Around the Globe 11.01.2013

US factory activity hits one-year low in Oct: Markit.

Manufacturing in U.S. Expands at Faster Pace Than Forecast – Bloomberg.

Manufacturing sector expands more than expected in October.

U.S. October manufacturing activity growth hits 2-1/2-year high: ISM | Reuters.

U.S. Factories Shrugged Off Shutdown –

ISM PMI 11.2013


There are two widely followed American manufacturing indices issued by Markit Economics and the Institute of Supply Management.  In June, the indices diverged with one continuing to rise while the other began falling.  Even though both organizations released their data today, guess which one the mainstream media is choosing to write about and which one is being ignored?

The optimistic numbers from ISM are winning the news battle 41,000 google news search results to 8,500.  This morning, I saw several articles hyping the ISM’s data but none reporting Markit’s.  None of this criticism should be construed as supporting one index over the other.  In fact, they are both probably right adding to the rest of the decidedly mixed data that defines the New Normal.


Markit US Manufacturing PMI 11.2013

Draghi’s Deflation Risk Complicates Recovery: Euro Credit – Bloomberg.

Euro slips to 2-week low as talk of looser ECB policy grows | Reuters.

Euro Fair Value at 1.37

The table above illustrates the relative advantage or disadvantage of the country’s euro membership, and it is all you need to know in order to correctly predict the ECB’s next move.  Germany is essentially running the ECB, so the bank delivers the monetary policy that the Germans want.  As long as inflation remains low and the value of the euro is weak enough for Germany to maintain its export subsidy, then Draghi will hold the course steady.  If the euro begins to rise above $1.45, Germany will allow a rate cut to weaken the euro.

An expensive euro is not as unlikely as you think.  Eurozone banks are busy selling assets to raise their capital levels before the ECB stress tests.  As long as this process continues, their will be steady buying pressure on the euro.  In the meantime, the ECB is not matching the rest of the world’s central bank printing programs.  As such, the euro will continue to strengthen:

Fed-ECB Balance Sheet Ratio versus USDEUR

China property inflation quickens in October: surveys | Reuters.

China 7 Day Repurchase Rate 11.01.2013


The Chinese financial system will blow up someday, though it won’t be today.  Whenever the PBOC attempts to stop printing yuan, liquidity dries up and interest rates rise.  In response, the PBOC prints yuan and adds it to the system to ameliorate liquidity problems.  The unintended consequence of this action is a credit bubble, which is particularly evident in the frothy Chinese housing market.  Sooner or later, the Chinese will realize that holding empty apartments in empty cities is not an efficient use of capital but, again, not today.


Around the Globe 10.23.2013

High-End Spenders Shrug Off Headwind –

Consumer Confidence by Income Group

Around the U.S., the same song plays ad nauseam.   The more money you have, the more money they give you.  Money printing has been very good to the rich raising the prices of their asset portfolios while the majority of the country suffers an unprecedented five year labor market recession.  In yesterday’s post, Around the Globe 10.22.2013 , we examined rampant inflation in the collectibles market.  Today, we learn that the market for high-ticket items is robust buttressing our argument that the “recovery” is exclusive to the rich.

The truth is that QE is not the solution to the problem, it is the problem.  Money printing is a particularly insidious because it helps the rich while crushing the labor market and therefore the working class.   Fortunately for the banksters, their central bank and their government, no one will figure out what is happening until long after they have taken their profits.
Full post with charts, images and links:

Draghi Says ECB Won’t Hesitate to Fail Banks in Stress Tests – Bloomberg.

ECB to Start Review of Bank Balance Sheets –

Net Bank Assets as a Percentage of Host Country GDP


Draghi’s job is too talk tough.  That’s what he was doing in July of 2012 with his pledge to do whatever it takes to save the euro, and that’s what he is doing now by claiming that he won’t hesitate to fail banks next year.  As the chart above illustrates, European banks are overlevered, TBTF disasters waiting for an opportunity to happen.  If ING bank failed, the Netherlands would not be able to bail it out as the institution’s balance sheet is twice Dutch GDP.

