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 09.16.2013

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.

Summers Quit Fed Quest as Democrats Spurned Obama Favorite – Bloomberg.

Three reasons why the Fed needs to taper now.

Fed taper likely to be announced this week: El-Erian.

US Treasury Borrowing Needs

Everybody has a reason why the Fed will begin purchasing less bonds over the next few months, i.e. the taper.  These are often complex theories based on arcane points of monetary policy stuffed with jargon.  The real reason is that the Fed is depleting the existing bond supply.  At a rate of $65bn per month in U.S. treasury purchases, the Fed will purchase the entire projected issuance in the fiscal year ending in March of 2014.

The next Fed chairman will have a large mess to clean.  The taper will cause interest rates to rise in two ways.  The first is the adjustment of supply and demand for T-bills.  The reduced demand for treasuries will bump up rates, though at least some of this is dynamic is already priced in.

The second is that the Fed standing by with its mighty printing press has beaten risk out of the market.  As the big elephant reduces it bond intake, risk levels will begin rising prompting markets to reprice.

Over the next few months, the consequences of the wind down of bond purchases will become apparent much to the chagrin of the next chairman.

Employment gap between rich and poor highest on record.

Unemployment Rate vs. Education Attainment

There are two troubling trends apparent on our unemployment chart.  The first is just what the article is telling you; specifically, higher income groups have recovered much better since 2009 than lower income groups.  High school and college graduates have retraced about half the increase in unemployment from the recession while high school dropouts have gained only about a third of their losses back.

The second is that each successive recovery from the last three recession has become less robust.  Unemployment levels from the Obama recovery are higher than the lows from the Bush recovery, which are higher still than the low levels witnessed during the Clinton boom.  The marginal returns from additional credit creation from cheap money are diminishing over time, but this won’t stop the Fed from reversing the taper if markets swoon post-taper.

Analysis: Europe, waiting for Germany, could be disappointed | Reuters.

Bavarian Elections Deal Blow to Renewal of Merkel Coalition –

Angela Merkel, courtesy of Armin Kübelbeck

Angela Merkel, courtesy of Armin Kübelbeck

Merkel is steaming towards victory in Germany’s elections Sunday.  While euro cheerleaders hope for Germany to change its eurocrisis fighting efforts after a new government is secure in the Bundestag, I think they will be disappointed.

The most significant message from German voters is that they do not want change, but more of the same.  Merkel can be counted on to maintain the euro for as little money as possible, which is exactly what Germans want.  What they don’t want are the inevitable consequences from kicking the can down the road umpteenth times.  Delaying the eurocrisis will just make it more severe when it eventually erupts.

Around the Globe 07.19.2013

Japan Sales-Tax Debate Looming for Abe After Election – Bloomberg.

Japanese Retail Sales YoY 07.2013

Japan is supposed to raise its national sales tax next year from 5% to 8% and in 2015 to 10%.  The country’s anemic consumer spending as seen above is projected to fall enough to cause a 4.4% contraction in GDP.  The simplistic solution is to forgo the increases, but a crucial piece of Abenomics is this tax increase for deficit reduction purposes.

Japan has reached the point of no return in its debt crisis.  Tax increases will not produce additional revenue as people will just cut consumption, as they have done in Greece and Spain.  A collapse is not imminent as Japan will somehow muddle along—until it doesn’t.  In the meantime, there is lots of money to be lost shorting JGBs.

World Bank Plugs Poland’s Budget Deficit – Bloomberg.

Polish GDP Performance

Poland does not use the euro, yet, but it is getting a taste of Europe’s malaise as the Eurozone is its largest trading partner.  The country has avoided recession so far, but its economic performance has declining in step with the Eurozone’s.  Last quarter, the economy hit stall speed of only 0.5% growth.

The green shot of a nascent debt crisis are appearing.  The budget deficit will be about 50% larger than projected and low rates have begun rising.  Poland is in better shape than the PIIGS, but economies can deteriorate quickly in Europe.

How Europe’s Bank Crisis Swamped the Pescanova Seafood Empire –

Eurozone Loans to the Private Sector

When economic and financial troubles overtake the world, hidden frauds become apparent.  Madoff’s scheme was revealed during the market swoon of 2008-9, and Enron, Worldcom, Parmalat and HealthSouth were unmasked after the Internet bubble burst.

