Around the Globe 10.25.2013

U.S. durable goods orders, sentiment suggest politics hurting economy | Reuters.

Durables rise, but aircraft surge hides underlying weakness.

Durable Goods Orders Through 09.2013

Durable goods orders are probably at or near peak at this stage of the “recovery.”  A large increase in orders for aircraft masked a 0.1% decrease in the rest of the series led by a 1.1% fall in capital spending.  Even though economic conditions remain tepid, the MFP is trotting out the government shutdown to explain this weakness despite the fact that the government shutdown occurred in October and the survey period was September.

Shutdown Dims Consumer Optimism – WSJ.com.

Consumer sentiment weakest since December 2012 in October.

U.S. consumer sentiment slides in October on government shutdown | Reuters.

Consumer Sentiment in U.S. Fell to 10-Month Low in October – Bloomberg.

UM Consumer Sentiment Through October 2013

According to the MFP, the dip in consumer sentiment was driven by the shutdown; yet, the shutdown began on October 1.  Consumer sentiment declined in both August and September prior to the shutdown.  The MFP recovery narrative controls all.  If the economic data does not confirm the narrative, then it is either ignored or explained away.  With the shutdown resolved for now, the MFP will have to rely on bad weather to provide appropriate economic excuses.

ECB Bond Figures Paint Picture of a Happier Euro Zone – MoneyBeat – WSJ.

Banks in Spain, France and Italy sell govt bonds in Sept -ECB | Reuters.

 

The recovery narrative is not just confined to the U.S.  The MFP reports that the eurozone is recovering, too. The latest “sign” is that European banks have begun reducing sovereign bond holdings with foreigners supposedly loading up on creaky euro sovereigns.  Once again, small, positive moves in the data have been distorted to conform to the narrative.

It is true that Spanish and Italian banks have reduced their holdings by €11.5bn and €8.1bn respectively, but these numbers are completely shorn of context in the article.  In percentage terms, Spanish banks reduced their sovereign holdings by 3.5% in the last quarter, and Italians sold 1.9% of their holdings.  To place these numbers in perspective, it would take Spain and Italy about four months just to sell the bonds they purchased in May.

The bond sales in the 3rd quarter represent a proverbial drop in the bucket of outstanding debt.  Italy is an excellent example of what has occurred during the Eurocrisis.  Notice that from late 2011 to early 2012, foreigners fled the Italian government bond market in droves and have not returned.  This is representative of the situation of all the PIIGS.  While the run has ceased, there has been no revival in foreign interest in this debt despite the anecdotal evidence presented in this article.

Italian Government Debt

 

Do you see a rebound in this chart? Needless to say, the article ends on a hopey note anyway:

But the crucial fact that they are now finding institutional buyers is a fresh pointer that the euro-zone is at least moving in the right direction.

Since banks are not really finding buyers for their sovereign bond holdings, we know that the Eurozone is not “moving in the right direction.”  Moreover, as this chart illustrates, the Eurozone financial system is increasingly becoming more balkanized as banks increase their domestic holdings, a trend that shows no signs of abating.

Financial Integration in the Eurozone

 

 

 

 

 

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Around the Globe 10.24.2013

Plans for Political Union Unravel in Europe – WSJ.com.

Periphery NPLs

The talk of a European quickly subsided along with the periphery’s capital market distress.  Astute readers of Dareconomics have known for over a year that the FANG would not approve any plan that would cost more money:

Germans Will Not Pay for Banking Union

leaving the mainstream financial press way behind this story.  The Germans actually may consider a political union with a common budget, but only if the periphery agrees to draconian reforms and monitoring.  As long as the bond vigilantes remain at bay, the PIIGs have no reason to continue reforming their economies and cutting their budgets, and the process has inevitably slowed to a crawl.

Eventually, this impasse will resolve itself, because the euro is slowly dying.  Either these countries will join together or come apart in order to improve their lots.  Your guess is as good as mine as to when the denouement will commence.

 

Euro-Area Services, Manufacturing Unexpectedly Slow – Bloomberg.

Chinese data lifts shares, dollar stays weak | Reuters.

US Manufacturing PMI 10.2013 Core v. Periphery PMI Employment Indices 10.2013 HSBC China Flash PMI 10.2013

Markit released PMI numbers for the U.S., Eurozone and China today.  American and European output continued to grow but at a slower pace with China registering its best number in seven months.  By peering past the headlines, we observe a continued deterioration in world economic conditions.