These tests will be merely be a continuation of the laughable stress tests that have been conducted so far.  The regulators will arrive, audit and admonish.  The banks will make a few minor changes to their capital structures to enable them to continue the sovereign debt purchases that are keeping the PIIGS afloat, and everyone will be happy.

Meanwhile, bank lending will continue to flag in the periphery, and eventually the disease will spread to the core.  Europe’s economy will stagnate indefinitely, but at least a collapse is not imminent.  As in the U.S., the wealthy’s lot will begin improving at the expense of the worker.

Spain Ends Two-Year Recession Amid Effort to Add Jobs – Bloomberg.

End of Recession in Spain Fuels Hopes for Euro Zone –

Spain emerges from two years of recession –

Spain Retail Sales Performance Spain Employed Persons


The mainstream financial press loves its Spanish recovery narrative and continues to tout it even as Spain remains in a depression.  This is the growth that MFP is getting excited about:

Spain GDP Performance


0.1% could be a rounding error, but instead it is hyped as a win for Spain.  As you can see above, Spain has only grown in 8 of the last 24 quarters and has not put together four consecutive quarters of growth since the GFC.  Moreover, total employment and retail sales are still falling proving that the depression continues.

There is no reason why the facts should get in the way of a good narrative.  This article cherry picks data, combines that with a couple of anecdotes from reliable, go-to permabulls, and declares victory.  If you need to use a quote, at least pick one that’s accurate instead of this:

“We are optimistic on the euro periphery as a whole and Spain in particular,” said Robert Wood, an economist at Berenberg Bank, which forecasts growth of as much as 1.4 percent in 2014. “The country has made big structural changes, it’s been engaged in a lot of deficit reduction, business sentiment is improving and unemployment is probably close to a peak.”

Sell-side economist Wood makes a rosy growth prediction for Spain based on three facts and an additional prediction.  Let’s see if the foundation can support the house.

First, the country has not made big structural changes.  Firing workers is no easier today than it was a few years ago.  A few superficial changes have been implemented, but these are largely ineffectual as illustrated by our second chart showing an ongoing reduction in the labor force.  Second, it has not been engaged in a lot of deficit reduction:

Spain Budget Deficits Last Decade

Last year, the deficit was close to 11% having risen from 9.4% in 2011.  Since the onset of the new normal, the Spanish government has underestimated its budget deficit by at least three full points.  This year, Spain has an EU mandated deficit target of 3.8% for the year.  Through July, it ran a 4.38% deficit.  Extrapolating this number to the full year, we get a 7.5% deficit.  Adding in the traditional Spanish forecasting “error” of three points, we come to a grand total of 10.5% for the year.  There has been no deficit reduction, and total debt levels continue to rise.  Spain will cross the 100% debt-to-GDP level sometime in the first half of 2014.

Third, business sentiment is improving:

Spanish Business Confidence


but note that Spanish businesses remain unconfident as they have since 2008 they are just less unconfident than they had been.

Fourth and last, the shill bases his rosy GDP prediction on a rosy labor market prediction.  Spanish unemployment is probably at the peak as companies have already fired everyone they need to for now, but this is much different from a growing workforce.  Just like in the U.S. falling unemployment numbers belie the true, dismal state of the labor market.

Moreover, GDP growth was driven by export growth.  The euro has appreciated since then and with weak economic conditions prevailing in Spain’s largest trading partners, continued export growth will be elusive.

The bottom line is that Spain remains in a depression, and the data points to continued economic pain despite the hype.


Around the Globe 10.01.2013

U.S. Factory Activity Shows Surprising Strength –

U.S. ISM Manufacturing Index Rose in September – Bloomberg.

ISM jumps; Construction report likely canceled due to shutdown.

September manufacturing activity highest since April 2011: ISM | Reuters.

ISM PMI 10.2013

The financial press enjoys hyping the various economic indicators but fails to place the results in context.  Rather than viewing each piece of economic data as a component of the big picture, these outlets tend to view each indicator separately.  Markit’s PMI data was released prior to today’s ISM numbers.  Markit revealed a PMI of 52.5, and this was buried in the online editions of all of the outlets above.

