Around the Globe 11.05.2013

BOJ Gov. Kuroda Calls Easing Steps Successful –

BOJ Struggles to Convince on 2% as Abenomics Shine Fades – Bloomberg.

Japan Salaries Extend Fall as Abe Urges Companies to Raise Wages – Bloomberg.

Japanese Incomes  Japanese GDP Performance Through 2Q2013

Japanese Inflation Rate


Printapalooza throughout the world continues, but the Bank of Japan is leading the world in money creation.  Printing inflates asset prices while deflating labor costs, i.e. wages.  In the first chart, note the trend of Japanese wages since the BoJ began printing over a decade ago.  It is not surprising that the Japanese economy is weak, because consumers have been on a slow, inexorable wage reduction for almost 15 years.  The current round has proven ineffective at raising GDP growth, as illustrated in our second chart.  Indeed, Japan witnessed stronger growth in the aftermath of Lehman than it is under Abenomics, which is also the last time Japanese inflation exceeded 2%.  If you examine the third chart, you can see what happened after the last three times the mainstream financial press called an end to Japanese deflation.

In the meantime, the export and stock market gains fueled by the weak yen have probably peaked.  The USDJPY exchange rate is highly correlated to the ratio between BoJ and Fed assets.  As our last chart details, the market has already priced in the more rapid expansion of the BoJ’s balance sheet.  A reduction in Fed purchases, the dreaded taper, will allow the yen to depreciate further.

BoJ to Fed Balance Sheet Ratio vs. JPYUSD


Service Industries in U.S. Grow at Faster Pace Than Forecast – Bloomberg.

Service sector exapnds more than expected in October: ISM.

U.S. service sector growth quickens in October: ISM | Reuters.

ISM NMI 11.2013

The economic data continues to tell a tale of stagnation.  The MFP is breathlessly reporting that the services PMI beat the consensus forecast despite the “shutdown.”  Numbers above 50 signal expansion, but a 55.4 is nothing to write home about.  Expected GDP growth at this level is below 2%, which is far below the 3.5% growth required to stir the labor market.

Pressure mounts on Draghi following eurozone forecasts –

Rehn Confident Greece to Meet Targets as Troika Talks Resume – Bloomberg.

EU Forecasts Sluggish Growth as Austerity Continues –

EU cuts euro zone growth forecasts for 2014.

Uncertainty over ECB caps moves in shares, euro | Reuters.

Euro Fair Value at 1.37


Everyone is trying to predict what the ECB will do on Thursday: will it cut rates or not? Most commentators seem to believe that the ECB will cut its discount rate, because the EU just cut its Eurozone growth forecast for 2014 to 1.1%.  The EU has been relentlessly cutting growth forecasts since 2010, so there is no crisis here.  The only thing you need to know about how the ECB will conduct monetary policy is contained in the chart above.

As long as the euro remains weak enough to promote German exports, there will be no rate cut to lower the euro exchange rate.  If the euro attains and maintains the low $1.40’s for a time, then there will be a rate cut.  At the current rate of $1.35, Germany is benefiting from both low inflation and a weak currency.


Around the Globe 09.30.2013

Japan Economic Recovery Remains Uneven as Production Declines –

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

Chicago Index Increases in Sign U.S. Manufacturing Improving – Bloomberg.

Dallas Fed Manufacturing September – Business Insider.

Texas Manufacturing Outlook Survey – Dallas Fed.

Chicago PMI Employment 09.30.2013

The mainstream media enjoys telling the reader what to conclude from the facts they report.  In this particular article, Bloomberg tells us that the rising PMI number is a “sign” of improving American manufacturing conditions.  Perhaps it is, but the article fails to place these numbers in context.

The reason that we desire an improving manufacturing sector is because factory owners used to hire more workers to increase production, but this dynamic is no longer part of the new normal.  As our chart above illustrates and our table below shows is that employment conditions remain soft.  While the factory owners are earning excellent profits, these are not trickling down to workers.

Manufacturing accounts for 12% of the economy but this is dwarfed by consumer spending’s 70% share.  The economy will not get moving until the consumer income begins rising no matter what these various manufacturing surveys have to say about output.