In our first chart, we can plainly see that American manufacturing growth peaked in early 2010 and has been expanding more slowly ever since.  Even though this month’s number is undoubtedly lower due to the shutdown, the trend indicated by the red arrow is clear with consistently lower peaks in each mini cycle since 2010.

The second chart shows that even though the MFP is excited about Europe continuing to grow, the economy still remains in a labor market recession. German and French employment are stagnant with the rest of the Eurozone enduring contraction.  Employment has not expanded in the periphery since 2008 and no relief is in sight.

China is the subject of our last chart.  Manufacturing growth is basically flat, and considering the economic situation in its two largest trading partners, discussed above, is not likely to improve.

 

Home affordability sinks as housing slows.

Mortgage applications fall, even as rates drop.

Housing Sales vs Affordability Index

Drops in the housing affordability index lead inexorably to lower sales.  The index is based on interest rates, incomes and house prices and is a pretty reliable indicator for future sales.  The precipitous drop in the index over the last few months has been based on rising rates and prices.  Based on its turn, we can forecast that housing sales are at or near peak levels for this “recovery.”

The banks have already begun slimming down their mortgage departments as refi activity has already reached a peak, but analysts have not yet adjusted their wildly optimistic profits projections.  For that matter economists have not revised their GDP forecasts either.  The fourth quarter is destined to come in below consensus.  Remember that you heard it here first.

China Bond Yields Soar – WSJ.com.

Spike in China money rates raises cash-crunch fears – FT.com.

China 7 Day Repurchase Rate 10.24.2013

China 10yr Yield

 

China keeps attempt to rein in its financial system, but every time it tries to do something interest rates rise.  Note the steep rise in both the overnight repo rate and the government bond market over the last few days.  This rise in rates will place upward pressure on the yuan, which means that China will need to purchase more dollars to maintain the exchange rate.

The world central banks have seemingly painted themselves in a corner.  Recall that when Bernanke attempted to move away from crisis monetary policy, the markets reacted adversely.  At this juncture, it is reasonable to conclude that the markets will all fall in unison if these central banks stop printing money, and for just that reason they won’t stop.

Around the Globe 10.23.2013

High-End Spenders Shrug Off Headwind – WSJ.com.

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:

https://dareconomics.wordpress.com/2013/10/23/around-the-globe-10-23-2013/

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

ECB to Start Review of Bank Balance Sheets – WSJ.com.

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 – 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.  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 10.22.2013

Foreigners Sold U.S. Assets as China Reduces Treasuries – Bloomberg.

China Exports Last 24 Months

 

 

China has reduced its US T-bill purchases in two of the last three months, but the country remains the largest international holder of US debt.  Commentators sometimes worry about what would happen if China ceased purchasing US debt; however, this is much ado about nothing.  China maintains an low exchange rate for the yuan to promote export related jobs in manufacturing over consumption.  As a result of this policy, China runs a persistently high trade surplus with the US.  Spending that money would lower the price of the dollar and raise the price of the yuan as the supply of dollars increased while demand remained level, so it is stashed in T-bills.

As a consequence, interest rates in the US remain low spurring more consumption and higher trade deficits, and so on.  One day, this system will break down, just not today.  In the meantime, Chinese T-bill purchases will fluctuate based on a variety of factors including the gross amount of exports in a given month.

Wealthy could lose big if Fed stops money flow.

Collectibles Market 1H2013

 

 

 

The rich are different from you and me.  When you or I come into some money, we may splurge on a nice dinner, new electronics or a weekend getaway.  The rich are already consuming their maximum in these areas, so additional cash will flow to more esoteric sectors of the economy, like the collectibles market.  The reason  the world’s central banks claim to have inflation under control is due to where they look for it.

Energy and food prices have been generally stable here in the U.S., but check out the charts above.  (For reference, the CPI and S&P 500 grew about 1% and 10% during the first half of the year.)  Each collectible sector is growing at well above the rate of inflation save for art and antiques with the classic auto market possibly within bubble territory.

This data raises an interesting question.  Will inflation remain segregated to the 1%, or will it eventually spill over to the 99? Intriguingly, housing inflation is already striking the 99% with higher median home prices and rising rents.

Murky jobs picture likely to keep Fed on hold.

