Mish's Global Economic Trend Analysis |
- Fed Governor Proposes Reorganizing Banks Deemed "Too Big to Fail"
- The "Extra-Value" Horse-Burger
- Philadelphia Fed Solidly in Contraction; Unwarranted Future Optimism; 3-Month Moving Average Suggests Recession; Hiring Plans Collapse
- European Car Demand Near 20-Year Low; Peugeot Workers Shut Down French Plant; GM Loses Global Car Sales Lead to Toyota Once Again
- Social Security Cliff in Sight; Retirees Will Outlive Trust Fund; Ramifications of Nonmarketable IOUs and Privatization
| Fed Governor Proposes Reorganizing Banks Deemed "Too Big to Fail" Posted: 17 Jan 2013 04:18 PM PST The Chicago Tribune reports Fed's Fisher: Reorganize banks that are "too big to fail" U.S. authorities should reorganize the country's largest banks to protect against the risk of institutions that are "too big to fail" and that would saddle ordinary Americans with the cost of a bailout the next time they get in trouble, a senior Federal Reserve official said on Wednesday.Issues and Concerns My first concern is they do not do this at all. My second concern is they do it wrong, leaving loop-holes all over the place as happened with Dood-Frank. They could also target size alone rather than operations. Glass-Steagall provided physical walls of separation that have since been rescinded. Moreover, banks should be banks not hedge funds. Much of what Goldman Sachs does is not banking at all. The legislation should not consist of some arbitrary size limit, but rather provide walls of separation and limit banks to be banks. Of course the real problem here is fractional reserve lending that enables banks to supersize at will, but don't expect that to be fixed. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The "Extra-Value" Horse-Burger Posted: 17 Jan 2013 02:37 PM PST I don't know about you, but I will no longer buy plastic tubes (that you cannot see through) supposedly containing ground chuck. I tried tubes of beef twice, but the product certainly looked different and was ground much finer than beef that comes in a normal package, in which you can actually see the color and texture. I would roughly describe the appearance of the product I bought as "compressed red paste". I bring this issue up because of a story from the UK about what has been found inside prepackaged "Everyday Value" frozen burgers. Please consider Tesco's U.K. Revival Hit as Horse DNA Found in Burgers. Tesco Plc (TSCO)'s efforts to win back U.K. shoppers were dealt a blow after the discovery of horse DNA in some beef products caused the U.K.'s largest grocer to remove them from stores and prompted a barrage of negative publicity.No Clear Explanation?! The CEO says there is no clear explanation. Really? Please be serious. The most likely explanation is someone (either Tesco or a Tesco supplier) used a blend of horse meat and beef because they thought they could get away with it. Even if it was an "accident" it certainly implies contamination, carelessness, and improper cleaning of grinders used for multiple purposes. Those are the only two realistic possibilities. I leave it to the reader to decide which one is worse. I do not imply the same thing is happening in the US. However, all things considered, I refuse to buy a product labeled as ground beef, that you cannot even see, and upon opening looks like red paste. Addendum: Reader "JB" writes ... The term for this is meat adulteration. This can be serious for instance if beef is adulterated with pork. People tend to eat their beef rarer than their pork and adulteration could expose people to parasites that are not killed because the meat is not cooked enough to kill the parasites. I do not know about horse meat but generally think the risk is less than having a product adulterated with pork.Addendum II: "JB" also wonders how much DNA testing the FDA does on meat products in the US. The reason is Phenylbutazone in Horse Meat. Sixty-seven million pounds of horsemeat derived from American horses were sent abroad for human consumption last year. Horses are not raised as food animals in the United States and, mechanisms to ensure the removal of horses treated with banned substances from the food chain are inadequate at best. Phenylbutazone (PBZ) is the most commonly used non-steroidal anti-inflammatory drug (NSAID) in equine practice. Thoroughbred (TB) race horses like other horse breeds are slaughtered for human consumption.I do not know enough about that issue to comment on how serious a threat that is. I offer the article for purpose of discussion. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Posted: 17 Jan 2013 11:00 AM PST Inquiring minds are digging into the Philadelphia Fed Manufacturing Survey for January 2013. Business outlook Survey, Current and 6 Months From Now
Observations
Unwarranted Future Optimism Please note the current index is -5.8 but future expectations rose from 23.7 to 29.2. That rise is indicative of unwarranted rampant optimism that will not pan out. Here's five reasons.