Parmalat is the situation closest to the Pescanova saga.  In both cases, regional companies in Southern Europe used cheap financing and questionable accounting to grow into multinationals before flaming out amidst bitter recriminations.  Pescanova is the first of several companies that will suffer the same fate as the Eurocrisis continues to spread.

China, U.S. companies’ great hope, now a drag | Reuters.

GE Earnings and the Proverbial Penny – MoneyBeat – WSJ.

Microsoft, Google disappoint; shares pay the price.

Earnings threat: Strong dollar.

Cost cuts help GE profit beat as order book swells | Reuters.

Morning MoneyBeat: What’s That You Said About a Strong Earnings Season? – MoneyBeat – WSJ.

US Dollar Index 07.2013

Despite the lofty heights of the stock market, corporate America continues to deliver lackluster results.  GE, MSFT, GOOG and INTC among others have all reported lower revenues.  Two factors are contributing to declining sales.  A stronger dollar is the culprit according the mainstream media.  Ignoring the other antagonist is necessary to maintain the recovery narrative, but contraction in Europe and slowing growth in China will persist in sapping revenues of large multinationals for the immediate future.

Wait, profits are in line with analyst estimates.  Yes, but those estimates have been guided down several times in the last year, and profits are the easiest numbers to game  Revenue is the number to watch.

China to Scrap Controls on Lending Interest Rate –

China liberalizes bank lending rates in reform push.

China liberalizes bank lending rates in reform push | Reuters.

China Removes Floor on Lending Rates as Economy Cools – Bloomberg.

China 7 Day Repo Rate 07.19.2013

Chart from

China is attempting to reform its financial sector and has removed the floor on interest rates for bank loans.  Reform could be a cover story.  By removing the floor on loan rates, inefficient state industries may be kept afloat by below market rates.  It will be interesting to see who gets cheaper loans between now and the end of the year.

Around the Globe 07.11.2013

Will Investors Finally Buy Bernanke’s Explanation?.

Bernanke Supports Continuing Stimulus Amid Debate Over QE – Bloomberg.

Fed Affirms Easy-Money Tilt –

SP500 07.11.2013

The recent market turmoil ended two weeks ago replaced by this rally which pushed the S&P 500 to a record level.  Commentators place too much significance on what the Fed says but not what it does.  Printing trillions of dollars will generally lead to rising markets, but talking about programs or their end is just talk.  There will be short-term moves because of the talk, but the long term remains unaffected.  Check out the chart for the S&p 500 and notice that it has been rising for over two weeks.  Could the rally be based just on talk or is something else occurring? Read the next passage for the answer. 

China Could ‘Shock’ Markets With Big GDP Miss.

China 7 Day Repo Rate 07.11.2013

Markets should not be shocked about China missing its GDP target.  In fact, if the country hits the target, the numbers have been fudged.  Too many other indicators point to a slowdown in growth including imports, exports, electricity usage and transportation patterns. 

On the plus side, the Chinese Cash Crunch has abated, and world stock markets have rallied because extra liquidity is entering the system.  The PBOC giveth, and the PBOC taketh away.  Chinese liquidity issues will continue to affect world markets for the foreseeable future.   

U.S. Jobless Claims Rise by 16,000 –

Jobless Claims in U.S. Unexpectedly Rise to Two-Month High – Bloomberg.

Jobless claims rise, but labor recovery grinds on | Reuters.

Initial Unemployment Claims Through 07.06.2013

Even though jobless claims rose, the mainstream media is spinning the story so that it conforms to its recovery narrative.  A blip upwards in claims is insignificant.  The real story here is that the labor market remains stagnant.  We discussed the poor quality of jobs last week, so let’s focus on the actual quantity.  Today’s chart of truth shows that number of people working has just recovered to the 2006 level when the country had a smaller population and workforce:

US Employed Workers 07.2013

U.S. Mortgage Rates for 30-Year Loans Rise to 2-Year High – Bloomberg.

Mortgage Rates 07.11.2013

Chart courtesy of ZeroHedge

The real estate industry shills that are used as sources for these types of articles interpret every move as supporting the housing market.  In reality, the rise in mortgage rates means that you get about one-quarter to one-third less house than you would before the rise:

House Affordability 06.26.2013

Chart courtesy of ZeroHedge


The flippers are the group driving price increases.  At these rates, who will they flip the houses to?

