| California Governor Jerry Brown's New Plan Shows He Still Does Not Understand 2 + 2 Posted: 16 May 2011 07:22 PM PDT The California humor show rolls on. Today we find out that because of the recovery, California is only $9.6 billion in the hole instead of $15.4 billion in the hole. Brown's old plan, because Republicans would not pass tax hikes (and I praise them for holding out), was to do a road show touring the state hoping to drum up support for a referendum to hike taxes. In the wake of the favorable budget news, the governor has a new plan. He wants Republicans to pass a tax hike now and have a voter referendum later. Really? Yes. What is the Governor Smoking?Proving once again that truth is stranger than fiction, I am wondering just what the governor is smoking. The appearance that California is not as much in trouble now (I assure you it is a mirage because this recovery is nearly over), makes it less likely that Republicans would go along with tax hikes not more. Besides, what part of 2 + 2 does Brown not understand? The legislature is 2 votes shy in both the House and Senate of ramming a preposterous tax hike measure down California taxpayers throats. A few Republicans are willing to bargain if Democrats will scrap California's defined benefit pension plan (a reasonable deal in my estimation if they also agree to make California a right-to-work state), but Democrats, forever beholden to public unions will not go along. That is the setup. Let's tune into the humor show for more details. California Expects $6.6 Billion Revenue GainBloomberg reports California Expects $6.6 Billion Revenue GainCalifornia's economy is "on the mend," driving revenue $6.6 billion higher than forecast through fiscal 2012, reducing the deficit of the most populous U.S. state and trimming the need for higher taxes, Governor Jerry Brown said.
The deficit estimate shrank to $9.6 billion from about $15.4 billion, Brown said in revising his budget proposal for the year that begins July 1.
Brown's initial plan in January asked lawmakers to put those tax extensions directly before voters in June. His revised budget calls for lawmakers to extend the taxes and then ask voters in November to validate the move.
Jim Nielsen, the top Republican on the Assembly budget committee, said he doesn't expect Republicans to agree to the tax extensions. Brown would need at least four Republican lawmakers to consent. The governor said he's in discussions with between four and 10 Republican lawmakers.
"As far as our caucus is concerned, tax increases are not something that we would agree to," Nielsen said at a news conference today. "Raising taxes only continues the spigot of spending."
California's constitution requires lawmakers to approve a budget by June 15 and for the governor to sign it into law by July 1. A new law approved by voters in November allows the budget to be passed by a simple majority vote and strips lawmakers of their pay whenever a budget is late. Unless some Republicans loses their minds or Brown offers up significant incentives such as scrapping defined benefit pension plans and offering right-to-work laws, nothing is going to happen by June 15. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Australia Real Estate Bulls Trot Out Every Cliché Known To Man Posted: 16 May 2011 12:26 PM PDT The title of this post comes from Australia's "Brisbane Bear" regarding a link to Soft is Pundits' New Hard-Sell PROPERTY pundits are labelling it a buyer's market. Clearance rates are low, the glut of properties for sale shows little sign of abating and prices are now negotiable.
Even the market's most bullish supporters are bending before signs of softer conditions.
SQM Research group says the number of homes on the market in April doubled compared with the same period a year ago.
And SQM director Louis Christopher says: "Melbourne is now experiencing a massive oversupply of real estate."
"If this continues into the next quarter, then we are likely to see considerable price falls over and above our existing forecast."
Select Clichés from the Article- "It's definitely a buyer's market" - Richard Wakelin, director of Wakelin Property Advisory
- "This is a really good time for people to be trading up" - Richard Wakelin, director of Wakelin Property Advisory
- "Buyers should be sitting back and watching for opportunities, looking for properties that have been passed in on the weekend" - Mark Armstrong, from Armstrong Property Planning
- Century 21 director Charles Tarbey suggests buyers focus on the $400,000 to $600,000 range in coastal and tourist properties.