Hiring Plans Special Questions  click on chart for sharper image Top Three Reasons for Hiring Reluctance
Note that only 4.1% of firms increased hiring plans while 37% decreased hiring plans. Curiously, future optimism is high, but hiring plans don't match. I suggest hiring plans are a better indicator. 3-Month Moving Average Suggests Recession Here is a chart from Doug Short at Advisor Perspectives that will help put the Philadelphia Fed index in proper historic perspective.  click on chart for sharper image Doug writes "The average absolute monthly change across this data series is 7.9, which suggests that the 10.4 point change from last month carries additional significance." I would add, the November and December data point are suspect and likely related to Obamacare and other artifacts shifting production into 2012 from 2013. Regardless, please extend an imaginary line from -5.8 across the chart. Adding fuel to the recession-debate fire, note that 7 out of 8 times the 3-month moving average hit that low, the economy was already in recession. The one miss was mid-1990s. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Posted: 17 Jan 2013 09:09 AM PST GM Loses Global Car Sales Lead to Toyota Again Auto sales have recovered in the US, but GM once again has dropped out of the top spot globally. CNN Money reports GM loses global sales title to Toyota, again. General Motors fell to No. 2 in the global auto sales race, even as 2012 was its best year for sales since 2007.No Pent-Up Demand in US How much pent-up demand remains in the US? I suggest none. Rather, sub-prime auto lending is a primary driver for keeping sales somewhat robust. European Car Demand Near 20-Year Low It's a different story altogether in Europe where European Car Demand Near 20-Year Low. The market for new cars in the European Union is at its weakest in nearly two decades, and recession across much of the region could dent sales further this year.Peugeot Workers Shut Down Plant In France, where socialist silliness and job protection idiocy run supreme, Peugeot workers shut down plant slated to be sold. Hundreds of Peugeot Citroen workers occupied a French factory scheduled to be sold off, largely shutting down production in a protest against planned layoffs at the struggling automaker.Union Madness Obviously the union wants Peugeot Citroen to keep producing cars it cannot sell simply to keep a few thousand people employed. This is the mindset of unions. It never occurs to them high wages and union work rules are two of the reasons the company cannot sell cars. Renault Will Cut 7,500 Jobs, 17% of its French Work Force The New York Times reports Renault, Adjusting to Europe's Declining Market, Will Cut 7,500 Jobs France's ailing industrial sector took another blow on Tuesday when Renault said it planned to cut 7,500 domestic jobs by 2016, or about 17 percent of its French labor force, as it adjusts production capacity to the crushing downturn in the European car market.Renault's CEO Proposes Study to Determine Why Consumers Are Not Buying Cars No doubt you are laughing right along with me in response to an inane suggestion by Renault's CEO. When asked what governments and companies could do to address the contraction of the market in Europe, he responded "Governments should try to determine why consumers are not buying cars." If Ghosn is serious, the board should fire him immediately. Is it the responsibility of government to figure out why Renault and other carmaker's cannot sell cars, or is that the responsibility of carmakers? The answer is obvious, and so is the answer to the original question. European carmakers struggle to sell cars for the same reason sales across the board in Europe are under pressure: Union wages, union work rules, inane government work rules on top of union work rules, high VAT and income taxes, EU rules and regulations on everything, demographics of the aging population, high youth unemployment (primarily as a direct result of inane work rules) and the Eurozone nannystate in general all contribute to poor sales. No doubt, I have left something out. However, I am certain the above items encompass something on the order of 98% of the answer. I provide this valuable service at no cost to the French taxpayer and also to Renault's CEO, lest the French government actually waste taxpayer money on a commissioned study (no doubt to come up with the wrong set of answers). Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Posted: 17 Jan 2013 12:24 AM PST In response to my post Making Social Security Actuarially Sound in a Business-Friendly Manner I have been exchanging emails and phone conversations with Jed Graham at Investor's Business Daily. Jed thinks benefit cuts will happen, and I agree. However, Social Security cuts are considered the "third rail" in politics. If you are not familiar with the term, it means anyone espousing cuts cannot be elected. Retirees Will Outlive Trust Fund Graham's current position on the viability of Social Security can be found in his January 14 article New Social Security Retirees Will Outlive Trust Fund For the first time since Social Security's cash crisis in 1983, the program can't afford to pay full benefits for its youngest crop of new retirees through life expectancy, government data show. Cliff Now in Sight  Nonmarketable IOUs Jed and I are 100% in agreement that the alleged "trust fund" is nothing more than "nonmarketable Treasuries — really IOUs from one branch of government to another" that have no real value. As Jed states, those IOUs provide the Social Security administration the "legal authority to run cash deficits until they're spent." The key points are as follows: There is no lock box, there is no fund, there is a deficit, and IOUs in a pretend piggy bank are not the same as marketable bonds. Amusingly, I got into an exchange with a reader just a few days ago over the IOU concept. Reader Elliot wrote "You don't seem to understand bonds. They're just an IOU. The Chinese give us $$, we give them an IOU, and then we spend the dollars." Clearly, one major difference is the trust fund has nonmarketable IOUs, not marketable bonds. I responded to Elliot that "You cannot owe yourself money and it's even more ridiculous to put an IOU in a piggy bank and pretend to collect interest on it." Elliott was not convinced. The discussion with Elliott proves that some people will continue to believe whatever nonsense they want, no matter how carefully facts are presented otherwise. One thing I did not realize before exchanging emails with Jed Graham was that the payroll tax cut did not actually contribute to the current Social Security deficit (SS was not charged for the reductions in payroll taxes). Rather, the cuts simply added to the general deficit, funded as temporary stimulus. Thus, the current deficit is real, not imagined, no matter how one looks at it. The payroll tax cut did not temporarily overstate the problem. Simply put, Social Security is already insolvent if one ignores imaginary interest deposited into an imaginary piggy bank. Only on a pretend basis, by counting interest owed to oneself in a piggy bank that does not even exist, is Social Security solvent. Elliott's of the world aside, Jed points out the IOU pretense is universally understood by the CBO, by the administration, etc. Unfortunately, Congress ignores the problem for political reasons. Clearly, something needs to be done to shore up the system. And since something has to give, by definition it will. I outlined six possibilities, none of which has universal appeal. Six Possible Ways to Make Social Security Actuarially Sound
All of the above are likely as noted in Making Social Security Actuarially Sound in a Business-Friendly Manner For more on Social Security trends please see ...
Jed Graham Reflections Jed invited me to post a few of his personal thoughts. Those thoughts are not necessarily reflective of the opinions of Investor's Business Daily, nor are they reflective of mine. However, for the sake of further discussion ... Jed wrote the 2010 book A Well-Tailored Safety Net. He proposed a new approach to reform called "Old-Age Risk-Sharing". Under Jed's approach, the maximum benefit cut would come in the first year of retirement; cuts would be progressively smaller for lower earners and the cuts would phase out over 20 years to preserve a robust safety net in very old age. You can read about his views in his post What I Told Obama's Fiscal Commission About Social Security. Mish Reflections In the above link, Jed writes ... "If we want a Social Security system that maintains the promise of income security late in life, additional benefit cuts that apply in very old age should be off the table" I have to ask: Is that want we want? My second question is: If so, how do we expect to pay for it? It's far easier to come up with a want list, than a means to pay for it. People always want things, unless and until they have to accept tax hikes to pay for them. Personal Belief The income redistribution philosophy of tax hikes to support Social Security goes against my own Libertarian beliefs of minimalist government. Cuts Coming, Regardless of Beliefs However, and regardless of my viewpoint (or yours), cuts of some kind are without a doubt actuarially necessary as fewer workers support more and more retirees. The only way cuts are remotely possible now would be to combine cuts with tax hikes. Politically speaking however, Democrats won't accept cuts, and Republicans won't accept tax hikes. Yet, if cuts eventually come (and demographically speaking they must), then perhaps the phased-in approach suggested by Jed is a pragmatic starting point for discussion, whether or not one believes the stated goal of "guaranteed income security" is socialist silliness. Once again, I am attempting to separate my own personal beliefs from something that may be more politically feasible. Two Sure Things
