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 06.26.2013

ECB Monetary Policy to Stay Loose –

Eurozone Loans to the Private Sector

Loose ECB monetary policy is not fueling the growth of loans to the private sector.  While the ECB is quick to blame “transmission problems,” there are two reasons for the rapid decline in bank lending.  First, the banks are not healthy and continue to hoard capital.  Second, the deep recession has reduced the number of profitable lending opportunities.  Keep in mind that the banks are still lending, just not to businesses.  The percentage of sovereign debt in their portfolios has increased dramatically since the recession began.

There is not much that the ECB can do about all this, so Draghi continues to jawbone.  Will his pledge celebrate its first birthday intact in one month?

Economy in U.S. Grew Less Than Projected in First Quarter – Bloomberg.

U.S. first-quarter growth cut to 1.8 percent | Reuters.

US First-Quarter GDP Gets a Haircut, Rises 1.8%.

Americans’ View of Economy Hits Post-Recession High: Survey.

US GDP Performance 06.2014

Economic growth is stagnating, because wages have not grown much since the end of the Great Recession.  Consumer spending accounts for over two-thirds of GDP in the U.S., and consumers are tapped out.  Adding to the bad news, Americans views on the economy have hit a post-recession high.  This is actually a contrarian indicator.  The dumb money is always the last to know.

Gold Prices Sink to Lowest Level Since August 2010.

Gold 06.26.2013

The gold rout continues.  Slowing world economic growth, taper talk and the lack inflation are the major culprits.  Gold will remain a poor investment for the immediate future, but it is still valuable as a disaster hedge.

Housing Market Shrugging Off Rise in Mortgage Rates.

Mortgage Applications Collapse To Lowest In 19 Months | Zero Hedge.

House Affordability 06.26.2013

From ZeroHedge


The headline is very misleading.  Housing prices rose in April, but mortgage rate and application information is from June.  A more appropriate headline would read, “Rising Mortgage Rates Have Yet to Affect Housing Market.” But, they will.  Note our chat above.  Houses are quickly becoming unaffordable at today’s increasing rates.

Now let’s bring a little reality to our “housing experts” who said:

On Tuesday, many housing experts shrugged off that concern, noting that the effect of a single factor like mortgage rates would be tempered by other forces like prices, wages and changes in employment.

As to those other tempering forces, prices are rising while wages and employment remain stagnant.  This means that housing is heading for a fall, which the lumber market has been telling us for a couple of months now.  What we have here is good, old-fashioned cognitive dissonance.  When facts disagree with the  mainstream media’s housing narrative, the facts are changed to support the narrative.

Financial Stress Index Hits Scary Level.

Financial Stress Index 06.25.2013

While the index has risen, it has yet to hit “scary” levels.  Note the red line in the chart above.  Currently the index is well below 0, which is neutral.  A rise to one would be concerning, and a breakout above would signal a meltdown.

While the index level itself is not a alarming, what is scary is the rate of change.  Note the red circle in the chart below:

Financial Stress Index YTD

Junk Bonds Suddenly Don’t Look So Good Anymore.

HYG 06.26.2013

From Google Finance

The junk bond market is seizing.  While the price decrease from the highs is less than 5% including the recent dead cat bounce, rumor has it that certain issues have stopped trading.  If the holders of these issues had to sell, prices would fall much more.  Free money may have stopped fueling price increases in this market, but it is still holding prices up.

EU’s Eroding Support Imperils Crisis Response –

Euro Flag Map

Here’s a little more cognitive dissonance for your day.  Europeans are displeased with the EU and believe that it has weakened their national economies, but they still overwhelmingly support the euro.  This is exactly the opposite of what it should be.  The single market has most definitely fostered growth within the EU, but the euro has become a hindrance.  The single currency is great for Germany, but a poor deal for practically everyone else as we see in this handy chart:

Euro Fair Value Germany

UPDATE 2-Italy denies risk to public finances from debt derivative deals.

UPDATE 2-Italy denies risk to public finances from debt derivative deals | Reuters.

Italy 10yr Bond 06.26.2013

From the Wall Street Journal

Markets are shaking off the latest scandal being reported from Italy, but they shouldn’t.  This is exactly how the Greek debt crisis began.  After derivative contracts were considered, Greek debt was actually much higher than had been reported.  Three bailouts later, we are now preparing for a fourth.

If the Italians are admitting to the contracts revealed by the media, then there are probably more that remain in hiding, but there is no reason to worry about bailing Italy out.  It is much too large for that and will just collapse.

