Central Perk

duminică, 31 octombrie 2010

Mish's Global Economic Trend Analysis

Musical Tribute to Quantitative Easin'
SEIU Makes Voting Easy
"Money’s Already Quite Cheap"
Happy Halloween: Pumpkins from Readers and Surveys about Ghosts
Simulation of a US State Defaulting

Posted: 31 Oct 2010 11:05 PM PDT

"Merle Hazard" writes ...

Dear Mish

Just wanted to tell you about a new song video out today that I had a hand in: Quantitative Easin'. It could hardly be more timely! I hope you will give it a listen.

This is sung by my friend, the very soulful Mr. Curtis Threadneedle. This is his first song, and we wrote it together.

It sort of speaks for itself; I think your readers might like it. Thanks for considering it.

Best,
"Merle Hazard"

It's a good song. Please give it a play.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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SEIU Makes Voting Easy

Posted: 31 Oct 2010 06:30 PM PDT

If you are in doubt of how to vote on Tuesday, the answer is simple. All you have to do is look at SEIU Endorsed Candidates and vote the opposite.

That link is for Illinois, but the SEIU has similar lists for other states. See if you can find one for your state.

The general rule is: Do NOT vote for any candidate endorsed by unions, especially public unions.

Illinois Voters

I am surprised to see a number of Republicans on the Illinois endorsed list, but those candidates are for state, not national choices. The SEIU did not endorse anyone for some races, no doubt because there was no democrat running, or neither candidate was willing to sponsor the garbage the SEIU wanted.

In Illinois, at the National level, simply vote Republican and be done with it. the same applies for all of the high level state positions including Governor, Lieutenant Governor, Attorney General, Secretary of State, Comptroller, and Treasurer.

The most important things to remember are that Governor Pat Quinn has vowed to raise your taxes in a bribe to win public union votes. Senate candidate Alexander Giannoulias will do the same.

California Voters

If you live in California please see How Not To Vote.

In California the process is simpler because public unions have only backed Democrats. However, California does have a number of important propositions to consider, notably proposition 25 which will make it easier for politicians to hike your taxes. Don't fall for it. Vote no on prop 25.

In addition you may want to vote yes on Prop 19, legalizing Marijuana, even though the unions have endorsed it (no doubt because it taxes the stuff).

Other States

If you live in other states and are unsure how to vote, take a look to see if the SEIU or other union has made it easy for you as well.

Disclaimer

Bear in mind I am not a Republican. Rather, I am a Libertarian who has openly and actively endorsed those who want to lower taxes, stop being the world's policeman, and in general get government out of the way. Unfortunately there are not many such candidates.

Regardless, we cannot afford cap-and-trade idiocies, expanding public unions, expanding collective bargaining, or more war mongering. In general the Democrats have been on the wrong side of all of those issues, while Republicans are right on many of them.

Simply put, we simply cannot afford 2 more years of disastrous Obama sponsored nonsense and public union handouts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Money’s Already Quite Cheap"

Posted: 31 Oct 2010 09:02 AM PDT

Quite often simple explanations are the best. There are dozens of reasons why another round of QE will fail, but much of comes down to "Money's Already Quite Cheap".

Please consider Schwarzman Says Fed Easing Won't Make Much Difference

Stephen Schwarzman, chief executive officer of Blackstone Group LP, the world's biggest buyout firm, said another round of asset purchases by the U.S. Federal Reserve won't have much of an impact on companies.

"It's not an enormous incentive to do something different with your businesses because rates are down a few basis points," Schwarzman, 63, said yesterday in an interview with Bloomberg Television's Margaret Brennan at the UBS Wealth Management Roundtable in New York. "Money's already quite cheap."

Schwarzman joins hedge-fund managers Paul Tudor Jones, Clifford Asness and Colm O'Shea in casting doubt on the effectiveness of more so-called quantitative easing. Asness, who runs Greenwich, Connecticut-based AQR Capital Management LLC, said he doesn't expect any long-term effects from such a move.

"Us printing money to buy our own bonds I don't think can matter long term," Asness said this week in an interview with Bloomberg News at the Buttonwood Gathering, a conference organized by The Economist magazine in New York.