Dallas Fed Survey

Italian Premier Pursues Last-Ditch Rescue of Government –

Berlusconi faces party revolt over Italy political crisis | Reuters.


Word today is that Berlusconi’s party is balking at their leader’s request for members to resign from the government.  The PDL’s full complement of five government ministers resigned, but rank and file legislators are threatening to support the coalition.  If a few defect, Letta will retain a slim majority, and the present government will live to fight another day.  This is what I wrote yesterday, and I stand by it:

Italy has had 61 different governments since 1946 and is about to try for a 62nd.  While the financial press is attempting to whip everyone into a state of frenzy over the “crisis”, this situation is fairly typical of Italian politics.  Governments in Italy only last about 13 months on average, and this one is already six months old.  Usually Italy can get by without anyone ruling the country because the civil service is running the country.   This time is different because Italy requires its duly elected government to enact budgetary and economic reforms.

While political instability is not good news, the current situation is overhyped.  In a few days, there will be a deal, because there is always a deal.  In the meantime, European markets are in store for a bumpy ride.

EU bank bailout roulette awaits Monte dei Paschi investors | Reuters.

BMPS 09.30.2013

The theme of this article is that Europe is not being consistent in how it is resolving the banking crises that have been breaking out in member countries since 2009.  I believe that the Eurozone has been very consistent in its resolution efforts.  Even though the plans for Ireland, Spain, Portugal, Greece and Cyprus are different, this is not where the commonality lies.

Eurozone bank/country rescues are based on the exposure of German, and to a lesser extent, French banks.  German and French banks had lots of exposure in Greece and Ireland, so Greek and Irish systems were fully bailed out by the Eurozone.

The French and German bank did not have much exposure to Cyprus, so the depositors and investors were forced to pay the lion’s share of the bailout with the troika contributing a small loan.

If Monte dei Peschi’s failure will adversely affect French and German interests, then it will receive a Eurozone bailout.  If the effects of the failure will be limited to Italy, then Italy will have to pay to clean up its own mess.

Around the Globe 09.09.2013

Japan Q2 GDP revised up sharply, boosts case for tax hike | Reuters.

U.S Stocks Rise Broadly –

Japanese GDP Performance Revised 2nd Quarter

This article is essentially cheerleading for Japan.  Here’s the lede:

Japan’s economy expanded much faster than initially expected in the second quarter, adding to growing signs of a solid recovery taking hold. (My emphasis)

Note how the recovery narrative thwarts any chance of real reporting.  The revised GDP figure is presented without context and assumed to be within a group of “growing signs” pointing to recovery.  There are also growing signs that this burst of economic activity is not indicative of a growth trend, but merely a continuation of Japan’s stagnation.

Inflation, fed by soaring energy costs, is reducing consumers’ purchasing power and crushing retail sales with a 1.8% plunge last month:

Japan Retail Sales

GDP growth was not that special, anyway.  Japan has exceeded or equaled 0.9% in exactly 10 out of 24 quarters without a revival in Japan’s postwar growth miracle. Just like the U.S, Japan’s economic picture remains mixed.  Those closest to the Bank of Japan’s easy money will do well, while regular people will remain recovery free.

China Trade Rebounds in Further Sign Economy Stabilizing – Bloomberg.

China Exports

As you can see for yourself, Chinese exports are an extremely volatile data series.  This volatility makes for an unreliable economic indicator.  Moreover, Chinese firms have more leeway on how they may invest export earnings giving them a large incentive to cook the books.  In May, Chinese regulators began cracking down on inflated export invoices, and liquidity dried up quickly almost causing a full-blown crisis.  By the beginning of July, the liquidity swoon had abated.

So, what does the rise in Chinese exports tell us? Is the country experiencing stronger GDP growth? Have the authorities stopped their crackdown allowing firms to inflate their export receipts again? Is the rise in exports just a spike in the data series that will not sustain itself?

These are all valid explanations for the rise in exports, but Reuters explores only the first one.  Once again, the recovery narrative trumps real reporting and analysis.

China Aug inflation another sign economy is stabilizing | Reuters.