New aid gives Greece summer respite before showdown | Reuters.

Greek Unemployment Rate 07.2013

This aid package should get Greece through German elections.  Afterwards, Greece will either be the recipient of loan forgiveness by its fellow Eurozone members, or it will be “Cyprused.” A combination of both choices could be used, too.  By “Cyprused” I mean that the banks will be raided to pay for the rest of the Greek bailout.  The seeds have already been planted for a depositor haircut.  The Greeks took over the solvent Greek subsidiaries of Cypriot banks, and Greece’s own bank restructuring has been on hold since December.  When the troika comes to take you savings, my Hellenes, don’t say that you have not been warned. 

Portugal president wants ‘salvation’ deal, including opposition | Reuters.

Anibal Cavaco Silva

From wikipedia

What’s the Portuguese President’s angle? If he had just approved the cabinet reshuffle, it’s business as usual.  For some reason, he decided that he wants the opposition to approve the reshuffle, too, and has offered the sweetener of early elections in 2014 rather than 2015.  He is risking the viability of the current government, but it is unclear what the reward for this maneuver is. 

Around the Globe 07.08.13

Analysts Boosting S&P 500 Target 11% Reduce Earnings Growth – Bloomberg.

Why Gloomy Earnings May Not Be So Dim.

Earnings Guidance Ratio 07.08.2013

There is the fantasy of the mainstream media’s earnings puffery, and then there is the reality of the Chart of Truth.  The chart tracks negative to positive earnings and revenue guidance released by S&P 500 companies.  As the bull market wears on, the ratio of negative to positive guidance in both areas has been rising.

What is particularly troubling is the rise in negative revenue guidance.  Revenues are much harder to sandbag than profits, and US corporate revenue is basically stagnating while profits continue to grow at a slower pace.  Moreover, P/E ratios have almost reached the peak achieved before the onset of the GFC in 2007.

The fundamentals indicate a range-bound indices, but it always takes time for the market to catch up with economic reality.  In this time, we can all go bust shorting the thing.

Euro zone nears deal on lifeline for Greece | Reuters.

Greece’s Economic Future ‘Uncertain,’ Creditors Say –

Greek GDP Performance 07.08.2013

Greece has no hope of ever exiting its depression unless large amounts of its government debt are written off by its Eurozone partners.  Everybody involved in the bailout knows this but dare not say it out loud until after German elections.  The 3rd bailout was constructed late last year to ensure that Greece would not require any more money before 2014, but Greece is always full of surprises.  The country is behind on its privatization schedule and is running a health system deficit of over €1 billion more than projected resulting in yet another larger than projected deficit.

A 4th bailout is currently out of the question, but it will appear as if by magic shortly after German elections.  In the meantime, the troika will keep Greece on life support by approving the next precious tranche:

But a week of talks in Athens, culminating in promises to reform the public sector, appeared to convince the troika of international lenders – the International Monetary Fund, the European Commission and the European Central Bank – that Greece is committed to rebuilding its economy.

By the way, read that last phrase.  Is that what Greece is doing? It is actually destroying its economy by slavishly adhering to the euro.  Let’s rewrite the passage above so that accurately reflects the facts:

But a week of talks in Athens, culminating in yet more Greek promises, appeared to give the troika of international lenders, the IMF, the EC and the ECB, the political cover necessary continue payments.

China Cash Squeeze Seen Creating Vietnam-Size Credit Hole – Bloomberg.

china-7-day-repo 07.08.2013

China is desperately attempting to slowly deflate its credit bubble so that it does not burst.  A bubble has never exhibited this behavior.  They always burst, but the mainstream media has a severe case of this-time-is-different:

As long as policy makers cushion the impact through fiscal and exchange-rate measures, the damage to the economy could be quite modest.

Economists are predicting that amidst this credit market turmoil, China managed to grow 7.5%.  Now, that is the official number.  In reality, China probably grew less than 5% based on exports, rail traffic and electricity usage.

The reality should not be surprising.  China has relied on a massive credit binge since 2008 to maintain the growth necessary for it to avoid a Chinese Spring, but this cycle is coming to an end.

German economy struggles as exports and output tumble | Reuters.