Jeremy Grantham, chief investment officer of Grantham Mayo Van Otterloo & Co. in Boston, said in a quarterly letter to investors that the Fed's quantitative easing will be a "more desperate maneuver than the typical low-rate policy."

Tony James, president of New York-based Blackstone, said today he wasn't convinced pushing borrowing costs lower would have a positive effect on the economy.

"I don't see that lower rates are going to encourage American industry to borrow and build," James said today on a conference call with reporters. "It has a counter-stimulative effect. I don't think it works."

The junk bond market has already gone nuts as noted in Mad Dash Into Junk Sets October Record so what is Bernanke hoping to accomplish other than a bigger bubble in junk bonds, equities, and commodities?

Virtually none of that helps small business owners shut of from the bond market and hurt by rising input prices and collapsing prices for their goods and services.

Cost-Push Inflation?

Someone sent me a comment that I do not understand push-through inflation and that is why I don't understand hyperinflation.

Well for starters hyperinflation is not caused by rising prices, hyperinflation is a loss of faith of currency (typically caused by some political event). The result (not the cause of hyperinflation) is rising prices. For a further discussion of hyperinflation please see "Straight Talk" with Economic Bloggers

Second the whole idea of cost-push inflation is silly. An excerpt from $30 Billion Offer No One Wants - Small Businesses Hit by Deflation will prove it.

NFIB Small Business Trends

Inquiring minds are taking a look at NFIB Small Business Trends for September.
INFLATION

The weak economy continued to put downward pressure on prices. Seasonally adjusted, the net percent of owners raising prices was a negative eight percent, a four point increase from July. August is the 21st consecutive month in which more owners reported cutting average selling prices that raising them.

COMMENTARY

The Index has been below 93 every month since January 2008 (32 months), and below 90 for 25 of those months, all readings typical of a weak or recession-mired economy.

Inflation? Not a threat. Far more owners have cut prices than raised them for 21 months in a row. Deflation? It certainly feels that way to a quarter of the owners reporting price declines for the goods and services they produce and sell.

Here are a few charts from the article.

Prices Received

Actual Price Changes

Cost-push inflation? Yeah right.

Meanwhile, QEII is punishing small businesses, the very lifeblood of the job creation engine.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Happy Halloween: Pumpkins from Readers and Surveys about Ghosts

Posted: 31 Oct 2010 08:35 AM PDT

Richard D writes ...

Mish,
Thought you might appreciate this, I carved the scariest thing I could think of this year into my pumpkin.
Richard

In a salute to Bernanke and the Fed, FRB stands for Fractional Reserve Banking, and QEII is Quantitative Easing round II.

27% Believe in Ghosts

A Rasmussen poll shows that 27% Believe in Ghosts

Twenty-seven percent (27%) of Americans say they believe in ghosts, according to a new Rasmussen Reports national telephone survey. Sixty-three percent (63%) don't, but another 10% aren't sure.

Belief in ghosts is up slightly from a year ago, when 23% thought they were real.

Men under 40 claim to believe in spirits more than their elders. Unmarried adults tend to think ghosts exist more than those who are married.

Maybe it's just because of the news this election year, but Democrats are twice as likely as Republicans to believe in ghosts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Simulation of a US State Defaulting

Posted: 30 Oct 2010 11:29 PM PDT

At the recent Buttonwood economic conference in New York City, a team of economists addressed the question "What If a State Defaults".

WHAT happens if an individual state defaults? That was the question posed to a panel of luminaries at the Buttonwood gathering in New York, including Robert Rubin, Josh Bolten, Glenn Hubbard, Laurence Meyer and Laura Tyson.

The panel was assumed to be a bunch of Presidential advisers faced with a request for funding from New Jefferson, a fictional state with many of the problems of a typical state - unfunded pension promises, years of fiddling the numbers to balance the budget and a government divided between the parties. New Jefferson is shut out from the markets and asks the Federal government for $1.5 billion to meet a debt repayment due 48 hours away. There could be systemic risks if default occurs with the Chinese government raising the issue of contagion and with some state banks owning a substantial portion of the state's bonds.

The panel reluctantly agreed to provide temporary funding for the state - say for 30 days - but to require the state to sort out its mess. But it suggested a whole series of stringent conditions, including the use of proper accounting and a requirement to fund its pension plans properly. they were divided over what would happened if New Jefferson failed to save its problem within 30 days.

