Around the Globe Weekend Edition October 19-20

Saturday:

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

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 – WSJ.com.

Infrastructure drive powers China’s growth prospects – FT.com.

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 – WSJ.com.

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.

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Around the Globe 10.14.2013

China’s Inflation Rises Faster Than Expected – WSJ.com.

China-to-India Price Jump Risks Growth as World Outlook Dims – Bloomberg.

China inflation at seven-month high, limits room for easing despite export tumble | Reuters.

Data show China passing US as biggest oil importer.

INDIA CPI through September 2013 China CPI

Nascent inflationary pressures have increased in both China and India. China loosened monetary policy starting in June to combat a burgeoning liquidity crisis, and this extra cash is wending its way through the financial system inexorably feeding through to food and energy prices.  India has failed to tighten its monetary policy quickly enough allowing a depreciated rupee to cause inflation.  As these countries grow, heavy resource usage creates a headwind to increasing growth rates.  They are both large enough now so that increases in resource consumption quickly raise prices crimping further growth.  Perhaps this is the reason countries have difficulty making the leap from middleweight economic powers to heavyweight.

Asmussen rules out ECB rollover of Greek bonds | Reuters.

Greek Government Budget Deficit Ratio

 

Asmussen must say things like this for two reasons.  First, Germany needs to keep up the austerity pressure, or else the Greeks will stop “reforming” the economy.  Second, Germany has not yet formed a government.  With sensitive coalition negotiations, it is an inconvenient time to admit that Greece needs a 4th bailout even though this is inevitable.  In order to preserve its export currency, the German government and the voters will continue denying that Greece needs more money until it does.  Then, it will gladly do whatever is necessary to bail Greece out.

Inverted yield curve sign has Wall Street on edge.

US Government Bond Yield Curve

Usually, an inverted yield curve screams, “RECESSION!” This time may be different, but maybe not.  Key pieces of economic data are pointing to a soft patch.  Housing sales, job creation rates, unemployment claims and GDP growth are all past recovery bests.  On the other hand, PMIs are indicating modest growth going forward.  The bottom line is that mixed economic data points to more of the same, i.e. the New Normal.

 

Around the Globe Weekend Edition September 28-29

Sunday:

Italian president hopes to solve political crisis without new vote | Reuters.

Italy’s Coalition Teeters as Berlusconi Allies Walk Out – Bloomberg.

Italian Minister Resignations Spark Government Crisis – WSJ.com.

LettaBerlusconi

Italy has had 61 different governments since 1946 and is about to try for a 62nd.  While the financial press is attempting to whip everyone into a state of frenzy over the “crisis”, this situation is fairly typical of Italian politics.  Governments in Italy only last about 13 months on average, and this one is already six months old.  Usually Italy can get by without anyone ruling the country because the civil service is running the country.   This time is different because Italy requires its duly elected government to enact budgetary and economic reforms.

While political instability is not good news, the current situation is overhyped.  In a few days, there will be a deal, because there is always a deal.  In the meantime, European markets are in store for a bumpy ride.

Saturday:

Greek Party Leader Arrested – WSJ.com.

Greek police arrest leader, lawmakers of far-right Golden Dawn | Reuters.

Golden Dawn

Greece is on the verge of civil war.  Rumors of a coup by the special forces dominated the news coverage in Greece this week but were rarely mentioned in the mainstream media.  The latest instability is garnering coverage.  In response to the politically motivated murder of a anti-fascist murder by a Golden Dawn party member.  The party member probably acted on his own volition, but the government is using this as an excuse to arrest the Golden Dawn party leadership.

This is a huge gamble on Samaras’ part.  While support for Golden Dawn has dropped in the wake of the violence, the neo-fascists are probably the most popular party among the military and police forces, who will be protecting the government from any unrest during this critical juncture in Greek politics.

From Friday’s Edition:

Albert Edwards accuses Fed of inequality cover up.

Income Growth 99 vs 1

Hanlon’s razor admonishes us to, “Never attribute to malice that which is adequately explained by stupidity.” The Federal Reserve’s monetary policy is promoting income inequality as our table above illustrates, but I do not believe that the Fed’s action are malevolent.

