Around the Globe 05.03.2013

ECB Agenda Tests Central Bank Extremes in Denmark: Nordic Credit – Bloomberg.

Danish GDP Performance

Living in a bad neighborhood makes it difficult for you to maintain your house nicely.  So it is with Denmark and the Euro Crisis.  A strengthening currency and economic contraction within the Eurozone has suppressed Danish economic growth.

As long as the world central banks continue to print money, Denmark will be forced to keep its interest rates low so that it currency does not become too strong, a similar policy stance to that of the Swiss National Bank.

The Danes understand the where all of this printing is leading:

Central bank Governor Lars Rohde said last month policy makers seeking to fuel growth have pumped the financial system with so much liquidity that an exit risks stunting a recovery and bursting potential asset bubbles.

Mr. Rohde should be careful about saying this out aloud, if he wants a good table at Jackson Hole in August.

Economy Adds 165,000 Jobs as Unemployment Dips – Businessweek.

Payrolls in U.S. Rise 165,000 as Unemployment Rate Drops – Bloomberg.

US Employed People

165,000 jobs are better than nothing, but job growth remains week.  Wall Street seems enthused about the number sending markets higher.  Before you get too excited, examine the chart above.  As of the last payroll report, the U.S. has recovered to 2006 employment levels.

If you own a lot of financial assets or real estate in major cities, then you are doing great.  If you must work for a living, not so much.  Fed policies have produced a 10% recovery.  Eventually, they will figure this out, and the whole mess will be autopsied in an economic text book in 2050.  For now, the magic money machine keeps humming.

Factory Orders in U.S. Decreased More Than Forecast in March – Bloomberg.

US Service Sector Expands Slightly Less Than Expected; Factory Orders Fall More Than Expected.

Service sector growth slowest in nine months in April: ISM | Reuters.

Factory orders fall sharply in March | Reuters.

US Factory Orders

This is how confirmation bias works.  Any piece of information that confirms your belief is given higher weight than facts that contradict it.  The bull market roars because people ignore the bad economic news and take the good to heart.  Payroll growth has spurred the markets higher today, but the troubling news that economic activity dropped in March is ignored.

Europe’s Promised Turnaround Has a Huge Error Rate.

The accuracy of the European Commission’s forecasts re-examined – ecp476_en.pdf.

EU sees deeper euro zone recession in 2013, slower deficit cuts | Reuters.

EU Forecast Error During Growth EU Forecast Error in Recessions

The charts above come from the paper by Laura González Cabanillas and Alessio Terzi entitled “The Accuracy of EC Forecasts Reexamined.”  During periods of growth, EC forecasts tend to be slightly pessimistic, but during recessions they become very optimistic.  Growth in the next year has been overstated by 1.76 points during the study period, which is 1969 to 2011.  It should surprise no one that accuracy has worsened since the onset of the Eurocrisis in 2009.

The EC is currently predicting a 0.4% contraction this year followed by a 1.2% expansion in 2014.  I think it is safe to say that both of these targets will be missed.

India Says Inflation, Trade Gap Constrain Policy Scope: Economy – Bloomberg.

India CPI

If India cuts interest rates, it risks stoking inflation and raising its current account deficit.  The problem with India’s economy is red tape.  The country has an impressive bureaucracy full stocked with bizarre regulations and bureaucrats who wish to hold on to their power.  Freeing the economy and opening it to international competition would increase its efficiency leading to lower long term inflation rates.

India always seems on the cusp of enacting reforms, but rentiers are persistent  and wield much political influence.

French Leader François Hollande’s Woes Fan European Fears –

Microsoft Word – Markit EZ Manufacturing PMI May 2013.

Markit Manufacturing PMI Eurozone May 2013

Let me save you some time reading this article.  France is screwed.  Its economy deteriorating rapidly as is its leverage within the EU.  The weaker France becomes, the more domineering Germany acts.  France has virtually no hope of breaking out of its economic stagnation as its major customers are contracting as well.  Even German PMIs are within contractionary territory.



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