Around the Globe 11.07.2013

Consumer Confidence in U.S. Drops for Sixth Consecutive Week – Bloomberg.

Bloomberg Consumer Comfort Index 11.2013

The economic data remains in definitely maybe mode.  GDP grew at a decent clip close to 3% last quarter, but this does not help us answer the most important question of the day— are Americans growing more prosperous? Well, every week they are asked, and for the last six they have responded, “No.”  In fact, removing the top 10% of earners from the survey would turn these poor results into dire ones.  As usual in the New Normal, if you were rich enough to afford a Twitter allocation today, then you’re probably doing okay.  If you’re not rich, not so much.

McKinsey Says 20% of Biggest Banks May Shrink or Merge – Bloomberg.

Credit Jobs at 10-Month Low as Borrowing Slows: EcoPulse – Bloomberg.

XLF 11.07.2013

Chart from Google Finance

After outperforming the S&P 500 for years, the financial services sector ETF diverged lower in late August.  Ongoing money printing is suppressing trading volumes while higher interest rates are simultaneously driving down new lending, particularly for mortgages.  Lower activity levels point to future industry consolidation.  The only question is will this happen through the M&A process, or will Fed-sponsored private bail-out program à la Bear Stearns?

Draghi Cuts ECB Rate to Fight ‘Prolonged’ Inflation Weakness – Bloomberg.

ECB cuts rates to new low, sees protracted low inflation | Reuters.

ECB Cuts Rates Unexpectedly as Low Inflation Threatens Recovery –

USDEUR Exchange Rate vs Fed to ECB Balance Sheet Ratio

Only 3 of 70 economists surveyed believed that there would be an ECB rate cut, but Draghi surprised everyone resulting in over a 150 pips drop in the USDEUR rate.  The ECB and its German overlords must be much more concerned about future growth prospects than they have been letting on.  Unfortunately for Europe, the weaker euro is temporary.  An ongoing bank deleveraging in advance of 2014 ECB stress tests is causing banks to sell overseas assets and convert the proceeds into euros.  Meanhwhile, the ECB’s failure to maintain the Fed’s torrid printing pace is raising the ECB/Fed balance sheet ratio to levels that imply a $1.54 USDEUR rate.

Once the rate cut proves ineffective, the Germans will reluctantly permit some sort of QE to maintain a favorable exchange rate, though the pretence given will have something to do with monetary transmission channels or some other wonkish nonsense.

U.S. growth picks up in third quarter as restocking offsets weak spending | Reuters.

US Retail Sales MoM

GDP rose because firms increased inventories dramatically during the 3rd quarter.  Of that 2.8% growth rate over 80bps are attributed to rising inventories.  If firms increased stocks in anticipation of more business and they are correct, then growth may even surpass 3% next quarter.  However, if the inventory surge was caused by a glut of unsold goods, then GDP growth will slow down from now until the end of the year.

I think that even the mainstream financial press is beginning to understand the economic situation.  Today reports of 2.8% should have elicited more recovery hype, but the media’s reporting on 3rd quarter growth was rather subdued.  Or, it could be that they are just too busy hyping the Twitter IPO to have paid much attention to GDP growth.

Jobless, US GDP data.

Labor Force Participation Rate vs. Fed Assets

Journalists are neither statisticians nor data experts, so they really do not understand how to read the deluge of economic data being constantly released.  Instead, they slavishly hew to a simplistic narrative involving unemployment claims and job creation. If either claims fall or there is positive job creation, the MFP consider this “improvement.”

This is the wrong way to view these numbers.  Both data sets must be placed into context and reviewed with other data in order to create a complete picture of the American labor market.  Jobless claims usually begin falling during a recession, and this is a leading indicator of recovery; however, low jobless claims in the middle of an expansion indicate that it is running out of steam.  You can look at the chart and see for yourself what happens after jobless claims trough.  (Hint: those gray columns indicate recessions)

Four Week Average Initial Claims through 09.27.2013

The MFP also draws the incorrect conclusions from job creation data.  The country needs about 200,000 new jobs per month to absorb new entrants into the labor force indicated by the red line:

US Monthly Job Creation

The chart does not show an “improving” labor market, but a stagnant one.  Essentially, after an initial burst of euphoria in 2010, the job market just got stuck.  As long as job creation lags behind new entrants to the labor force, the labor market neither is improving nor will it improve.