Standard monetary procedure in the U.S. has been to loosen the money supply in the wake of a recession.  The Fed went to this well one too many times and was forced to embark upon its novel money printing experiment.  Today, it is stuck.  Surely some Fed officials have figured out that their actions are making the rich richer and the poor poorer, but the present policy cannot be terminated.  Even discussing the end of the program causes market distress.

Once money printing begins it must continue until either the printing or the lack thereof causes a crisis.  As we learned two weeks ago, the Fed cannot and will not taper.  The new plan is to keep printing while hoping that an economic miracle takes place before the inevitable consequences of incessant money printing.

From Thursday’s Edition:

U.S. Pending Home Sales Fall for Third Month in a Row – WSJ.com.

Pending Sales of Existing Homes in U.S. Decreased 1.6% in August – Bloomberg.

Pending home sales fall 1.6 percent in August.

Pending Home Sales Through August 2013

Rising mortgage rates have stopped the housing “recovery” in its tracks, which should come as no surprise for astute readers of Dareconomics.  Houses have become more unaffordable since May crimping sales.  In my opinion, we have witnessed a peak.  Downward pressure on sales volumes will be a major headwind against more price increases going forward.

From Wednesday’s Edition:

Millionaire optimism hits 9½-year high, Spectrem Group says.

Consumer Confidence by Income Group

Millionaires are actually doing quite well for themselves and are completely out-of-touch with workers.  Cheap money enriches those closest to it, and this “recovery” is proof.  Let’s follow the money:

  • The Federal government is the closest to the printing press, and it is performing better than any other entity.  The Fed is printing cash to finance the Feds at record low rates while it simultaneously runs record high deficits.
  • TBTF banks are the next in line at Ben’s cafeteria, and they are the beneficiaries of the Fed’s largesse in numerous ways.  Their financing costs are low due to financial repression and the implicit TBTF guarantee from the government.  Furthermore, the Fed has been purchasing their holdings of treasuries and MBS raising prices to ensure profits and gains in their investment portfolios.
  • Corporations get their money from the TBTF banks who are busy underwriting a record amount of bond deals.  The corporations are also using the cheap money to buy back shares and raise dividends, but not to expand much to the chagrin of the American worker.
  • The rich derive their wealth primarily from their investment and real estate holdings, so they are doing very well, too.  Cheap money has inflated asset prices, and they are the main beneficiaries of the cash as it trickles down from the corporations.
  • Meanwhile, the middle class is earning 8% less than it did in 2007:

Median Income Performance in the U.S. Since 2007

Remember, money printing does little to improve the labor market, but it does manage to significantly improve the lots of the feds, banksters, corporatists and the rich.  The Fed equitably distributes the benefits and burdens of the program: the well-off get the money, and the rest of us will get the bill at some future date.

From Monday’s Edition:

China’s Data Suggest Rebound – WSJ.com.

HSBC China Flash PMI 09.2013

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

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

 

Around the Globe 09.26.2013

Exclusive: Greece does not need third bailout, seeks debt ‘reprofiling’ – deputy PM | Reuters.

Greek GDP Performance Through 2Q2013

The mainstream media definitely got this headline correct.  Greece does not need a third bailout, because it has already had one.  The next bailout will be the fourth, but Venizelos, the Finance Minister, is claiming that it won’t be necessary.  Venizelos believes that changing the terms of the debt coupled with a return to the bond market will alleviate the need of another bailout program.

Lowering the interest rates on Greek debt held by the rest of the EU would constitute another adverse credit event and also be considered another bailout.  Moreover, Greece will never return to the bond market as a full-fledged euro member, but Venizelos need not worry.  Greece will continue to receive enough table scraps from its troika overlords to remain within the euro maintain Germany’s and his ow living standards.

U.S. data gives conflicting signals on economy’s health | Reuters.

US GDP Performance From 1948

The various pieces of economic data are not conflicting.  They all tend to confirm the picture of an economy that is still struggling with politically connected entities doing well while the rest of the country endures a five year labor market slump.  In our chart above, we have marked this “recovery’s” best growth with a red line making it easy to see how poorly the economy has performed in the wake of the Great Recession.  Peak economic growth during the last two recoveries was double and quadruple the highest rate today

The only thing the economic data conflicts with is the economic recovery narrative.  At this point, economic growth should be stronger, and economists and commentators must adjust to the new normal rather than seeking and expecting the old normal.

