Update: Spanish Recovery Narrative

Spain GDP Performance

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

End of Recession in Spain Fuels Hopes for Euro Zone – WSJ.com.

Spain emerges from two years of recession – FT.com.

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 (above).  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.

Original Published on October 23,2013

Around the Globe Weekend Edition October 5-6

Saturday:

Ireland Votes to Keep Senate Open – WSJ.com.

Irish Unemployment Rate Through September 2013

The government lost its referendum to dissolve the Irish Senate.  No matter how  bad the  employment situation is, the Irish can rest easy knowing that 60 fellow Irishmen are not losing their jobs after all.  Perhaps the government can create a few more legislative bodies to put some more of the 296,300 unemployed back to work.  Since the onset of the Irish banking crisis, the unemployment rate has skyrocketed about 10 points and has remained stuck at this level.

From Friday’s Edition:

Netherlands in Budget Stalemate – WSJ.com.

Italy and Netherlands Budget Comparison

During the last four years, Italy has posted a smaller deficit than the Netherlands three times with one statistical dead heat.  While this may seem surprising, it is not.  The Netherlands is suffering the aftereffects of its own property bubble and the ongoing competitive disadvantage imposed by its euro membership.  It seems that the ECB’s Teutonic monetary policy does not sit well with the Dutch.  As you can see for yourself, there is an excellent argument for the Netherlands to revert to the Guilder:

Euro Fair Value Netherlands

The euro for the Netherlands is overvalued by over 10% at today’s current rate.

From Thursday’s Edition:

U.S. jobless claims show job market healing but service sector slows | Reuters.

U.S. Jobless Claims Tick Up – WSJ.com.

Four Week Average Initial Claims through 09.27.2013

While there was a slight spike upward in initial jobless claims, the four week moving average has dropped to its typical post-recession low of about 300,000.  Unfortunately, the unemployment rate remains well above what it should be at this point in the recovery:

Unemployment Rate September 2013

This is problematic because this recovery is running its course.  Examine the initial claims chart and see for yourself.  The bottoming out of claims, indicated by the red ellipses, typically indicates a turn in the business cycle.  Perhaps the low claim number indicates “strength” as the article tells us, but when you place this number in context with the other data it becomes apparent that the economy is close to peak recovery.

From Wednesday’s Edition:

Gross Says Market Mispricing Eventual Fed Target Rate Increase – Bloomberg.

Pimco’s Gross says low interest rates may persist for decades | Reuters.

Japanese Benchmark Interest Rate From 1981

Japanese GDP Performance From 1981

Bill Gross is correct.  Rates will stay low for years.  If you do not believe that this is possible without stoking inflation, I present Japan.  The BoJ has maintained a near zero rate interest policy for seventeen years without any inflation.  While inflation may be avoided, there are other negative consequences.  To see for yourself, examine the charts above.  Compare Japan’s GDP performance on the left and right sides of the red line and consider what this will mean for the stock market for the next decade.

From Tuesday’s Edition:

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?

From Monday’s Edition:

Japan Economic Recovery Remains Uneven as Production Declines – WSJ.com.

Japan Industrial Production Through September 2013

No matter where the money printing occurs, the results are the same.  The Bank of Japan’s latest foray into the world of QE has predictably made banksters, speculators and corporations more money while the rest of the country fares poorly.  Of course, there are economic”bright spots” caused by asset price inflation, but they will be unable to spread sustainable growth throughout the Japanese economy.  After witnessing two other QE programs courtesy of the Fed and the BoE, it is safe to conclude that these are the effects of money printing:

  1. Record high bank profits
  2. High corporate profits from financial engineering and cost cutting.
  3. Bull markets for both stocks and bonds
  4. Rising real estate prices
  5. Falling employment levels:

Labor Force Participation through August 2013

American Recovery More Hype Than Substance

US Household Income Performance Since 2000

Americans With Best Credit in Decades Drive U.S. Economy – Bloomberg.