China GDP vs. Housing Prices 08.2013

Chinese economic data is not reliable, but that does not stop anyone from attempting to draw conclusions from it.  Chinese inflation is under-reported by the government through one simple trick.  Housing inflation is reported as only 8% since 2000, while rents have skyrocketed over 50% during this same period.  Moreover, housing prices have risen much more than the official figure.  Once China’s greater rate of inflation is considered, it’s economy is about $1tr less than officially reported.  If you don’t believe me, then read this excellent report about the scam:

How Badly Flawed is Chinese Economic Data – $1 Trillion and Over Hit to GDP.

Monte Paschi doubles planned capital hike to 2.5 billion euros | Reuters.

BMPS 09.09.2013

Back in February, we predicted that BMPS would need much more than €1bn to fill its capital shortfall and that the bank was heading towards nationalization in this post:

Latest Chapter in the Monte dei Paschi Scandal

Today, we were proven right.  There is no way that the bank will be able to raise €2.5bn on its own, which means that the Italian government will be bailing it out shortly.  Depositors prepare to be Cyprussed.

Spain Cash-Starved Firms Seeking Growth Run Out of Time – Bloomberg.

Spain Loans to the Private Sector 09.2013

While the Spanish government continues to proclaim that the economy is recovering, the economy seems to have other ideas.  GDP continues to contract, and it is not hard to see why.  Spain’s zombie banks cannot make loans, and without capital Spanish companies are dying.

On the other hand, German bank lending is doing fine:

German Loans to the Private Sector 09.2013

The ECB is running the perfect monetary policy for Germany, which is exactly the opposite of what the PIIGS need right now.  As long as the euro exists, so will this problem.

Unemployment Falling for Wrong Reason Creates Fed Predicament – Bloomberg.

Withholding vs Employment 9-13

The article implies that there is a lot of controversy over the true health of the labor market. There shouldn’t be any controversy.  The labor market remains weak according to every indicator.  Median incomes are down 8% from their 2007 peaks, the participation rate continues to decline, the majority of new jobs are part-time and low quality, and even the heavily manipulated headline unemployment rate remains historically high.

QE has not and will not ameliorate the employment situation.  The Fed needs to end QE for other reasons and needs optical improvements in the labor market so that it can declare victory and go home.  Once enough Americans exit the labor force, it will be able to point to a sub-7% unemployment rate declare the labor market health, which will come as a surprise to millions of Americans earning less, working less or not working at all.

Around the Globe 08.12.2013

Emerging World Loses Lead in Economic Growth –

China’s starts its turnaround, yet skeptics still abound.

China’s good economic news keeps getting better.

China HSBC-Markit PMI 07.24.2013

Months of poor economic data have been discarded by Bob Pisani who is busy cheerleading a Chinese recovery.  Shanghai has outperformed Tokyo recently, and Pisani uses this fact to bolster the Chinese recovery narrative.  Frothy stock markets and manipulated official data do not constitute an economic recovery.  The best third party data we have shows a shrinking manufacturing sector confirmed by trading partners importing less Chinese goods.

Moreover, Chinese money markets remain distressed:

China 7 Day Repo Rate 08.12.2013

Shrinking exports amidst ongoing financial distress point to lackluster future growth in China, and this dynamic will continue to depress growth in emerging markets.

Greece’s Fiscal Discipline Starts to Pay Off –

Greek GDP Performance 07.08.2013

Yay! Greece is saved! (again).  The mainstream media enjoys calling an end to the Greek debt crisis every few months.  This time, the achievement of a “primary budget surplus” is the reason to start partying like its 2008.  Unfortunately, the primary surplus does not exist:

The data, which don’t include payments on debt interest, local government and social security fund budgets, show that Greece is likely to secure a primary budget surplus for the year, for the first time in more than a decade. (My emphasis)

The health system is running a deficit of over €1.2bn year to date and is not paying vendors.  The arrears to these vendors are not included in the €1.2bn figure.  Once you take into account these hidden debts, Greece no longer runs a primary surplus.  Furthermore, unemployment is still the highest it’s ever been, and the economy continues to shrink over 4% a year.

On the plus side, after German elections, Angie will write another check  for some much-needed debt relief.  Perhaps, with a little luck, Greece can rise to a recession from a depression.