Safety Net Discussion I have spent an amazing amount of time on this post already, probably 14 hours. I thought I finished yesterday but I didn't. Yesterday evening I realized I did not fully address the concept of what constitutes a "safety net", and how much it would take for the average worker to accumulate one. Jed has done quite a bit of research on the subject, so I decided to ask him. Jed responded... "I think since we are talking the bare bones safety net w/ SS that people can't do without, it makes sense to use the risk-free (some might argue with "risk-free") Treasury rate. Rule of thumb is that to overcome a 10% benefit cut, an average earner (now about $45k a year) has to save 1% of wages (assuming Treasury returns and a lifetime annuity). For new workforce entrants facing a ballpark 25% benefit cut, as in the Romney plan, that means roughly 2.5% of annual wages. " The key words are "average earner". In a phone conversation with Jed, he acknowledged things are not so simple. Someone making minimum wage needs to save far more on a percentage basis. Those making $100,000 a year need to contribute far less on a percentage basis. For his safety-net calculations, Jed uses the Social Security Administration's risk-free "real" rate, projected to be 2.9% in 2022 and beyond. Currently, the real return on 10-year treasuries is negative. The "real" return on 30-year treasuries is currently about 1%. I suggest real returns will not get back to the long-term average for a long time, perhaps longer than many social security recipients live. If "real rates" are indeed lower than the Social Security administration projects, then required savings rates will rise. The problems do not stop there because we are not starting from scratch. What about the "average earner" who is now age 40? Jed notes such a person may need to contribute 5% of his wages for a minimal return. That still does not cover all the bases because it assumes everyone is funding their own plan. Is self-funding the new idea? Or is the original intent of Social Security (minimum retirement income assistance regardless of how much one contributed) still intact? Regardless of your answer, those making minimum wage will never be able to meet a reasonable "safety net" goal, on their own accord. I do not champion the idea that Social Security is a "right". It isn't. Rather, I simply state the pure mathematics of the setup. Funding Your Own Way I have a close friend who objected to "Means Testing" which was point six of Six Possible Ways to Make Social Security Actuarially Sound, as listed above. She proposed that what she puts into SS should be hers or her heirs, and no one else's. Ideally, I agree. However, if her money is hers (and your money is yours) let me ask a simple question: Does government belong in the "income guarantee" business at all (taking your money only to return some portion of it later)? If so, why? If not, then let's stop Social Security altogether. It's certainly a debate worth having, and the answer determines whether or not there should be any "safety nets". Privatizing Social Security In a follow-up phone call I discussed privatization of Social Security with Jed. He was once in favor of partial privatization, but that was when Social Security was running a surplus. He is not in favor of it now. Let's discuss this from the point of view of my friend who states "What I put into SS should be mine, no one else's". Privatization Ramifications To create a real "lock box", not an imaginary lock box, with imaginary interest, we need to privatize Social Security, not send money to Washington to be confiscated for whims of the moment. Assuming that is politically feasible, and ignoring all the people already fully committed to the current system (those retired), as well as those half-way in (those in their 40's), what are the ramifications of privatization? Before answering, please note that Social Security revenues are in practice used for general expenditures. Simply put, if payroll taxes were diverted to funding private plans, the deficit would soar. Such a step would require massive tax hikes or massive cuts across the board somewhere (I would vote for massive cuts across the board, especially cuts in military spending). Then we would still need to do something about partial funding and those already retired. Finally we would need to discuss limitations on those who want to tap their SS funds before retirement. For a discussion on tapping retirement money, please consider Over 25% of 401Ks Tapped to Pay Current Bills; Dead-Fish Housing Assets; Walking Away Yet Again. Quickly you can see we are back to the basic question "Whose money is it anyway, and why should government dictate what I do with it?" Frank Discussion of the Issues is Needed Regardless of your point of view on what should or should not be done (Jed has his ideas, I have mine, my friend has hers, and you have yours), it's long overdue for a frank discussion of the issues. Solutions can only happen following admission of the problems. The starting point for discussion is simple admission that Social Security and Medicare are both insolvent, that promises have been made that cannot possibly be kept. Without a doubt the country needs a frank discussion of "safety nets" and how they should be funded, as well as frank discussions on Medicare and healthcare rationing. Unfortunately, few if any politicians are willing to admit the truth or to have those discussions, for fear of losing votes. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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