As to why the labor market remains moribund despite the best efforts of the central bank, check out this chart:

Labor Force Participation Rate vs. Fed Balance Sheet

Labor Force Participation Rate vs. Fed Assets

Must be a coincidence, huh?

Spain nears year-end funding target as industrial output grows | Reuters.

Spanish Industrial Production


Despite my best efforts, the MFP’s Spanish Recovery Narrative, a subplot of the Euro Recovery Narrative continues unabated. Allow me to make another attempt by explaining this Reuter’s article passage by passage:

Spanish industry grew for the first time since early 2011 in September, data showed on Thursday, keeping investor sentiment towards the country upbeat as a strong debt sale brought the government close to hitting its 2013 funding target.

1.  As long as the ECB funds virtually 100% of peripheral debt purchases practically for free, banks will continue to buy Spanish debt.  Indeed, Eurozone TBTF banks increased their sovereign debt holdings by 26% last quarter.  This is not a sign that Spain is recovering; rather, it is a sign that the ECB has a printing press.

Calendar-adjusted industrial output rose by a surprise 1.4 percent year-on-year in September, beating expectations of a 1.5 percent contraction and marking its first growth on an annual basis since February 2011.

2.  A one month change could indicate an anomalous result.  Certainly, we should expect to see several months in a row of expanding output.  A trend like that would be something to write an article about, but an isolated rise after 25 months of contractions, meh.

Meanwhile, the Treasury easily sold 4 billion euros ($5.4 billion) in mid- and long-term bonds and has now shifted 96 percent of its 121.3-billion-euro year-end target.

An improved outlook for the Spanish economy from ratings agency Fitch also boosted demand for the 2018, 2023 and 2026 bonds offered.

That helped lower the price paid by the Treasury – a trend of declining yields that seems likely to continue following Thursday’s surprise interest rate cut by the European Central Bank, which occurred after the debt sale.

The 10-year bond yielded 4.164 percent, the lowest since September 2010 and a long way from rates of over 7.6 percent hit during the height of the debt crisis in the summer of 2012.

3.  I don’t need to explain why Spanish rate optics are improving again.  See #1 above.

Spain has languished in an economic slump since a property bubble burst in 2008, dragged down by depressed consumption in the face of record high unemployment.

That led nervous investors to demand unsustainable premiums to hold Spanish paper.

But an ECB pledge to do whatever it takes to back struggling euro zone economies, expansive monetary policies in the United States and Japan and the correction of fiscal and economic imbalances in the country have helped ease concerns.

Spain’s economy registered its first expansion in over two years in the third quarter thanks to strong exports, which also boosted capital goods production and lifted the headline industrial output figure.

“All the indicators point to a turnaround, and that we’re entering into growth. The doubt remains on whether it will be strong or weak, but it’s clear we’re passing from a period of recession to a period of growth,” said Nicolas Lopez,analyst at Madrid broker M&G Valores.

4.  The passage above is an excellent nutshell review of the Spanish Recovery Narrative topped by some encouraging words from a permabull stockbroker.  Much to most Spaniards’ great chagrin, all indicators do not point to a turnaround, only those which can be manipulated by the central bank like interest rates and stock market indices.  Now, if there were only a way to teach central banks to print well-paying jobs rather than speculative cash for the TBTF banks and corporations, you wouldn’t be reading this, and more importantly, I wouldn’t be writing this.

Fitch last week raised its outlook on Spain’s debt, adding to the wave of improving sentiment and encouraging investors to bid for relatively high-yielding paper the Treasury is selling compared to many of its euro zone peers.