Analysts See Just Enough Growth for a Fed Pullback –

Fed Balance Sheet vs. SP500 07.2013

The Fed may attempt to taper in September, but once the results of its experiment run awry it will fire up the printing press.  A reduction in bonds purchases will trigger a market panic, and that cannot be allowed.  The stock market has not been rising on S&P revenue, so the magic money machine it is, as our chart makes abundantly clear.

Fresh government remedies fail to stem Indian rupee’s slide | Reuters.

USDINR 08.12.2013

India remains stuck between a rock and a hard place.  A weak currency will stoke inflation, but a defensive interest rate hike will sap growth.  The RBI has decided to deploy other measures including removing cash from the system via bond sales.  Our chart shows the relative ineffectiveness of these measures.  Despite the best efforts of the RBI, the rupee still slides.  If you stay between a rock and  a hard place, eventually you’ll get smashed.

Euro Area’s Recession Seen Over as Champagne Kept on Ice – Bloomberg.

Markit Eurozone Flash PMI 07.2013

The economist’s definition of a recession is two straight quarters of contracting GDP.  This definition has nothing to do with the reality experienced by workers.  As long as unemployment rates remain high, incomes will stagnate, and this is what regular people would consider as a recession.  Just as you have suspected, economists are not regular people.  PMIs point to an end to the Eurozone’ GDP contraction, but the labor markets remain weak, sovereign debt levels continue to grow and bank lending to the private sector is decreasing.  The recession may technically end, but the malaise remains.

Japan’s Below-Forecast Growth Fuels Sales-Tax Debate – Bloomberg.

Japanese GDP Performance

Japan’s economy is growing because of cheap money inflating the stock market and Japan Inc’s profits.  This “wealth effect” from all of this money should now trickle down to households creating a self-sustaining recovery.  Just because this policy has failed in both the U.S. and the U.K. does not mean failure in Japan.  This time is different!

Around the Globe 07.12.2013

China Credit Weathers Cash Crunch –

China Leverage Risks Bypass Super-Saver Households as GDP Slows – Bloomberg.

China 7 Day Repo Rate 07.12.2013


This article neglects the effects of shadow banking on credit creation.  Regulated lending shows no ill effects of the cash crunch, but the PBOC’s goal in tightening the money supply was to control the growth of credit in the shadow banking system.  We will discover whether or not the policy had the desired effect shortly.

China Can Endure Growth Slowdown to 6.5%, Finance Chief Says – Bloomberg.

Chinese FinMin Lowers the Bar, and Raises the Jitters.

China Flash PMI 06.20.2013

China’s official growth rate will be less than 7.5% this quarter, and the FinMin is preparing markets for a lower rate.  By mentioning 6.5%, he is anchoring the media’s and trader’s expectations so that a 7.1% rate or whatever seems good in comparison.  I leave you to guess at what the unofficial or real rate of GDP growth is.

Draghi Impotent as Fed Trumps ECB on Yield Curve – Bloomberg.

German Yield Curve 07.13.2013

The red ellipse in the chart above shows the ever widening spread between long and short term debt in Germany, which is happening throughout Europe.  Investors are beginning to realize that those long-term obligations are severely impaired in light of Europe’s woes.  Debt restructurings, defaults or whatever you’d like to call them are in Europe’s future whether de facto or de jure.

Consumer Sentiment in U.S. Unexpectedly Declined in July – Bloomberg.

Consumer sentiment slips on fears over stock prices, rates | Reuters.

UM Consumer Confidence 07.12.2013

The rise in consumer sentiment seems over for now.  The mainstream media calls the blip downward a “surprise,” but with a cooling economy how could anyone be caught off-guard with this move? The labor market remains in poor shape and gas prices are rising.  Both Barclays and JPM have cut 2nd quarter growth forecasts to less than 1%, and poor worldwide demand seems ready to crimp growth for the immediate future.  The mainstream media is surprised that this information does not fit its recovery narrative.

Thrift trumps Abenomics as Japan shoppers stick to bargains | Reuters.