This is a very long video that some readers might enjoy. However, the panel did not address whether the long-term pension problem can be tackled if the courts decided that existing pension rights are legally protected.

Long-term pension issues are without a doubt the most likely reason a state would default.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Seth's Blog : Marketing Halloween

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Marketing Halloween

Some things to think about while the doorbell rings...

There are communities that have moved Halloween from today, because they don't want it to be on a school night.

There are communities that abhor Halloween, arguing that it is a day for Satanists and other ideas that are anethema.

And there are communities where the goal is to obtain as many chocolate bars as possible. (The hobo costume will always remain the official teenager get up, because you can make one in three minutes).

How did fruit end up as treat non grata? How did the few giant candy companies end up stamping out variety, selling giant bags of cheap chocolate instead? (Hint: there's huge pressure to do 'the regular kind' as many consumers/homeowners are afraid to stand out in this regard). A great example of peer pressure meeting the race to the bottom.

And in the last few years, how did a trivial kids' holiday turn into a multi-billion dollar bacchanal for adults, complete with ornate houses and bespoke costumes? Is it because of some well-orchestrated Halloween Marketers of America initiative? It just seemed to happen, didn't it?

My take: Marketing home runs usually happen because the market/tribe/community is itching for a void to be filled, not because a marketer committed some brilliant act of promotion or pricing. The art, then, is to pick your niche, not to freak out about how to yell about it. You can't make a perfect storm, but you can find one.

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sâmbătă, 30 octombrie 2010

Mish's Global Economic Trend Analysis

Housing Question From Down Under

Posted: 30 Oct 2010 12:29 PM PDT

Ben from Australia has a wife who is wondering about the wisdom of staying in cash on the sidelines waiting for Australia home prices to decline.

With and Email header of Advice for an Aussie, Ben writes ...

Hey Mish,

Just wanted to say a quick hello. I love it every day when then email with your latest posts arrives in my inbox about 5:20pm each afternoon (Sydney time).

You are completely right about the property boom in Sydney and Australia. One of my best mates is about to buy a pretty average 3 bedroom unit in Sydney for about A$750,000. It is absolutely crazy. He plans to rent it out (the rent will cover less than half the interest etc) but he is sure it will go up 10-15% a year. "Why?" I always ask. "Because it always does!" he replies. I've stopped explaining my position to him. All my mates think I am uncle scrooge.

But my question – I have a young family and a growing business. I'm stashing everything in cash in the bank and waiting to buy a house when the RE market (inevitably) falls – although my wife is getting impatient. The Reserve Bank of Australia is a pretty conservative beast (that's a good thing in my book) with official interest rates at 4.50% and headed higher. But I look at China and your comments about Australia (and Canada) getting belted in the fallout. Would you suggest anything other than putting everything in the bank?

Anyway, hope you're having a good weekend. Just wanted you to know that your efforts are appreciated around the world.

Cheers,

Ben

Response to "Down Under"

Hello Ben, that home prices in Australia keep going up is all the more reason to wait. The bigger the bubble the bigger the crash when it happens. Home prices always revert to the mean. Australian home prices are standard deviations above the norm in terms of price-to-rent and price-to-wages.

The bubble will pop and the crash will be spectacular, no doubt as soon as every conceivable person on the sidelines is sucked in.

"No Bubble?" Don't Believe It

The central bank says there is no bubble. Don't believe it.

Moreover, I laugh when I read articles like No house price bubble: RBA

RBA deputy governor Ric Battellino said today house prices in Australia, relative to income, were reasonable.

"People feel that house prices in Australia are quite high and that's quite often because the ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated,'' Mr Battellino said in response to a question at a business function in Sydney. ''But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries."

What Battellino seems to be suggesting is to look across the Outback and average prices and there is no bubble. This is like suggesting there is no bubble in San Diego because there is no bubble in Danville, Illinois.

Well, there may not be a bubble in the central Illinois farm belt, but not many people live in widely dispersed small farm towns of a few thousand people each.

It makes no sense to measure prices this way. The bubbles in Australia are where the vast majority of the people live.

