marți, 6 martie 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Recession Hits Australia; 21st Monthly Decline in Construction; Service Sector in Contraction, New Orders Plunge; Ring, Ring Goes The Bell

Posted: 06 Mar 2012 10:18 PM PST

A set of incredibly weak economic reports from down under have left me with in inescapable conclusion that Australia has entered recession.

Australia GDP Expands "Less Than Expected" .04% in 4th Quarter

The BBC reports Australia's economy expands 0.4% in the fourth-quarter
Australia's economy has expanded by less than expected in the fourth quarter of 2011, as business spending dropped, sending the dollar to a six-week low.

Gross domestic product rose by 0.4% in the three months to the end of December compared with the previous three months, said the Bureau of Statistics. Analysts were expecting growth of 0.8%.

However, most analysts say that growth is expected to pick up in the coming months. "We're doing much better than most," said Stephen Walters, from JP Morgan.

The Reserve Bank of Australia (RBA) said it still expects growth of 3-3.5% this year and next.
3.5% growth? What the heck are these guys smoking?

21st Monthly Decline in Construction

Bloomberg reports Australian Construction Index Falls to Lowest in Four Months
A gauge of Australia's construction industry fell to the lowest level in four months as commercial construction remained weak and house building declined.

The construction performance index fell to 35.6 in February from 39.8 a month earlier, the 21st monthly decline, a survey by the Australian Industry Group and the Housing Industry Association released in Sydney today showed. A reading below 50 represents a contraction.

"The tentative signs of recovery that had emerged in the closing months of 2011 as interest rates were lowered appear to have dissipated since the start of this year," Australian Industry Group Director of Public Policy Peter Burn said in a statement. "With new orders also weak in February and with market interest rates somewhat higher, the outlook for the next few months remains flat."
Tentative signs of recovery? With construction dropping 21 straight months? Really?

Service Sector in Contraction

Markit reports Australia Service Sector in Falls in February.
Key Findings

  • Service sector activity fell in February according to the latest seasonally adjusted Australian Industry Group/ Commonwealth Bank Australian Performance of Services Index (Australian PSI®) which was down 5.2 points to 46.7 in the month.
  • And in three-month-moving-average terms, the Australian PSI® has remained below the critical 50 point level for four consecutive months.
  • Reports of declining activity levels in February were common across the sector, with businesses reporting that sales, new orders and employment levels all fell back in the month.
  • The new orders component of the Australian PSI® recorded a particularly sharp fall, and is now at its lowest level in over 12 months.
  • In line with these soft trading conditions, the average selling price index declined in February, and is also at its lowest level in over 12 months.

New orders

  • On a seasonally adjusted basis, new order levels fell sharply in February after remaining broadly steady over much of the past year.
  • The new orders component of the Australian PSI® fell by 8.5 points to 45.6.
  • New order levels declined across most service sub-sectors in February, with particularly sharp declines reported in the retail trade and communication services sub-sectors.
  • This was only partly offset by solid growth in new orders in the finance & insurance and personal & recreational services sub-sectors.

Australia PSI



click on chart for sharper image
Huge Price Squeeze

Please take a good look at that chart. Wages have risen 31 months. Input prices have risen 108 consecutive months!

Every other component of the PSI is in contraction. Selling prices have fallen for 3 months while new orders have plunged.

Trendline Growth

For another look at GDP growth in Australia, please consider The Australian economy is not growing at trend
The outcome over 5 years? Trend growth at 0.72% per annum, with peak to trough and current total growth as marked on the chart.

Over the last 12 months, yearly GDP per capita growth was at 0.7% - substantially less than the long term rate of 1.48% over the last ten years, or the 2.4% rate over the whole data series.

The Australian economy is still growing, but at half the long term pace on a person by person basis, and given the problems with the standard CPI measurement (which contrary to popular belief, does not measure inflation), it is likely that purchasing power is not being maintained either.

With a government forced to return to surplus to maintain its AAA rating and thus reduce stimulus spending, credit growth running at 35 year lows and decelerating, a slowdown and likely reversal in Terms of Trade from record high commodity prices and in the absence of further Chinese stimulus (which arguably did more than all the endogenous stimuli post GFC), its hard to see how GDP growth can return to the mean trend of pre-GFC years.