This is the Internet.  Here, online in the virtual world, everyone wants to sell you something.  When they hype their claims too much, that’s when I go to work.  I write a blog.

In the midst of an unending labor recession, it would be big news if the American economy began to grow at the rate necessary to yield large increases in job creation, but the recovery has failed to materialize after all these years.  Sure, we have risen from the bottom, but the country is still under the peak of the pre-GFC years.

This article takes several pieces of data and attempts to fit them within the mainstream media recovery narrative.  Along the way, the writers rely on financial industry shills who have the sole objective of convincing people to do business with their firms.

Joseph Carson, James Paulsen and Michelle Meyer are all permabulls working at Alliance Bernstein, Wells Capital Management and Bank of America, respectively.  Googling their names yields many articles in which they are quoted.  If you don’t have time to do the research, basically they usually state that the economy is improving and you should invest in the stock market.

The main theme of this article is that households have improved their balance sheets to the point that they are about to embark on another borrowing binge that will lead to strong growth in the second half of the year.  Putting aside the irony that the authors fail to see that a borrowing binge in the aughts is what got us into all of this trouble in first place, let’s scrutinize some of the data used to support the theme and ascertain whether or not it holds up.

The writers and the shills are very happy that household net worth soared to a record high  in the first quarter.  The problem is that they fail to scrutinize the figures.  Virtually all of the gains are concentrated in the top 10% of the wealth distribution.  Federal Reserve money printing has inflated stock and bond prices and reinflated last decade’s real estate bubble, so if you rent and do not have a large stock portfolio, these gains have bypassed you.

People who derive their wealth from their labor are doing very poorly:

US Household Income Performance Since 2000

Incomes remain 8% below what their pre-recession peaks.  No matter what anecdotes the article uses to support the theme, the fact remains that the vast majority of Americans are in worse financial shape now then they were at the onset of the recession.

Another data point that is used to promote the theme is new vehicle sales:

Light Vehicle Sales Pace 1976-2013

In comparison to 2008, sales have improved markedly.  However, placing today’s sales pace in historical context we observe that sales have only improved to average while the country’s population has grown and the Fed has flooded the markets with cheap credit.

One of the permabulls states

Shares of financial companies such as banks “will continue to outperform as they’re right at the heart of the credit-creation process, which is becoming noticeable,” he said. The S&P 500 Financial Index of 81 institutions is up 26 percent this year, compared with a 20 percent increase for the S&P 500.

Once again, central bank largesse, not an organic recovery, explain the inflation affecting asset prices.  Note the correlation between the Fed’s balance sheet and the S&P 500:Fed Balance Sheet vs. SP500 07.2013

Two other sets of data used to hype the putative recovery are credit card delinquencies and the Financial Obligation Ratio.  Credit card delinquencies have fallen dramatically, but a great deal of the improvement can be attributed to the record number of charge offs in the wake of the Great Recession.

Credit Card Charge Offs 08.2013

More bad debts were written down leaving the performing accounts:

Credit Card Delinquencies

The Financial Obligations Ratio measures American income versus financial obligations.  It has dropped to lows just like the article says, and this should point to increased consumer spending.  What no one bothers to tell the reader is that the ratio has begun rising again:

Total FOR 1q2013

The totality of the data continues to support a slowly growing economy that is vulnerable to shocks.  As long as the Federal Reserve delays the natural clearing process that should have occurred after the last recession, economic growth will continue to disappoint, but that will not stop anyone from attempting to predict the start of the new American boom.

Around the Globe 06.01.2013

Vanguard Touts Canadian Debt Sunk by Worst Rout Since ’08 – Bloomberg.

US 10yr 06.01.2013 Canada 10yr  Bond 06.01.2013

Why have Canadian bond yields risen in the month of May? Well, US yields have also risen, and the two securities track each other closely.  Why have US yields risen? It seems that investors are having a taper tantrum, which has suppressed the go-go stock market during the last week or so.  The US 10 year has been range bound between 1.4-2.3% since the summer of 2011.  If yields breakout above 2.3% and remain there for a few days, then you might have a trend.  Until then, let’s call this noise and move on.