Ben Asked "But I look at China and your comments about Australia (and Canada) getting belted in the fallout. Would you suggest anything other than putting everything in the bank? "

His question is in reference to Misguided Love Affair with China; China's Massive Monetary Expansion and Crackup Boom.

One thing Australians have going for them is treasury rates of 4.5%. The second thing is they do not have to worry about currency fluctuations, something that carry trade investors do have to worry about.

Australia Dollar Weekly Chart

The Australian dollar has been on a tear. Yet, where to from here is of primary concern to carry trade players seeking 4.5% in interest but assuming the risk in the slide of the Australian dollar.

Australians have no such concerns, and that does open up another play. Instead of sitting in cash, Australians can consider buying longer term Australian Central Bank notes on the expectation that when the housing bubble bursts, the RBA will respond by lowering rates.

For someone living in Australia with expenses and wages in Australian dollars, long-term Australian Central Bank bonds looks like a very good opportunity.

Those are my thoughts as to what looks attractive from this side of the ocean where 5-year treasury notes yield a mere 1.17% and 10-year notes a paltry 2.6%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mad Dash Into Junk Sets October Record

Posted: 30 Oct 2010 12:56 AM PDT

The mad dash into junk bonds continues. Please consider Junk Sets October Record, Mortgage Bonds Rally

Sales of junk bonds in the U.S. set a record for October as returns topped investment-grade debt and more borrowers were raised than cut. Government-backed mortgage bonds may beat Treasuries by the most in at least 10 years.

Fortescue Metals Group Ltd. and Calpine Corp. led speculative-grade companies issuing $33 billion of debt this month, according to data compiled by Bloomberg. The notes have gained 2.32 percent on average in October, compared with a loss of 0.16 percent for high-grade securities, Bank of America Merrill Lynch Index data show. Not since March have high-yield, high-risk securities outperformed by such a wide margin.

Investors have driven relative yields down to the lowest in five months on confidence the Federal Reserve will flood the economy with money, allowing the neediest borrowers to access capital and refinance debt. The rally is robust enough to extend into next year, said James Murren, chief executive officer of Las Vegas-based casino operator MGM Resorts International, which sold $500 million of notes rated CCC+ on Oct. 25.

"The bond market will get better," Murren said yesterday in an interview at Bloomberg headquarters in New York. "People are going to start to have a more positive outlook toward 2011. They're going to be searching for yield and they're going to go down the rating scale and that's going to benefit companies like us."

U.S. junk bonds have gained 14.4 percent this year, compared with the record 57.5 percent in all of 2009. The 1.96 percent increase this month in the Bank of America Merrill Lynch Global High Yield & Emerging Markets Plus index exceeds gains on the Global Broad Market Corporate Index by 215 basis points, after outperforming by 233 basis points last month.

Global corporate bonds have lost 0.19 percent in October, after rising 0.22 percent in September and the worst performance since losing 0.4 percent in May. Year-to-date returns total 8.84 percent.

Lehman High Yield Bond ETF

S&P 500 Weekly Chart

Buy the Dip?

The last two downturns in January and May of 2010 were buying opportunities. Will buy the dip work next time? Fundamentally I see no reason it should, but that does not mean it won't.

I have been saying for 18 months that the stock market is unlikely to break hard as long as corporates are strong, but buyer beware, sentiment can turn on a dime.

Extreme Sentiment

We have a possible warning signal in that the corporate rally for the last two months has been US only.

We have another type of warning signal with the CEO of MGM Resorts International proudly proclaiming "The bond market will get better."

Will it? He does not know, no one does. Moreover, I see no reason to think it will.

Finally, we have Richard R.S. Smith, head of high-yield capital markets at Royal Bank of Scotland's RBS Securities unit touting "We've pushed many of our clients into what we view as a very attractive market from a refinancing standpoint. We think it's going to continue as long as the U.S. government maintains a 10-year treasury rate below 3 percent."

RBS just happened to pimp $500 million of MGM bonds rated CCC.

This is exactly the kind of sentiment it takes to make a top. However, please remember that sentiment, no matter how extreme, can always get more extreme.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Seth's Blog : Just because he's angry

[You're getting this note because you subscribed to Seth Godin's blog.]

Just because he's angry

... doesn't mean he's right.