It's also hard to see how this is surprising.

Ring, Ring Goes The Bell

Indeed, it's not surprising (to a few of us anyway).

Yesterday I stated Australia Retail and Housing Bloodbath Coming Up.

Today I am ringing the bells of recession.

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.

Athens' Pitifully Hollow Warning to Bond Holdouts; Self-Serving, Misguided Hype by IIF on "Implications of a Disorderly Greek Default and Euro Exit"

Posted: 06 Mar 2012 11:45 AM PST

I can't help laughing at the Financial Times headline story Athens threat to bond holdouts.
Greece has threatened to default on any of its bondholders who do not take part in this week's €206bn debt restructuring, raising the pressure on potential holdouts.

The threat is aimed in particular at the 14 per cent of investors who own Greek bonds issued under international law. The remaining 86 per cent, who own bonds covered by Greek law, were warned in the same statement that Greece would use so-called collective action clauses to make any deal binding on any holdouts.

People involved in the deal said there would be no sympathy for any holdouts in the international law bonds, as many of them were hedge funds who had bought in on the hope of being paid back in full as other investors suffered losses of about 75 per cent.

"They will be portrayed as evil hedge funds and nobody will have any pity for them. That means you can be violent with them. They need to realise that they don't have a free option here," one person close to the deal said.
Pitiful Threat

This pitiful threat demonizing evil hedge funds will prove to be as effective as a parent telling a child, "If you don't clean up your room, I will give you piece of cake".

The hedge funds want a default. They are the ones covered with CDS contracts that will pay them in case of default. Those covered by CDS contracts have no incentive to agree to deals and threats to blow the entire deal sky high is exactly what most of the holdouts want to hear.

Implications of a Disorderly Greek Default and Euro Exit

Even more pathetic than the Greek "threat" is a "confidential" (purposely leaked) report by the Institute of International Finance which which represents about 450 banks and other private creditors to Greece.

The Wall Street Journal has posted the document, Implications of a Disorderly Greek Default and Euro Exit so let's take a look at the hype.

  1. Direct losses on Greek debt holdings (€73 billion) that would probably result from a generalized default on Greek debt (owed to both private and public sector creditors);
  2. Sizeable potential losses by the ECB: we estimate that ECB exposure to Greece (€177 billion) is over 200% of the ECB's capital base;
  3. The likely need to provide substantial additional support to both Portugal and Ireland (government and well as banks) to convince market participants that these countries were indeed fully insulated from Greece (possibly a combined €380 billion over a 5 year horizon);
  4. The likely need to provide substantial support to Spain and Italy to stem contagion there (possibly another €350 billion of combined support from the EFSF/ESM and IMF);
  5. The ECB would be directly damaged by a Greek default, but would come under pressure to significantly expand its SMP (currently €219 billion) to support sovereign debt markets;
  6. There would be sizeable bank recapitalization costs, which could easily be €160 billion. Private investors would be very leery to provide additional equity, thus leaving governments with the choice of either funding the equity themselves, or seeing banks achieve improved ratios through even sharper deleveraging;
  7. There would be lost tax revenues from weaker Euro Area growth and higher interest payments from higher debt levels implied in providing additional lending;
  8. There would be lower tax revenues resulting from lower global growth. The global growth implications of a disorderly default are, ex ante, hard to quantify. Lehman Brothers was far smaller than Greece and its demise was supposedly well anticipated. It is very hard to be confident about how producers and consumers in the Euro Area and beyond will respond when such an extreme event as a disorderly sovereign default occurs.

There is a more profound issue, however. The increased involvement of the ECB in
supporting the Euro Area financial system has been such that a disorderly Greek default would lead to significant losses and strains on the ECB itself. When combined with the strong likelihood that a disorderly Greek default would lead to the hurried exit of Greece from the Euro Area, this financial shock to the ECB could raise significant stability issues about the monetary union.
Self-Serving, Misguided Hype by IIF

That "confidential" PDF is one of the biggest examples of self-serving nonsensical financial hype stories as you can find anywhere. It was put together by nannyzone supporters attempting to scare everyone about eurozone breakup costs.