Employers Add 148,000 Jobs; Unemployment Falls to 7.2% – WSJ.com.

Payrolls in U.S. Rise Less Than Forecast – Bloomberg.

Tepid job growth supports Fed’s cautious stance | Reuters.

Nonfarm Payrolls Through Sept 2013

Job creation ran at about 1/3 the number necessary to absorb all the new entrants into the labor market during the month, but unemployment dropped anyway indicating the continuing decimation of the American workforce.  This is actually good news for the stock market, because investors will expect more money printing and higher share prices bidding them up thus.

Supposedly, the Fed exercises monetary policy under a dual mandate of low inflation and low unemployment; yet, inflation remains high as we explained in the post above, and job creation has disappointed throughout the “recovery.”  This money printing has been quite ineffective at spurring employment, but it continues.  While the policy does little for the majority,  very rich minority has paid lots of money in campaign contributions to ensure they become even richer:

Fed Balance Sheet vs. SP500 10.2013

Moreover, the Fed had lost control of rates since taper talk began in May.  Informing markets  that the Fed will be buying billions in T-bills almost every day has bid the yield back down with U.S. debt maintenance costs.

US 10yr 10.22.2013

 

U.S. existing home sales fall, price appreciation slows | Reuters.

Here’s Why Existing Home Sales Slowed Down In September And Will Continue To Do So – Business Insider.

Home Sales Fell 1.9% in September – WSJ.com.

Existing Home Sales Through Sept 2013

 

Existing home sales fell during September as higher financing rates and stagnant incomes have created significant headwinds for prospective purchasers.  Well, at least we managed to reattain 2003’s sales pace.  Look for more bad news in this space as the consequences of the government shutdown reveal themselves in October’s data.

Around the Globe Weekend Edition October 19-20

Saturday:

Euro Zone May Not Have Emerged from Recession, CEPR Says – WSJ.com.

Eurozone Total Employed Persons US Labor Force Participation

The mainstream media is beholden to the standard definition of a recession, which is two consecutive quarters of GDP contraction.  If it chose to feature another data series as its bellwether of economic health, then it would be forced to alter the recovery narrative that it has been touting for the last few years.

As it happens to be,  the labor market reveals more about the experiences of the vast majority of taxpayers.  Both the Eurozone and the United States remain in labor market recessions, even though GDP is growing modestly.  Total jobs have decreased in the Eurozone, and there is no end in sight to the contraction.  In the U.S., job creation is positive but is not maintaining pace with the number of new labor market entrants; hence, the employment participation rate continues to decline.

If you own stocks, bonds or real estate, then this is the economy for you.  If you derive most of your wealth from the fruits of your labors, then the recession never ended.

From Friday’s Edition:

Heard on the Street: China Rebound Fails to Reassure – WSJ.com.

Infrastructure drive powers China’s growth prospects – FT.com.

China GDP

What goes up, must come down.  Recessions are normal.  These down periods give the economy time to reallocate resources so that productivity increases ultimately lead to rising GDP and employment levels.

Once politicians figured out that they will be blamed for the twists and turns of the business cycle, they began trying to prevent contractions.  The two methods for accomplishing this objective are government spending and money printing.  This has been occurring for years, but credit growth is reaching an important juncture.  The diminishing marginal returns of stimulus are fast approaching zero.  The U.S. has printed almost $3tr extra dollars and has added over $6tr to the government debt since Lehman, and this has only added $1.4tr to GDP.  That’s over a six to one ratio.

China is nowhere near that poor ratio, yet, but it is well on its way.  Chinese officials wish to maintain power, and they will create as much yuan as is necessary to accomplish their goal.

China Credit Growth

 

From Wednesday’s Edition:

Shutdown is having ‘notable impact’ on mortgages.

Home Builders Cite Waning Confidence – WSJ.com.

New Purchase Mortgage Apps
Source: MBA/Zerohedge

New mortgage apps are plummeting, which does not bode well for home sales.  Even though the budget “impasse” will end with a deal before too much long-term damage to the nation’s standing is done, the consequences of this political theater will drag on for months.  Home sales will drop through October, but a November rebound will be touted by the mainstream media as a resurgence in the housing “recovery,” not the pent up demand from prior weeks.

 

From Tuesday’s Edition:

Fed’s Dudley: Large Balance Sheet Increases Inflation-Fighting Discipline – Real Time Economics – WSJ.