Around the Globe 06.25.2013

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

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

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

US Durable Goods 06.2013

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

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

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

Cyprus Debt to GDP

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

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

Population of Spain 06.2013

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

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

PBOC Addresses Cash Crunch –

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

china-7-day-repo 06.25.2013

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

New Homes Sales Hit Third Straight Month of Gains.

US Home Prices Jump in April, Setting New Record.

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

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

Case Shiller 06.2013

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

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

Bonds Steady, Taking Cue From Overnight Stabilization.

Exit From the Bond Market Is Turning Into a Stampede.

MUB 06.25.2013

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

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

Around the Globe 06.17.2013

For China, Too Much Steel Isn’t Enough – Businessweek.

China Steel Inventory and Price 06.17.2013

As the chart illustrates, Chinese steel inventory went parabolic right before the Spring. This is another sign that Chinese GDP growth is rapidly slowing.

Steel was a big deal in all of those former communist countries.  The USSR routinely bragged about its rising steel production as a result of its oft-touted five year plans.  Steel production was one metric where the Soviets could surpass the West.  The steel may have been rusting in piles scattered around the country, but there was great political value in boasting about rising production.  Alas, the political value in Chinese steel production is much greater than its economic value at this juncture because the world is awash in steel.

Hedge Funds Cut Gold Bets as Paulson’s Loss Widens: Commodities – Bloomberg.

GOLD 06.17.2013

If this article came to the conclusion that bearish bets were rising, this trend would support a short-term bullish position in gold.  Since bullish positions are falling with no rise in shorts, I believe that gold will remain trapped in its recent range.  After the crash in April, the price seems to be moving sideways and consolidating around $1350/oz.  If the U.S. economy continues to strengthen, it will be a rough ride for the gold bugs.

Central Banks’ Failure to Communicate Boosts Bond Yields – Bloomberg.


When this article says that the central banks have failed to communicate, it really means that central banks have not made it clear that the magic money machine is still on and will remain so for the immediate future. The chart above illustrates the growth in the world’s major central bank’s balance sheets.  The BoJ, Fed and BoE will continue asset purchases for the immediate future, and the ECB will continue its backdoor financing of the periphery’s banks, so what’s the problem? The market swoon since May has in effect been a taper tantrum.

Homebuilder Confidence in U.S. Rises to a Seven-Year High – Bloomberg.

Homebuilder sentiment rises to highest in seven years in June | Reuters.

Housebuilders Index 06.17.2013

This is optimistic assessment of the housing market typical of the mainstream media:

Low mortgage rates, a strengthening job market and limited inventories are benefiting builders including PulteGroup Inc. and Lennar Corp. (LEN) as the housing market contributes to growth this year after emerging as a bright spot in 2012.

It’s debunking time.  I just need to find my debunker.  Oh, here it is.  Okay, where were we? That’s right.  We’re getting ready to debunk.  First, mortgage rates have begun rising leading to a large drop in new applications.

Mortgage Applications 06.2013

Second, while the job market is “strengthening,” it is not improving enough to drive a recovery in housing.  The country is adding jobs at a rate of less than 200k per month, which is not enough to significantly reduce unemployment.

Third, banks are increasing the pace of foreclosures, so more inventory will be on the way shortly.  Moreover, flippers need to sell those houses to real people to cash out, and this dynamic will add to inventory.

None of this matters.  A few months after the housing market crashes, the mainstream media will figure out that the housing market was never that healthy to begin with.  Until then, expect these hopey articles to arrive monthly at a mainstream media outlet near you.

Big Short on Aussie Tells Loomis Time to Buy: Australia Credit – Bloomberg.

AUDUSD 06.17.2013

The Aussie has already dropped about 10% off its highs from April and has not been below a dollar for over a year.  Lots of dumb money has now rushed in and placed lots of short bets on the Aussie.  This has already helped the currency rally a two cents off its lows.  The Aussie is done with its major moves until adverse news arrives from China (and it will).

Greek PM faces allies, court on state TV closure | Reuters.


I should not be surprised by this, but I am.  After all the indignities heaped upon the Greek people, it seems that the proverbial straw that is breaking the camel’s back is the closure of Greece’s public broadcaster.  Interestingly enough, the television station accounts for a mere 3% of total viewership, but the people will not tolerate losing even one channel.  It appears that this is one revolution that will not be televised.