For starters the ECB will not be impacted by Greece regardless of what happens. The ECB would be made whole by EMU member nations if necessary.

Moreover, the idea that tiny Greece will "cause" a Lehman-like cascade is farcical. The "cause" of this mess is the woefully inept treaty that created the eurozone.

Greece, Spain, and Portugal are all bankrupt and all will exit the eurozone in due time and one cannot lay the blame for this on Greece. Indeed, had the fools at the EMU, IMF, and ECB allowed Greece to default two years ago, damage would have been minimized.

Foolish attempts to "contain" Greece made matters far worse. That the damages will be higher now is a direct consequence of the ECB president Jaan-Claude Trichet's policy "we say no to default".

At every opportunity to do the right thing (let Greece default), bureaucrats in the ECB, IMF, and EMU member countries threw more and more money at  Greece in repeated attempts to prevent the inevitable.

Only Realistic Solution is Eurozone Breakup

Throwing still more money at Greece now will not prevent Greece, Portugal, and Spain from leaving the eurozone later. Instead, repeated attempts to stay on this road-to-ruin will do nothing but up costs later on, just as Miracle Monti's misguided LTRO programs will likewise do.

For a more realistic discussion of the impacts and a recommended proper approach, please consider Report Shows Netherlands Would Benefit by Leaving Eurozone; Country by Country Aggregate Costs; Dutch Freedom Party Wants Euro Exit Referendum; Critical Juncture for Eurozone

The euro and the eurozone are fundamentally flawed. Those flaws cannot be fixed by throwing more money at the problem. The only solution that really works is a breakup of the Eurozone, and the sooner the bureaucrats accept that simple fact, the better off everyone will be.

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.

Obama Unveils New J.P. Morgan, Wells Fargo Bailout Plan, Disguised as Mortgage Relief

Posted: 06 Mar 2012 09:46 AM PST

Under guise of helping homeowners, president Obama has finalized his plan to further aid banks. Please consider Obama's alleged Mortgage Relief Plan.
The White House on Tuesday announced it was cutting the mortgage fees charged by the Federal Housing Administration's refinancing program in another effort to help the languishing housing market recover.

President Barack Obama will announce the move at an afternoon press conference, his first since November.

An estimated 2 million to 3 million FHA borrowers will be eligible to benefit from the revamped program, the White House said in a statement.

The measures to be announced by Obama this afternoon do not need Congressional approval.

Under the revised FHA streamlined refinancing program for loans originated prior to June 2009, borrowers refinancing existing FHA loans would pay an up-front mortgage insurance premium of 0.01%, down from 1.0%. The annual premiums will be cut in half to 0.55%.

The reductions could save the typical FHA borrower about a thousand dollars per year, the White House said.

Jaret Seiberg, senior policy analyst with Guggenheim, said the plan would be "broadly positive" for housing and the economy by reducing foreclosures and freeing up income for consumers.

Big banks like J.P. Morgan Chase JPM and Wells Fargo WFC would see fee income related to FHA mortgages spike with this program, Seiberg said in a research note.
Broadly Positive For Whom?

Contrary to the opinions of Seiberg, this plan will not be "broadly positive" for housing and the economy any more than numerous other misguided attempts purported to do the same thing, all of which failed at their stated intent.

Throwing more taxpayer money down the drain will of course be "broadly positive" for big banks that will see income rise.

Indeed, much of the rally in bank shares this year has been in regards to "broadly positive" measures by the administration and the Fed purposely designed to bailout banks in contrast to stated reasons.

Moreover, the plan is sure to be "broadly positive" for Obama's reelection chances, and "broadly negative" for taxpayers who will no doubt end up footing the bill, perhaps in more ways than one.

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.

Misty Water-Colored Memories, Dirt-Cheap Stocks, and Patient Opportunism

Posted: 06 Mar 2012 02:12 AM PST

Looking at forward earnings estimates, buy recommendations, and numerous explanations once again as to why "stocks are cheap" I am left wondering (to paraphrase Barbara Streisand) "Can it be that it is all so simple now? Or has time repeated every lie?"

Looking back, all that's left from the housing crash is "misty water-colored memories" of opportunities to cash out at the top (or dreams of not buying in the first place). The same can be said of the Nasdaq technology bubble that peaked at 5132 in March of 2000.