Exclusive: Fed’s Fisher, outspoken hawk, sees no QE reduction this month | Reuters.

Fed Balance Sheet vs. SP500 10.2013

The printfest will continue because it cannot stop.  Once the Fed stops creating dollars by monetizing federal and mortgage debt, the market will cease its rise shortly thereafter.  Eventually, the policy of printing money to increase asset prices will lose its efficacy.  First, additional QE will stop inflating market prices, but it will still be able to maintain some sort of stability.  Next, well, no one knows what happens next.

 

From Monday’s Edition:

Asmussen rules out ECB rollover of Greek bonds | Reuters.

Greek Government Budget Deficit Ratio

Asmussen must say things like this for two reasons.  First, Germany needs to keep up the austerity pressure, or else the Greeks will stop “reforming” the economy.  Second, Germany has not yet formed a government.  With sensitive coalition negotiations, it is an inconvenient time to admit that Greece needs a 4th bailout even though this is inevitable.  In order to preserve its export currency, the German government and the voters will continue denying that Greece needs more money until it does.  Then, it will gladly do whatever is necessary to bail Greece out.

Around the Globe 10.18.2013

Spain’s ruling party hit by fresh slush fund allegations – FT.com.

Spanish Bad Loans Soar To New Record High | Zero Hedge.

Spain Bad Loans

Chart sourced from ZeroHedge

Spain’s “recovery” continues.  If you Spanish stocks or bonds, you have done nicely since the Draghi pledge over a year ago.  Workers continue to reel from the effects of a poor labor market.  Spain must institute draconian reforms within its economy if it is to have a fighting chance at growing again.  Unfortunately, the country’s political system is basically paralyzed with the Prime Minister and ruling party spending political capital on defending themselves against the revelations of the PP’s slush fund. Meanwhile, the banking sector that was supposedly fixed a few months ago has just set a new record for nonperforming loans.

While the country is no longer in immediate danger of defaulting, it will continue down the path of economic despair.  An ineffective government cannot create and implement the necessary reforms to free and stimulate the economy while Spain is forced to operate under Germany’s monetary policy.  Get used to the unemployment rate and lack of growth, Spain, because they aren’t going anywhere.

Insight: Europe’s bold vision hits trouble | Reuters.

Eurozone Unemployment Selected Countries

The Eurozone is in dire straits.  The common currency has cleaved into separate, distinct areas.  In the periphery, employment and particularly youth unemployment are at record highs.  The core is performing adequately in these areas, but unemployment rates have begun to rise.  Periphery banks are reducing their lending to the private sector while increasing their domestic sovereign debt holdings.  Core banks have no such issues with private credit creation being sufficient to promote economic growth.

Eventually, the periphery will begin rebelling against the German monetary regime, but until that happens expect the employment picture to slowly, but inexorably, deteriorate over the coming months.  No one knows when the system will break, but break it must.

China Growth Rebounds After Li Stimulus to Meet Target – Bloomberg.

China GDP Grew 7.8% in Third Quarter – WSJ.com.

China GDP grows 7.8% in the third quarter.

China Annual GDP Growth US Annual GDP Growth

Yea!  Woo-Hoo! The mainstream media loves hyping China.  The Chinese GDP growth rate rose 30 bps to an annualized pace of 7.8%.  This figure is above the government’s 7.5% goal, so keep buying those Chinese stocks.

There are two reasons one should be skeptical about Chinese GDP.  The first is that the figure is politically managed.  The real world is messy reflected by volatile economic data, like GDP growth.  Note our charts above.  In the last six reported quarters, U.S. economic growth has ranged from 0.1% to 3.7%, a spread of 3.6.  Chinese economic growth has logged a 7.4% low with a 7.9% high for a mere spread of 0.5.  Mind you, this is a country that shuts down several times a year for days causing wild seasonal fluctuations in other data sets.

China is not in danger of an imminent collapse, but the country has slowed down appreciably from it peak growth.  This dynamic will increasingly act as a headwind to world growth.

As for the second reason why one should treat Chinese economic data skeptically, you’ll have to keep reading.

Heard on the Street: China Rebound Fails to Reassure – WSJ.com.

Infrastructure drive powers China’s growth prospects – FT.com.

China GDP

What goes up, must come down.  Recessions are normal.  These down periods give the economy time to reallocate resources so that productivity increases ultimately lead to rising GDP and employment levels.

