| Government Shutdown in Minnesota: 23,000 of 36,000 State Employees Furloughed; Ohio Privatizes Prisons; Pennsylvania Slashes School Funding Posted: 01 Jul 2011 08:41 PM PDT In what we should all hope happens at the national level, Minnesota Shuts Down after failing to pass a balanced budget by the June 30 deadline. Minnesota's state government began a broad shutdown on Friday going into the July 4th holiday, after Democratic Governor Mark Dayton and Republican legislative leaders failed to reach a budget deal.
Parts of the government had already begun to shut down on Thursday ahead of the midnight budget deadline, including some websites and dozens of highway rest stops on one of the biggest travel days of the year.
The budget impasse means that some 23,000 of the roughly 36,000 Minnesota state employees will be furloughed, and state parks and campgrounds will be closed ahead of what is usually their busiest stretch of the year for the Independence Day holiday.
All but the most critical state functions will be suspended while the spending impasse continues into the new fiscal two-year period that starts on Friday, which would make the 2011 shutdown much broader in scope than one in 2005.
NJ Cuts Aid to Local Governments, Family Planning
Controversial Governor Chris Christie signed a $29.7 billion budget, averting a government shutdown, after slashing $900 million using his line-item veto authority from the budget Democrats had presented to him.
"I will not give in to the Democrats' tax-and-spend agenda no matter how many times they and their allies and special interests demagogue me for refusing to do so," Christie told the Associated Press. "
The new budget adds $150 million in public school financing, and includes $447 million in funding for some of the state's poorest districts. Among the items cut by Christie were $139 million in aid to local governments, $50 million allocated for crime-fighting initiatives, $7 million for an AIDS drug distribution program, and $3.8 million for Senate and Assembly staff salaries.
Ohio Privatizes Prisons, Sets Plan to Abolish Estate Tax
Ohio Governor John Kasich signed a $55.8 billion budget hours before the midnight deadline, closing an estimated $8 billion deficit without raising state taxes. He used his line-item veto power to eliminate spending on a number of initiatives, including economic development and funding for certain special needs programs.
As part of the plan, the state will privatize five prisons, but the governor vetoed a proposal that would have given the state first choice on repurchasing prisons after they are sold to private parties.
Pennsylvania Budget Slashes Funding for Schools
Pennsylvania Governor Tom Corbett enacted a $27.15 billion state budget, which reduces spending more than $1 billion from the current fiscal year and includes severe cuts to higher and basic education.
Corbett, a Republican whose party controls both houses of the state legislature, signed the budget within an hour of Pennsylvania's midnight deadline for the 2012 fiscal year, which starts July 1.
The governor said the spending plan streamlines government, includes no tax increase and places limits on local property tax increases.
Any property-tax increase above the rate of inflation must be approved by local voters, the governor said. Praise for Privatizing PrisonsSpecial praise goes to Ohio Governor John Kasich for privatizing prisons. California desperately needs to do the same. If things go well, Ohio's plan could be and should be a model for other states. It is time to eliminate massive salaries and pension benefits of prison workers, most of whom are currently way overpaid and equally uneducated with nothing more than high school diplomas. Hopefully transit workers will be next. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Spain vs. Germany 10-Year Bond Spread; Reflections on "Contagion" Theory Posted: 01 Jul 2011 10:29 AM PDT Here is an interesting chart and commentary courtesy of Steen Jakobsen, Chief Economist at Saxo Bank from Steen's Chronicle It's all Greek to me!The back and forth of headline risks continues to drive this market between risk-on and risk-off to the huge frustration of investors as visibility seems to get worse and worse by the day.
There are still a number of event risks in the pipeline for the rest of June and into July, but the main point remains the same: We continue to only see political solutions based on buying time ("extend and pretend") and attempting to us liquidity to deal with a problem of solvency.