Japanese Retail Sales YoY 07.2013

Abenomics is running into demographic reality.  Japan’s deflation is in part caused by its aging population.  The young and middle aged raise families, and this is an expensive undertaking creating lots of consumer spending.  The elderly do not spend money so readily.  What Japan needs is not monetary inflation, but a baby boom. Unfortunately, poor economic prospects both limit the size of families and delay their start.  It looks like the magic money machine can’t fix everything.

Portugal’s Bond Market Tanks as Crisis Deepens.

Portugal 10yr Bond 07.12.2013

From Bloomberg

Whenever one of the PIIGS threatens to defy the troika, yields rise.  Once investors realize that the threats are empty, the yields fall.  The only leverage Portugal has is the threat to leave the euro.  Since all political parties are committing to remaining within the Eurozone, there is no Plan B and no leverage to renegotiate the deal.  Eventually, the opposition may gamble by supporting an exit, but not today.

Around the Globe 07.02.2013

1 in 10 Canada Families Highly in Debt: Chart of the Day – Bloomberg.

Canada vs US Housing Prices 07.2013

I present the counter Chart of the Day.  Resource-rich Canada has benefited from the growth of China and other emerging markets.  This growth combined with an easy money policy has created a housing bubble.  In fact, Canadian housing prices surpassed the greatest extent of the American housing bubble over two years ago and have continued rising.

The drop in Canada’s consumer credit is not good news.  It is a sign that the housing bubble is bursting.  Canadians have ceased taking out large mortgages to buy homes.  We are about to discover how strong Canada’s banking system really is.

Germans Let Cars Age as Consumers Halt Buying in Crisis – Bloomberg.

European Car Sales 06.18.2013

Germany leads Europe in new car production but purchases less than half its own wares.  The country produces about 6 million new cars annually and buys less than 3 million.  The euro is a weaker currency than Germany deserves based on productivity.  This helps German exports, but it also robs the people of purchasing power.  The flipside to an export friendly currency is reduced living standards for the country.  Perhaps, even Germany would benefit from a euro breakup.

Banks Stay Bond-Addicted as Cash Hoarders Prevail: Japan Credit – Bloomberg.


By purchasing bonds, the Bank of Japan wanted to increase the amount of cash available for loans.  Just by jawboning alone, loans to the private sector rose from the fall to the spring.  When the plan was announced and implemented in April, loan creation reversed its positive trend as detailed in the chart.  Banks have plenty of cash and have determined that loaning the money to the Japanese government at less than 1% is the best use of the extra funds.  The dearth of good lending opportunities speaks volumes about the true health of the Japanese economy.

Investment Banks Eye ‘Hedge Funds for the Masses’.

Hedge Funds Trail S&P 500 by 10 Percentage Points, Goldman Says – Bloomberg.


Since the beginning of the bull market in March of 2009, the average hedge fund has risen 21% compared with a rise of 77% in the S&P 500 through May of 2013.  Less than 5% of the funds are able to match the return of the S&P 500 or even the average mutual fund.  As wealthy investors flee the sector, what are these banker to do to keep the gravy train rolling? The answer is to figure out a way to sell these funds to retail investors.  The smart money may only leave if the dumb money takes its place.

Exclusive: Greece has three days to deliver or face consequences – EU officials | Reuters.

Chicken fight

Greece and the troika are playing chicken again.  Greece is not reforming rapidly enough the troika, so it is threatening to hold back the next bailout tranche.  What makes this game of chicken more interesting than usual is that the Greek banks have yet to be recapitalized since the 3rd Bailout was agreed to last fall.  This sets up a “depositor haircut” à la Cyprus to keep the bailout on track prior to German elections.

There  is no way that Greece will receive any more money from the troika with German elections looming, but Greece cannot be allowed to collapse either.  The solution is a raid of Greek depositors.  This is why Cypriot banking assets were transferred to the Greek system as part of the Cyprus Bailout in April, so that the funds for the raid would be available.  If you think that this is too cynical for even the troika, then you have not been paying attention to the eurocrisis.

Dollar Climbs Above ¥100 –

YENUSD 07.02.2013

The yen had been stuck below 100 until today.  Decent economic data is given as the reason for the move above the psychologically important level.  Whenever the yen gets too weak, the demand for yen based loans drives the price up again.  I believe that it will be very difficult for the yen to weaken beyond 105 in light of this dynamic.

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.