Once politicians figured out that they will be blamed for the twists and turns of the business cycle, they began trying to prevent contractions.  The two methods for accomplishing this objective are government spending and money printing.  This has been occurring for years, but credit growth is reaching an important juncture.  The diminishing marginal returns of stimulus are fast approaching zero.  The U.S. has printed almost $3tr extra dollars and has added over $6tr to the government debt since Lehman, and this has only added $1.4tr to GDP.  That’s over a six to one ratio.

China is nowhere near that poor ratio, yet, but it is well on its way.  Chinese officials wish to maintain power, and they will create as much yuan as is necessary to accomplish their goal.

China Credit Growth

Around the Globe 10.16.2013

Shutdown is having ‘notable impact’ on mortgages.

Home Builders Cite Waning Confidence – WSJ.com.

New Purchase Mortgage Apps

Source: MBA/Zerohedge

New mortgage apps are plummeting, which does not bode well for home sales.  Even though the budget “impasse” will end with a deal before too much long-term damage to the nation’s standing is done, the consequences of this political theater will drag on for months.  Home sales will drop through October, but a November rebound will be touted by the mainstream media as a resurgence in the housing “recovery,” not the pent up demand from prior weeks.

Draghi Turns Judge on EU Banks as ECB Studies Accounts – Bloomberg.

Euro zone inflation drops to 3.5-year low in September as expected | Reuters.

Net Bank Assets as a Percentage of Host Country GDP

The ECB is not set to judge Eurozone banks.  This is political theater to satisfy voters that the EU is not throwing away more of their hard-earned money on politically connected bank bailouts.  Bank stress tests have already been conducted by the ECB with kid gloves, and this treatment is expected to continue.  The Eurozone’s banking system is a disaster waiting to happen.  Bad loans in the periphery are being hidden by policies such as slow markdowns of nonperforming debt and playing extend and pretend to prevent loans being categorized as “nonperforming.”

Take a look at our chart and prepared to be surprised by the host countries of the most dangerous banks.  Germany and the rich countries do not wish to be on the hook for periphery banks, not just because they are being selfish but also because they can’t.  They need to keep their powder dry in the case of a systemic collapse, still not out of the question at this juncture in the eurocrisis.

China Intervened Aggressively in Currency Markets in Latest Quarter – WSJ.com.

Chinese T-Bill Holdings

The Chinese mainstream media was recently bitching about the amount of US treasuries held by the country.  No matter the country, the mainstream media fails when it refuses to depart from its narrative on a topic.  The narrative for China’s position as the largest foreign holder of US debt is that the virtuous Chinese lend their savings to the stupid, fat spendthrifts across the Pacific to save them.  Actually, the Chinese are saving themselves.

China actively discourages personal consumption by it citizens with an array of methods.  Hence, China sells to but does not buy from the US, so surplus dollars must be invested somewhere, i.e. the US treasury market.  In addition to not buying much from the US, the country purchases dollars on the open market to maintain the yuan’s weakness and its trade surplus.  Like all Nash equilibriums, this system will continue until it cannot.  Then, it will stop.  Good luck guessing when.

Full post with charts, images and links:

 https://dareconomics.wordpress.com/2013/10/16/around-the-globe-10-16-2013/

Around the Globe 10.15.2013

Fewer US homes entered foreclosure track in third quarter.

Foreclosure starts vs sales

 

The mainstream media loves its housing recovery narrative and fervently guards it against the data.  This is the lede from the article above:

The number of U.S. homes set on the path to foreclosure slid to a seven-year low in the third quarter, reflecting a gradually improving housing market and fewer homeowners falling behind on mortgage payments.

That statement is false.  Foreclosures are sliding because banks are keeping delinquent properties out of the foreclosure, whether by design to maintain higher prices or because they simply cannot work their way through the backlog.  I believe the latter explanation is more likely as incompetence trumps malevolence.  If the housing market were really on its way back to health, the number of delinquencies would have plummeted in lockstep with the foreclosures.  It hasn’t:

Mortgage Delinquency Rate

This second chart shows that defaulted mortgages have remained near recession peaks and historic highs. What is really happening here is that the zombie inventory of homes continues to grow keeping supply out of the hands of the 99% who pay inflated prices for homes and rents for apartments.

Citigroup results hit by bond trading slowdown.

Citigroup Results Hit by Weak Fixed Income Trading – WSJ.com.