Debt in the euro-zone’s once-shunned peripheral economies has attracted strong demand in recent months and Spain’s auction came after Italy raised a record 22.3 billion euros from a four-year inflation-linked bond this week.

On Thursday, the Spanish Treasury sold 4.03 billion euros, beating the targeted range of between 3 billion and 4 billion euros and clearing the way for pre-financing 2014 borrowing.

While the recent economic data has helped fuel rising optimism toward Spain, some economists were more cautious about the strength of the recovery.

“This is another strong auction of Spanish debt and a confirmation, if one were needed, that Spain’s problem isn’t on the funding front, but rather on the fiscal and economic ones,” said Nicholas Spiro, managing director at Spiro Sovereign Strategy, echoing many other analysts’ views.

Spain’s export-led recovery is weighed down by continuing dire consumer demand which is not expected to grow until record levels of unemployment are dealt with. The European Commission sees Spain’s jobless rate remaining above 25 percent to 2016 at the earliest.

“Spain, like Italy, is very much a tale of two halves: a resilient and relatively buoyant bond market and a sickly economy whose public finances are going from bad to worse,” said Spiro.

5.  Well, at last Spiro finishes up strongly for us while implying just what we explicitly stated above, specifically, that only the half of the system that can be affected by the ECB is performing adequately.


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 11.04.2013

Janet Yellen’s mission impossible—Commentary.

Could QE spur deflation, not inflation?.

There are two reasons why the Fed will keep printing. 1st:

Fed Balance Sheet vs. SP500 10.2013


US 10yr through 11.04.2013

The creation of the 401(k) years ago politicized the stock market.  The government’s policy of herding Americans into purchasing equities to fund their retirements has created an expectation that the government must do something about falling markets, so it does.  Additionally, the government must be able to finance itself.  A rise in treasury rates would result in higher deficits down the road; hence, the Fed must keep rates low and the only method currently at its disposal is the printing press, so print it does.

Ultimately, all of this printing is slowly destroying the economy, because QE is ultimately both inflationary raising assets prices and deflationary suppressing income growth.  Japan started its own money printing program in the late 90’s, and you can see for yourself how incomes are performing:

Japanese Incomes

Like the Fed, ECB expected to keep on pumping.

ECB may soon join the flight of the doves | Reuters.

Debt crisis has left Germany vulnerable –

USDEUR Exchange Rate vs Fed to ECB Balance Sheet Ratio

The MFP and its assorted shills, hangers on and supplicants believe that the ECB will begin printing in earnest to match pace with the Fed, and it just might but not for the reasons it endlessly touts: unemployment, lower inflation and economic contraction and stagnation in the periphery.  Rather, the only thing you need to know is the USDEUR exchange rate.  When it rises to a level that threatens Germany’s export machine, then there will be an ECB rate cut and not one second before.

The chart above illustrates the relationship between the dollar/euro exchange rate and the Fed/ECB balance sheet ratio.  As you can see, the rate has diverged from its long-term relationship, but these divergences are only temporary.  The euro will continue it general, upward trend for the near future.  Once the euro crosses the $1.45 line, the ECB will consider a rate cut because this is the rate that curtails Germany exports.

China reform checklist: How to tell that this time it’s for real? | Reuters.

China 7 Day Repurchase Rate 11.04.2013


Chinese leaders enjoy discussing economic reforms almost as much as the mainstream financial press hyping said reforms.  Chinese leadership has linked economic growth with political stability.  In light of this fact, this is all you need to know about Chinese economic reforms: if the reforms have any negative consequences, they will quickly be rolled back.  The PBOC has been attempting to liberalize the financial system by stepping away and letting the banks fund each other rather than relying on central bank liqudity.  Unfortunately, whenever it begins backing out of the overnight lending market, interest rates spike, so it rushes right back in.

This is exactly how government reforms will proceed.  The government will attempt to reform the economy.  Once adverse consequences erupt, (i.e. higher unemployment, the wrong guy’s factory being shuttered) the government will reverse course in short order.  After conditions settle down, it will make another feeble attempt to reform and change its mind once the consequences return.  Rinse and repeat.

