Around the Globe 07.19.2013

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

Japanese Retail Sales YoY 07.2013

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

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

World Bank Plugs Poland’s Budget Deficit – Bloomberg.

Polish GDP Performance

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

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

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

Eurozone Loans to the Private Sector

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

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

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

GE Earnings and the Proverbial Penny – MoneyBeat – WSJ.

Microsoft, Google disappoint; shares pay the price.

Earnings threat: Strong dollar.

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

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

US Dollar Index 07.2013

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

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

China to Scrap Controls on Lending Interest Rate –

China liberalizes bank lending rates in reform push.

China liberalizes bank lending rates in reform push | Reuters.

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

China 7 Day Repo Rate 07.19.2013

Chart from

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


Around the Globe 07.17.2013

China to Avoid ‘Wide Fluctuations’ in Economy, Li Says – Bloomberg.

China Keeps On Gobbling Up Treasurys –

China’s Treasuries Holdings Hit Record as Investors Sell – Bloomberg.

China 7 Day Repo Rate 07.17.2013


One of the problems with China is that the country’s leaders believe that the economy will diligently obey their plans for it.  China began cracking down on evaders of capital controls, which created a drop in liquidity.  The PBOC did not initially respond to central government’s initiative causing a spike in overnight lending rates that sent reverberations throughout world markets.  Eventually, China got everything under control, which only makes it more brazen.

Enter Premier Li telling the mainstream media that China will avoid “wide fluctuations” in its economy.  No amount of central planning will be able to deliver stability.  China is heading for a huge fall, and it will drag down the world’s economy with it.  Remember China’s influence on world markets the next time it has issues.  As liquidity disappeared in the country throughout June, world markets fell including that for U.S. treasuries.

U.S. Housing Starts Fall by 9.9% In June –

U.S. housing starts fall to ten-month low, weather blamed | Reuters.

Housing Starts in U.S. Unexpectedly Fall to Lowest in a Year – Bloomberg.

Housing starts fall in June, raising slowdown fears.

Housing Starts 07.2013

From ZeroHedge

New Building Permits 07.2013

From ZeroHedge

Last week, we discussed how rising mortgage rates would crimp housing demand in short order.  One may witness this dynamic in both housing permits and starts.  Both indicators registered significant decreases last week.

The mainstream media quotes various industry shills in an attempt to blame the weather, but here’s the truth: conditions were adequate for construction, and they were certainly adequate for a clerk to file new building permits as the task generally takes place indoors.

Those journalists love their housing recovery narrative, so you would expect them to defend it to the hilt.  As a reminder, there has been non housing recovery, just a slight bounce from the bottom as today’s Charts of Truth illustrate above.

Bernanke Says Fed Bond Purchases Not on ‘Preset Course’ – Bloomberg.

Bernanke: Fed to begin tapering bond purchases later this year.

Bernanke tells Congress Fed flexible on bond buying | Reuters.

Ben Bernanke - 4chon Wiki.

Ben Bernanke – 4chon Wiki.

Bernanke’s and the Fed’s yammering did not cause the June Swoon.  “Taper Tantrums” make for good copy, but they had little to do with last month’s market volatility.  It is no coincidence that China endured a cash crunch at the same time as the taper tantrum.

Since Bernanke made his remarks at roughly the same time as markets began their descent, it is tempting to attribute the decline to his powers, but it is also incorrect.  Emerging markets began having difficulties in early May three weeks before he spoke.  You know what else began rising in early May? Chinese overnight rates.

Greek PM unveils tax cut ahead of vote on job losses | Reuters.

Greek FlagThis is indeed shocking news.  Greece actually is implementing good policy.  The VAT will be lowered from 23% to 13%.  Lower taxes should stoke economic growth among the few people who still pay them.

The lower VAT will lead to lower tax revenues.  A large hole has already opened in Greece’s budget and will have to be dealt with after German elections.  The EU is reticent about giving away more money to Greece, so any debt relief will be attached to a depositor haircut in the Greek banks sometime in late 2013 or early 2014.