China’s Manufacturing Expansion Exceeds Analyst Estimates – Bloomberg.

China’s Purchasing Managers’ Index Rose in May – WSJ.com.

China PMI 05.30.2013

China PMI 05.23.2013

The standard Bloomberg article encouraging people to buy more stocks starts like this:

Economic statistic X rose in the latest (week, month, quarter) indicating that (insert optimistic prediction here).

Here is the first line of this article:

China’s manufacturing unexpectedly accelerated in May, indicating a slowdown in economic growth in the first quarter may be stabilizing.

Don’t believe the hype.  China has two institutions computing its PMI.  The official PMI issued from a quasi-governmental agency shows stagnation, but the independent HSBC-Markit PMI shows contraction.  Despite Bloomberg’s hopey headline, Chinese manufacturing has hit a rough patch.

The ‘Hindenburg Omen’: Bear Signal Scares Market.

Stocks Slide On Hindenburg Omen Sighting | Zero Hedge.

Hindenburg Omen

The various predictors of stock market performance all suffer from the same flaw.  As soon as an anomaly is noticed, speculators begin taking advantage of it through arbitrage.  Then, the anomaly disappears.  Even if this omen proves to be prescient, Turbo Tuesdays will save us all.

Turkish PM Erdogan calls for end to protests as clashes flare | Reuters.

Istanbul is to Turkey as New York City is to Bible Belt.  The entire country is a Koran Belt with a few cosmopolitan pockets. The protest is about the proposed razing of Tahir Square.  This is a central square in Istanbul where the people meet and sometimes protest.  The Turkish Prime Minister is attempting to consolidate power by eliminating a key rallying point for the opposition.

It’s a shame that the secular democracy built by Ataturk is being torn asunder by Erdogan’s  populist, Islamist party.  

 

Around the Globe 05.29.2013

Morgan Stanley Gears Up for New Property Fund – WSJ.com.

In Hot Housing Markets, Are Investors Fanning Flames? – Businessweek.

Median Home Price vs Real Disposable Income_0

courtesy of ZeroHedge

The Fed has succeeded in recreating the real estate bubble from the waning days of the Greenspan era.  TBTF banks with their pockets full of Benny Bucks are swarming all forms of real estate just like in the good old days.  Morgan Stanley is attempting to raise new funds for a real estate fund while the housing market is at its most expensive levels ever in terms of income.  This time is different, and I am sure that the current boom will outlive the end of central bank easing.

Central Banks Act With a New Boldness – NYTimes.com.

chart3_central_bank_balance_sheets_q3_12_sm

Central banks are not acting with a new boldness.  “Print and pray” has been ongoing since 2009, and this is not the first iteration of this policy.  Several countries in central Europe implemented similar plans in the wake of WWI, most famously Germany though Hungary and Austria also monetized their sovereign debts with similar consequences.  The policies are maintaining the status quo for now, but there will be a price to pay.

Worse-Than-Cyprus Debt Load Means Caribbean Defaults to Moody’s – Bloomberg.

LR Club Debt to GDP 2012

This chart details the debt to GDP ratios of the lowest rated countries.  Ratings don’t matter.  Japan’s ratio is twice Jamaica’s and yet maintains a solid investment grade rating and much lower interest rates.  Expectations and individual preferences play a much larger role in investment decisions than grades assigned by a ratings agency.  Even though Caribbean debt is lowly regarded, it has still managed to rally this year along with just about everything else.

EU’s Rehn says Slovenia’s plan should be enough to avoid bailout | Reuters.

EU to Deliver Verdict on Slovenia’s Plan to Avert Bailout – Bloomberg.

Slovenia GDP Performance

Slovenia has crafted an aggressive plan in an attempt to avoid a bailout.  The problem with the plan is that it relies on optimistic GDP projections for the next two years.  Slovenia will continue in recession with its European brethren indefinitely.  Social welfare expenditures will be higher, and tax receipts will be lower resulting in larger budget gaps than anticipated.  Additionally, the banking system will require more money as more loans go bad.  All of this bad news means that Slovenia will request a bailout sometime after German elections.