Alternative Mish Suggestions- Trading up now will greatly increase losses
- Tourist properties will be especially hard hit
- Now is a poor time to buy in general
- Wait 5 years, then see what prices are
- In the meantime, rent
Comment to Brisbane Bear: You have only just begun to see Clichés. For reasons why, please see Economic Bust in Australia:Near-Record Corporate Bankruptcies, Employment Drops Unexpectedly; Rise in Bad Home Loans;Record Low Property TransactionsAustralia's bust has just started. Expect a 5-year decline minimum. As a point of reference, the US housing bust will be 6 years old this summer. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Debt Ceiling Reached, Geithner Declares "Debt Issuance Suspension Period", Drools Over Soft Pitch from Senator Bennett; T-Bill Rates Near Record Low Posted: 16 May 2011 10:03 AM PDT The US government debt ceiling has been reached. As expected, it's a non-event for the market in spite of all the incessant whining by Treasury Secretary Geithner and President Obama. Bloomberg reports Treasury Bill Rates at Almost Record Low as U.S. Debt Ceiling Is ReachedTreasury bill rates were at almost record lows as the U.S. reached its federal borrowing threshold and a congressional vote loomed in the next few months on raising the nation's $14.3 trillion limit.
Six-month rates were at 0.07 percent, compared with the record low 0.0305 percent set on May 7, as Treasury Secretary Timothy F. Geithner said he has taken action to stave off the federal debt limit until Aug. 2, using accounting measures that involve two retirement funds. Three-month bill rates were at 0.02 percent, almost the lowest level since they went negative during the financial crisis.
"The debt ceiling issue continues to keep bill rates remarkably low," said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "With the cuts in issuance for short-term securities. demand for paper in the front end demand remains firm for bills."
Geithner wrote lawmakers today to say he has declared a "debt issuance suspension period," a technical measure that allows him to free up borrowing room from the Civil Service Retirement and Disability Fund and the Government Securities Investment Fund. The steps, which come as Republicans and Democrats argue over when and how to raise the debt limit, won't affect retirees or government operations.
Since the government shut down non-essential services in 1995, the borrowing threshold has been increased 12 times. In half of those instances, Congress waited until the ceiling had been reached before it was adjusted. Geithner's Letter to CongressHere are a few snips from Geithner's Debt Issuance Suspension Letter to Congress. Dear Mr. Leader:
I am writing to notify you, as required under 5 U.S.C. § 8348(l)(2), of my determination that, by reason of the statutory debt limit, I will be unable to invest fully the portion of the Civil Service Retirement and Disability Fund ("CSRDF") not immediately required to pay beneficiaries. For purposes of this statute, I have determined that a "debt issuance suspension period" will begin today, May 16, 2011, and last until August 2, 2011, when the Department of the Treasury projects that the borrowing authority of the United States will be exhausted. During this "debt issuance suspension period," the Treasury Department will suspend additional investments of amounts credited to, and redeem a portion of the investments held by, the CSRDF, as authorized by law. ... The letter is pretty boring and repeats the above paragraph for the Government Securities Investment Fund ("G Fund") of the Federal Employees' Retirement System as well, followed by a feeble plea to raise the ceiling. House Speaker Promises to Raise Debt Ceiling but Add ConditionsOn May 15 Boehner Says U.S. Must Raise Debt LimitBoehner, who in a May 9 speech demanded spending cuts greater than the amount of any debt-ceiling increase, told CBS yesterday that he understood "what the president was saying about jeopardizing the full faith and credit of the United States."
"Our obligation is to raise the debt ceiling," he said. "But to raise the debt ceiling without dealing with the underlying problem is totally irresponsible."
Last month Obama appointed Vice President Joe Biden to lead negotiations with a small bipartisan group of congressional leaders to try to strike a deal on reducing the debt and deficits. The negotiators have met three times with Biden; the president held separate talks with Senate Democrats and Republicans May 11 and May 12.
"I've said, 'Get them in a room, hammer out a deal, and make sure that we don't even get close'" to defaulting on the nation's debt, Obama said on CBS yesterday. Fear-Mongering Response to Senator BennettLast week Senator Michael Bennett of Colorado sent a letter to Treasury Secretary Tim Geithner asking what would happen if the debt ceiling was not raised. Geithner's Fear-Mongering Response to Senator Michael Bennett was quite entertaining. Here are a few select quotes from Geithner: A default would call into question, for the first time, the full faith and credit of the U. S. government. As a result, investors in the United States and around the world would demand much higher rates, reflecting the increased risk we might default on our obligations again.