When the ISM’s PMI registered at a 56, this news was placed on the homepage of Reuters, Bloomberg, the WSJ and CNBC.  Which number is better? Neither.  The truth is that these numbers confirm the present trend of tepid growth with an increasing chance of a recession going forward.  Companies may be doing well with robust order flow and strong pricing power, but they are not willing to add more workers.  As long as hiring remains slow, economic growth will remain tepid.  As long as economic growth remains tepid, hiring will remain slow.

US Manufacturing Employment PMI 10.2013

Euro-Zone Factory Growth Slows –

Euro zone manufacturing output falls in September.

Eurozone Markit PMI 10.2013

The Eurozone remains in a stagnant state.  The Manufacturing PMI is barely within expansionary territory with a 51.1.  This number represents a small decline from August.  Commentators seem concerned that the Eurozone “expansion” is running out of gas only two months after it began.  This information merely conforms to the actual situation on the ground rather than the recovery narrative.  Growth is not accelerating, which is what used to happen prior to the New Normal, and this change is confusing to the mainstream media.  The story is not the monthly fluctuations of the PMI but rather the overall trend.  What is making this recovery weaker than previous iterations?

China manufacturing tepid in September, small firms struggle | Reuters.

China September HSBC PMI well below flash estimate.

China Sept. Manufacturing Index Rises Less Than Forecast – Bloomberg.

HSBC China PMI 10.2013

People place too much emphasis on the latest data release, but the real story is that Chinese manufacturing has been basically flat since mid-2011.  The economy is still growing by 7.5% a year, and this growth must be coming from somewhere.  Credit creation has been proceeding at a fairly rapid clip, and this is supporting the economy in the short term.  The question in China is the same as for the rest of the large economies:  How long will this loose money policy remain effective?

Lawmakers to Break With Berlusconi –

Bunga Bunga

Bunga Bunga

It seems as if Letta’s government will live to fight another day.  PDL lawmakers rightly fear that voters will blame them for plunging the country into chaos.  The problem is that even though this government will survive it is too weak to create and implement the necessary reforms to Italy’s political, economic and financial systems to spur growth.  While there will not be an immediate crisis, eventually the consequences of past behavior will catch up to Italy, but it won’t be today.  The country will continue muddling along until one day it doesn’t.


Around the Globe 09.25.2013

Millionaire optimism hits 9½-year high, Spectrem Group says.

Consumer Confidence by Income Group

Millionaires are actually doing quite well for themselves and are completely out-of-touch with workers.  Cheap money enriches those closest to it, and this “recovery” is proof.  Let’s follow the money:

  • The Federal government is the closest to the printing press, and it is performing better than any other entity.  The Fed is printing cash to finance the Feds at record low rates while it simultaneously runs record high deficits.
  • TBTF banks are the next in line at Ben’s cafeteria, and they are the beneficiaries of the Fed’s largesse in numerous ways.  Their financing costs are low due to financial repression and the implicit TBTF guarantee from the government.  Furthermore, the Fed has been purchasing their holdings of treasuries and MBS raising prices to ensure profits and gains in their investment portfolios.
  • Corporations get their money from the TBTF banks who are busy underwriting a record amount of bond deals.  The corporations are also using the cheap money to buy back shares and raise dividends, but not to expand much to the chagrin of the American worker.
  • The rich derive their wealth primarily from their investment and real estate holdings, so they are doing very well, too.  Cheap money has inflated asset prices, and they are the main beneficiaries of the cash as it trickles down from the corporations.
  • Meanwhile, the middle class is earning 8% less than it did in 2007:

Median Income Performance in the U.S. Since 2007

Remember, money printing does little to improve the labor market, but it does manage to significantly improve the lots of the feds, banksters, corporatists and the rich.  The Fed equitably distributes the benefits and burdens of the program: the well-off get the money, and the rest of us will get the bill at some future date.