Flagging Demand Makes German Economy No European Growth Engine –

German Exports 07.08.2013

In Friday’s edition of Around the Globe we asked who will buy all of those German exports, and now we have our answer: nobody.  Exports to the Eurozone in particular plummeted.  Germany’s stagnating economic growth does not bode well for the Eurozone’s future prospects.  It may be time to change the economic forecast and push the Eurozone’s recovery into 2014.

India’s Tumbling Currency Matters, and Here’s Why.

USDINR 07.08.2013

The rupee is off 20% from its peak in October, and this does not bode well for the Indian economy.  India imports everything, and this stunning fall in its currency will raise the inflation rate.  With relatively mild inflation, India has been able to lower interest rates for the last two years or so.  These low rates have provided ample credit for the economy to grow, but this trend is set to change.  The weakening rupee will force India to choose between stable prices and economic growth, and there will be political consequences no matter the choice.

Cyprus Finance Minister Calls for Urgent Completion of Bank Restructuring –

Cyprus GDP Performance 07.08.2013

There will be continued delays in restructuring Cyprus and its banks.  The €10bn pledged is insufficient for the task, and completing the bank restructuring will reveal this truth.  Hence, the restructuring will take place in the fall after a certain country has elections.  Only when Merkel is safely reelected will she be able to continue throwing money into the widening maw of the periphery.

Around the Globe 07.03.2013

Housing Recovery Rides Mortgage Rate Roller Coaster.

Rise in mortgage rates cut into homebuyer demand last week | Reuters.

Mortgage Applications 07.03.2013

From ZeroHedge

As the chart above plainly illustrates, there is a strong, negative correlation between mortgage applications and rates.  The move upward in mortgage rates from their May lows reduces the buying power of a home buyer 15%.  This dynamic is pushing down housing sales though real estate industry shills claim that housing sales will remain buoyant.  Usually, raising prices for a product reduces demand, but the housing recovery narrative dies hard.

Service sector growth slows to three-year low in June: ISM | Reuters.

Service Industries Unexpectedly Grew at Slower Pace in June – Bloomberg.

ISM US Service PMI 07.03.2013

From ZeroHedge

US Markit PMI 07.01.2013

The charts above show both the services and manufacturing sectors simultaneously slowing down.  Fortunately, they barely hold onto expansionary territory.  Unfortunately, the economic data continues to disappoint, and the recovery remains lackluster four years after the supposed end of the recession.  For the future, expect more of the same.  A little luck could help pick up the pace, but a shock will throw the country back into recession.

Trade Deficit in U.S. Jumped in May as Imports Near Record – Bloomberg.

US Trade Deficit 07.03.2013

From Bloomberg

Exports are falling as China and Europe continue to disappoint while imports spiked.  Yet, these negative trends are spun into good news.  The rise in imports is not a sign that the economy is heating up.  It indicates that Americans spent a larger share of their incomes on energy. Persistent high trades deficits will continue to sap economic growth.  This was the reason that 1Q2013 growth was revised downward almost a quarter from 2.5% to 1.9%.  How soon the mainstream media forgets the articles it published only weeks ago.

WTI Crude Rises Above $100 a Barrel as Inventories Drop – Bloomberg.

WTI quote 07.03.2013

Middle Eastern crises are excellent for oil prices, but they are bad for the economy.  Higher energy prices mean that consumers get less bang for their buck in virtually every sector.  This price spike will sap economic growth in the second quarter as explained in the comments regarding the trade deficit above.

Companies in U.S. Added More Workers Than Forecast in June – Bloomberg.

Jobs data upbeat, but trade and services dim outlook | Reuters.

ADP Jobs Added 07.2013

The economy actually needs to create 500, 000 per month for the next three years or so to raise employment to the level last seen before the onset on the Great Recession.  You would never know this from reading accounts of payroll increases in the mainstream media.  188,000 jobs created is less than half what we need, but it is also a relatively strong number as the chart shows.  The best thing you can say about the employment picture is at least it isn’t getting worse.

Analysis: Portugal, Greece risk reawakening euro zone beast | Reuters.

Portugal’s Coalition Splinters on Austerity Fatigue – Bloomberg.

Portugal Stocks Slide as Political Crisis Worsens.

Portugal Resignation Rocks European Markets –

Portugal 10yr Bond 07.03.2013

From Bloomberg

Let’s not panic, because there will be plenty of time for that later.  While the markets are roiled at the prospect of Portugal reneging on its bailout, a lot must happen before that becomes a reality.