Spread between 10 year Government yield in Germany and Spain
click on chart for sharper image
I will once again reiterate that the main risk for Spain is not "contagion" from Greece but more the internal domestic issues coming to the fore: High unemployment, local states budget deficits rising and to some extent unaccounted for, the continued risk to bank stress test vis-à-vis housing markets and overall the funding issues for banks which are a Europe-wide issue. Contagion or Just the Same Problem Elsewhere?The spread is now down to 2.35 with the rally in European bonds in the wake of Greek bailout news, but nothing has changed in Spain, Portugal, Ireland, or Greece. The contagion theory is that one country is sick and it spreads. However, Ireland, Portugal, Greece and Spain are already sick as a rabid dog. They cannot become infected, because they are already infected. Furthermore, the IMF, ECB, EU medicine of throwing good money after bad is not the cure. Ironically, France and even Germany are now at risk because of silly policies designed to prevent the unpreventable. Plan to Spoon-Feed Greece to DeathThe original Greek bailout was 110 billion Euros, now it takes another $85 billion (and counting). When the fire sale of Greek assets does not bring in enough money, the banks and IMF will place even harsher terms on Greece. The revised plan is to spoon-feed payments to Greece in 12 billion-euro bites while demanding "progress". This will ensure Greece is sucked dry (at fire sale prices) of any government assets worth owning by the time the "bailout" is over. See Plan to Spoon-Feed Greece to Death for a discussion. Portugal, and Ireland should make note of the process. The same "bailout" plan will be used on them unless they tell the IMF and EU to go to hell. Plan to Suck Greece Dry Will BackfireThe plan is to suck Greece dry, not to bailout Greece, but rather to bailout the banks that to lent Greece. However, the plan will backfire. Greece will default anyway, and the ultimate cost will be higher to Greece and the banks that lent to Greece. European taxpayers will be asked to foot the bill. Notice how silly this has gotten. Had Greece simply defaulted a year ago, the cost may have been haircuts of $50 billion or so. Now $282 billion (and counting) has been invested to "save Greece". Another $124 billion was approved today, details to be finalized later. I ask again: Does Greece look or feel saved? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Manufacturing ISM Weaker Than it Looks; Digging Into the Numbers; Inventory Restocking Accounts for Much of the Rise Posted: 01 Jul 2011 09:05 AM PDT Inquiring minds are digging into June 2011 Manufacturing ISM Report On Business® to better understand the unexpected rise in PMI from 53.5 to 55.3. Manufacturing at a Glance click on chart for sharper imageInventory ReplenishmentFor all the excitement over the 1.8 point rise, much of it is restocking inventories in the wake of the tsunami. I called the ISM within minutes of the release to find out what portion of the overall 1.8 point rise could be attributed to inventories rising 5.4 points and what portion to customer inventories rising 7.5 points. I also asked what portion of the inventory rise could be attributed to the tsunami. Finally, I asked what portion could be attributed to the class "Fabricated Metal Products" because that is the bucket for auto parts. However there is only one person taking such calls at the ISM and her phone is probably ringing off the hook. I did not yet hear back. Some of the answers came from elsewhere. From Goldman Sachs as posted on Zero Hedge. BOTTOM LINE: The ISM beats expectations and rises in June. The details of the report, however, were weaker than the headline as more than half of the headline increase was due to an increase in inventories
The Institute for Supply Management (ISM) rises unexpectedly in June, up 1.8 points to 55.3. As the median forecast and ourselves had looked for a decline, this is clearly an encouraging upside surprise. The composition of the report, however, was on the weaker side. Specifically, a sharp increase in the inventories index (from 48.7 to 54.1) explained 1.1 points of the 1.8 increase in the headline index. If anything, an increase in inventories is a negative for future activity. The remaining 0.7 point of the headline increase was due to small increases in new orders (by 0.6 point to 51.6), production (by 0.5 point to 54.5), supplier deliveries (0.6 point to 56.3) as well as a more sizable increase in employment (1.7 points to 59.9).
Details - New orders barely rose and flirt with contraction.
- Backlog of orders is in contraction for the first time.
- Imports dropped 3.5 points and flirt with contraction.
- Prices paid dropped along with commodity prices and most likely will drop again next month.
US ISM an Outlier Earlier this morning I asked China PMI Lowest Since February 2009, on Verge of Contraction; 18-Month Low in Europe; US ISM Unexpectedly Rises; US an Outlier?Scorecard
- China on Verge of Contraction
- Germany 17-Month Low
- Europe 18-Month Low
- Italy, Ireland, Spain, Greece in Contraction
- US ISM Rises
US an Outlier?
I believe the US is an outlier. Manufacturers are gearing up following the Japanese tsunami, expecting a second-half revival that will not come. The partial answers to my ISM questions help confirm my thoughts. If I hear from the ISM, I will post an addendum. Addendum - Reply from ISM:The PMI is an equally weighted composite of New Orders, Production, Employment, Supplier Deliveries, and Inventories (inputs to Manufacturing). Customer Inventories is tracked separately to add to the overall insights, but is not factored into the PMI.
We did not receive any commentary from our respondents indicating that the "Japan effect" is driving Inventories. Since it is equal weighted of five components, the effect of inventories is 5.4 divide by five, or 1.08 (1.1) of the overall 1.8 rise as noted by Goldman Sachs. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| China PMI Lowest Since February 2009, on Verge of Contraction; 18-Month Low in Europe; US ISM Unexpectedly Rises; US an Outlier? Posted: 01 Jul 2011 07:21 AM PDT Still more signs the weakening recovery is all but over come from China where the private and government reported manufacturing PMIs are are verge of contraction. China's official manufacturing PMI data showed the index falling to 50.9 in June from 52.0 in May -- the third consecutive month of slowing in the manufacturing sector. The slowdown was consistent with the private HSBC PMI, which slipped to an 11-month low of 50.1 in June, from 51.6 in May.
"This lower-than-expected PMI reading will further depress markets which have been increasingly worried about a hard landing in China in the past two months," said BOAML economist Lu Ting. US ISM Unexpectedly RisesIn a snapback of weaker than expected manufacturing ISM reports recently, U.S. ISM Manufacturing Index Unexpectedly Rose in JuneThe Institute for Supply Management's factory index unexpectedly rose to 55.3 in June from 53.5 the prior month, the Tempe, Arizona-based group said today.