Citigroup results hit by bond trading slowdown | Reuters.

Citigroup 10.15.2013

 

All of the TBTF banks are enduring lower profits due to smaller bond volumes and a decrease in mortgage applications.  This news has not mattered one iota to share prices as our chart of C shows.  A mild 50¢ sell-off at the open followed by a rally back to just about the pre-earnings level.  Corporate profits have ceased improving, so the current rally is exclusively beholden to additional multiple expansion.  The financial commentariat generally believes that this expansion is unlikely, but in light of the new Printmaster General’s dovish bonafides, I am not so sure.  The market is still far below record P/E levels, and the magic money machine isn’t finished yet:

S&P500 PE Ratio

Fed’s Dudley: Large Balance Sheet Increases Inflation-Fighting Discipline – Real Time Economics – WSJ.

Exclusive: Fed’s Fisher, outspoken hawk, sees no QE reduction this month | Reuters.

Fed Balance Sheet vs. SP500 10.2013

The printfest will continue because it cannot stop.  Once the Fed stops creating dollars by monetizing federal and mortgage debt, the market will cease its rise shortly thereafter.  Eventually, the policy of printing money to increase asset prices will lose its efficacy.  First, additional QE will stop inflating market prices, but it will still be able to maintain some sort of stability.  Next, well, no one knows what happens next.

Germany digs in heels as Europe moves towards banking union | Reuters.

Total Banking Sector Balance Sheet to GDP

 

The Eurozone has created a faux banking union, which should be sufficient to keep the bond vigilantes at bay for the moment.  There are several requirements for a real banking union as currently exists in the U.S. under the auspices of the FDIC, which you can read about in more detail here:

Cosmetic, Can-Kicking Banking Union Agreement in Play | DARECONOMICS

The sticking point is the money.  The rich countries refuse to become joint and severally liable for depository insurance and resolution costs with their poorer brethren.  What this means is that a euro in Germany is much safer than a euro in Spain, because the Germans have more money to bailout its banking sector.  Hence, the current agreement does not break the pernicious bank and sovereign link.  German banks will have money to lend to businesses, and the periphery won’t, so it will remain mired in stagnation.  This Nash equilibrium will remain until one of these countries decides to gamble on a euro exit.

Around the Globe 10.14.2013

China’s Inflation Rises Faster Than Expected – WSJ.com.

China-to-India Price Jump Risks Growth as World Outlook Dims – Bloomberg.

China inflation at seven-month high, limits room for easing despite export tumble | Reuters.

Data show China passing US as biggest oil importer.

INDIA CPI through September 2013 China CPI

Nascent inflationary pressures have increased in both China and India. China loosened monetary policy starting in June to combat a burgeoning liquidity crisis, and this extra cash is wending its way through the financial system inexorably feeding through to food and energy prices.  India has failed to tighten its monetary policy quickly enough allowing a depreciated rupee to cause inflation.  As these countries grow, heavy resource usage creates a headwind to increasing growth rates.  They are both large enough now so that increases in resource consumption quickly raise prices crimping further growth.  Perhaps this is the reason countries have difficulty making the leap from middleweight economic powers to heavyweight.

Asmussen rules out ECB rollover of Greek bonds | Reuters.

Greek Government Budget Deficit Ratio

 

Asmussen must say things like this for two reasons.  First, Germany needs to keep up the austerity pressure, or else the Greeks will stop “reforming” the economy.  Second, Germany has not yet formed a government.  With sensitive coalition negotiations, it is an inconvenient time to admit that Greece needs a 4th bailout even though this is inevitable.  In order to preserve its export currency, the German government and the voters will continue denying that Greece needs more money until it does.  Then, it will gladly do whatever is necessary to bail Greece out.

Inverted yield curve sign has Wall Street on edge.

US Government Bond Yield Curve

Usually, an inverted yield curve screams, “RECESSION!” This time may be different, but maybe not.  Key pieces of economic data are pointing to a soft patch.  Housing sales, job creation rates, unemployment claims and GDP growth are all past recovery bests.  On the other hand, PMIs are indicating modest growth going forward.  The bottom line is that mixed economic data points to more of the same, i.e. the New Normal.

 

Around the Globe Weekend Edition October 12-13

Sunday:

Number of the Week: Housing Affordability Hits Four-Year Low – Real Time Economics – WSJ.