BOJ to Make More-Frequent Bond Purchases – WSJ.com.

Japan’s Bond Market Wants BOJ to Purchase More Short-Term – Bloomberg.

JGB 10 Year 05.29.2013

Note the sawtooth pattern starting in the beginning of April when Japan announced its 2-2-2 policy.  The BoJ could easily smooth volatility by conducting open market purchases every day in accordance with a prereleased schedule.  This is how the Fed does it, and the U.S. treasury market has not seen the volatility of the JGB market during QE.  The BoJ only conducts purchases on less than half the trading days leaving room for wild price swings on the off days.  Central banks move slow, but I bet that the BoJ will change its market tactics in June to suppress volatility.

ECB: Cyprus Shock Caused Deposit Flight – WSJ.com.

Bank assets to GDP dutch

Abe Adviser Tells S. Korea to Cope With Yen Not Blame Japan – Bloomberg.

South Korea Currency Weakening 2

The South Koreans are crying “currency war,” and methinks they protest too much. As the chart above illustrates, the Won has depreciated the most since the end of the Bretton Woods while the yen has appreciated the most.  The recent moves have been sharp, but historically South Korea does not have a leg to stand on.    And this is why currency wars (and indeed all wars) suck: every country thinks it is in the right and the people suffer as a result.

Latin America Disappoints After Squandering Commodity Boom – Bloomberg.

China PMI 05.23.2013

From HSBC & Markit

As the demand for commodities decrease, the fortunes of several economies wane.  Latin America experienced a large boost from Chinese growth.  Just like Australia, the region will have a hard time replacing the demand shortfall created by China’s slowdown.  While China’s GDP growth remains high, this is an illusion.  Its trading partners are buying less Chinese exports and selling China less imports.  As long as this trend continues, it will suppress Latin American growth.

OECD cuts world economic forecast | Reuters.

Eurozone GDP Performance 05.13.2013

Whenever you read economic forecasts, remember that they perform no better than chance over one-quarter out.  The OECD is predicting that Europe will grow 1.1% in 2014.  This is not a forecast, just hope.  There is no indication in any of the data that the Eurozone is ready to exit its interminable recession.

Why People Get So Emotional About Gold.

GLD 05.29.2013

This is a very interesting article and a must read for investors.  In a nutshell, the author is telling investors not to allow emotion to affect their investment decisions.  Goldbugs are too emotionally involved in their holdings.  Many of them believe that central bank money printing will lead to hyperinflation, and their gold holdings will protect them from financial Armageddon.  As fears of another crisis recede, the price of gold follows it down.  The goldbugs may turn out to be right in the end, which brings us to what Keynes said once: the market can remain irrational much longer than you can remain solvent.

Around the Globe 05.12.2013

A Turning Point for Income Inequality?.

From the pen of Michael Feroli, chief economist for JPM:

The economics profession has arrived at an uncharacteristically high degree of consensus regarding the cause of this trend: the pace of technological advance has outstripped the ability of the educational system to supply the human capital skills needed to utilize this technology, leading to out-sized earnings gains for those who have such skills (the so-called college wage premium).

If all the economists agree on something, then they are probably all wrong.  The reason for rising income inequality has nothing to do with an educational system falling behind the pace of technological change.  Rather, central bank money has increased the income of the rich by inflating the price of the assets they control.

The Cotillion Effect predicts this dynamic.  It also predicts that those furthest away from the cheap money, i.e. workers, will see very little of its effects.

I guess if you work for a TBTF banks it is better to blame the educational system for suppressing wage gains for the American worker rather than the Federal Reserve that is simultaneously filling your bosses pockets with mullah.

Fed maps exit from stimulus – MarketWatch.

Fed Maps Exit From Stimulus – WSJ.com.

Jon Hilsenrath tells us:

Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.

