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 09.09.2013

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

U.S Stocks Rise Broadly –

Japanese GDP Performance Revised 2nd Quarter

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

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

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

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

Japan Retail Sales

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

China Trade Rebounds in Further Sign Economy Stabilizing – Bloomberg.

China Exports

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

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

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

China Aug inflation another sign economy is stabilizing | Reuters.

China GDP vs. Housing Prices 08.2013

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

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

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

BMPS 09.09.2013

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

Latest Chapter in the Monte dei Paschi Scandal

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

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

Spain Loans to the Private Sector 09.2013

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

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

German Loans to the Private Sector 09.2013

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

Unemployment Falling for Wrong Reason Creates Fed Predicament – Bloomberg.

Withholding vs Employment 9-13

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

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

Around the Globe 06.08.2013

European Union (EU) clash with IMF over ‘mistakes’ in Greece bailout | World | News | Daily Express.

Greek GDP Per Capita

Greece has reached GDP levels last seen on the eve of its accession to the Eurozone.  Heckuva a job, troika, heckuva of a job.  Now that Greece has made the euro round trip having given back all of its GDP gains from joining the common currency, do you think its citizens and leaders will finally figure out that they should leave the euro?

For Some Investors, Federal Reserve Can Start Tapering NOW.

Fed QE versus SP500

Allan Greenspan actually believes that a Fed QE exit will lead to even higher stock prices.  Of course, Mr. Greenspan also believed that his policies did not create stock market and housing bubbles.  Since a picture says a 1000 words, we will not present a counterargument to the latest drivel to emanate from Mr. Greenspan and a couple of sell-side twits.  Just look at the chart.

We’re Rich Again! So Why Don’t We Feel It?.


First of all, we are not rich and never were.  The top 10% in this country owns 98% of the bonds and 81% of the stocks.  Fed money printing has raised the prices of these assets resulting in a boom for the top 10%.  These same policies have also caused stagnation in the labor market where the 90% derives the lion’s share of its worth.  QE is just the umpteenth iteration of trickle down economics. How much of Uncle Ben’s money has trickled down to you?

China Export Growth Plummets Amid Fake-Shipment Crackdown – Bloomberg.

China’s export growth slumps – MarketWatch.

China trade data underscores growth worries | Reuters.


China is preparing to enter its first recession in years, and this should be an interesting test for the new government.  While the official numbers hold up, the proxy numbers reveal an economy entering stall speed.  Falling demand for raw materials, electricity and transportation are more telling than whatever garbage the government releases to the mainstream media.

Home Loan Rates Near 4% Send Buyers Scurrying: Mortgages – Bloomberg.

Mortgage Applications 06.2013

When will the mainstream media call an end to the housing recovery that never began? Plunging mortgage applications do not bode well for future sales, which are still running at rates from the late 90’s.

Pound Surges Most in 3 Years on Signs U.K. Economy Strengthening – Bloomberg.

GBPUSD 06.07.2013

The pound has been quite volatile since the beginning of the year.  While it has declined precipitously since scaling the heights of $1.62 in December, its recent rally has recaptured half of its losses.   Once Mark Carney gets his hand on the Old Lady of Threadneedle’s printing press, this trend should reverse itself.