For Richard Perry, Japanese bonds are the new subprime.



The widow-maker lives on.  One day, somebody will make a killing shorting Japanese bonds, but today is not that day.  After some initial volatility, JGBs have settled into just about the same range they had before the BoJ began jawboning in November.  Japan is a disaster waiting to happen, but it has been waiting for years.  The metrics have been pointing to a large default for years, but Japan continues humming along.  Investors should sell their Japanese bonds while they can, but they defy logic and roll over their holdings upon maturation.

There is safety in numbers.  Japanese managers who sell their bonds to invest elsewhere will be escorted to window seat if the trade does not work out well.  On the other hand, if you stay in Japanese bonds like everyone else, you keep your office until the whole system tanks.

Japan’s quarterly commercial real estate sales soar 78%.

J-REIT Performance Last 3 Years 07.2013

The mainstream media is breathlessly reporting that Abenomics is succeeding due to the “soaring” commercial Japanese real estate investment.  Let’s introduce math to the theme, and see if it holds up.

Japanese real estate investment is given as $10.2bn for the 2nd quarter of 2013, which is a reported 78% rise from the same quarter last year.  What was investment in the 2nd quarter of 2012? Just solve for x:  1.78x=$10.2bn, x= $5.73bn.

Both figures are nothing to write about.  Japan’s GDP is about $5.2tr, so this $10.2bn accounts for about 0.2% of GDP.  This is how small this sector is.  If the Japanese economy is a jar of 500 pennies, those commercial real estate investments account for one of those pennies up from a little over a half a penny in 2012.

Nothing is changing in Japan despite the BoJ’s best efforts.  Invest wisely.

Around the Globe 06.28.2013

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

China 7 Day Repo 06.28.2013

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

Euro Zone Set to Keep Shrinking –

Eurocoin Survey 06.2013

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

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

Eurozone Retail PMI 06.28.2013

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

Greece Faces Collapse of Second Key Privatization.

Greece - Privatization

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

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

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


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

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

Japan Manufacturing PMI 06.28.2013

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

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

US Consumer Sentiment Comes in Higher Than Expected in June.

Chicago PMI 06.2013

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

UM Consumer Confidence 06.28.2013

Thomson/Reuters University of Michigan Consumer Confidence Survey

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

Gold 06.28.2013

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

Around the Globe 06.25.2013

Orders for U.S. Durable Goods Rose More Than Forecast – Bloomberg.

U.S. Stocks Rebound From Nine-Week Low on Economic Data – Bloomberg.

Consumer confidence highest in over five years in June | Reuters.

US Durable Goods 06.2013

There was a bumper crop of positive economic news today led by the rise in durable goods orders.  Is this good news or bad? While rising factory activity shows a strengthening economy, this dynamic could portend the Fed reducing its bond purchases despite all the protestations to the contrary in the media yesterday.

The consumer confidence numbers are even trickier to analyze.  Today’s rise in the Conference Board suggests improving sentiment, but the University of Michigan numbers released last week show the opposite.  Let’s call this data “mixed” for now and move on.

Cyprus says not seeking re-work of debt bailout, but tweaks | Reuters.

Cyprus Debt to GDP

After the panic subsided, Cypriots realized that the country will suffocate underneath a crushing burden of debt.  Now, they do not wish to rework the bailout but merely tweak it.  What is the difference between reworking and tweaking? It’s a matter of semantics.  Presumably, German voters will not be as angry at donating more money towards tweaks.  No matter, after German elections, the Cyprus bailout will be reworked, as the chart above leaves no other choices.

Population in crisis-hit Spain down 114,000 – Yahoo! Finance.

Population of Spain 06.2013

The inflection point in Spain’s population growth is 2008, the start of the country’s economic woes.  Robust economic growth led to more immigration and less emigration, but this trend is over.  Population growth is one factor that fuels GDP, so this is one more reason while Spain will find itself mired in depression for the foreseeable future.

PBOC Says It Will Ensure Stability of China Money Market – Bloomberg.