... or even well-informed.

Something to think about when dealing with a customer, a leader or even a neighbor.

It's easy to assume that vivid emotions spring from the truth. I'm not so sure. They often come from fear and confusion and well-told stories.

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Daily Snapshot: Working Together on the Economy

Your Daily Snapshot for
Saturday, October 30, 2010

Your Weekly Address: Working Together on the Economy

Ahead of the elections, the President says no matter what happens both parties must work together to boost the economy, and expresses concern about statements to the contrary from Republican Leaders. Watch the video.

Weekly Wrap Up

Quote: “My favorite image will be the one I take tomorrow.” – Pete Souza, Chief Official White House Photographer and Director of the White House Photography Office, in a live video chat on WhiteHouse.gov. http://wh.gov/3wX and Souza's ten favorite photos: http://wh.gov/3mn

Your West Wing Week: "The Mysterious Case of Mysterious Case 55" Video: http://wh.gov/3dR

Fresh on Twitter: PressSec Something new: You take first crack. Use #1q in a q & I'll answer 1 on vid before today's briefing. What do you want to know? (Answer: http://wh.gov/3dN)

Actions We’re Taking: President Obama speaks on the security situation regarding suspicious packages bound for the United States. http://wh.gov/3wp

The Daily Show: President Obama talks to Jon Stewart: http://wh.gov/3p1

Notable Number: 2%. The Gross National Product (GDP) – a key measurement of our economic growth – grew at a 2.0% annual rate over the last three months. Video: The President on accelerating recovery: http://wh.gov/3vL

Energy Vampires: Secretary Chu says slay "energy vampires" (appliances that suck up energy even when turned off): http://on.fb.me/9HRA9c

National Energy Awareness Month: Solar panels on the White House and in the desert, 36 billion gallons of biofuels, and cleaner trucks: http://wh.gov/3vi

A First for Trucks and Buses: A proposal for the first national standards for emissions and fuel efficiency: http://wh.gov/3PP

Leveling the Playing Field: Elizabeth Warren talks about standing up the new Consumer Financial Protection Bureau: http://is.gd/gpqS9

You Asked, Axe: Answered: Senior Advisor to the President, David Axelrod, answered your questions in Tuesday Talks this week: http://wh.gov/3Vy

California Women's Conference: First Lady Michelle Obama and Dr. Jill Biden go West: http://wh.gov/3Ev

The Science Guy: Check out a behind the scenes video from the White House Science Fair, including Bill Nye: http://wh.gov/3yh

It’s a Bird, It’s a Plane…It’s a High-Speed Train: The Department of Transportation awards $2.4 billion to continue developing high-speed passenger rail corridors: http://wh.gov/3pV

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Seth's Blog : Won't get fooled again

[You're getting this note because you subscribed to Seth Godin's blog.]

Won't get fooled again

I know you say your media returns results better than anyone else's. I've heard that before.

I know you say that this stock is a sure thing, even better than gold. I've heard that before.

I know you say you'll work full time on business development even though it's hard work and there are distractions everywhere. I've heard that before.

I know you say that your promotional strategy for this movie is huge and we should run more ads and promote it more as a result. We've heard that before too.

The reason that people don't believe you isn't that you're a liar. The reason we don't believe you is that the guy before you (and the woman before him) were unduly optimistic hypesters and we got burned. We believed, we leaned into it and we got stuck.

If you catch yourself making a promise that's been made before, stop. Don't spend a lot of time and effort building credibility with this sort of promising, because it doesn't pay off.

Make different promises, or even better, do, don't say.

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vineri, 29 octombrie 2010

Mish's Global Economic Trend Analysis

Double Dip Delayed, Not Derailed; Understanding Consumer Spending

Posted: 29 Oct 2010 11:47 AM PDT

The BEA Advance GDP for Third Quarter 2010 came in at +2.0%. However, Table 2. Contributions to Percent Change in Real Gross Domestic Product shows that Change in private inventories contributed +1.44 while real final sales contributed a mere .6.

How sustainable is that?

The answer is not very. This is likely the last hurrah for inventory replenishment even without factoring in upcoming cutbacks at the state level.