Housing Affordbability Index

 

After we resolve the debt “crisis,” the country must face more economic headwinds.  Unless the labor market improves, consumer demand will remain weak.  Or is it unless consumer demand improves, the labor market will remain weak?  No one seems to know anything except to keep the magic money machine running:

Fed Balance Sheet vs. SP500 10.2013

Saturday:

China’s September exports in surprise slump.

China’s September export growth in surprise slide | Reuters.

China Exports Unexpectedly Drop – Bloomberg.

China’s Exports Unexpectedly Shrink – WSJ.com.

China Exports Through Sept 2013

When the mainstream media writes that it is “surprised” by data,  what it is really saying is that the data is not conforming to its narrative.  China experienced an economic slowdown in the Spring as officials attempted to tighten the money supply in response to frothy conditions.  Sometime in June, they realized that this policy was crushing industrial output so they printed some yuan and injected it into the banking system.  The growth in money supply seemed to do its job with exports rising for two months straight, so the mainstream media declared China to be recovering and moved onto the next crisis.  Meanwhile, China is learning that the marginal gains in economic growth from additional credit creation are rapidly shrinking spurring officials to plot their next move.

From Thursday’s Edition:

U.S. retailers’ sales rise in September, but shoppers stay cautious | Reuters.

September Retail Sales Were Tepid – WSJ.com.

US Retail Sales YoY

US retail sales grew at a sluggish pace in September.  Considering the health of the labor market, these results are unsurprising and do not bode well for the future.  Retail sales have seemingly turned over and are growing at the slowest pace since the beginning of the recovery.  You can see for yourself what happened the last two times the retail sales pace slowed on the chart above.

From Wednesday’s Edition:

Puerto Rico Yields Above Venezuela’s in Worst Rout: Muni Credit – Bloomberg.

U.S. Treasury Said to Have No Puerto Rico Assistance Plan – Bloomberg.

MUB 10.09.2013

The Puerto Rican debt crisis is similar in form to the Eurocrisis. Ultralow rates have induced Puerto Rico to issue too much debt rather than cutting back on expenses. Furthermore, the dollar is too strong a currency for Puerto Rico, which renders the commonwealth noncompetitive on world markets.   You can say the same thing about Greece, Italy, Spain, Cyprus or even France.  There is no way to bail out a state or territory if it gets into trouble, which is similar to the relationship between the Eurozone countries and the ECB.  Saving Puerto Rico would require an act of Congress, and that does not seem likely at the present juncture.

From Tuesday’s Edition:

Japan Current-Account Surplus Plunges to Record August Low – Bloomberg.

Japan has suffered from the effects of a strong yen for over a decade.  This strength has spurred Japan, Inc. to offshore more factories over the years.  The truth is that there is not a large Japanese export sector anymore.  Exports have been range bound since the end of the Great Recession:

Japanese Exports

Meanwhile, lower export levels together with decreasing income from foreign investments have pushed the Japanese current account to historical lows.  Note the downward trend:

Japanese Current Account Balance

Japan is set to join the ranks of debtor nations in 2014.  Good luck selling 10 year bonds with sub-1% yields when that happens.

 

From Monday’s Edition:

Workers Stay Put, Curbing Jobs Engine – WSJ.com.

The writer has created a false argument here.  Basically, he is telling the reader that the labor market is sending out mixed signals.  Jobless claims are hitting post-recession lows amid stable job creation in the economy, but people are not leaving their present jobs for better opportunities.

Actually, the data is quite consistent and points to a weak jobs that will remain so indefinitely.  Let’s examine the data.  First, note that low unemployment claims merely indicate that people have stopped being fired.  This is an important indicator foretelling the end of a recession, but not as useful once it does.  Also, check for yourself what happens after unemployment claims bottom out as highlighted in red:

Four Week Average Initial Claims through 09.27.2013

Next, the United States must create 200,000 jobs a month just to employ all of the new workers joining the workforce every month.  As you can see, post-recession job creation performance has been abysmal with the red line on top indicating healthy growth and the red line on the bottom showing where we really are:

Nonfarm Payrolls Through August 2013

Not enough jobs are being created and those that are are of very low quality:

2103 Full vs. Part Time Jobs

The fact that workers are not moving around is consistent with all of other labor market data:

Historical Data Chart

Job vacancies are about a fifth to a third lower than the last two recoveries.  There is simply less opportunity available in the new normal.