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 10.31.2013

U.S. jobless claims fall in better news for labor market | Reuters.

Initial Jobless Claims Through 10.26.2013

The mainstream financial enjoys reporting simplistic explanations for complex trends.  The MFP explanation of the month is the “shutdown.”  Negative data is explained away by the shutdown, while positive data is used to reinforce the recovery narrative.  A more nuanced reading of the data reveals two facts.  First, initial unemployment claims have dropped to business cycle lows.  Second, claims had begun rising in the beginning of September long before the latest government manufactured crisis.

The pace of layoffs has slowed throughout 2013 after remaining static through 2012.  it seems that initial claims have finally bottomed out over four years since the “end” of the recession, but hiring remains weak.  Last month a mere 148,000 jobs were created well under the 200,000 necessary to maintain pace with new entrants to the labor force.

Home prices are still affordable, says Shiller.

Housing Affordbability Index



Shiller does not believe that the country is in the midst of a housing bubble and this is his thinking:

“I define a bubble as a time when people have extravagant expectations, and the expectations are driving home price increases,” said Robert Shiller, Case-Shiller index co-founder and Yale University professor of economics, in an interview with CNBC. “We don’t have the mindset of earlier this century.”

What Shiller is saying is that price expectations are different now than in 2006.  This is true, but the background economic picture has also changed with these expectations.  In 2006, people believed that house prices will continue rising as rates remained low and consumer incomes were growing.  Today, people believe that house prices will continue rising despite rising rates and stagnant consumer incomes.  Isn’t today’s market just as irrational as 2006 once we take those facts into account?

These headwinds will buffet housing going forward resulting in declining sales.  Moreover, once investors realize that there is no money to be made in renting hundreds of single family home due to the lack of economies of scale in the sector, expect a housing correction to a lower sales pace at lower prices.

Germany Hits Back at U.S. Over Economic Criticism –

U.S. Treasury Blasts Germany’s Economic Policies –

America’s misplaced lecture to Germany | The World.

Euro Fair Value at 1.37

An unbalanced economy is a weak economy.  The old cliché is, “Neither a borrower or lender shall be,” not “A borrower shall not be, but lenders are fine.”

Export-driven economies rely on a weak currency to flood the market with their goods and thereby place two burdens upon their populations.  The cheap currency makes imports more expensive, so consumers in export-driven economies cannot afford as much.  Lower consumption levels equate to lower employment levels as the infrastructure of consumption remains lacking.

Prices for consumer goods are much higher in export countries.  In the U.S., you can buy a nice HDTV and a surround sound system for about $1500.  In Germany or the Netherlands, you couldn’t even buy the HDTV for that price.  As a consequence, the retail sector remains small and labor force participation rates remain low.

As the chart illustrates, Germany receives a very nice benefit from belonging to a currency zone with more  unproductive members, and those countries pay a steep premium to remain in the Eurozone.  Eventually, someone will figure out that he could reverse his country’s fortunes rapidly by reverting to its national currency.  Until then, the periphery will struggle, and breakup risk will persist.  He who exits first, exits best.

ECB easing hopes help stocks, bonds deflect Fed hit | Reuters.

Euro-Area Inflation Rate Falls to Four-Year Low – Bloomberg.

Fed-ECB Balance Sheet Ratio versus USDEUR

Draghi better fire up the printing press  before it is too late. The Eurozone “Recovery” has been led by a surge in exports from the periphery.  While the employment picture is still deteriorating, at least higher export orders were a bright spot.  Unfortunately, this brief upswing in exports is about to reverse course.  The Euro has been depreciating as the ECB neglects to match the Fed, the BoJ and the BoE in currency creation.  Our chart illustrates the relationship between the Fed and ECB balance sheets and the USDEUR exchange rate.  The present ratio indicates a rate of $1.54.  The strong euro has already begun to weigh on PMIs and will filter down to GDP in due course.


Around the Globe 10.28.2013

Pending Home Sales Show Sharp Drop –

Pending Sales of Existing Homes Slump by Most in Three Years – Bloomberg.

Pending home sales drop 5.6 percent in September.

U.S. pending home sales fall by most in more than three years in September | Reuters.

NAR Pennding Home Index through 09.2013

The MFP is rightly attributing this fall in pending home sales to the precipitous rise in mortgage rates since May, though the NAR would have you believe that the shutdown beginning on October 1 somehow affected pending sales from September.  Houses have become dramatically more unaffordable since May from rising rates and housing prices against the backdrop of stagnant incomes.  The only way for the housing market to improve at this juncture would be from gains in consumer income, which is not in the cars.


Hilsenrath to Wall Street: You don’t know Fed.

QE Infinity? No end in sight for money printing.

In Fed and Out, Many Now Think Inflation Helps –

Fed Balance Sheet vs. SP500 Last Year

If you wish to know the Fed’s future money printing output, this is the only chart you need to understand.  The Fed buys bonds, and the sellers invest those proceeds into stocks raising prices.  When the Fed stops or even threatens to stop, the whole trade begins unraveling. While the Fed claims to be concerned with unemployment and inflation, the Fed is extremely apprehensive about the consequences of a falling stock market.    Going forward, the Fed will continue to use low inflation and poor labor market data to justify continued printing to support both the government bond and stock markets.

Analysis: Convalescent euro zone seeks to escape debt overhang | Reuters.

Currency Woes Batter Europe’s Industrial Giants –

EURUSD 10.28.2013

From Yahoo Finance

The Eurozone and the MFP is really counting on PIIGS exports continuing their rise in order to support the Eurocrisis Recovery Narrative.  Unfortunately, a rising euro will stop the export “boom” in its tracks.  The Euro will continue to rise as the Fed continues to print.  Moreover, Eurozone banks are still selling overseas assets to bolster capital ratios back home.  This process has created  background buying pressure on the euro that may even pick up as these backs clean up their balance sheets in advance of the commencement of the “banking union” in late 2014.

Not happy at work? Wait until you’re 50 or older….

This article is typical of the drivel spewing from the mouth of the MSM.  People report increasing job satisfaction after 50 because of some rather obvious selection bias.  People switch jobs several times over the course of their careers.  If your job sucks, you quit it in the hopes that the next job will be better.  This process will continue until you find a job that you enjoy.  Then, you will stay with it as long as you can.  It is not surprising that people settle into a comfort zone with their employment when they reach the last stages of their careers.  So the article’s advice to sit around and “just wait” until you’re 50 is poor advice.  It takes a lot of work to obtain satisfying work, so get to work already!

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 10.24.2013

Plans for Political Union Unravel in Europe –

Periphery NPLs

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

Germans Will Not Pay for Banking Union

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

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


Euro-Area Services, Manufacturing Unexpectedly Slow – Bloomberg.

Chinese data lifts shares, dollar stays weak | Reuters.

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

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

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

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

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


Home affordability sinks as housing slows.

Mortgage applications fall, even as rates drop.

Housing Sales vs Affordability Index

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

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

China Bond Yields Soar –

Spike in China money rates raises cash-crunch fears –

China 7 Day Repurchase Rate 10.24.2013

China 10yr Yield


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

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

Around the Globe 10.23.2013

High-End Spenders Shrug Off Headwind –

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 10.18.2013

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

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

Spain Bad Loans

Chart sourced from ZeroHedge

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

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

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

Eurozone Unemployment Selected Countries

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

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

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

China GDP Grew 7.8% in Third Quarter –

China GDP grows 7.8% in the third quarter.

China Annual GDP Growth US Annual GDP Growth

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

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

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

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

Heard on the Street: China Rebound Fails to Reassure –

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

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.

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