Not a V-Shaped Recovery

In terms of real final sales, this "recovery", is the weakest on record. Dave Rosenberg has some thoughts on that in Lunch with Dave.

U.S. REAL FINAL SALES 60 BASIS POINTS SHY OF DOUBLE-DIPPING

The major problem in the third quarter report was the split between inventories and real final sales. Nonfarm business inventories soared to a $115.5 billion at an annual rate from the already strong $68.8 billion build in the second quarter — this alone contributed 70% to the headline growth rate last quarter. If we do get a slowdown in inventory investment in Q4, as we anticipate, it would really not take much to get GDP into negative terrain. We estimate that if the change in inventories slowed to about $94.0 billion in Q4 (about $22 billion below Q3 levels), GDP would contract fractionally. In other words, it won't take much for GDP to slip into negative terrain.

The recession may have technically ended, but outside of inventories, and the best days of the re-stocking process look to be behind us, this has been a listless recovery. At 60 basis points above zero, real final sales are just a shock away from double-dipping — a shock like looming tax hikes, accelerating fiscal cutbacks at the state/local government level or the millions of "99ers" about to fall off the extended jobless benefit rolls at the end of November.

In terms of components, the good news was that consumer spending did accelerate to a 2.6% annual rate from 2.2% in the second quarter — the best performance since Q4 2006. Non-residential construction eked out a 3.8% annualized gain, the first advance since Q2 2008. But the good news pretty well stopped there.

It is also no surprise to see imports bulge when inventories did the same, but what caught our eye in the external trade portion of the GDP report was the sharp slowing in export growth, to a 5% annual rate trend — half the pace we saw in the first half of the year. Weren't the overseas economies supposed to be providing a big lift to the U.S. economy?

Finally, state and local government spending dipped 0.2% — the fourth decline in the past five quarters. At a 12% share of the economy, this sector is nearly twice as large as business spending, and can be expected to be a dead-weight drag on the economy as far as the eye can see.

Here is the bottom line: the double-dip has been delayed but not derailed; despite widespread cries from the economic elite to the opposite. The economic recovery is extremely fragile and unless we get an improvement in real final sales, all it would take would be a modest inventory drawdown to pull real GDP back into contraction mode.

Consumer Spending up 2.6 Percent? - No Not Really

Rosenberg mentioned the one bright spot was consumer spending was up 2.6%. Indeed Table 2 in the BEA report shows Personal Consumption Expenditures were +2.6%.

However, it is important to understand what components make up PCE.

I talked about PCE on August 3, 2010 in Personal Income Flat, Private Wages and Salaries Decline in June; Is Consumer Spending 70% of GDP? Checkmark Recovery Revisited

Understanding PCE and Consumer Spending

To understand the discrepancy, we have to know what goes into PCE in comparison vs. retail sales. Here is an interesting article written in August of 2009 that addresses the issue.

Is Consumer Spending is 70% of GDP?

Economist Michael Mandel's article Consumer Spending is *Not* 70% of GDP not only addresses the above question, he also explains the apparent discrepancy between retail sales and consumer spending. Let's take a look.
I opened up this morning's NYT and see the big headline "Retailers See Slowing Sales in a Key Season." And I just know that we are about to have another round of "consumer spending is 70% of gross domestic product, so blah blah blah blah of course we can't recover unless consumers start spending again." (Not in the NYT story, to their credit, but you can find similar quotes everywhere you look).

Blah blah indeed. As a textbook author, there are few things that frost me more than hearing "consumer spending is 70% of gross domestic product," because it perpetuates two very large and very misleading untruths.

First, the category of "personal consumption expenditures" includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom's knee replacement, that gets counted as consumer spending in the GDP stats.

At a time when we are wrangling over health care reform, it's misleading to say that "consumer spending is 70% of GDP", when what we really mean is that "consumer spending plus government health care spending is 70% of GDP."

Second, an awful lot of those back-to-school dollars are going to imported clothing and school supplies (how many of those laptops and iPods do you think are made in the U.S.?). A dollar of consumer spending does not translate into a dollar of domestic production.

In fact, the whole way that the BEA presents the GDP statistics points the public debate in the wrong direction. GDP stands for "gross domestic product"—that is, domestic production. But the breakdown of GDP is into expenditures categories—personal consumption expenditures, government consumption expenditures, etc.

