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 10.15.2013

Fewer US homes entered foreclosure track in third quarter.

Foreclosure starts vs sales


The mainstream media loves its housing recovery narrative and fervently guards it against the data.  This is the lede from the article above:

The number of U.S. homes set on the path to foreclosure slid to a seven-year low in the third quarter, reflecting a gradually improving housing market and fewer homeowners falling behind on mortgage payments.

That statement is false.  Foreclosures are sliding because banks are keeping delinquent properties out of the foreclosure, whether by design to maintain higher prices or because they simply cannot work their way through the backlog.  I believe the latter explanation is more likely as incompetence trumps malevolence.  If the housing market were really on its way back to health, the number of delinquencies would have plummeted in lockstep with the foreclosures.  It hasn’t:

Mortgage Delinquency Rate

This second chart shows that defaulted mortgages have remained near recession peaks and historic highs. What is really happening here is that the zombie inventory of homes continues to grow keeping supply out of the hands of the 99% who pay inflated prices for homes and rents for apartments.

Citigroup results hit by bond trading slowdown.

Citigroup Results Hit by Weak Fixed Income Trading –

Citigroup results hit by bond trading slowdown | Reuters.

Citigroup 10.15.2013


All of the TBTF banks are enduring lower profits due to smaller bond volumes and a decrease in mortgage applications.  This news has not mattered one iota to share prices as our chart of C shows.  A mild 50¢ sell-off at the open followed by a rally back to just about the pre-earnings level.  Corporate profits have ceased improving, so the current rally is exclusively beholden to additional multiple expansion.  The financial commentariat generally believes that this expansion is unlikely, but in light of the new Printmaster General’s dovish bonafides, I am not so sure.  The market is still far below record P/E levels, and the magic money machine isn’t finished yet:

S&P500 PE Ratio

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.

Germany digs in heels as Europe moves towards banking union | Reuters.

Total Banking Sector Balance Sheet to GDP


The Eurozone has created a faux banking union, which should be sufficient to keep the bond vigilantes at bay for the moment.  There are several requirements for a real banking union as currently exists in the U.S. under the auspices of the FDIC, which you can read about in more detail here:

Cosmetic, Can-Kicking Banking Union Agreement in Play | DARECONOMICS

The sticking point is the money.  The rich countries refuse to become joint and severally liable for depository insurance and resolution costs with their poorer brethren.  What this means is that a euro in Germany is much safer than a euro in Spain, because the Germans have more money to bailout its banking sector.  Hence, the current agreement does not break the pernicious bank and sovereign link.  German banks will have money to lend to businesses, and the periphery won’t, so it will remain mired in stagnation.  This Nash equilibrium will remain until one of these countries decides to gamble on a euro exit.

Around the Globe 07.02.2013

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

Canada vs US Housing Prices 07.2013

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

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

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

European Car Sales 06.18.2013

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

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


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

Investment Banks Eye ‘Hedge Funds for the Masses’.

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


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

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

Chicken fight

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

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

Dollar Climbs Above ¥100 –

YENUSD 07.02.2013

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

Around the Globe 06.10.2013

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 06.07.2013

Fed on Track to Ease Up on Bond Buying Later This Year –

Markets might have gone too far on taper talk: Fed’s Plosser | Reuters.

Greenspan: Taper Now, Even If Economy Isn’t Ready.

Fed Seen Reducing Asset Buying by Smaller Amount – Bloomberg.

Fed QE versus SP500

Everyone is a Fed prognosticator today.  It appears that a change in Fed policy is coming judging from its communications including a Hilsenrath special, but watch how fast the Fed changes its mind when market volatility begins rising.

Germany Cuts Growth Outlook –

Bundesbank dampens optimism over German economy | Reuters.