First, the current government must fall, and there are still coalition negotiations to be had.  Second, a anti-bailout government must be elected, and then that government must follow through.  Keep in mind that the current ruling coalition in Greece made a lot of noise in the election before meekly succumbing to the troika’s demands once firmly in power.  Third, the troika must actually pull the plug on Portugal, and it is doubtful that this risky decision will be taken before German elections.

Of course, it was doubtful that France, Russia and the U.K. would rush to the defense of tiny Serbia after Austria handed the country an ultimatum fully backed by the Kaiser’s blank check.  Be wary of Europe in the summertime.

Retail Sales Rise in Euro Zone –

Euro zone slump eases just as debt crisis returns to haunt progress | Reuters.

Eurozone Retail Sales YoY 07.03.2013 Eurozone Retail Sales Mom 07.03.2013

Here’s another example of anchoring bias.  Eurozone economic data is so awful that when less awful data is released it is perceived as “good.”  While retail sales rose 1% from April to May, they actually decreased slightly from May of 2012.  Moreover, we have been down this road before.  As the red circles in the charts highlight, European retail sales have occasionally risen or stopped falling so dramatically several times since the beginning of the Eurozone recession.  Despite the positive spin bestowed on this news by the usual suspects, the chart of truth shows  that sales have not risen in consecutive months since the summer of 2011.  And the recession wears on.



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.

Around the Globe 06.28.2013

China Bad-Loan Alarm Sounded by Record Bank Spread Jump – Bloomberg.

China 7 Day Repo 06.28.2013

As the chart illustrates, the 7 Day repo rate has been declining rapidly as the PBOC adds liquidity and jawbones, but the Chinese financial system remains stressed.  Longer term repo rates remain high, and bad loans have been rising since late 2011.  While the cash crunch has abated for now, the Chinese credit bubble is bursting.  Look out below.

Euro Zone Set to Keep Shrinking –

Eurocoin Survey 06.2013

The Eurozone is mired in a recession with no end in sight, but the mainstream media must point to a light at the end of the tunnel to conform the latest news to its Eurozone Recovery Narrative.  Here’s an excerpt:

Many recent economic data releases and surveys have suggested the contraction is easing and may end soon. Figures released Friday showed German retail sales rose in May following three straight months of decline, while French consumer spending also increased.

Eurozone Retail PMI 06.28.2013

Italian and French retail sales are both declining, which is unsurprising considering record unemployment rates.  The mainstream media has been calling an end to this recession since October and as long as it does not change its tune it will be right someday.  Today is not that day.

Greece Faces Collapse of Second Key Privatization.

Greece - Privatization

Greece will never be able to sell all of its state assets at the prices it desires.  Similar to many third world countries, Greece does not protect property rights well, and businesses are subject to arbitrary and capricious regulations that hinder productivity.  This is a problem, because a hole is opening up in the Greek budget and is being exacerbated by the lack of privatization receipts.  The troika privatization projections are highlighted above.  While the sums seem small, they loom large in the German elections.  Will Merkel make it to September 22 without the Greek situation exploding?

HEARD ON THE STREET: A Stormy Summer Looms for Bonds –

Lacker Says Markets to Stay Volatile as Fed Debates Tapering QE – Bloomberg.


Rates have stabilized for now, but the action will heat up as the summer progresses.  When retail investors see how much money they have lost so far in their bond funds, they will continue selling them to avoid more losses leading to the funds liquidating specific positions.  While this is occurring, don’t expect government rates to follow.  The money from liquidations has to go somewhere.

Japan Recovery Strengthened in May in Boost for Abe: Economy – Bloomberg.

Japan Manufacturing PMI 06.28.2013

The Japanese recovery did strengthen giving the mainstream media fodder for its Japanese recovery meme.  Placing the PMI an production numbers in context would really add to this story, but that type of analysis would also not support the narrative.  As the chart above shows, Japan has been down this road before with rises quickly leading to stagnation and contraction.  We will know by year end if Japan’s recovery is self-sustaining, but I have a feeling that this time won’t be different.

Business Activity in U.S. Cools More Than Forecast – Bloomberg.

US Consumer Sentiment Comes in Higher Than Expected in June.