Durable-Goods Orders Tick Up –

Demand for U.S. Capital Goods Increases Less Than Forecast – Bloomberg.

Orders for U.S. Capital Goods Rise as Spending Improves – Bloomberg.

US durable goods up 0.1% in August vs. expectations of a 0.5% drop.

U.S. durable goods edge higher, fiscal uncertainty weighs | Reuters.

U.S. Durable Goods Orders

There has been a steady rise in durable goods orders since the “end” of the recession, but it appears that the rise is over.  Since the last quarter of 2011, durable goods sales have become stuck in a pretty tight range save for one outlier each to the upside and downside, as indicated by the red lines.  While these numbers aren’t awful, they aren’t great either.  Just like the rest of the economy, future performance in this sector will be meh.

U.S. New-Home Sales Rebound in August –

New home sales rise by 421,000 in August.

Sales of New U.S. Homes Rose in August Following July Plunge – Bloomberg.

New Home Sales

The mainstream media is characterizing the latest blip upward in new home sales as a “rebound.” The real story lies within the chart where it become obvious that a mere blip will not suffice; new home sales are running at or near troughs from the early 80’s and the early 90’s and stand at less than a third of the pace achieved during Housing Bubble 1.0. Since the printing press has already been deployed, the only thing that will increase sales is rising consumer incomes.  Based on the current job creation pace, a healthy labor market is not in the country’s immediate future.

IMF Calls for Euro Zone to Create Central Budget Authority –

EU Balks at Rule Change That Could Ease Austerity –

Germany Debt to GDP

Germany and the rich countries will never agree to easing austerity or creating a central budget authority because they will never become joint and severally liable for periphery debts whether they be sovereign or from the financial system.  Germany’s budget situation is under control, while the same cannot be said for France, Italy and Spain, where deficits have risen in lockstep since the GFC:

F I S Debt Sampler

The rich countries know that any easing of the current program will allow deficits to rise even faster.

Around the Globe: Weekend Edition September 21-22


Merkel Appeals for Strong Europe as Steinbrueck Attacks – Bloomberg.

Merkel and Steinbrueck

There are two possible outcomes for Sunday’s Bundestag elections.  Either Merkel and her coalition win outright, or she must form a grand coalition with the Social Democrats.  Eurocrisis fighting efforts will become more dovish under the second scenario while probably remaining the same under the first.  In either situation, concessions and expensive ones at that will be made in the name of preserving the euro after the election.  Results should be in around 2PM EDT.


Rajan’s India Inflation Battle Pressures Singh as Election Nears – Bloomberg.

India CPI 09.2013

The RBI is tightening monetary conditions in order to squelch inflationary pressures.  The government could reform its internal markets to maintain economic growth in the face of tight money, but entrenched special interests are able to thwart these efforts particularly in advance of elections next year.  While the rate hike will do the job, it does so with the risk of recession.

The Indian situation should sound familiar.  There is another country forcing its central bank into doing all the heavy lifting while the political system remains paralyzed, and it is heading for a debt limit crisis in a few weeks.


From Thursday’s Edition:

Fear of missing out fuels China property market.

China Housing Index 09.2013

China’s property market has become quite bubblicious in the last year. In this article alone, there are at least three factors signalling a bubble:

  1. The belief that prices can only go up has taken hold.
  2. People are regretting missing out on the price rises.
  3. The Real Estate market is accounting for an ever-increasing portion of economic growth prompting the government to continue policies that are inflating the bubble.
  4. Speculators comprise the majority of buyers.

BTW, each of the four points existed right before the U.S real estate market began its descent.  This bubble will pop, too, but no one knows when.

From Wednesday’s Edition:

ECB advisers call for more long-term loans | Reuters.