U.S. Jobless Claims Remain Near Six-Year Lows – WSJ.com.

Jobless Claims in U.S. Unexpectedly Decline to 305,000 – Bloomberg.

Jobless claims down to 305,000 vs. 330,000 est.; 2Q GDP at 2.5% vs. 2.8% est..

Initial Unemployment Claims Through 09.20.2013

Low jobless claims indicate that companies are not laying off as many workers, which is to be expected in an environment of stable, if not robust, consumer spending.  Firms are maintaining current employment levels but not expanding.  There is no firing, but no hiring either.

The true state of the labor market is not revealed by decreasing unemployment claims but by the total number of people working:

US Employed Workers 09.2013

Employment levels remain well-off the peak.  During the last recovery, it took two years to regain the pre-recession peak.  Nearly four years after the trough, over two million less people have jobs.

U.S. Pending Home Sales Fall for Third Month in a Row – WSJ.com.

Pending Sales of Existing Homes in U.S. Decreased 1.6% in August – Bloomberg.

Pending home sales fall 1.6 percent in August.

Pending Home Sales Through August 2013

Rising mortgage rates have stopped the housing “recovery” in its tracks, which should come as no surprise for astute readers of Dareconomics.  Houses have become more unaffordable since May crimping sales.  In my opinion, we have witnessed a peak.  Downward pressure on sales volumes will be a major headwind against more price increases going forward.

Around the Globe 09.11.2013

Mortgage apps plunge, refinancing hits 4 year low as rates soar.

Mortgage applications slide as rates match 2013 high – MBA | Reuters.

New-Home Sales Not So August – Developments – WSJ.

Mortgage Applications vs. Sales  6 Month Lag 09.2013

From Zerohedge

The recovery narrative counted on a new housing boom to propel the U.S. into strong sustainable growth, but it looks like the boom, actually Housing Bubble 2.0, is running out of steam.  Our chart illustrates the relationship between housing sales and the mortgage rate with a six month lead for the rate.

A recent survey confirms that the housing market is slowing down.  From “New Home Sales Not So August:”

  • There was a 4% decline in new home sales from July.
  • 5% of sellers were forced the lower prices, the highest level in 18 months
  • Realtors’ expectations of buyer traffic missed for the first time since December of 2011.

Rising rates and stagnant incomes will continue to weigh on housing demand for the immediate future despite what people wish to believe.

Richest 1% earn biggest share since Roaring ’20s.

Income Growth 99 vs 1

Two of the recurrent themes of this blog are that cheap money benefits the rich to the detriment of the rest of us and that there are diminishing marginal returns with each successive iteration of monetary easing .  The table above succinctly supports each case.

Observe how the 1% grabs an increasing share of income as monetary easing becomes more drastic.  During the Clinton boom, the Fed maintained a tight policy until 1998 when it loosened in response to the Long Term Capital Management crisis and trouble with the Asian Tigers.  The Bush Boom was created by a very low interest rates in the wake of the bursting stock market bubble and 9/11, while the current “recovery” is a child of not just low interest rates, but zero bound rates plus trillions in money printing to purchase Federal debt and mortgage bonds from TBTF banks, hedge funds and rich investors.

The mostly organic Clinton boom logged the best numbers for both the 99% and 1% racking up an overall 31.6% income increase with 45% of the gains accruing to the rich.  During the Bush boom fed by cheaper money, the overall income increase is a mere 16.1% with the rich capturing 65% of the gains.  The current economic “recovery” is being fueled by the cheapest money: not only has the Fed reduced the operating costs of the TBTF banks with ZIRP but it is also bailing them out of their poor investments by purchasing mortgage bonds driving up the price markedly since 2009.  Income has only recovered about 6% with the rich taking home 95% of that gain.

Note the pattern: each successive expansion is about half as strong as its predecessor, income growth of 31.6% declining to 16.1% and then to 6.0%.  Moreover, each wave of monetary easing results in a higher percentage of income gains benefiting the 1%, increasing about 50% from expansion to expansion, 45% to 65% to 95%.