PBOC Addresses Cash Crunch –

China’s central bank seeks to allay fears of credit crunch | Reuters.

china-7-day-repo 06.25.2013

The PBOC has abandoned its laissez-faire posturing from the last few weeks and now pledges to support stability in the money markets.  The bank has ceased withdrawing cash from the system via bill sales, and this action combined with a little, good old-fashioned jawboning has succeeded in bringing rates down since last week.  Stability has been achieved in the short-term, but a creaking shadow banking system ensures that the long-term will be a wild ride in the Middle Kingdom.

New Homes Sales Hit Third Straight Month of Gains.

US Home Prices Jump in April, Setting New Record.

New-Home Sales Rise 2.1% in May; Case-Shiller Index Jumps –

New home sales near five-year high, prices rise | Reuters.

Case Shiller 06.2013

When digesting the housing reports issued by the mainstream media, it is best to heed the advice of Chuck and Flav: Don’t believe the hype.  The recent rise in housing price brings them to 2004 levels.  When you remember that there has been inflation since then, you realize that prices still have not recovered.  Of course, they are better than they were, and this is good news if you own a home but bad news if you wish to buy.  While the recent rise in mortgage rates spells the end to the housing recovery meme, remember that the mainstream media’s narratives die hard.

Cash Is Tight: 6 More US Muni Bond Sales Postponed.

Bonds Steady, Taking Cue From Overnight Stabilization.

Exit From the Bond Market Is Turning Into a Stampede.

MUB 06.25.2013

Municipal bonds are down over 10% from their November peaks.  This is a story which started months ago, but the decline became steeper in once the taper tantrum set in.  Prices have stabilized today, but this is probably the start of a dead duck bounce.  Rates will bounce up and down, but they will generally trend down over the next few months.  One exception is the U.S. treasury market, which may benefit from haven flows if it gets serious.

By the way, one of the first markets to blow up in the beginning of the GFC was the muni market, particularly ARS.  Is history repeating itself?

Around the Globe 06.14.2013

Yen Slump Failing to Stem Japan’s Exodus of Factories Overseas – Bloomberg.

YENUSD 06.14.2013

Abenomics has made the round trip.  The Yen has made up all of its losses, and the Nikkei 225 has given up most of its gains since the 2-2-2 plan was announced in early April.  According to both anecdotal and statistical evidence, the weaker yen failed to revive Japanese manufacturing.  This is  because manufacturing capacity has been leaving Japan since the Asian Flu of 1998.

I will not call an end to this project yet.  There is a chance the market rally and yen weakening have paused with investors waiting for the results of elections next month.  If Abe’s party wins like it is supposed, the circus may return to town.

Spain Recession Seen Ending by 2014 as Austerity Eases – Bloomberg.

Spanish GDP Performance

Economic forecasts more than one quarter fare no better than chance in predicting the direction of the economy.  This inconvenient fact does not stop anyone from trying.  If you’re right, you can brag about your acumen to all your little economist friends.  If you’re wrong, well, everyone is usually wrong anyway.

As long as the Euro Crisis and it resultant recession have been around, economists have been predicting their ends two quarters into the future.  Before you invest on their advice, examine the chart above and decide for yourself which direction Spain is heading.

Why the Fed Will Try to Calm Market Nerves.

Fed QE versus SP500

The reason the Fed will attempt to calm market nerves lies within the chart above.  There’s no need to write any more pithy analysis.  Just look at the chart, and the Fed’s motive becomes clear.  The markets are being targeted by QE in order to create the “wealth effect.” Once the money machine stops, so does the economy.

Euro-Zone Risks Return to Fore –

GGB 06.14.2013

In this article, the mainstream media begins to question its own Eurozone recovery meme that it has touted since November, 2012.  The recovery was an illusion in the first place, and the only thing that has changed is that periphery bond yields have begun rising again, which prompted this article.

In November, the Eurozone was ensconced in a recession where it remains today.  Rising rates are not a sign of investors getting cold feet but rather a taper tantrum.  Note the day rates starting rising in the chart above.  Italy, Portugal and Spain show a similar inflection point in their yields, too.