I think we need to move towards presenting GDP in terms of production, rather than spending. We need a shift from the consumer to the producer as our main unit of analysis.

But for now, we need to stop being so darned obsessed with consumer spending.
Why Consumer Spending Is Important

I disagree with Mandel's last statement because sales tax revenues are extremely important to state budgets.

However, Mandel's excellent article helps explain many things even alleged "productivity" issues of the US vs. Europe.

Personal Consumption Expenditures

The above chart courtesy of the St. Louis Fed, shows one of the biggest distortions of reality you will ever see. Someone looking at the chart might actually get the idea that "consumer spending" has recovered above pre-recession levels.

However, state sales tax revenue (the only valid measure of consumer sales), is still far below 2007 levels and states are in serious trouble over it.

So no, consumer spending (in the real sense) is not soaring, and given the need for consumers to deleverage, it would not be a good thing if it were. For more on consumer spending and sales tax collections, please see Retail Sales Rise More Than Forecast; Once Again I Ask "Really?"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Misguided Love Affair with China; China's Massive Monetary Expansion and Crackup Boom

Posted: 29 Oct 2010 01:39 AM PDT

China is pointing the finger at the US, complaining about "Out of Control" US dollar Printing by the Fed.

Dollar issuance by the United States is "out of control", leading to an inflation assault on China, the Chinese commerce minister said in comments reported on Tuesday.

"Because the United States' issuance of dollars is out of control and international commodity prices are continuing to rise, China is being attacked by imported inflation. The uncertainties of this are causing firms big problems," Chen was quoted as saying by the official Xinhua news agency.

Chinese officials have criticised U.S. monetary policy as being too loose before, but rarely in such explicit language.

Decoupling Theories Renewed

I will get to loose monetary policy in just a bit, but first consider More than decoupled, China is in league of its own

Two years on from the global financial crisis, the contrast with the rich world is striking. In the United States and Europe, growth is sluggish, a slump into outright deflation is a real risk and central banks look set to loosen policy further.

So the evidence is in: China is decoupled, influenced by, but ultimately independent from other major economies.

"The crisis was a test and China passed the test. Decoupling has become a much more solid thesis now than three years ago when we only talked about it hypothetically," said Qing Wang, Morgan Stanley's chief economist for greater China.

Chinese Money Supply Numbers from People's Bank of China

Money and Quasi Money Jan 2009 - 496135.31
Money and Quasi Money Sep 2010 - 696384.86

"Out Of Control" Monetary Expansion Irony

I am certainly not about to defend the Fed's misguided policies, but the complaint from Chinese commerce minister that US monetary printing is "out of control" is the ultimate in "pot calling the kettle black" irony.

Over the past few weeks I have exchanged quite a few Emails regarding China with my friend "BC" who writes ...

Total Chinese money supply is up over 4 times since '03, a 17%/yr. rate at a doubling time of just 4 years; up 66% since Jan. '08, a 19%/yr. rate at a doubling time of 43 months; and up 40% since Jan. '09, a 20%/yr. rate at a doubling time of 40 months.

Knowingly or otherwise, China has experienced a textbook faster-than-exponential money and debt/asset blow off or crack-up bubble that mathematically cannot continue. All faster-than-exponential bubbles burst and collapse, with prices falling back to the levels at which the differential rate of GDP and money began to diverge at an order of exponential magnitude, which was around early '02.

Ironically, Bubble Ben bashers claim the Fed is going off the rails with debt-money reserve growth?! Imagine what would happen to the Renminbi were the currency to be floated/convertible with money growing at arguably near hyper-inflationary rates in China!

Do Schiff, Faber, or Rogers ever talk about China's reckless, hyper-inflationary money supply growth? This kind of money supply growth is banana republic-like, making our feeble efforts appear benign by comparison.

This situation is INSANE, and the crash coming in China-Asia will be unprecedented in world history.

Credit Expansion in US vs. China

One might think that a country whose money supply is doubling every 40 months and growing exponentially since 2003 would not be pointing the finger elsewhere, complaining that others are "out of control".

One might also think those screaming about hyperinflation would scream about happenings in China, not just the US.

One would be wrong on both counts.