Eurozone PMI 05.2013

The Bundesbank cut its economic growth forecast for Germany based on weak demand from the Eurozone.  While the ECB sticks to its recovery-right-around-the-corner position, the realistic BuBa realizes that a broad Eurozone recovery is unlikely to occur this year.  With European demand falling, exports are the supposed salvation of the Eurozone.  However, worldwide demand is softening at the worst possible time.  Look for the pace of contraction to accelerate in the third quarter.

Five Takeaways From Jobs Report – Real Time Economics – WSJ.

U.S. Adds 175,000 Jobs, Beating Expectations –

Hiring points to resilience in economy | Reuters.

Payrolls in U.S. Rose 175,000 in May, Unemployment 7.6% – Bloomberg.

US Nonfarm Payrolls

Reading the articles about the jobs report and their headlines, you would believe that the U.S. is in the midst of a booming economic recovery, but it’s not.  The economy needs to create about 400,000 jobs for the next few years just to return to the pre-recession employment situation.  The chart shows just how severe the country’s job loss during the recession was.  Currently, the labor market is not contracting, but it is not growing quickly enough either.  That is what 175,000 new jobs means.

Retailers’ sales rise in May, spending stays moderate | Reuters.

US Retail Sales 06.2013

After the recession ended, people began spending money on purchases that they had delayed due to economic uncertainty.  Since then, retail sales growth has slowed markedly as seen in the chart above.  Real, sustainable increases in consumer spending, which accounts for 70% of the U.S. economy, must be preceded by increases in employment and wages.  As long as the labor market remains tepid, economic growth will continue to disappoint.

Draghi Disappoints as Firepower Becomes Fig Leaf – Bloomberg.

ECB Benchmark Rate 06.07.2013

The problem with the Eurozone is the euro, and no ECB policy can change that.  The alphabet soup of thinly disguised money printing programs will maintain the status quo until it doesn’t, but they will not cure the Continent of its malaise.  A radical freeing of European internal and external markets will stoke growth, but this is a political nonstarter.  Europe will not change until a crisis forces it to.

Mexico Holds Key Rate as Inflation Clashes With Slower Growth – Bloomberg.

Mexico CPI Mexico GDP Performance

The U.S. purchases 80% of Mexico’s exports.  Its slowing economy shows the true state of the American “recovery:” slowing and approaching stall speed.  Mexico’s decreasing GDP growth argues for a rate cut, but persistently high inflation argues against.  The Bank of Mexico is doing the wise thing and maintaining its current interest rate posture to attract foreign capital and maintain the value of the peso.

Around the Globe 06.06.2013

Economist: Housing Will Thrive After Fed Exit.

US Housing Sales through 04.2013

The mainstream media loves promoting its housing recovery narrative.  In this article, the reporter writes, “Housing has experienced an incredible recovery.” Apparently, an incredible recovery means 2010 sales levels, which are less than one-third the pace at the market’s peak.

The chief economist for a sell-side firm bases her thriving housing market prediction on rising mortgage activity going forward.  We have a chart for that:

Mortgage Applications 06.2013

As you can see, mortgage activity is actually falling.  The truth is that the housing market will not revive until employment and income rise.  In other words, people who actually wish to live in houses must reenter a market overrun by exuberant flippers with their pockets stuffed full of Uncle Ben’s money.

The Aussie Dollar Just Can’t Catch a Break.

AUDUSD 06.06.2013


All you need to know about the Aussie can be summed up in this handy chart:

China HSBC PMI 06.02.2013

Chinese manufacturing is contracting, and in lockstep, China’s demand for raw materials.  China is purchasing less Aussies, and this shortfall in demand is driving the currency lower.  This trend will continue for the immediate future broken up by occasional rallies.

$1 Trillion Debt Crushes Business Dreams of U.S. Students – Bloomberg.

Credit Growth to 2013

Government intervention creates a vicious circle.  The purpose of offering cheap loans is to make higher education accessible to all, but this is not the end result of student loan programs.  The hot money created by government subsidies actually increases the cost of college, so in the long run the program runs counter to its purpose:

Tuition Inflation

The chart also details what hot money from government subsidies is doing to another popular economic sector that is subject to Beltway reforms (the orange line).