U.S. Coal Exports Plunge –

Now, China Watchers See Growth Below 7%.

Coal Price 06.13It’s hard to say what is really happening in China as the country controls releases of its own internal information.  However, by proxy we are able to deduce that Chinese growth is falling.  Electricity usage is down as are oil imports and rail traffic.  China’s trading partners report lower imports from China.

The latest proxy signal of China’s decreasing growth is its deep drop in coal imports.  Coal is used for power and to create steel.  The precipitous drop in its price and demand over the last year or so shows the true state of Chinese manufacturing.

China is often accused of smoothing its economic numbers, so it will be interesting to see what its 2nd quarter growth is light of all of these proxy economic indicators.


Consumer Sentiment in U.S. Declines From Six-Year High – Bloomberg.

UM Consumer Confidence 06.14.2013

After last month’s euphoria, this months UM numbers have fallen back to earth, not that they were great to begin with.  The base reading is 100, so numbers in the 80’s are nothing to write home about.  The continuing story of this recovery is its failure to produce a surge in job creation, and this factor will limit growth to the tepid 0-2.5% zone indefinitely.

This Nation Could Be the Most at Risk From Capital Flight.

Brazilian Real to USD 06.14.2013

This is the latest chapter in the ongoing emerging markets jog.  Brazil has come a long way from its hyperinflation days, but it does not wish to fall into that trap again.  While other countries may wish for a weaker currency to attract imports, the Brazilian central bank thinks of itself first and foremost as an inflation fighter.  Don’t be surprised at another rate increase this summer.

Around the Globe 06.10.2013

IMF Says Another Greek Bailout Necessary | Zero Hedge.

Greek Privatization Plan Hits Snag –

Hail the outbreak of honesty about Greece’s bailout –

Bad IMF Predictions 2

The IMF has admitted that its economic predictions for Greece have been poor and this has caused the Greek people unnecessary suffering.  You can see how bad the predictions have been in the chart above.  Each has missed to the downside including privatization receipts, but the Fund still will not admit that the poor predictions were not mistakes but rather political compromises to enable the Europeans to present their voters with a smaller cost.

The can was kicked yet again, and once again it appears that we are running out of road.  Greece has missed its unemployment, economic growth and privatization forecasts by so much that another bailout is inevitable by the end of the year just like we wrote months ago:

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

Japan current account surplus doubles as income gains, exports rise | Reuters.

Japanese Current AccountThe mainstream media must spin news positively to keep those clicks coming.  It is accurate to state that Japan’s current account surplus has doubled, but by removing this number from context the author has made this piece of news “optimistic.”  The chart above shows that as a percentage of GDP the current account has been decreasing and the trend continues.  The red arrow points to the spot where the current account balance resides today.  Placing that number in context, in order to finance itself without foreign assistance, Japan’s current account surplus must be close to 10%.

German Top Court Likely to Say ‘Yes, But’ to ECB Policy – Bloomberg.

German court to hear case against ESM, ECB bond-buying in June | Reuters.

German Supreme CourtThis is the official symbol of the German Supreme Constitutional Court in Karlsruhe.  It looks pretty cool and is ready for duty on a government website, official publication or the hood of a Pontiac Trans-Am.  On to the business at hand…

The German high court will never render a decision that imperils the euro.  As such, it will rubber stamp whatever argument put forth by Merkel’s government to allow the ESM and ECB to monetize periphery debt as long as it is with the consent of the Bundestag.  In an effort to keep things calm so that everyone carries on, the decision will not be issued until after elections.

No Inflation as Yields Jump Belies Point of No Return View – Bloomberg.

US 10yr 06.10.2013

The taper tantrum began May 2.  Since then, the stock market has moved sideways, and the bond market has fallen (yields rose).  My alternate explanation is that liquidity is drying up.  First, commodity markets felt the pinch.  Then, it was the bond markets.  That leaves equity markets for the next big move.  Arguably, this has already started with foreign stock markets led by Japan moving downwards during the last six weeks.