Chicago PMI 06.2013

U.S. economic data has been mixed recently.  Today, the Chicago manufacturing report showed a declining rate of expansion on the way to stagnation while UMich’s Consumer Sentiment increased.  Good news and bad news, or is it more like bad news and bad news? The last time the Consumer survey was this high was on the eve of the Great Recession:

UM Consumer Confidence 06.28.2013

Thomson/Reuters University of Michigan Consumer Confidence Survey

Gold’s Drop to 34-Month Low Extends Record Quarterly Fall on Fed – Bloomberg.

Gold 06.28.2013

The Gold Rout of 2013 continues.  The recent high prices have led to increased production and salvage, and finally the supply increases have pushed the price down.  This is how every gold bull market ends.  The price is now below the price of production, but this fact is of little solace to investors.  When a rally ends, prices tend to over-correct to the downside.

Around the Globe 06.27.2013

Home Builder Sales at Risk Due to Rising Mortgage Rates.

Pending-Home Sales Surge to Six-Year High –

Pending Sales of Previously Owned U.S. Homes Jumped 6.7% – Bloomberg.

from Bloomberg

from Bloomberg

The mainstream media loves its narratives, because they make journalism so easy.  All one must do is cherry pick data to fit into the narrative, and, voila, you have yourself a nice, brand new article ready for publication.

Pending home sales spiked in May, but there is a caveat.  Rising rates throughout the last couple of months are forcing people to buy now for fear of being left without an affordable mortgage.  In the coming months, this dynamic will fade, and pending home sales will begin decreasing.  Then, the msm will print the utterances of NAR shills telling us that the decline is nothing to worry about and that these other indicators, which are much more important anyway, point to the market’s strength.

If you do not believe that mortgage rates will not be a drag on the “housing recovery,” then you need to examine this chart:

House Affordability 06.26.2013

Consumers Boost Spending –

Consumer Spending in U.S. Rebounds as Incomes Increase – Bloomberg.

Personal Income Growth

Rising rates may be spurring buyers to bring forward their housing purchases, and they may be having the same effect in other sectors.  The rise in consumer spending in May was driven by durable goods, primarily automobiles.  In the coming months, consumer spending will remain flat as purchases brought forward to take advantage of the cheap financing will subtract from future performance.

Euro zone economic mood rises to 13-month high in June | Reuters.

Eurozone Economic Confidence

While the U.S. may be experiencing a tepid recovery, at least it’s a recovery.  Europe remains in the throes of a recession, which has metastasized to a depression in Greece and Spain.  The mainstream media is certainly happy that Eurozone confidence rose and is taking it as a sign that the recession is ending.  Perhaps, they should glance at the “Chart of Truth” above.  Everything is relative.  While there was a nice rise in business confidence, note that it is still below the figure from two of the last four recessions.  While the euros are more confident than last month, historically speaking they are not really confident at all.

Europe strikes deal to push cost of bank failure on investors | Reuters.

Bank assets to GDP

Europe’s banks are over-leveraged, and everyone knows this.  What is keeping capital from fleeing the system is the set of implicit guarantees that the state would be there to bail everyone out in case of disaster.  In April, the Eurozone decided that to withdraw its implicit guarantee during the Cyprus bailout, and capital has been fleeing the country ever since:

Cyprus Deposits May_0

From ZeroHedge

Note that the steep fall in the chart above occurred with capital controls in place.  Now that the state’s guarantee is gone, investors will reprice the banks’ credit risk accordingly and will demand higher rates of return.  When the banks require extra liquidity, investors will not be there leaving the job to the ECB.  Slowly but surely, the eurozone nurtures the seedlings of its destruction.

China Cash Crunch Spreads –

Here’s the Real Crisis in Australia – Bloomberg.

AUDUSD 06.27.2013

From Yahoo Finance

Despite the PBOC’s assertions to the contrary, the Chinese cash crunch continues.  While various rates have improved, anecdotal evidence reveals a lack of liquidity throughout the Chinese economy.  The biggest loser here is Australia.  The lack of demand for its raw materials is crimping economic growth and driving down the value of the aussie.  The chart above is there to remind you exactly how far the currency has fallen and how much room it has to fall further.