Draghi Sees Economy Recovering as ECB Rates Left on Hold – Bloomberg.

ECB holds rates, sees gradual recovery this year | Reuters.

ECB Sees Longer Wait for Recovery –

Eurozone Unemployment 05.31.2013

The ECB lowered its GDP performance estimate for the Eurozone from -0.5% to -0.6%, and Draghi forecasts a return to growth by the end of the year.  Of course, the return to growth keeps getting pushed back by ECB forecasters from their initial prediction of the 1st quarter in the fall, to the summer in their 1st quarter forecast and to year end today.  Notice a pattern? The ECB will continue to predict growth commencing six months from the date of the prediction until the day the euro breaks.  In the meantime, GDP will contract, unemployment will rise and prosperity will remain just around the corner.

EU Hits Back at IMF Report –

For hard-hit Greeks, IMF mea culpa comes too late | Reuters.

Bad IMF Predictions

Hanlon’s razor is, “Never attribute to malice that which is adequately explained by stupidity.” On the plus side, the IMF was not cooking the books and actually believed that it was issuing usable economic forecasts for the Greek bailouts.  On the minus side, IMF economists are dangerously incompetent.  Despite missing to the downside time after time, they continued to rely on the same defective models.  This mea culpa and change in philosophy is a day late and a drachma short for the people of Greece.

Merkel urged to come clean on Greek debt relief | Reuters.

Angela Merkel, courtesy of Armin Kübelbeck

Angela Merkel, courtesy of Armin Kübelbeck

The German opposition, the SPD, is attempting to make hay out of the fact that the Greeks will require debt forgiveness after German elections.  While this is true and German voters will be outraged when this goes down in the winter, the SPD supports this policy, too. In fact, the Socialists will be more than happy to expend even more money to keep the euro together.  This is the type of stupid move that the challenger makes on his way to losing an election to an incumbent.

Around the Globe 05.15.2013

US Budget Deficit Shrinks Far Faster Than Expected.

CBO Sees Deficit Narrowing to $642 Billion –

US Budget Deficit

Let’s start today’s edition with some good news.  The US budget deficit is shrinking dramatically.  The CBO lopped $200bn off this year’s deficit to bring it down to just over $600bn or 4% of GDP.  If the bull market survives the year, that number will fall even further.  A 2% budget deficit is within reach for fiscal year 2013.

While the CBO wishes to extrapolate the good news into the next decade, forecasting fiscal deficits that far into the future is a fool’s errand.  You may ignore the chart above from 2014 going forward.

The CBO does attempt to accurately forecast the deficit numbers.  This policy is evidenced by the fact that some years it misses high and some years it misses low.  Eurozone countries have predicted far rosier numbers since the beginning of the Eurocrisis and have rarely missed high.

Euro-Zone Recession Continues Into 2013 –

Germany can’t stop euro zone from sinking into longest recession | Reuters.

Euro-Area Recession Deepens as Slowdown Exceeds Estimates – Bloomberg.

Euro Zone GDP Performance

German GDP Performance

While basket cases France, Spain and Italy surprised no one by contracting in the first quarter, Germany’s avoided entering recession by the slimmest of margins.  A meager 0.1% of economic growth from the abysmal performance recorded at the end of last year.  Despite optimism from the eurocrats, there is no end in sight to this recession.

The Eurozone’s largest markets, China and the U.S, are not growing enough to stoke exports in addition to the lack of demand on the continent.  The ECB’s monetary policy will not keep the vigilantes at bay forever, so these countries better arise from their economic torpor soon.

Industrial Production in U.S. Falls by Most in Eight Months – Bloomberg.

Factor Output Drop Hammers US Industrial Production.

US Industrial Production

The American manufacturing renaissance was just a lot of hype.  Industrial production has decreased in two of the last three months.  Easy money has raised asset prices but has done little to increase domestic demand for goods and especially labor.  The mainstream media continues to report on an American recovery that really isn’t there.