Housing’s Up, but Is Foundation Sound? –

US Housing Sales through 04.2013

This is a well-written piece explaining both sides of the housing recovery debate.  In my opinion, the bears are a bit too optimistic.  A full-fledged recovery to pre-crash levels will take years.  In the meantime, the U.S. must figure out another way to promote economic growth rather than replacing one bubble with another.

Rupee Falls to Record Lows –

Rupee to Dollar 06.10.2013

This asset also is experiencing a taper tantrum.  In fact, it appears to correlate perfectly with the recent decline in treasury prices. India does have macroeconomic issues, but why did these issues begin to manifest themselves in the rupee exchange rate beginning May 2?

The Painful Side Of Japan’s “Growth Strategy” | Zero Hedge.Oil Price in Yen 02.01.2013

The decline in the yen has led to a large increase in the price of oil for Japanese consumers.  The high oil price will drag down Japanese growth rates for the immediate future.

Around the Globe 06.04.2013

An Austerity Success Story in Slovenia – Bloomberg.

Slovenia GDP Performance through 2013

Slovenia Debt to GDP

The article is entitled, “An Austerity Success Story in Slovenia.”  Examine the charts above and tell me where we may find the success.  GDP is cratering amidst skyrocketing government debt and unemployment and will continue to do so as long as Slovenia is shackled to the uncompetitive euro.

The only cure for the Euroflu is strong, sustained economic growth.  Since a painful internal devaluation will not be sufficient to stoke growth, the quickest way for Slovenia to return to health is for it to revert to its old national currency.  That would be success.  Anything else is just talk.

Gross Says Reduce Risk Assets Since QE Not Boosting Growth – Bloomberg.

Pimco’s Gross Skewers Bernanke: You’re Part of the Problem.

Fed Balance Sheet Projection 2014

I concur with Mr. Gross that the Fed is the problem here, but allow me to add a reason to his list.  Cheap money is allowing those who made bad investment decisions to stay in the game rather than liquidating.  Hence, unproductive assets are not changing hands.

Liquidation is a natural part of the creative destruction process.  When an investor can no longer finance a bad decision, he liquidates, and someone who wishes to put the asset to productive use gets it at a bargain.

For example, Mr. Red buys an office building but is unable to charge enough rent to cover financing, so he sells it at a loss.  Mr. Blue buys the building on the cheap and invests money in it to refurbish it and hire a maintenance staff.  In this scenario, economic growth is happening.

What the Fed has done is lower Mr. Red’s financing costs so that he does not have to sell to another investor who may extract more benefits from the assets adding to the country’s GDP.  Stagnation is the price we pay for inflated asset prices.

Stock Gains ‘Well Supported’ by U.S. Earnings: Chart of the Day – Bloomberg.

SPX to US Corporate Profits

The mainstream media really wants you to buy stocks.  A cursory inspection reveals that stocks appear historically cheap when compared to other eras, but one key piece of information is missing.  Interest rates are much lower today than they were in 2008.  As such, the index to profit ratio for 1Q2013, or the return, much be discounted with this in mind.

Rates (US 10 yr note) are roughly half what they were in 2008.  Adjusting for interest rates, we double today’s ratio to $2bn.   As the chart above reveals, the stock market is once again at bubblicious, historical highs courtesy of Uncle Ben and his magic money machine.

Europe’s Black Market Economy Is Booming.

Greek Government Revenues

Tax increases never work as planned due to the black market.  Higher tax rates force economic activity underground.  Greece has increased rates and created brand new taxes since 2010 in an attempt to raise extra revenue to deal with its debt crisis.  As the chart above indicates, tax collections have actually fallen in response.

What high taxes do is make economic activity at the margins unprofitable.  This dynamic forces participants to make a choice.  They can either cease the activity or move it to the black market where it remains profitable.  Fortunately for Europe, those people are choosing the black market so they can continue to feed, house and clothe their families.