There is no need to worry.  The Fed is just discussing its exit, not planning it.  Judging from Friday’s reaction to the rumor about this article, the Fed will be ending the program no time soon.  In fact, since virtually all of the economists surveyed have ruled out an increase in asset purchases, I view this as the most likely outcome.

ECB’s Draghi says no call for G7 central banks to do more | Reuters.

ECB Benchmark Rate

When the time comes, the ECB will begin monetizing sovereign debt.  Preserving the euro is the ultimate law trumping all others.  Preserving the euro is the best option for Germany, so its government will give tacit approval to the scheme.

Bernanke: Fed keeping close watch for another financial bubble – NBC News.com.

Junk Bond Yields

The Fed has never caught a bubble in time, but next time will be different.  With junk bonds yielding under 5%, you may believe that at least one bubble has already been created by all of this money printing.  The Fed does not see it that way.

Around the Globe 05.10.2013

Dollar Buying Continues Apace After ¥100 Break – WSJ.com.

WSJ Dollar Index 05.10.2013

The dollar has quietly been strengthening since it bottomed out in September.  The WSJ Dollar Index has risen almost 8%.  So far, exports have held up with the added benefit of cheaper import prices tamping down inflationary pressures.  Perhaps this is why the Fed has remained quiet about Japan’s attempts to devalue the yen.

Analysis: Policy patience seen wearing thin as yen drops | Reuters.

European Shares Advance as Yen Weakens Past 101 a Dollar – Bloomberg.

YENUSD Exchange Rate to 05.10.13

Not everyone is happy about the Bank of Japan’s monetary policy.  South Korea recently lowered its own interest rate, and the Japanese seem likely to encounter resistance to the policy at this weekend’s G-7 meeting.  Now that the yen has broken through the magical 100 barrier, it looks ready to run.

Investors Rediscovering Margin Debt – WSJ.com.

NYSE Margin Debt 05.10.2013

The last three times that margin debt has outgrown the S&P500, it signaled a correction.  With the world central banks simultaneously easing, it’s anyone’s guess what will happen next.

A Faster Recovery in Germany Than Elsewhere – NYTimes.com.

Germay vs. Ez Unemployment

Economists: Fed Will Taper Bond Purchases This Year – Real Time Economics – WSJ.

Fed QE versus SP500

The Fed will not decrease bond purchases.  If anything, the organization is laying the groundwork to increase purchases to $100bn per month. Look for a Hilsenrath article laying out the case soon.  It will note that inflation remains low and the job market remains weak, so the Fed has more room to act.

And if you seriously believe that the Fed will end this program, then examine the chart above and see what happens when the Fed ceases bond purchases.

Australia-New Zealand Job Gain Deepens Dilemma on Currencies – Bloomberg.

new-zealand-inflation-cpi australia-inflation-cpi

I don’t know what the problem is here.  Inflation remains low in both countries, and unemployment continues to decrease despite the strengthening currency.  Aussies, Kiwis: just be thankful you’re not in the eurozone.

Greek Recovery Meme Dies Hard

HEARD ON THE STREET: Green Shoots in Greece? – WSJ.com.

A Depression May Be In Eye Of the Beholder – WSJ.com.

The Eurozone recovery meme spread to Greece in January.  I addressed two instances of green shoots in Greece:

Recovery Meme Spreads to Greece, Yes, Greece | DARECONOMICS.

Greek Recovery Meme | DARECONOMICS.

Generally, the key to writing a good Eurozone recovery story is to cherry pick statistics, tell some anecdotes, and ignore the real data that shows that you are crazy for writing an article like this.  After reading thousands of words from the WSJ, look at these charts:

Greek GDP Performance 05.2013 Greek Unemployment Rate Greek Annual Budget Deficit

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 – WSJ.com.

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.

 

Around the Globe 04.30.2013

EU considers protecting savers against future bank collapses | Reuters.

Spanish and Italian NPLs 03.2013

There are two issues with protecting depositors from banking crises.  As we have observed in prior EU led bailouts, no law is applicable to the troika when its handing out bailout euros.  Whether its confiscating deposits in Cyprus, ignoring bond covenants in Greece or changing member governments, anything and everything is on the table once a country enters the crisis zone.