Intriguingly, even though the rich are receiving most of the gains today, everyone is worse off due to excessive liquidity with income gains decreasing across-the-board.  Perhaps, this is the real reason that the Fed is preparing to taper.

Recession risk gone in all US states but 1: Moody’s Analytics.

Citigroup Economic Surprise Index August 2013

Today, we have already covered two reasons why the American recovery will continue to be tepid, the end of Housing Bubble 2.0 and the diminishing marginal returns of more debt.  Add another to the list—Moody’s Analytics just declared that recession risk has disappeared in all 50 states.  These are the same people that declared a bottom to the housing market 2008 and completely missed both the GFC and Great Recession and continue to slap on AAA on just about any paper presented to them by the TBTF banks.

Even though MA is a separate unit from the rating agency, this is a conflict of interest.  The same company that rates municipal debt is touting the economic health of the issuers, so take their guidance with a grain or two of salt and check out the Citibank Economic Surprise Index crossing into negative territory illustrated above.  Housing headwinds, ineffective monetary policy, flat incomes and now less surprises indicate a bumpy road lies ahead.

China Shadow Banking Returns as Growth Rebound Adds Risks – Bloomberg.

China Overnight and Seven Day Repurchase Rates

In May, China’s new leaders decided to crack down on the various methods that the Chinese were circumventing the various methods that the PBOC and government use to the control the financial markets.  The crackdown quickly metastasized into a full-blown liquidity crisis, which the authorities managed to get under control in early July.

At first, the government seemed willing to tolerate high rates and plunging liquidity in a bid to move to a more sustainable growth model.  Once they realized, that they were heading into a full-blown financial crisis, the appetite for reform quickly dissipated.  Now, it seems that China will allow additional leverage in order to maintain a 7.5% growth rate.  Eventually, additional credit will fail to budge growth rates.  How high will it go before then?

Outstanding Chinese Credit

Greece May Need Two More Aid Packages Says ECB’s Coene – WSJ.com.

Greece does not need two more aid packages. The country is now a ward of the Eurozone and will require periodic cash payments to remain afloat until it is freed from its giant debt pile.  Greece currently maintains a debt-to-GDP ration of 156% and rising.

In order for it to knock debt levels down to reasonable levels within a decade, it would have to accomplish two impossible goals.  It would have to grow its economy by 7% a year for the next 10 years while delivering a balanced budget every year to reduce the ratio to just under 80%, about German levels.

Based on what we have witnessed since 2009, what are the chances that Greece attains a Chinese 7% real growth rate while balancing a budget that has a deficit of 10% of GDP? Well, those are your chances of the Eurozone being able to cease aid.  As long as Greece can’t pay its bills, the Eurozone must pick up the tab.  Remember this when commentators begin breathlessly discussing primary surpluses.

 

Around the Globe 09.10.2013

Yep, it’s another housing bubble.

Mortgage Lenders, Home Buyers Feel Rate Squeeze – WSJ.com.

NAR House Affordability Index

The NAR Housing Affordability Index compares housing prices to consumer incomes and mortgage rates.  After the bubble burst, reductions in both prices and rates led to record affordability despite shrinking incomes.  Unfortunately, this “housing recovery” never became sustainable, because incomes remain stagnant.

Consumers simply do not possess the money to drive the market further, and investors have begun reducing their speculative activity. Over the next few months, Bernanke’s Housing Bubble will meet a similar fate to Greenspan’s.

Job Openings in U.S. Fell in July to Lowest in Six Months – Bloomberg.

U.S. job openings fall almost broadly in July | Reuters.

Don’t expect jobs, wages to grow any faster, economists say – NBC News.com.

Seasonally Adjusted Job Openings

The number of job openings fluctuates, so one bad month should not be a cause for concern.  What is troubling is that job openings, after surging from late 2009 into early 2012, have leveled off since then as indicated by the arrow.  Since 2012, the number has ranged between 3.6-3.9 million, which is way below the historical numbers of a smaller U.S.