Economists projected the gauge would drop to 52, according to the median forecast in a Bloomberg News survey. Estimates of the 77 economists ranged from 49 to 55.
Other figures today showed manufacturing growth is slowing from China to Europe. China's factory index fell in June to the weakest level since February 2009, while in the 17-nation euro area, a gauge slipped to an 18-month low. German manufacturing expanded at the slowest pace in 17 months, while Italy, Ireland, Spain and Greece contracted. Scorecard- China on Verge of Contraction
- Germany 17-Month Low
- Europe 18-Month Low
- Italy, Ireland, Spain, Greece in Contraction
- US ISM Rises
US an Outlier? I believe the US is an outlier. Manufacturers are gearing up following the Japanese tsunami, expecting a second-half revival that will not come. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Plan to Spoon-Feed Greece to Death; Greece to Receive Another $124 Billion in Small Bites, Details Postponed; 33% Chance of Italy Debt Downgrade Posted: 01 Jul 2011 06:26 AM PDT The cost to keep Greece afloat keeps rising. The latest deal, not yet finalized says Greece to Receive Up to $124 Billion in New AidGreece may receive as much as 85 billion euros ($124 billion) in new financing, including a contribution from private investors, in a second bailout aimed at preventing default and ending the euro-region's debt crisis, according to an Austrian Finance Ministry official.
Euro-area nations and private investors will contribute 70 percent of that aid, with the International Monetary Fund offering the rest, Thomas Wieser, head of the ministry's economic policy and financial markets department, said at a briefing late yesterday in Vienna. European Union finance chiefs also hold a conference call tomorrow to free up a 12 billion- euro payment overdue from the original rescue.
The new bailout program, which should run from mid-2011 for three years, has to be "imagined as a cash-on-delivery agreement," Wieser said, adding that the dates of paying out installments haven't yet been set.
"Before every payment there will be a discussion of the finance ministers to see if the program is on track and whether the Greeks are still doing their part," Wieser said.
The first payment under the new program will probably take place in September, and may be of a similar size to the 12 billion-euro July installment, he said.
Plan to Spoon-Feed Greece to DeathThe original bailout was 110 billion Euros, now it takes another $85 billion (and counting). When the fire sale of Greek assets does not bring in enough money, the banks and IMF will place even harsher terms on Greece. Notice the plan to spoon-feed payments to Greece in 12 billion-euro bites while demanding "progress". This will ensure Greece is sucked dry (at fire sale prices) of any government assets worth owning by the time the "bailout" is over. Portugal, and Ireland should make note of the process. The same "bailout" plan will be used on them unless they tell the IMF and EU to go to hell. 33% Chance of Italian Debt DowngradeCNBC reports Italy still faces debt risk despite austerityRisks remain to Italy's plans to reduce its massive public debt despite new austerity measures, mainly due to weak economic growth prospects, ratings agency Standard & Poor's said on Friday.
Italy's cabinet on Thursday approved an austerity package worth some 47 billion euros ($66.55 billion) that is aimed at shielding the country from the Greek debt crisis and eliminating the budget deficit in 2014.
Ratings agencies S&P and Moody's have warned they may cut Italy's credit rating because of its inability to pass reforms to bring down its debt mountain. S&P has an A-plus long-term rating on Italy and the country is rated Aa2 by Moody's.
Following the unveiling of the government's austerity package, S&P said it maintained its view that there is a roughly one in three chance that its ratings on Italy could be lowered within the next 24 months.
Italy remains vulnerable due to its massive public debt of around 120 percent of gross domestic product (GDP) and its chronically weak economic growth -- the most sluggish in the euro zone over the last decade Eurozone Delays Decision on New Greek BailoutThe New York Times reports Eurozone Delays Decision on New Greek BailoutEurozone finance ministers have canceled a crisis meeting planned for Sunday because they need more time — as much as two more months — to nail down the details of a second bailout for Greece, officials said Friday.
They will, however, hold a video conference on Saturday to sign off on a new loan installment that will keep Greece from bankruptcy over the summer.
"It would have been too ambitious to get the deal (on a second package of rescue loans) done by Sunday," said a eurozone official. Several key aspects of a new bailout, such as the contribution of banks and other investment funds, are still up in the air — although eurozone leaders said last week that there will be new financing for the struggling country. Plan to Suck Greece Dry Will BackfireThe plan is to suck Greece dry, not to bailout Greece, but rather to bailout the banks that to lent Greece. That plan is still not finalized. However, the plan will backfire. Greece will default anyway, and the ultimate cost will be higher to Greece and the banks that lent to Greece. European taxpayers will be asked to foot the bill. Notice how silly this has gotten. Had Greece simply defaulted a year ago, the cost may have been haircuts of $50 billion or so. Now $282 billion (and counting) has been invested to "save Greece". Does Greece look or feel saved? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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