expectations, Grows $19 Billion. It's hard to think that the economy is going into any kind of recession with numbers like these. For the second straight month we just got a HUGE number on consumer credit Consumer credit expanded by $19 billion in December. That's far more than the $7 billion that was expected by economists. This chart from Reuters' Soctty Barber basically tells it all. The data on which that chart was produced was the Consumer Credit - G.19 government report. Demolishing the Revolving Credit Side of the Story Lance Roberts of Streettalk Live demolishes the revolving credit side of Weisenthal 's story (a $4 billion December rise) in an excellent perspective Consumer Credit and the American Conundrum. Demolishing the Non-Revolving Credit Side of the Story My job is to demolish the non-revolving side of Weisenthal's story, and it's an exceptionally easy task to do. Non-Revolving credit rose $11.8 billion in December. However, $8.8 billion of that is growth in federal government loans (which just happens to be where student loans are parked). Here are some charts I put together stripping out federal government loans. Non-Revolving Loans Minus Government Loans Non-Revolving Loans Minus Government Loans Detail True Bounce in Percentage Terms Note that the year-over-year "bounce" has not even gotten back to the zero-line in spite of exceptionally easy comparisons. Middle-Aged Borrowers Pile on Student Debt Reuters reports Middle-Aged Borrowers Pile on Student Debt Educational borrowing is up for every age group over the past three years, but it has grown far more quickly among those between 35 and 49, according to the analysis of more than 3 million credit reports provided to Reuters by the credit score tracking site CreditKarma (CreditKarma.com). That group saw its school debt burden increase by a staggering 47 percent, according to the analysis. The average student loan debt for those aged 38 to 41 was the biggest of that group -- about $12,000, up from just under $9,000 in 2009. Young people still carry the biggest student loan burdens; those aged 26 to 29 have an average of $14,000 in student debt. But the increased levels in middle-aged student debt is a new phenomenon. Negative Payback on Retraining The benefit of going back to school at age 49 is likely negative. My friend "BC" comments: The payoff for 40- and 50-somethings taking on debt to change occupations or trying to find jobs in "health care" or "education" and compete with Millennials trying to secure similar positions is low or negative. Statistically, the benefit to "education" occurs between ages 14 and 22, where one goes to high school and university. Obtaining an MBA, law degree, or another graduate degree after age 26-28 historically has not resulted in a net benefit in terms of job/career prospects or wage/salary income; and this has become particularly the case since the late '90s. In other words, the vast majority of people running up debt at universities, community colleges, and for-profit technical schools are wasting their time and money, as well as directing scarce resources to the "health care" and "education" sectors that don't need more misallocation further driving up costs. Needless to say, there is no precedent in US history for middle-aged unemployed, underemployed, or unemployable Americans running up debt in an economy that has not created a net new private sector full-time job per capita in at least 10 years. Fewer Nonfarm Employees Now Than December 2000 Here is one key chart (of many) from Fewer Nonfarm Employees Now Than December 2000; Unemployment Rate: Some Things Still Don't Add Up; Obamanomics? Total Nonfarm Employees There are currently 132,409,000 nonfarm employees. In December of 2000 there were 132,481,000 employees. How's that for job growth? Retraining Scam Job retraining is scam perpetrated by for-profit universities, fueled by statements from Obama regarding re-training people for new jobs. Brick-layers are told they can be "chefs", take $10,000 courses and the universities call it a "success" if they land a job "in their field" at McDonald's. Unemployed roofers are led to believe they can become Java programmers, and they waste collective $billions trying. Meanwhile out of work Java programmers are told to take up a trade like roofing or auto mechanics. The cost of education keeps rising because Obama (like Bush before him), keeps adding to the student loan program when the entire student loan scam really needs to be shut down. Why Does the Scam Roll On and On? No politician wants to stand up and tell the truth: Retraining is a waste of money and the odds of launching a new career in other than a low-paying job requiring few skills is simply not likely. For-Profit universities pad politicians' pockets One can always find success stories, but in aggregate, retraining middle-aged workers is a net waste of money. To Paraphrase Joe Weisenthal Now, to paraphrase Joe Weisenthal: "It's hard to think that the economy is NOT going back into a recession with numbers like these." The difference in viewpoint is understanding what the underlying numbers really represent. 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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