Eurozone Loans to the Private Sector Through 08.2013

There is a loose money faction within the ECB that wishes to reopen LTRO in order to boost private lending for business expansion.  That’s the reason we are being told anyway.  In reality, two rounds of LTRO commencing at the time indicated by the green arrow failed to slow the decrease in private lending.  The red arrow highlights the inflection point where private loans began contracting at a faster rate at about the same time as the Draghi pledge.  Since Eurozone banks are not deleveraging, where could all the cash from LTROs and reduced lending have gone? Isn’t it obvious:

Eurozone Debt to GDP Ratio

Creaky Eurozone governments led by Italy, Spain and France have added over  €400bn to the debt stock and someone needs to purchase this debt so that these countries can continue financing themselves.  Banks rather loan to governments a higher yield with cheaper money borrowed from the ECB, which is also functioning as a buyer of last resort, than loan money to the private sector.  Loans to businesses are neither guaranteed nor eligible for the same collateral treatment by the ECB; hence government borrowing is crowding out the private.

From Tuesday’s Edition:

Consumer Prices in U.S. Rose Less Than Forecast in August – Bloomberg.

U.S. consumer prices muted, but rents and medical costs rise | Reuters.

U.S. Consumer Prices Rose 0.1% –

US Inflation Rate YoY

When the economy is strong, increasing demand generally stokes inflation as can be seen above from Jan 2002 to 2008 during the post 9/11 recovery.  Today’s monetary easing is based on the theory that this process also works in reverse.  That is, printing more money to purchase bonds will stoke inflation leading to a pickup in economic growth.

Current theory does not account for the diminishing marginal returns of easy money.  Each successive round of monetary easing has  resulted in less benefits inuring to the American people:

Income Growth 99 vs 1

At one time, the Fed’s actions would be expected to lift the economy from its doldrums, but too many years of loose money have taken their toll.  Today, the best we can hope for from additional money printing is stagnancy, which is different from stability.

From Monday’s Edition:

U.S. manufacturing sector regaining some momentum | Reuters.

U.S. Factory Output Picked Up in August –

US Industrial Production Through August 2013

The latest manufacturing reports are being taken out of context to present a picture of “hope.” Industrial production did rise in August, but as we can see above gains in this sector have been trending downward since a robust recovery following the Great Recession.  August’s results do not reveal a manufacturing sector expanding at rapidly enough to significantly lower unemployment and raise wages.  Stagnant wages are what is holding the economy back at this juncture.

Around the Globe 07.01.2013

Chinese Manufacturing Gauges Fall as Slowdown Persists – Bloomberg.

China: From Driver to Drag on Global Growth.

China Flash PMI 06.20.2013

The HSBC/Markit PMI in the chart above shows that Chinese manufacturing is contracting, and even the official PMI points to stagnation.  The Chinese slowdown will be suppressing world economic growth for the immediate future.  The effects of the contraction are spreading far and wide with falling PMIs in South Korea and Germany and declining raw material production in Australia.  In the meantime, the PBOC seems willing to sacrifice short-term growth in order to slow credit creation, so this dynamic won’t be ending soon.

Factory activity, hiring slows in June: Markit | Reuters.

Manufacturing in U.S. Rebounded in June as Orders Picked Up – Bloomberg.

US Markit PMI 07.01.2013

The latest PMI for American manufacturer can be summed up as, “more of the same.”  As you can see, the PMI has moved up and down between 50 and 56 since 2010.  The “good news” in June’s report was that manufacturing employment began contracting, and this is a sign to Fed watchers that Uncle Ben won’t turn off the magic money machine anytime soon.  The most intriguing tidbit from the report is that export orders tanked to 46.3 deepening the contraction that began last month.  The Chinese flu spreads.

Special Report: The Bundesbank’s fight to be heard | Reuters.

EU leaders push banking union despite German reluctance | Reuters.

Bank assets to GDP

The EU follows the golden rule, “He who has the gold, makes the rules.”  Today, it is the Germans who have the gold.  The ECB kowtows to the Bundesbank with the Germans receiving the monetary policy they want, which results in a policy much too tight for the periphery.

The Germans are also driving the talks on the banking union.  Germany will not agree to anything that requires it to commit funds prior to elections in September.  Once Merkel is reelected, the government will probably change its mind, much to the great chagrin of the German taxpayer.  Until then, there will be no progress on a banking union, though you may see a well-parsed political press release here and there.