High unemployment? Blame high home ownership, study says – NBC

Unemployment versus Home Ownership


This is an interesting study.  High rates of home ownership lead to higher structural unemployment.  This study’s conclusion makes sense, and it survives a careful reading.  Renters are more mobile than homeowners, and this affects the unemployment rates.  In the chart excerpted from Dr. Oswald’s study, we can see two examples that tend to prove the rule.  Of course, there are other reasons why Greece has a drastically higher unemployment rate than Germany, which is why the country is so far above the trend line.  BTW, Greece’s neighbor on the chart is Spain.

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 –

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






Around the Globe 10.23.2013

High-End Spenders Shrug Off Headwind –

Consumer Confidence by Income Group

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

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

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

ECB to Start Review of Bank Balance Sheets –

Net Bank Assets as a Percentage of Host Country GDP


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

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

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

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

End of Recession in Spain Fuels Hopes for Euro Zone –

Spain emerges from two years of recession –

Spain Retail Sales Performance Spain Employed Persons


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

Spain GDP Performance


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

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

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

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

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

Spain Budget Deficits Last Decade

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

Third, business sentiment is improving:

Spanish Business Confidence


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

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

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

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


Around the Globe Weekend Edition October 19-20


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

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 –

Infrastructure drive powers China’s growth prospects –

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 –

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 10.16.2013

Shutdown is having ‘notable impact’ on mortgages.

Home Builders Cite Waning Confidence –

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 –

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:

Around the Globe 10.14.2013

China’s Inflation Rises Faster Than Expected –

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 10.02.2013

U.S. Government Shutdown Threatening Housing Recovery – Bloomberg.

New Home Sales

Just a few weeks ago, the so-called housing recovery couldn’t be stopped, but now the shutdown is threatening to stop it in its tracks.  New activity will fall a bit due to the technical factors surrounding the shutdown, and then the economy will make this up in future months.  All in all, housing activity should remain around where it is now, as indicated by the red circle, unless incomes move sharply upwards.

Draghi Says ECB to Act If Needed to Control Money Markets – Bloomberg.

ECB says all options open to temper market rates | Reuters.

ECB Benchmark Rate Through October 2013

Draghi offered nothing new in today’s press conference.  ECB will maintain low rates and will consider cuts as the “recovery” progresses.  A rate cut will do little to assist the peripheral countries as their rates will not change relative to Germany’s, but that won’t stop any post-cut rally.

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.

Berlusconi U-turn secures Italian government’s survival | Reuters.

Berlusconi Backs Down on Threat to Topple Government –


Italian political crisis #1,047 since WWII officially ended with Letta’s successful confidence vote.  You can start buying Italian government bonds again.  Unlike the U.S., Italy had a political broker, Giorgio Napolitano, President of the Republic who was able to move among the various factions to broker a deal.  Acrimony runs so high in Congress that there is no obvious deal maker.  When a group steps forward, things will get moving quickly and Congress will do its job.

Bad-Loan Revival Unburdens Banks –

Fed Holdings of MBS

There is no such thing as a free lunch.  The Fed’s action have inflated real estate prices and bailed out the nation’s banks from many poor lending decisions.  The problem with this policy is apparent from the anecdote within the article.

The bank was able to sell a foreclosed property for $1.1mm rather than the initial estimate of $972k on a $1.2mm loan.  Sure, the banks losses were lowered, but this money came from someone, in this case factory-owner Mr. Hong.  What do you think he would do with that extra $128k? Maybe, he would have hired more workers, invested in a new machine to increase productivity or increased his marketing budget.  Each of these activities would have increased GDP.  Instead, the wealth is being transferred to the banksters where it will line fat cat pockets but will do little to spur GDP growth.