The lack of labor demand leads inevitably to stagnant wages suppressing economic growth indefinitely. Consumer spending accounts for 70% of the U.S. economy.  If this component stagnates, it is impossible for the other 30% to fill this hole.  The New Normal endures.

Greece Close to Budget Surplus – WSJ.com.

Greek Government Budget

The WSJ’s headline is misleading.  Greece is close to a “primary” surplus.  What is a primary surplus? It means that the Greek Government is able to pay for its expenses minus debt payments from its revenues.  Commentators cheerleading Eurozone like to tout Greece’s reaching this step, but it is an illusory accomplishment.

The primary surplus ignores the problem of too much debt. Let’s say you and your neighbor are in primary surplus (i.e. both of you earn enough money to pay all of your monthly expenses); however, you do not have a mortage or a car payment, and he has both.  As you can see, while each of you are in primary surplus, by virtue of your lack of debt, you are in much better financial shape than your neighbor.

Ignoring Greece’s 157% of GDP debt pile is pure fantasy and so is its primary surplus.  The reason Greece is in trouble for the next decade is its crippling debt level.  The primary surplus blithely ignores the most important factor influencing Greece’s economic health.

Don’t worry too much about the Greeks.  Most of that debt will never be paid off, but they will remain in this bailout program as long as the Germans keep out the checkbook.

Italian Economy Shrinks More Than Initially Estimated – Bloomberg.

Italian Politics Weighs on Sovereign Debt – WSJ.com.

Berlusconi allies step up threats over Italian Senate ruling | Reuters.

Italy vs. Spain Yield

Spain is probably in worse economic shape than Italy.  Spain is still enduring the aftershock of its burst housing bubble, while Italy merely suffers from malaise.  Italy’s problem today is that the governing coalition is getting shakier by the day.  Letta’s party is trying to end Berlusconi’s political career.  In return, Berlusconi’s allies are threatening to bring down the government if any moves are made against their leader.  Brinkmanship has replaced compromise to the detriment of the Italian people, but expect a last minute solution to the problem saving the government and Italian bonds at the last possible minute.

Around the Globe: Weekend Edition September 7-8, 2013

Sunday:

Fannie Mae, Freddie Mac Remain Unfinished Business Five Years After Financial Crisis – WSJ.com.

Government Share of Mortgage OriginationsIf anyone ever tells you that the housing market is healthy, then that person needs to examine this chart.

Since the onset of the Great Financial Crisis, the federal government has doubled its role in the mortgage market. The so-called housing recovery is being supported by Fed money printing and the easing of lending standards with the tacit acceptance of the government.

Saturday:

Greek premier says economic pain will ease next year | Reuters.

Bad IMF Predictions 2

The Greek Prime Minister has been yammering about the light at the end of the tunnel since he first took office in 2012, and he has been consistently wrong.  The mainstream media refuses to put these predictions in context by informing the reader that he has been making the same claims for a year! Eventually, he should be right.

Unfortunately for the Greek people, it is not today.  While a strong tourist season lowered the rate of contraction, the season is over and will have a negligible effect on third and fourth quarter results.  Unemployment remains over 26%, and the economy continues to shrink at almost a 4% pace.  Despite the mainstream media’s hyping of the “Greek Recovery” since the Spring, Greece’s economy has shown no signs of a pick up.  Note how well the official forecasts for Greek economic growth and unemployment have performed above.

From Friday’s edition:

Greek Economy Contracts Less Than Expected – WSJ.com.

Greek GDP Performance Through 2Q2013

Only in the Eurozone could a 3.8% rate of GDP contraction be viewed as a positive development:

“The figures were much better than our expectations,” said Nikos Magginas, senior economist at National Bank of Greece. “The target for a 4.2% contraction for the full year is feasible, and since we are expecting an equally strong third quarter it could even reach 4%.”

The rate of contraction has decreased for three straight quarters leading the mainstream media to declare that Greece is emerging from recession after “analyzing” the data.  Well, analyze the data a little more.  On three separate occasions since the beginning of the crisis, Greece has witnessed this same trend as illustrated by the red circles.  You can see for yourself what happened next.

Don’t put the checkbook away just yet, Angie.