Around the Globe 06.26.2013

ECB Monetary Policy to Stay Loose –

Eurozone Loans to the Private Sector

Loose ECB monetary policy is not fueling the growth of loans to the private sector.  While the ECB is quick to blame “transmission problems,” there are two reasons for the rapid decline in bank lending.  First, the banks are not healthy and continue to hoard capital.  Second, the deep recession has reduced the number of profitable lending opportunities.  Keep in mind that the banks are still lending, just not to businesses.  The percentage of sovereign debt in their portfolios has increased dramatically since the recession began.

There is not much that the ECB can do about all this, so Draghi continues to jawbone.  Will his pledge celebrate its first birthday intact in one month?

Economy in U.S. Grew Less Than Projected in First Quarter – Bloomberg.

U.S. first-quarter growth cut to 1.8 percent | Reuters.

US First-Quarter GDP Gets a Haircut, Rises 1.8%.

Americans’ View of Economy Hits Post-Recession High: Survey.

US GDP Performance 06.2014

Economic growth is stagnating, because wages have not grown much since the end of the Great Recession.  Consumer spending accounts for over two-thirds of GDP in the U.S., and consumers are tapped out.  Adding to the bad news, Americans views on the economy have hit a post-recession high.  This is actually a contrarian indicator.  The dumb money is always the last to know.

Gold Prices Sink to Lowest Level Since August 2010.

Gold 06.26.2013

The gold rout continues.  Slowing world economic growth, taper talk and the lack inflation are the major culprits.  Gold will remain a poor investment for the immediate future, but it is still valuable as a disaster hedge.

Housing Market Shrugging Off Rise in Mortgage Rates.

Mortgage Applications Collapse To Lowest In 19 Months | Zero Hedge.

House Affordability 06.26.2013

From ZeroHedge


The headline is very misleading.  Housing prices rose in April, but mortgage rate and application information is from June.  A more appropriate headline would read, “Rising Mortgage Rates Have Yet to Affect Housing Market.” But, they will.  Note our chat above.  Houses are quickly becoming unaffordable at today’s increasing rates.

Now let’s bring a little reality to our “housing experts” who said:

On Tuesday, many housing experts shrugged off that concern, noting that the effect of a single factor like mortgage rates would be tempered by other forces like prices, wages and changes in employment.

As to those other tempering forces, prices are rising while wages and employment remain stagnant.  This means that housing is heading for a fall, which the lumber market has been telling us for a couple of months now.  What we have here is good, old-fashioned cognitive dissonance.  When facts disagree with the  mainstream media’s housing narrative, the facts are changed to support the narrative.

Financial Stress Index Hits Scary Level.

Financial Stress Index 06.25.2013

While the index has risen, it has yet to hit “scary” levels.  Note the red line in the chart above.  Currently the index is well below 0, which is neutral.  A rise to one would be concerning, and a breakout above would signal a meltdown.

While the index level itself is not a alarming, what is scary is the rate of change.  Note the red circle in the chart below:

Financial Stress Index YTD

Junk Bonds Suddenly Don’t Look So Good Anymore.

HYG 06.26.2013

From Google Finance

The junk bond market is seizing.  While the price decrease from the highs is less than 5% including the recent dead cat bounce, rumor has it that certain issues have stopped trading.  If the holders of these issues had to sell, prices would fall much more.  Free money may have stopped fueling price increases in this market, but it is still holding prices up.

EU’s Eroding Support Imperils Crisis Response –

Euro Flag Map

Here’s a little more cognitive dissonance for your day.  Europeans are displeased with the EU and believe that it has weakened their national economies, but they still overwhelmingly support the euro.  This is exactly the opposite of what it should be.  The single market has most definitely fostered growth within the EU, but the euro has become a hindrance.  The single currency is great for Germany, but a poor deal for practically everyone else as we see in this handy chart:

Euro Fair Value Germany

UPDATE 2-Italy denies risk to public finances from debt derivative deals.

UPDATE 2-Italy denies risk to public finances from debt derivative deals | Reuters.

Italy 10yr Bond 06.26.2013

From the Wall Street Journal

Markets are shaking off the latest scandal being reported from Italy, but they shouldn’t.  This is exactly how the Greek debt crisis began.  After derivative contracts were considered, Greek debt was actually much higher than had been reported.  Three bailouts later, we are now preparing for a fourth.

If the Italians are admitting to the contracts revealed by the media, then there are probably more that remain in hiding, but there is no reason to worry about bailing Italy out.  It is much too large for that and will just collapse.