Moreover, unlike US monetary expansion that sits as excess reserves, China's money supply growth has spawned massive lending sprees, property bubbles, and asset bubbles in general.

I spoke briefly of this in Massive Inflation in China, US Inflation Nonexistent

In a fiat credit-based society, credit-expansion not reserve-expansion is the key to understanding inflation. Credit is contracting in the US but running rampant in China. It should be no wonder China shows signs of an inflationary crackup boom and the US is mired in deflation.

Peak Oil and the Demand for Resources

In my recent interview with Chris Martensen (see "Straight Talk" with Economic Bloggers) a pertinent question came up regarding energy.

2. Many of our readers have subscribed to Chris' position that the economy must be increasingly interpreted through two other lenses; energy and other environmental resources. Can you comment on the Three E's?

Mish: I am a firm believer in peak oil. I don't know how anyone can deny it. Given peak oil, and given the demand from China for oil and other commodities, the world is on a crash course of demand that cannot be filled.

China is growing at 8-10% a year (assuming you believe the stats). Can China keep growing at that rate forever? For even 10 more years? What about India? Brazil?

Either we get some serious energy breakthroughs, China slows, or the standard of living drops in the US, UK, and Europe. Well China does not want to slow, and the US and Europe are fighting hard to maintain a standard of living that is not sustainable.

Historically these situations end up with war. That is an observation, not a prediction.

Something has to give, perhaps many things, but all of the people who think China will soon be the number one economy in the world and that China's growth is sustainable, better start thinking about the implications of what I just typed above.

Preparation For War?

My friend "BC" writes ...

China's behavior since 9/11 and the invasion and occupation of Afghanistan and Iraq by the US is reminiscent of nations' war preparations of the past.

Then again, given Peak Oil, China's increasing dependency on imports of oil and other mineral resources, and the extent to which the US imperial military is arming the Middle East, encircling Iran and Pakistan, and encroaching deeper into Central Asia and towards China's western frontier, why would the Chinese not be preparing for war (or at least war-like conflict in regards to trade and resources)?

Runaway Printing Fuels Crackup Boom

It is important to understand the drivers behind China's growth.

1. Rampant monetary expansion
2. Property bubbles including completely vacant cities
3. US and European outsourcing
4. Malinvestment in infrastructure

Those who claim China's growth is internal fail to factor in points 2 and 4.

"BC" writes ...

China's runaway growth is derivative of US firms' massive investment in China-Asia, which has occurred recently coincident with Peak Oil, peak US Boomer and EU demographics, and now China reaching terminal velocity of investment, production, and credit growth.

That the US and EU economies (60-65% of world GDP) can no longer grow because of demographics and Peak Oil, and China is heavily dependent upon global markets for continuing US firms' investment and derivative growth of Chinese domestic investment, production, and exports, Peak Oil and China's terminal velocity occurring for the largest credit bubble per GDP in history implies that China faces an unprecedented contraction, with the risk that GDP per capita will fall at least 50% in the coming decade.

China bank profits defy loan problems

Much the same way the US housing bubble did not matter until it did, China bank profits defy loan problems

Bank of China and Agricultural Bank of China both reported rises in net profit of nearly 30 per cent in the third quarter in spite of government attempts to slow new lending and rein in asset prices.

The banks are the first of China's state-controlled lenders to report profits for what is expected to have been a bumper quarter for most of their competitors as well.

However, the banks face problems involving bad loans resulting from a government-directed lending binge launched to combat the financial crisis.

Analysts, regulators and even the banks warn that the big expansion in lending, with the volume of new loans doubling from a year earlier to Rmb9,600bn in 2009, will almost certainly lead to a large rise in non-performing loans as many borrowers eventually default.

With credit still relatively easy to obtain and with economic growth still above 9 per cent, many of those asset problems are yet to materialise.

Love Affair Will End Badly

Parabolic expansion of housing prices, credit, or asset prices never ends well. Yet because the US bubble has burst while the various Chinese bubbles have not, various economic pundits are chanting nonsense once again about decoupling scenarios, even in the midst of currency wars and competitive currency debasement.

This love affair with China will not end well for the US, for China, and especially for the commodity producers like Australia and Canada, each in huge denial about their own property bubbles.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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