The only rule that they follow is that Germany and the northern tier will not pay any more money for bailouts.  Hence, a banking deposit guarantee is only as solid as the country issuing it.  Perhaps, we will soon see how this will all work.  Spain’s NPLs have gone parabolic, and Italy has reached the launch point.  (TIP: move your money from Eurozone banks now, like the rich have already done.  Do it now.  Don’t wait.)

Bernanke Watch: Is He Eyeing the Exit?.

Ben Bernanke - 4chon Wiki.

Ben Bernanke – 4chon Wiki.

Ben Bernanke will not serve another term as Fed chief, but don’t worry permabulls.  His likely successor, Vice Chairman Janet Yellen, is actually a more enthusiastic money printer.  Ceasing current policy would likely cause a market swoon with unknown consequences, so whoever winds up with the job will not dare to make abrupt changes.

Home Prices in 20 U.S. Cities Climb by Most Since May 2006 – Bloomberg.

Home prices rise, seen helping economic recovery | Reuters.

LA Market Housing Prices

The Fed’s plan is to reinflate burst asset bubbles via money printing in the hopes that the paper wealth created will induce consumption.  Rising housing prices are only good news for those who are looking to sell.  If you wish to buy, your housing cost will take a bigger chunk from your income for the next fifteen to thirty years.  If you have no plans to move, then rising housing prices will increase property taxes.

Note that against the backdrop of newly forming bubbles the employment situation remains dismal for the majority of Americans.

Business Activity in U.S. Unexpectedly Shrank in April – Bloomberg.

Chicago PMI 04.2013

No matter how much money is printed and how much future generations are indebted, the story remains that all the magic bullets fired to revive the American economy have failed.  Removing red tape and reforming the country’s byzantine tax code would probably kickstart the economy, but politicians are loathe to propose these policy choices.  Reducing laws and taxes decreases the government’s power, so this strategy is essentially a nonstarter.

Special Report: Kuroda’s calculus – How the Bank of Japan staged its big bang | Reuters.

Japan Debt to GDP

Since I began following the financial markets as a teenager in the 80’s, a distinct trend has emerged in mainstream media reporting.  The central banker is lionized and treated like a rockstar among the financial outlets.  This report is typical of the trend.

Whenever you read these articles, keep in mind that there are no simple solutions to the present quandary in Japan.  Years of economic stagnation, runaway spending and demographic decline have created a disaster waiting to happen.  No amount of Bank of Japan action will change the endgame, though it will alter the timing somewhat.  Japan will now collapse either sooner or later than otherwise.  Take your pick.

In the meantime, whenever the mainstream media blathers about the Japanese recovery keep the chart above in mind.

Japan household spending surges as Abenomics gains momentum | Reuters.

Older shoppers lead Japan’s surge in consumer spending – FT.com.

Japanese Retail Sales

Slap a few anecdotes together, cherry pick your statistics and you have a recovery meme.  This type of article has been quite popular during the eurocrisis, and now it begins to appear in Japan.  Consumer spending rose 5.3% in March, but retail sales simultaneously fell 0.3%.  How can both those facts be true? Methinks higher import prices caused consumer spending to rise taking a bite out of other sectors.

Japan-to-Korea Output Misses Estimates as Taiwan Cools: Economy – Bloomberg.

The biting reality of the Japanese situation is contained within this article.  This information was not hyped as much as the rise in consumer spending, but it is just as important.  Industrial production continues to remain soft in the Pacific Rim.  With that fact in mind, who will buy all of those Japanese exports to spur a recovery?

UPDATE 3-Cyprus bailout scrapes through island’s parliament | Reuters.

The Cyprus bailout passed parliament by a 29-27 vote.  The Cypriots just condemned themselves to a decade of depression and stagnation in order to maintain their euro membership.  The people support the euro by a two to one margin, so they only have themselves to blame now.