Nonfarm Payrolls Through August 2013

Yesterday, the mainstream media got very excited about the drop in initial unemployment claims.  Various outlets proclaimed that the number represented labor market strength.  Today, the labor market is weak again.  Only 169,000 jobs were added in August and the last two months were revised downward.  In the last two years, job growth has exceeded the 200,000 necessary to keep pace with the country’s population growth only seven times and has never approached the 400,000 that would be indicative of a respectable labor market as you can see for yourself in the chart above.

Job creation is woefully inadequate for this stage of the recovery, and 144,000 created jobs out of the 169,000 are mostly low-quality positions like retail and food service.  Since consumers are not earning enough money, they are relying on credit, which means even the lackluster economic growth we are experiencing is unsustainable.

From Thursday’s edition:

Spain’s Deficit Struggle Shows Threat to ECB Rally – Bloomberg.

Spanish GDP

Earlier in the year, we covered the funny numbers emanating from the Tesoro in Spain in this post:

MSM Begins Reporting Actual Spanish Numbers.

I predicted the 2013 budget deficit for Spain of 8% with the potential for 10%.  The naysayers told me that I was crazy, so let’s check in with our amigos in Spain and see if they will be able to meet this year’s 6.5% target.

Spain has a deficit of €45bn throughout the first seven months of 2013.  Those numbers yield a €6.4bn per month deficit spending pace leading to a deficit of at least €77bn.  This number is 7.7% of the Spanish GDP of approximately €1tr.  It does not include arrears to suppliers and provincial governments, or any other trick.

At the present rate of deficit spending, Spain should cross the 100% debt to GDP ratio sometime in early 2014 just like we said in February.  I hate to say I told you so…

From Wednesday’s edition:

GM to Ford Sales Climb in Best Month for U.S. Since 2007 – Bloomberg.

U.S. auto sales on pace for best month since November 2007 | Reuters.

GM, Ford, Toyota and Chrysler Log Strong Sales – WSJ.com.

Light Vehicle Sales Pace 1976-2013

Cheap money is being used to paper over the problems in the economy.  Light vehicle sales have rebounded to pre-GFC levels, and at first glance, this is a positive development.  However, the information is being presented without context.  Placing August’s sales results into context places a giant gap in the mainstream media narrative.

First, a sales pace from 2007 isn’t that great.  The red line illustrates that from 1997 to 2007, auto sales surpassed this month’s pace in all but two months while the country’s population was lower, 267 million to 302 million in those years compared to 316 million today.  Since 1998, the country has added six New York Cities, but auto sales have basically remained flat during this time.

Second, in light of this chart showing declining incomes for Americans

US Household Income Performance Since 2000

you may wonder where people are getting all of this money to purchase shiny, new cars.  Wonder no more:

Subprime deja vu: Bank car loan lending standards ease:

  • A record 84.5 percent of people acquiring cars in the second quarter financed the deals with loans or leases, Experian said on Tuesday. That is up from 79.7 percent in 2008.
  • The shifts came as average credit scores for new car loans from all lenders fell for the fourth consecutive year.
  • U.S. banks made 36 percent of their car loans to subprime borrowers in the second quarter, up from 34 percent a year earlier, according to data from Experian.
  • On nearly 20 percent of new car loans, lenders take the additional risks of allowing borrowers six to seven years to repay.
  • Total U.S. outstanding auto loans rose to nearly $751 billion, up 10 percent from a year earlier.

Credit fueled expansions are never sustainable.  In addition to the various bubbles created courtesy of your Federal Reserve, please add the “New Car Bubble” to the list.

From Tuesday’s edition:

Mobius: The rupee rout will be over soon.

USDINR 09.03.2013

Mobius believes that the rupee rout is almost over, but I am not so sure.  Economic growth is slowing, consumers are continuing to purchase gold exacerbating India’s current account deficit and the government does not seem to be able to handle the situation before 2014 elections.  More financial distress is within India’s immediate future.

Around the Globe 09.06.2013

U.S. job growth disappoints, offers cautionary note for Fed | Reuters.

U.S. Employers Add 169,000 Jobs as Hiring Pace Slows – WSJ.com.

Payrolls in U.S. Rise Less Than Forecast; Jobless 7.3% – Bloomberg.