‘Unprecedented’ $80 Billion Pulled From Bond Funds.

Bond Outflows 07.01.2013

Keep an eye on the bond markets.  Liquidity dries up in summer, and this rout could intensify once people see their June account statements.  The large outflows so far have not led to stressed selling, because fund managers are drawing down cash reserves and selling treasuries.  Once this buffer is depleted, look out below.

European shares turn negative after euro zone PMI data | Reuters.

Record Euro-Zone Unemployment Likely to Rise –

German Markit PMI 07.01.2013

Here’s some more doom and gloom for you.  Which do you want first? Okay, the gloom it is.  While the Eurozone PMI’s rise is pointing to an end to the recession at the present rate of change, the number masks the real story.  German manufacturing has begun contracting.  If Germany slows down, the Eurozone recession will endure.  This news is not surprising as contracting China is Germany’s best customer.

Now it’s time for the doom.  Eurozone unemployment has risen to another record, 12.1%.  The patience of European voters is wearing thin, and as it does the spectre of populism returns to the Continent.

In the MSM, the Word “Hope” Indicates Bullshit is Coming

Unemployment claims drop, raising hopes for job market – Economy Watch.

How does a one week drop in jobless claims indicate hope for the job market?

I am not sure. Job creation is  still running below the level of new market participants. Consumer demand, which drives 70% of the economy, is stagnant. There are other valid reasons why the initial jobless claims number is dropping.

First, this number has become less reliable during the Great Recession and is constantly being tweaked. The writer glosses over this explanation, because the labor department source told him so.

Second, when we are attempting to measure economic trends, one month is not a sufficient sample size to extrapolate movement.

I will have labor market “hope” once the yearly moving average of claims is decreasing at a rapid clip.


Iceland’s Success In Battling Joblessness

Iceland’s Success In Battling Joblessness.

The gist of this post is that while Iceland may never reach its bubble prosperity levels it is still a prosperous country with 6% unemployment. Ireland is still a relatively prosperous country with high unemployment, though it is still richer than it was in the 90’s. What is the difference between Ireland and Iceland besides switching the letter “r” for “c”? Iceland let its banks fail, while Ireland is drowning under the debt created by bailing out its banks.

In order for the business cycle to do its magic, business have to be allowed to fail. When businesses fail, their demand for inputs leaves the system causing prices to fall. This decrease in costs allows the surviving businesses to begin growing again with cheaper labor, capital and commodities. Cheaper inputs also encourage people to start their own firms, which have a greater chance of success due to lower costs. By artificially keeping prices “stable,” we are merely forestalling the inevitable crash and keeping the economy from entering a recovery.

Today’s Journal

Business News & Financial News – The Wall Street Journal –

The stock markets have still considerable gains for the year and are at or near multi-year highs, but the cheerleaders at the WSJ must be nervous. Check out these headlines from the Saturday Online Edition:

Signs Grow that Housing Has Hit Bottom

Weak Report Lifts Chance of Fed Action

Heard: Setting Fed to Work

Economists: Odds of QE3

Greece to Quicken Sales of State Firms

Italy Approves Spending Cuts

The headlines are bullshit and do not belie the facts exposed, or sometimes hidden, in the articles below the click.

This is business strategy of Murdoch media empire. Basically, give the readers what they want. In the case of the WSJ, the readers are market participants, and all market participants want good news. Give it to them and keep readership high. A few years ago, the WSJ was truly an elite newspaper, but now it has been surpassed by the FT. Not that the FT has gotten better, the WSJ has just gotten worse

U.S. Stocks Retreat; Hospital Stocks Surge –

U.S. Stocks Retreat; Hospital Stocks Surge –

As much as businesses complain about regulation, they actually love it. The cover story for regulation is consumer protection, but really most regulation thwarts competition resulting in fatter profits for the regulated and correspondingly higher costs for the consumer.

What the market is telling us is that the Affordable Care Act is going to be good for the hospitals’ bottom lines. It is said that your profits are my cost and guess who will be paying the costs here.