Reckoning Nears for Detroit –

Detroit Population

Detroit problem is simple to identify.  In 1950, the city was home to almost 2 million people, but now its population is a little over 700,000.  A small city is supporting the infrastructure and legacy costs of a much large one.

Cities become depopulated all the time as one learns from visiting ruins scattered throughout Europe.  In ancient times, there were no civil servant pensions to worry about.  Since Detroit cannot afford to pay all of its legacy costs, it won’t.  Bondholders and pensioners will lose money from the inevitable Detroit bankruptcy no matter what laws are on the books.

Around the Globe 06.03.2013

China May HSBC PMI at 49.2, Worst Since October.

China HSBC PMI 06.02.2013

I hate to say I told you so, all right.  On Friday, Bloomberg got all hopey on us putting forth the Chinese recovery narrative based on the official PMI data, but we encouraged astute readers of Dareconomics to consider the other Chinese PMI figure.  Today, the independent HSBC-Markit PMI confirmed that Chinese manufacturing has declined two straight months.  Declining Chinese fortunes are a harbinger of tough times ahead for South Korea, Japan and everyone else in Asia.  Oh, and who, pray tell, is buying all those Eurozone exports destined to awaken the Continent from its torpor?

Europe Markets That May Be Worth Snapping Up.

Eurostoxx 600 06.03.2013

The much celebrated “expert” in this article states

It is too early to talk about growth, but what is interesting is that all the leading indicators we are looking at are currently touching a bottom and the risk of downside is low.

Because the downturn has endured for so long, sell side touts are calling the present situation the bottom, but they have been calling the bottom since the fall.  Since then, GDP has continued its contraction and unemployment has set a new record every month.  This is an historically bad recession, so the simple truth is that no one knows how long it will last and how bad conditions will ultimately become.

Before we go, let’s debunk a few misconceptions that got past the fact-checkers at CNBC.  First, periphery labor costs have not dropped enough to spur growth.  In order for these countries to regain their competitiveness, a further drop of one-quarter to one-third is necessary.  Second, the Spanish budget deficit did not drop from 11.2% to 6.98% of GDP.  The cost of the bank bailout raises the deficit to over 10% for 2012, and Spain is on track to have another 10% deficit for 2013. Just because the EU does not count the bank bailout for purposes of fulfilling treaty obligations does not mean the debt doesn’t exist.

I wonder how those Eurozone PMIs look.

Europe’s Manufacturers Show Positive Signs –

Eurozone PMI 05.2013

What a coincidence.  I was just wondering about this release.  While the WSJ headline writer spun this news to the positive side to increase clicks,  we note that the number has been firmly ensconced in contractionary territory for fifteen months as the Eurozone gets ready to log another another quarter of recession.  PMI does seem to be trending upwards from a November bottom, but it is too early to call the end or even the beginning of the end.

BIS lays out simple plan for how to handle bank failures | Reuters.

BIS Member Nations

This is an excellent plan for conducting a bank resolution.  It is similar to how the FDIC winds down failing U.S. banks.  The Eurozone should take heed.

Analysis: Hungary hails victory of ‘Orbanomics’ but there’s a cost | Reuters.

Hungary GDP Performance Q2Q

The Hungarian government believes that its economic plan is succeeding.  The chart disagrees.  Growth has been anemic since the onset of the Great Financial Crisis, and the trend points down, not up.  None of these facts will stop the Hungarian PM from yammering, and the mainstream media from reyammering.

U.S. Factories Show Surprising Contraction –

Manufacturing sector contracts in May: ISM | Reuters.

US Manufacturing Shrinks; Construction Spending Up.

Manufacturing in U.S. Shrinks at Fastest Pace in Four Years – Bloomberg.

From Bloomberg

From Bloomberg

All you need to know about economists is that they were “surprised” by the contraction in U.S. manufacturing activity in May after two straight months of falling PMIs.  Manufacturing in the Eurozone and China is contracting, so why would anyone be surprised that there is falling demand for American exports? On the plus side, Ben should crank up the magic money machine to 11 if U.S. data continues to disappoint.