Jobs growth misses high hopes; unemployment rate drops to 7.3%.

Nonfarm Payrolls Through August 2013

Yesterday, the mainstream media got very excited about the drop in initial unemployment claims.  Various outlets proclaimed that the number represented labor market strength.  Today, the labor market is weak again.  Only 169,000 jobs were added in August and the last two months were revised downward.  In the last two years, job growth has exceeded the 200,000 necessary to keep pace with the country’s population growth only seven times and has never approached the 400,000 that would be indicative of a respectable labor market as you can see for yourself in the chart above.

Job creation is woefully inadequate for this stage of the recovery, and 144,000 created jobs out of the 169,000 are mostly low-quality positions like retail and food service.  Since consumers are not earning enough money, they are relying on credit, which means even the lackluster economic growth we are experiencing is unsustainable.

Not Looking for Work: Labor-Force Participation Hits 35-Year Low – Businessweek.

Labor Force Participation Rate

The fall in the unemployment rate does not indicate that more people have jobs, but rather that more people have become discouraged and ceased their job searches.  The labor force participation rate continues to sink.  Typically, a recession causes a fall in the rate, which resumes growing soon after the recession ends as represented by the downward pointing arrows.  The upward pointing arrows show that the typical pattern died in the 21st Century.

Some commentators like to blame America’s aging population for the fall in the rate, but older workers have actually increased their participation somewhat since 2009.

Part-time positions dominate jobs picture.

Unemployment Rate and Underemployment Rate August 2013

During the last seven months, the economy has created full-time jobs at a rate of 32,000 per month and part-time positions at 104,000.  Another difference in this “recovery” from previous versions is that the number of people who are working less than they would like skyrocketed and remains historically high in comparison to the standard unemployment rate.  Note the wide gap between the two lines.

Obamacare and lackluster demand are discouraging firms from adding workers.  Note that while productivity rose 2.5% last month, wages only increased by 0.5%.  As long as the labor market remains soft, wages will not grow much.  Since 70% of U.S. economic growth is derived from consumer spending, expect tepid growth indefinitely.

Greek Economy Contracts Less Than Expected – WSJ.com.

Greek GDP Performance Through 2Q2013

Only in the Eurozone could a 3.8% rate of GDP contraction be viewed as a positive development:

“The figures were much better than our expectations,” said Nikos Magginas, senior economist at National Bank of Greece. “The target for a 4.2% contraction for the full year is feasible, and since we are expecting an equally strong third quarter it could even reach 4%.”

The rate of contraction has decreased for three straight quarters leading the mainstream media to declare that Greece is emerging from recession after “analyzing” the data.  Well, analyze the data a little more.  On three separate occasions since the beginning of the crisis, Greece has witnessed this same trend as illustrated by the red circles.  You can see for your self what happened next.

Don’t put the checkbook away, Angie.

India rupee hits near two-week high; worst may be behind | Reuters.

USDINR 09.06.2013

The mainstream media is calling an end to the rupee rout.  Beware.

Around the Globe 08.30.2013

America’s Widening Confidence Gap, In a Little Chart – The Market Now.

Consumer Confidence by Income Group

From Bloomberg.com

A constant them in this blog is the unreliability of economic indicators due to their being skewed by the top of the income distribution.  Earlier in the week, I compared and contrasted the confidence levels among different consumer income groups, and you can read that here:

Around the Globe 08.27.2013

That chart basically compares the top half of the U.S. income distribution to the bottom half segmented into four groups.  I would like to the top half divided in a similar fashion in order to learn exactly how much of this “confidence” is being reported by the upper echelons.

 

U.S. July Consumer Spending Up 0.1%, Income Rises 0.1% – WSJ.com.

Consumer Spending in U.S. Rises Below Forecast on Incomes – Bloomberg.

Weak spending, inflation data underscore soft U.S. economy | Reuters.

I wonder why consumer spending and the economy are still weak.  Could it have anything to do with this chart?

US Real Wage Performance Since 2000

 

Euro-Zone Unemployment Falls – WSJ.com.