A Default would not only increase borrowing costs for the Federal Government. but also for families, businesses, and local governments.
Even a short-term default could cause irrevocable damage to the American economy. Geithner Drools Over Softball The letter goes on and on with colorful warnings about double-dip recessions. The entire setup looks like a staged event. Michael Bennett is a Democrat from Colorado who wants the debt ceiling raised. Purposely or not, Bennett lobbed a softball to Geithner who drooled all over it. Game of ChickenLet's be serious here. Everyone knows the debt ceiling will be raised. All this politics is about preventing (or gaining) spending concessions. Obama and the Democrats wants to raise taxes, the Republicans want to reduce spending. The debt ceiling is a game of chicken to see who blinks first and by how much. I hope House Speaker Boehner plays it for the max. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected Posted: 16 May 2011 12:06 AM PDT Before taking a look at industrial production, let's take a look at how uneven the jobs recovery has been. The New York Times reports A Jobs Recovery Is Happening Faster for Some Countries Than OthersTHE financial crisis and the severe recession that followed destroyed jobs in every industrialized country. While many countries have started to recover, in only one major one, Germany, has unemployment declined to a level lower than it was in September 2008.
When the downturn began, Germany had about 25 percent of the population in the euro zone and a similar share of the unemployed workers. Its population share is about the same now, but it has only 17 percent of the unemployed.
If the euro zone were a fiscal union rather than just a monetary one, there would have been automatic subsidies through unemployment benefits and other programs for the weaker areas. If there were easy labor mobility in the zone, more workers would have moved to Germany. If there were separate currencies, the German mark would have appreciated against the other European currencies.
As it is, none of that happened. Many Germans resent the need to bail out other countries, and many people in those countries resent being forced to cut wages and payrolls in the name of restoring competitiveness. Unemployment Rate Comparison
 Spain, Ireland, Greece, Portugal Continue Decline European Production SlipsThe charts above show what has transpired. However, the pertinent question, as always is "What's Next?" For some clues about Europe, please consider German Bonds Rise as European Production Slips, Limiting Rate SpeculationMay 12, 2011 10:27 AM CT
German bunds rose, pushing the 10- year yield toward a two-month low, as a report showed European industrial production unexpectedly fell in March, strengthening the case for interest rates to be kept on hold.
Production in the euro area slipped 0.2 percent in March from February, when it grew 0.6 percent, the European Union's statistics office in Luxembourg said today. The median prediction of 25 economists surveyed by Bloomberg was for a 0.3 percent gain.
Greek unions kept ferries docked at ports, grounded flights and shut hospitals and schools yesterday in protests against Prime Minister George Papandreou's plans to sell state assets and usher in more spending cuts. The country's unemployment rate rose to 15.9 percent in February, from 15.1 percent the previous month, Athens-based Hellenic Statistical Authority said.
Greece is likely to restructure its debt in the first half of next year, Barclays Capital strategists including Piero Ghezzi, head of global economics, emerging markets and currency research in London, wrote in an investor report yesterday. A restructuring is "unavoidable," Credit Suisse Group AG analysts, including Andrew Garthwaite, wrote a research note today. French Industrial Production Unexpectedly Declines .9 PercentPlease note French industrial production unexpectedly fell in MarchFrench National Bureau of Statistics (Insee) on Tuesday (May 10) released data show that the French industrial production unexpectedly fell in March.
Data show that the French rate of industrial output in March fell 0.9%, is expected to rise 0.4% Spain Production Down 1%, Ireland Down 1%, Greece Down .6%According to the Wall Street Journal article Industrial Output Signals Slower Euro-Zone Growth, industrial production dropped 1% in Spain, Dropped 1% in Ireland, and dropped .6% in Greece. Moreover, things do no look so good for the UK either. Figures released Thursday by the U.K.'s Office for National Statistics showed industrial production there was weaker than expected in March due to continued maintenance on oil and gas infrastructure. However, the narrower measure for manufacturing also raised questions about the strength of economic growth.