Gilts Trail in Worst Global Bond Month Since 2004: U.K. Credit – Bloomberg.

UK 10yr Gilt 06.03.2013 US 10yr 06.01.2013

Government bonds did not do so well in May.  Gilts underperformed Treasuries.  This could be just a little noise, or it could be investors frontrunning the beginning of the BOE’s new Printer-in-Chief Mark Carney’s regime.  I am not convinced that the fixed income bubble is done inflating, but ask me again in two months.

Turkish Stocks Slide as Protests Enter Fourth Day.

Istanbul 100 06.03.2013


If you believe that today’s 10% rout makes it time to BTFD, note the 52 week low on the chart first.  The Istanbul stock market has been very frothy and was probably due for a correction.  These Turkish protests are inexplicable to me.  The Prime Minister has won three elections in a row with nice, fat majorities and has been exhibiting the same authoritarian behavior the entire time.  If the Turkish people are fed up with Erdogan, then why didn’t they vote him out of office when they had the chance?


Around the Globe 05.13.2013

A Top Contender at the Fed Faces Test Over Easy Money –

Janet YellenHere are the reasons that the Janet Yellen will be nominated as next head of the Federal Reserve.

First, Dr. Yellen has been an outspoken advocate for money printing.  In fact, the current policy is probably a bit too hawkish for her.  If you think the printing presses are running at full speed now, wait until she takes over in the beginning of 2014.  While the current Fed chatter is revolving around an exit strategy, she will advocate raising the Fed’s monthly bond purchases once she assumes the chairmanship.  This position guarantees her the support of the TBTF banks.

Second, the current administration would love to nominate the first female Fed head.  This is the type of maneuver that will strengthen the Democrats’ support with female voters.  While she is not a close supporter of the Obama administration, she is not an enemy either and has played the political game rather well.  In fact, President Romney may have nominated her for the position, too.

Last, Jon Hilsenrath just wrote this puff piece extolling her virtues and keeping the criticism light, just the way chairmen like it.  This article will assist him in retaining his title as unofficial Fed spokesman.

Bank of Israel Unexpectedly Cuts Lending Rate – Bloomberg.

Shekel USD 05.13.2013

Central banks for one-quarter of the world’s GDP have cut rates in the last month since Japan announced the start of Printapalooza.  Since Draghi’s pledge and Bernanke’s QEternity announcement, the shekel has gradually strengthened save for a brief respite during the lead up to U.S. presidential elections.  The move surprised markets, and the shekel weakened as a result.  As long as inflation remains low, the world central banks will continue easy money policies.

Bond Sales to Fall 1st Time Since 2010 as U.S. Revenue Soars – Bloomberg.

Are Bond Vigilantes Taking On the Fed?.

US Budget Deficits

The Fed continues printing money to purchase $85bn in U.S. government and mortgage bonds ever month.  The steady improvement in the government’s finances over the past few years is shrinking the supply of eligible debt for the Fed’s program.  Within a few months, the Fed will be buying all of the Treasury’s new issues.  Furthermore, some of Kuroda’s newly printed yen will find a home in the U.S. treasury market.  As low as yields have gone, they still have further to fall.

Euro Recession Seen Longest in Single Currency Era – Bloomberg.

Eurozone GDP Performance 05.13.2013

How long can the Eurozone recession continue? As long as the continent uses the euro, it will be doomed to contraction.  The only large country exhibiting economic growth is Germany, and it is barely mustering a 1% rate.  With looming slowdowns in the U.S. and China, Germany may join France, Italy and Spain in recession as export orders fail to materialize.

Insight: Housing improvement may herald return of U.S. workforce mobility | Reuters.

Negative Equity

Lots of negative equity and few good jobs across the country will keep people from moving.  Those facts do not dissuade the authors from attempting to be the first to spot a trend.  If they are correct, they will puff their chests proudly and boast of their insight.  If they’re wrong, they’ll just keep writing articles until they are right.  That’s pretty good racket.