Central Banks Are Repeating Greenspan’s Mistake.

Taper by ‘Fat, Dumb and Happy’ Fed Will Hurt: Strategist.

The central banks have painted themselves into a corner.  Easy money policies have saved the world from a deeper recession, but at the price of inflating asset prices around the globe.  If they taper down asset purchases, the stock market will drop like a stone.  On the other hand, maintaining the rate of money printing keeps the bubbles inflating to their inexorable fate.  This is quite the pickle.  If I was running the Fed, I don’t know what I would do either.

Around the Globe 04.14.2013

Lockhart Calls Unfounded the View That Fed Monetizes U.S. Debt – Bloomberg.

Fed Holdings SOMA 01.2013

Atlanta Fed President Dennis Lockhart denies that the Fed is monetizing the country’s debt.  Central banksters are supposed to say this, so they do.  When the Federal Reserve buys debt, it is by definition monetizing the debt.  Just because it purchases the debt on the market rather than directly from the government does not change the essence of its actions.  Note the chart above.  The Fed owns a significant portion of the debt stock over three years in duration.

The reason given for these purchases is that they will eventually kickstart the economy.  The real reasons that for all of this money printing is to maintain low interest rates so the government can afford to finance itself and to pump up the stock market.

EU Affirms Debt-Cut Strategy in Face of ‘Fragile’ Outlook – Bloomberg.

Markit Eurozone PMI Flash March 2013

Europe save the really stupid stuff for weekend press releases.  We have three this weekend starting with this doozie.   The Germans will continue to insist on budget cuts while affected Eurozone countries die.  For the umpteenth time, the eurocrats predict an economic recovery right around the corner for the eurozone without any evidence to support this forecast.

Does the chart above point to increasing economic output? PMIs remain ensconced in contractionary territory and will remain there as long as governments and consumers are simultaneously cutting spending.

EU Set to Clash on Bank Deal as Germany Sees Treaty Limit – Bloomberg.

As astute readers of Dareconomics know, there will never be a banking union.  Germany and the rest of the FANG countries will never pay for the insolvent banks of the periphery especially when they have their own insolvent banks to worry about.  The latest dilatory tactic deployed by the German government is supporting EU treaty changes to create a banking union rather than a multilateral agreement.

Treaty changes take years and require referendums in many of the EU countries.  Moreover, other countries will attempt to add their agendas once the process is opened up.

The rich countries either have to put up or shut up at this point.  Perhaps after elections, Merkel will level with her people and explain that the continuation of the Eurozone will require hundreds of billions of the German taxpayers’ euros.  Then again, maybe they will just continue kicking the can down the road until it’s too late to solve the problem.

Schaeuble Favors ‘Liability Hierarchy’ in European Bank Bailouts – Bloomberg.

In one sentence Schaeuble claims that Cyprus is an exception but then holds it restructuring out as a template for future bailouts.  From the words of the various eurocrats who have spoken on the issue, it is very clear that depositors will be taking losses on future bank bailouts.  I don’t want anyone in Spain or Italy to be surprised when they lose half their money overnight one of these days.  Get your money out now while you still can.  The smart money has already left.

This is my informal test for the dodginess of any financial transaction.  If a CFO could lose his job over conducting the transaction, then it is ripe for a panic.  Let’s say Apple collapsed tomorrow, could you blame a CFO for investing his firm’s excess cash in AAPL commercial paper? No, the company is running like a top.

Now the same CEO gets caught with €1bn worth of deposits in Spain and Italy when a banking crisis forces depositors to take losses, could you blame him then? Hell, yeah.

The 2nd hypothetical is foreseeable, while the 1st is not.  The smart money, aka “The I don’t want to be fired money,” is leaving the eurozone as we speak.

Analysis: Euro zone bank troublespots don’t come down to size | Reuters.