The government hopes manufacturing will play a significant role in the U.K.'s economic recovery. The sector, which has been boosted by the pound's depreciation since late 2007, has performed well and was the one bright spot in the economy's surprise contraction in the fourth quarter of 2010.
But there are signs of a loss of momentum. The latest Purchasing Managers' Index survey showed manufacturing growth slowed to a seven-month low in April, while a Confederation of British Industry's survey showed a drop in the number of firms expecting output to rise in the next three months.
Economists said Thursday's data added to signs that growth rates in the manufacturing sector, which accounts for about 11% of the U.K.'s gross domestic product, are returning to more typical levels—but that might highlight weakness elsewhere. Pound Declines as Traders Scale Back Interest-Rate Bets on Growth Concern
Please consider Pound Declines as Traders Scale Back Interest-Rate Bets on Growth ConcernThe pound weakened against most of its major peers this week as signs the U.K. economic recovery is faltering heightened speculation that the Bank of England won't raise interest rates anytime soon.
Risks to economic growth remain "skewed to the downside," the central bank said in its quarterly inflation report. Price growth may quicken to 5 percent this year, it said. Statistics this week also showed U.K. industrial and manufacturing production increased by less than economist forecasts. Traders scaled back bets on when policy makers will boost borrowing costs.
"We're starting to see some of the effects of the government spending cuts feed through to the real economy and that's causing rate hike expectations to be pushed back," said Chris Walker, a currency strategist at UBS AG in London. "The pound has very much moved in tandem with rate expectations. It's looking a bit vulnerable now."
Growth is slowing as Prime Minister David Cameron's coalition government is seeking to reduce a fiscal deficit of almost 10 percent of gross domestic product by raising taxes and cutting public spending, the deepest cuts since World War II. The Bank of England left its key rate unchanged at 0.5 percent on May 5, three days after Governor Mervyn King said the economic effect of raising borrowing costs would be "severe." Currency FundamentalsLet's recap Trichet Backs off Rate Hikes; US Dollar Up Sharply; Currency FundamentalsThursday, May 05, 2011 3:39 PM
ECB President Jean-Claude Trichet has backed off his usual way of signaling a rate hike, which is to use the phrase "strong vigilance". Instead, Trichet said today "the ECB will monitor inflation risks very closely".
The market interpreted this change as a pause in rate hikes by the ECB. Unlike most, I had been expecting this action by Trichet for many reasons. I gave some of those reasons in my speech last week at Saxo bank. (See Meeting with Saxo Bank Chief Economist; My Speech in Copenhagen; Images of Stockholm and Copenhagen) for a discussion and lots of digital images.
Why I expected Trichet to Curtail Rate Hikes
- Strengthening Euro is hurting European exports
- ECB's One Size Fits Germany Policy is not viable.
- Rate hikes would exacerbate problems Spain, Greece, Portugal, Italy, Ireland, Greece, and Spain (the PIIGS)
- The recovery in Europe is not on solid footing
- Hiking rates to combat oil prices makes no sense if the spike in oil prices is not caused by a rise in demand
Fundamental Factors Affecting Currencies
- Expected and actual interest rate actions
- Direction of interest rate differentials
- Actual interest rate differentials
- Demand for dollars in debt deflation credit crunch
- Deficits
- Actions on Deficits
- Trade imbalances
The top reason the Euro has been soaring was an expectation the ECB would hike three times or more and the Fed none. Trichet threw cold water on that expectation today, and the Euro promptly sank 3 cents vs. the US dollar. Cold Water on Rate HikesAs noted above, currencies move not only on interest rate differentials, but expected interest rate differentials. The Bank of England and the ECB have now both thrown cold water on expected hikes. Huge Cracks in Global Recovery PictureUnless those production reports are outliers, we are beginning to see a picture of a much slowing Europe. Moreover, back in the states, Non-Manufacturing ISM Plunges Below Prediction of All 73 Economists, New Orders CollapseDown under, please consider Economic Bust in Australia:Near-Record Corporate Bankruptcies, Employment Drops Unexpectedly; Rise in Bad Home Loans;Record Low Property TransactionsMeanwhile China is overheating. Add that all together and there are enormous cracks in the global recovery picture. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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