Is the Canadian Housing Market Falling Apart?.

Canada vs US Housing Prices

Canada did not figure out a magical formula for economic growth.  Rather, a natural resources boom fueled the economy resulting in a housing bubble that is putting the American version to shame.  Eventually, Canada will have its own version of the American housing crisis complete with its own recession, but it will have to wait until oil prices drop.

Weaker Yen Raises Hope and Fear –

Nikkei hits new 5-1/2-year high on weak yen; financials, exporters lead | Reuters.

YENUSD Exchange Rate to 05.13.13

The Yen briefly crested above 102 Monday morning in Tokyo.  While the cheap currency will continue to fuel stock markets throughout the world, it will not revive the Japanese economy.  All those factories moved out of Japan years ago.  70% of the cars for the U.S. market are made in the U.S.  Furthermore, while the yen may make Sony products cheaper, Sony has nothing to sell you.  All of the cool electronics are now made in China or South Korea, and they are designed in Silicon Valley.

Around the Globe 05.09.2013

Nearly two-thirds of Greek youths are unemployed | Reuters.

Stournaras Says Greek Recovery May Begin by End-2013 – Bloomberg.

Greece: Economic recovery in sight.

Greek finance minister sees economic recovery.

Greek Employed People

Greek unemployment hit 27% across the board with youth unemployment reaching 64.2%.  Nearly two-thirds of Greeks under the age of 25 cannot find work.  Of course, the Greek finance minister has a job, and he is very busy proclaiming that Greek economic growth will resume in 2014 in interviews on state television.

Three months ago, he promised a recovery beginning at the end of this year in the Bloomberg article linked above, but the march of time has forced him to alter the trajectory of the Greek boom.  Growth is always just around the corner in these eurocrisis countries, and I am sure that Greece is slowly morphing into a Mediterranean tiger as we speak.

Perhaps, Greece’s slow-burning civil war will come to end as the economy grows, so the mainstream media has can stop not reporting it.

Junk-Bond Yields Fall Below 6% to Record, BofA Data Show – Bloomberg.

High Yield? Not So Fast: Junk Bond Yields Fall Below 5% –

Junk Bond Yields

The Wall Street marketing language for junk bonds is “high yield bonds.” A yield-to-maturity less than 5% does not appear to be high to me, so I propose that Wall Street be forced to resume using the term junk bonds.  At least Main Street will know what it’s getting into with the improved nomenclature.  If and when junk bonds return to their historical average yield of close to 10%, people will lose half of their principal, and that is why the Fed will not return to a tightening bias.

Spain Bonds Fall as Aussie Gains; S&P 500 Little Changed – Bloomberg.

Spanish Bond Yield 05.09.2013

Believe it or not, Spanish sovereign bond yields still have room to fall.  As long as the money printing continues, the excess cash will be stashed somewhere.  The current spread between bunds and bonos is about 270 basis points.  If the bund bottoms out at .5%, we will see a 3.2% yield for SSBs.

The yield may even fall further if the ECB joins the party with the same gusto as the Fed, BoJ and BoE.

South Korea Joins India-to-Europe Rate Cuts for Growth: Economy – Bloomberg.

South Korea Benchmark Interest Rate

We discussed the Asian currency situation earlier in the week.  60% of South Korea’s GDP derives from exports.  As Japan weakens the yen, South Korea must keep pace in order to maintain its competitiveness.  BTW, do you know which country is the greatest currency manipulator since the breakdown of Bretton Woods? The answer is in this chart:

South Korea Currency Weakening 2

What’s Wrong With the U.S. Job Market? – Businessweek.

Jobless claims data hints at strengthening labor market | Reuters.

U-6 05.07.2013

Unfortunately for people in the real world, the labor market is not strengthening.  Employers have stopped laying people off, because they have cut labor expenses to the bone.  This is good news but not a recovering labor market.  The bleeding has stopped, but the patient is still in bad condition.

What is needed to create jobs is a sustained growth rate of 4-5%.  Until this happens, the labor market will remain stagnant.