Around the Globe 09.23.2013

Yellen Would Bring Tougher Tone to Fed –

YellenFed watchers have redesignated Janet Yellen as the frontrunner to replace chairman Ben Bernanke.  What no one has discussed is who will replace Jon Hilsenrath as unofficial Fed mouthpiece?

Journalists must straddle a fine line between treating subjects with kid gloves to obtain access and while maintaining the necessary distance to continue objective reporting.  Hilsenrath became too close to Bernanke and the Fed so that he was no longer a reporter, merely a conduit of information from his anonymous source.  This fact bodes well for his retaining his unofficial title as he has proven himself in the role.

Moreover, he is off too a good start to gaining the favorite’s confidence with this puff piece.  Clichés like “hard-charging” and “demanding” are deployed while we learn little about the candidate that we already did not know.  All you really need to know about Janet Yellen is that she is the candidate most willing to crank up the magic money machine to 11, and that is why she is garnering crucial support of the financial industry that will vault her into the role come 2014.

Triumphant Merkel starts tough task of seeking coalition | Reuters.

Merkel Wins Big in German Election –

Merkel’s Victory Is Stunning and Depressing – Bloomberg.

Angela Merkel, courtesy of Armin Kübelbeck

Angela Merkel, courtesy of Armin Kübelbeck

Germany experienced a shift to the right in Bundestag elections. Merkel’s own party drew support not seen since Helmut Kohl unified Germany and the two libertarian parties polled over 9% of the vote.

Much to both parties’ chagrin, the new AfP siphoned critical support away from FDP so that neither earned the 5% necessary to enter the Bundestag.  So while Merkel received a large mandate, in practice it will be difficult to exploit this as she must either enter a grand coalition with the Social Democrats or pick one of the small, leftist parties with which to govern.  This means that Merkel will rule from the center again, which probably indicates a more dovish approach to dealing with the periphery.  Get ready to open your wallets, Germans.

China’s Data Suggest Rebound –

HSBC China Flash PMI 09.2013

Fox News likes to tell us that they report and we decide; not that it works this way in practice, but at least the issue is on their radar.  On the other hand, the affiliated Wall Street Journal does not offer a similar claim.  This is probably why it has reported that China flash PMI has risen to a six month high and decided that the number indicates an economic rebound.

Well, you’re not the boss of me, Wall Street Journal! I am deciding that the six month high in Chinese data represent easy money shenanigans courtesy of your PBOC.  The green arrow indicates the July low in PMI that was cured by record injections of liquidity into the Chinese financial system.  Some of this money is being used to inflate export receipts to create additional funds to invest outside the country, and that is why PMI is rising.  In reality, Chinese manufacturing remains stagnant, not good but not bad either, more like meh.

Euro-Zone Business Activity Rises –

Core v. Periphery PMI Employment Indices

Journalists travel in the circles of banksters, central banksters, government officials and corporate leaders so their views of the economy are very much influenced by these groups.  If you belonged to one of those groups, you could be forgiven for believing that the economy is doing well.  Stock markets are frothy, and now these PMIs are rising indicating a little GDP growth, which is at least better than a contraction.

However, the truth lies in the PMI employment component, which was given short shrift by the mainstream media.  If you take a peek at our chart, you will discover that the Eurozone’s “recovery” just applies to those who own stocks and bonds while employment in the periphery continues to contract. Cheap money may be able to assist corporations financially engineer profits, but it does not seem to promote employment no matter which of the alphabet soup of central banksters you choose: the Fed, BoE, BoJ or ECB.

Draghi Says ECB Will Offer More Long-Term Loans If Needed – Bloomberg.

Draghi Says ECB Willing to Consider More Loans to Banks –

Eurozone Loans to the Private Sector Through 08.2013

There are two reasons for doing something: the real reason and the reason one uses.  The reason Draghi is using to print more money is some wonkish and obscure factors regarding “monetary transmission.” The real reason that Draghi will gladly offer another round of LTROs is that sick European banks cannot easily fund themselves.  Since they are keeping their host countries afloat by continuing to purchase sovereign debt, they cannot be allowed to fail.