12 years later, the Nasdaq has managed to crawl back to 3000. Will it be another 10 years before the Nasdaq again hits 5000?

"Dirt Cheap" says Analyst Dick Bove

In 2000, in 2007, and again recently, we have heard many misguided explanations as to why "stocks are cheap". Some use forward earnings estimates, others tortured rationale such as "stocks are cheap compared to bonds", and still others use historical P/E estimates as if recent history is a guide to repeatable earnings.

Recently, analyst Dick Bove said Bank Stocks 'Dirt Cheap' as Image Starts to Turn
The Rochdale Securities vice president of equity research has long held that big banks have been most hampered not by their balance sheets by rather by negative perceptions - from Washington, Wall Street, and individual investors.

But as positions improve and policy makers begin to indicate that some of the more onerous new regulation proposals could be eased, that in turn presents opportunity, Bove said.

"What we're looking at is the complete change in attitude towards this industry from what it's been over the past three years," he said in an interview. "What has killed this industry over the last three years has been the negative psychology. It's not negative any longer."

"If you take a look at this industry based on any historical comparison to what the true value of the companies would be, they're dirt cheap," Bove said. "They remain dirt cheap, and the fact is that either you've got to come to the conclusion that the industry will never get back to the multiples it had in the past...or that it will get back to where it was in the past, in which case these stocks are still very, very cheap."
Warning: A New Who's Who of Awful Times to Invest

Please compare the analysis by Bove to that presented by John Hussman in Warning: A New Who's Who of Awful Times to Invest
Banking Notes

The FDIC Quarterly Banking Profile for the fourth quarter of 2011 was released last week. The headline: "Banks earned $26.3 billion in the fourth quarter, an increase of $4.9 billion (23.1%) from the same period in 2010." This FDIC report was quickly picked up by news articles as a sign of clear recovery in the banking sector.

The details: "Earnings benefited further from lower provisions for loan losses. Insured institutions set aside $19.5 billion in provisions for loan losses during the fourth quarter." The amount set aside for loan losses declined $13.1 billion (40.1%) from the fourth quarter of 2010. Actual net charge-offs of $25.4 billion exceeded loss provisions of $19.5 billion. As a result, total loan loss reserves declined by $6.3 billion (3.2%), falling for the 7th consecutive quarter. Meanwhile, full-year net operating revenue declined for only the second time since 1938 (the only other decline occurred in 2008).

In another widely reported sign of recovery, the number of insured institutions on the FDIC's "problem list" fell from 844 to 813 during the quarter. Of course, 18 insured institutions actually failed last quarter, and so are no longer on the list. Nearly 1% of insured institutions were merged into other institutions during the quarter, likely accounting for much of the remainder.

Similarly, banks enjoyed their largest quarterly increase in lending since 2008, which was hailed as a sign of resurgence in economic activity.

A good amount of bad debt has been written down, but the remaining bad debt still needs restructuring. Notably, non-current assets and bank-owned non-foreclosed property ("other real estate owned" or OREO) is actually a larger percentage of bank assets today than in 2008. Restructuring generally means reducing the interest spread or writing down a portion of the principal, and this process is likely to siphon off earnings in the financial sector for years. Despite their preferred status as "risk on" speculative assets, I continue to view financials as a minefield.
Bubbles Are Not Reblown

To Hussman's distinctly sobering bank forecast, let me add a couple of thoughts. For starters, the last bubble is not re-blown.

Consider the "4 horseman" of the internet boom: Microsoft, Intel, Dell and Cisco. Where are they now? Sure there are some new leaders like Google and Apple, but the old ideas have languished.

Consider the housing bust: In spite of every trick in the book used by Congress and the Fed, housing prices make new low after new low.

Consider the banking sector: In spite of every effort by the Fed to get banks to lend, banks simply are not lending.

I suggest the financial sector will be dead money (at best) for years, perhaps decades, just as waiting for the return of Intel, Cisco, or Microsoft has been.

Cisco Monthly



click on chart for sharper image

Citigroup Monthly



Is there going to be another credit lending bubble?