Bank assets to GDP

Here is the chart mentioned in the article.  It would have been very easy to include it.  The piece misses the most significant factor regarding asset quality.  In a financial crisis, all loans and assets are considered suspect.  A large bank is a disaster waiting to happen and small countries like Luxembourg and Malta would be forced to allow banks to fail setting off a domino effect throughout the financial system.

EU Increases Efforts to Fight Tax Evasion –

Austria Defies Mounting Pressure to End Bank Secrecy.

Even Luxembourg is scaling back bank secrecy.  Amidst this environment, it is only a matter of time before Austria follows suit.  The PM supports this, while the FM is against it.  The EU is out of money and is doing anything and everything to increase revenue.  Tax cheating is rampant within the Eurozone, and they seem determined to wipe it out through cooperation.

Can China Turn ‘Economy on Steroids’ to Real Growth?.

No.   China relies too much on its export sector for organic growth.  As long as large economies like the Eurozone, Japan and the U.S. exhibit contraction to low growth, China’s economic activity will remain suppressed.

Analysis: Don’t underestimate Germany’s new anti-euro party | Reuters.

Anti-euro and anti-bailout sentiment in Germany is increasing.  Some Germans do not enjoy being resented by the rest of the Eurozone.

Eurozone Recession Worsens Through 1st Quarter

Markit Eurozone Manu PMI March 2013

European manufacturing ebbs further in March | Reuters.

Euro-Area Unemployment Rises to Record 12% Amid Slump – Bloomberg.

Euro-Area Manufacturing Output Contracts Less Than Estimated – Bloomberg.

Euro Zone Hits New Jobless Record –

Despite all of the happy talk emanating from Brussels and repeated by the mainstream media, Europe is nowhere near a recovery.  In fact, figures show that the Eurozone recession continues to deepen in contradiction to the consensus of economists who see growth right around the corner later in the year.

Eurozone unemployment hit a record of 12% in February with January’s 11.9% initial figure being revised upward:

Eurozone Unemployment 03.2013

Rising unemployment will continue to sap demand resulting in persistent Eurozone economic weakness.

Germany was formerly the only bright spot in Europe, but it is feeling the effects of weak demand from its southern neighbors.  German manufacturing PMI dropped below 50 in March indicating contraction:

Markit Eurozone Components Manu PMI March 2013

Indeed, only France saw an increase in PMI in March, and it is still well within contractionary range.

All of this was viewed as good news by the investment community as the ongoing weakness in the Eurozone may push the ECB to cut rates a quarter point at its next meeting:

Eurostoxx 600 04.02.2013

Just like you shouldn’t fight the Fed, you should probably not fight the ECB either.

Poor German Flash PMI Confirmed by Business Climate Survey

CESifo Group Munich – Ifo Business Climate Index Edges Downwards.

German Business Confidence Unexpectedly Drops – Bloomberg.

Yesterday, we noted that Markit Flash PMIs for March indicated a deepening of the Eurozone recession led by a surprising fall in Germany’s number to just over 50, Eurozone Recession Deepens .  A PMI over 50 signals expansion and under 50 contraction.  While Germany has not entered a contraction, a reading around 50 equates to economic stagnation.

Today, Markit’s findings were confirmed by Munich’s Ifo group’s business climate index.  After growing steadily since the fall, the index took an unexpected  plunge in March:

Ifo Business Climate Survey March 2013

All sectors witnessed reduced expectations including manufacturing, the core of the renown German export machine:

Ifo Business Climate Survey Manufacturing March 2013

The eurocrats are forecasting a return to growth for the entire Eurozone in the second half of 2013, but as the economic indicators roll in this seems less and less likely.  Europe may be able to return to growth in 2014 if it gets all of its budget cuts out of the way in 2013 and if the U.S. and China continue to grow through the year.  Otherwise, expect more GDP shrinkage and missed deficit forecasts to the downside for the remainder of 2013.