Eurozone Total Unemployed Workers 08.2013

Today’s award for the most misleading headline of the day goes to the Wall Street Journal.  Eurozone unemployment did fall slightly; about 24,000 less people were unemployed in July than in June.  The reason why the headline is not accurate is because a shift in 24,000 in a population of close to 20 million should not be considered as a change either way, because the number is too small to be significant.  Basically, a decrease of one-tenth of one percent is probably within the error range for the survey.

Moreover, the real story of the Eurozone’s employment picture is right here:

Eurozone Employed Workforce 08.2013

the number of people working declined 668,000 or about 0.5%.  This was the steepest monthly drop in the workforce since the beginning of the Eurozone recession.  Perhaps the GDP recession is over in the Eurozone, but the labor recession wears on.

Greek Cash Shortfall Spells Problems for Euro Zone – WSJ.com.

Greek Government Budget Deficit

Deadheads were a cult that followed folk rock group the Grateful Dead around on tour living a hand-to-mouth existence relying on the kindness of others.  When the tour ended, Deadheads tended to just stay wherever they were until the next touring season began.  This leads to the old joke from the 80’s:

Q. How can you tell that a Deadhead crashed on your couch?

A. He’s still there.

So, how can the Germans tell that they once bailed out Greece? Because they are still bailing out Greece.

Greece has devolved into a permanent ward of the Eurozone.  The Greeks need to attain economic growth rate of 5% for several years in a row in order to end their nightmare, but this growth will never come.  While the Germans are loathe to admit it, they are now the guardians of Greece and will be paying a few billion euro a year for years to maintain the integrity of the eurozone.  These payments will continue until either the Germans get tired of handing over the cash or the Greeks grow weary of what will be increasingly draconian conditions attached to the aid.

Around the Globe 08.05.2013

Greek Government Focused on Surplus, Stournaras Says – Bloomberg.

Troika Greek GDP Forecasts

The various Greek bailouts have not been engineered with Greece in mind.  Rather, each iteration’s purpose has been to kick the can past German elections.  The not-so-secret deal between Greece and the troika is for the Greeks to keep a lid on things until after September 22 in exchange for debt forgiveness when extra bailout money becomes necessary.  According to the article, Greece has financing until August of 2014, but I would be surprised if it does not require more aid this winter.  A hole has already opened up in the 2013 budget due to the health service running a €1.3bn deficit.

HSBC shares drop after revenue hit by emerging market slowdown | Reuters.

HSBC 08.2013

Large profits belie the real story in banking: the slowing world economy is decreasing revenues.  Money printing can raise asset prices and provide firms with money to buy back their shares to improve profit optics, but it cannot create sustained, organic growth.  HSBC is a large player in emerging markets, and its performance shows the increasing economic headwinds in that sector.

Australian Minister Seeks Weaker Currency – WSJ.com.

AI Markit Austalian PMI

The Aussies have joined the nascent currency war with remarks by a key minister.  Kim Carr, Labor’s Industry Minister, criticized Asian country’s currency manipulation making indirect comments about Japan’s loose monetary policy.  The chart above illustrates the contraction of Australia’s manufacturing sector, and the chart below shows the rise and fall of the Aussie over the last five years.  As you can see, an exchange rate of .65 USD/AUD is not out of the question particularly with considering China’s troubles.

AUDUSD08.05.2013

US service sector growth accelerates, trounces estimates.

U.S. service sector growth jumps in July as new orders surge: ISM | Reuters.

Services in U.S. Expand at Fastest Pace in Five Months – Bloomberg.

US Services PMI 08.2013

The mainstream media is sticking to its recovery narrative.  Every piece of economic data hails a strengthening recovery that seems never to arrive.    While the services PMI did surge in July, this surge has happened at least three times since the economy hit bottom.  Rather than accelerating to take-off speed, the economy continues to muddle with tepid growth rates around 2%, around half the necessary clip for the significant job creation.

On Main Street, jobs numbers miss the real story.

2103 Full vs. Part Time Jobs

Over four years since the economy bottomed out, we have only replaced about three quarters of the jobs we lost during the recession.  Moreover, we have failed to create another three million jobs for people entering the workforce leaving us millions of jobs short at this juncture.  What jobs being created are low-quality positions paying low wages with no benefits.  Money printing helps Wall Street at the expense of keeping down Main Street.