Take a look at excess reserves parked at the Fed for your answer. The same can be said for reserves piling up at the ECB. So where's that earning's growth going to come from? Mars?

About That Increase in Lending

Analysts went gaga (a continual state of affairs actually) over recent increases in bank lending. For example, consumer credit expanded by $19 billion in December of which $11.8 was non-revolving credit.

I took a look at non-revolving credit in Consumer Credit "Demolishes Expectations" Really? No Not Really! The "Non-Bounce" in Non-Revolving Credit and noted that $8.8 billion of that is growth in federal government loans (which just happens to be where student loans are parked).
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.
Eight Reasons Banks Aren't Lending

  1. Banks are capital impaired
  2. New Basel may require banks to hold more capital
  3. Few credit-worthy businesses want to expand
  4. Banks can park trillions of dollars at the Fed and make .25% interest risk-free for doing nothing.
  5. Demographics: Retiring boomers are scaling back purchases
  6. Real wages are declining
  7. Banks are sitting on massive amounts of real estate, SIVs, and off-balance sheet garbage still not marked to market
  8. Banks simply do not like the risks

Are U.S. Stocks (In General) Dirt Cheap?

Still think bank stocks "dirt cheap"? Heck, are stocks in general dirt cheap? Let's return to Hussman for an opinion.
Last week, the estimated return/risk profile of the S&P 500 fell to the worst 2.5% of all observations in history on our measures. This is not a runaway bull market. Rather, it is a market that again stands near the highs of an extended but volatile trading range. I am convinced that the breakdown of the market from this range has been deferred only through repeated and extraordinary central bank actions.

Importantly, the market is again characterized by an extreme set of conditions that we've previously associated with a "Who's Who of Awful Times to Invest." The rare instances we've seen this syndrome historically are reviewed in that previous weekly comment. They include the 1972-73 and 1987 market peaks, and several instances since 1998.

Arguments that stocks are "cheap on the basis of forward operating earnings" fail to adjust for the record high level of profit margins (about 50% above their historical norms), and also apply bubble-era norms for price-to-forward earnings multiples. This is the same argument that analysts made in 2007, and it is dangerously wrong.
Hussman has made those kinds of arguments before and so have I. If anything, I think Hussman may be an optimist. Indeed, I believe there is a decent chance of "Negative Returns for a Decade"



Clearly I have been preaching a consistent message, and equally clearly the market has other ideas. I was in a similar situation in 2006, calling for a recession when the yield curve inverted, waiting an agonizingly long time for it to arrive.

This is yet another agonizingly long time for me as it has been for Hussman who writes ...
My greatest concern as an investment manager is the possibility that some number of our shareholders will grow so exasperated with remaining defensive during these periods that they capitulate and take a significant position in the market at the worst possible point.

In a market that has now underperformed Treasury bills for more than 13 years, with two plunges of more than 50% in the interim (all of which we anticipated), my hope is that shareholders recognize our record in identifying major downside risks, and understand - if not fully agree with - my insistence on stress-testing our methods against Depression-era data in 2009 in response to the credit crisis.

The completion of the present bull-bear market cycle (and it will be completed) will undoubtedly present strong opportunities to play offense, but today stands among a Who's Who of the worst historical times to do so. Particularly for investors who do not have a large number of future cycles between now and the point they will need to draw significantly on their assets, a defensive stance is crucial here.
Red highlighting is mine.

Here is a quote from Howard Marks at Oaktree Capital as referenced by Hussman.

Howard Marks, Oaktree Capital, The Most Important Thing (2011)

"You simply cannot create investment opportunities when they're not there. When prices are high, it's inescapable that prospective returns are low. That single sentence provides a great deal of guidance as to appropriate portfolio actions. Patient opportunism - waiting for bargains - is often your best strategy."

I tracked that message down to chapter 13 of Marks' Google Book The Most Important Thing: "The Most Important Thing Is .... Patient Opportunism"

The wait may be agonizing, but it beats the consequences of plunging in at exactly the wrong time as happened in the Nasdaq in 2000, in housing in 2005 (on arguments "get in now before it's too late), and in the stock market in 2007.

History suggests there will be better opportunities around the corner for those who have the patience to wait for them. How long that wait might be is still anyone's guess.

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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