Bid to relaunch synthetic CDO unravels –

I am just so happy that someone learned something from the GFC that I will not make any snarky remarks about this article.  Nope, I am just going to bask in the warm glow of knowledge and wisdom.  By the way, CDOs are not the only securities that the TBTF banks use to make money from the stupid and the trusting.  Examine your portfolio, and check for others.  The more complicated the security, the more likely it is that you are getting ripped off.

Cramer: A ‘Nightmare Scenario’ for Both Bulls and Bears.

SPX 06.17.2013

I agree with Mr. Cramer’s assessment.  A sideways market is no fun for anyone.

Hungarian Central Banker Warns on Fed Moves –

Hungary CPI 2007-2013

Everyone has gotten used to cheap central bank money.  Hungary has been able to keep interest rates low without stoking inflation because the world’s major central banks have been printing plenty of money.  If the central banks tighten, Hungary will be forced to raise its own rates in the midst of a recession or risk reawakening inflationary pressures.

Hungary has an historically high inflation rate, and stories of the hyperinflation following both WWI and WWII make the Bank of Hungary a natural hawk.  Ideally, the country would prefer loose money policies throughout the world so that it may keep its own rates low, but it will not hesitate to raise rates to quell inflation.

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 06.06.2013

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 05.22.2013

Target cuts full-year forecast after weak first quarter | Reuters.

TGT 05.21.2013

Target, Kohl’s and Walmart have all reported declines in same store sales for the 1st quarter. The retailing titans are quick to blame the weather over the actual reason, a huge social security tax increase for workers. Why would they spin the results this way? Weather can improve, but smaller paychecks are a permanent part of the new normal. The companies are attempting to persuade investors that poor sales are temporary, but they aren’t buying it as the stocks underperform the market.

Bernanke: Too Soon to Consider Tapering Bond Buying.

Bernanke touts benefits of Fed easing, no hint of pullback | Reuters.

Bernanke Says Premature Fed Tightening Would Endanger Recovery – Bloomberg.

Fed QE versus SP500

For months, we have been writing that the Fed cannot possibly lower
the rate of money printing for fear of a market swoon.  Today, the
chairman admits as much:

A premature tightening of monetary policy could lead interest rates
to rise temporarily but would also carry a substantial risk of slowing
or ending the economic recovery and causing inflation to fall further.
interest rates will kill the stock market rally in an instant, and the
algos will create the mother of all panics as they all try to sell on
the news in unison.  Until this happens, enjoy those paper profits in
your 401(k).

Cotton Moving Average Signals Further Slide: Technical Analysis – Bloomberg.

Cotton Price 05.21.2013

When central banks commenced printapalooza, the hot money flowed into
commodities as the cotton price chart shows.  Cotton was also given a
boost by the spread of the Arab Spring to Egypt, a major cotton
exporter.  Since then, concerns of a shortage have alleviated, and the
hot money has flowed into the stock and bond markets.  Weak demand from
both manufacturers and speculators should continue to push prices

Four Reasons Housing Recovery Isn’t Yet Boosting Economy – Real Time Economics – WSJ.

Sales of Previously Owned U.S. Homes Climb to Three-Year High – Bloomberg.

US Home Sales Rise to Highest Level in More Than 3 Years.

Existing home sales highest in almost three-and-a-half years | Reuters.


Here is one reason why the “housing recovery” has yet to significantly boost the economy: the housing recovery does not exist. Sales of existing homes have finally clawed their way back to the lows of the 2001 recession, but in order to experience pre-2008 levels of economic growth housing sales still need to increase another 40%. With declining real wages for the vast majority of U.S. workers, a large increase in sales is a pipe dream. The chart above shows how far we have really fallen.

Iceland Freezes EU Plans as New Government Shuns Euro Crisis – Bloomberg.

Iceland GDP PerformanceEurozone GDP Performance 05.13.2013

Politicians like to talk.  The newly elected Icelandic government
gives many reasons for shelving EU accession talks, but the real reason
lies within the charts above.  While the Eurozone economy atrophies,
Iceland has achieved steady economic growth in the wake of its financial
crisis.  Hmmm, what is the difference between the Icelandic and Eurzone

Bank of Japan vows market steps to curb bond turbulence | Reuters.

JGB 10 Year 05.22.2013

Japanese bond yields have not risen all that much considering their history. What is troubling is the recent bouts of volatility. Wide, intraday price spreads have no precedent. These volatile days foreshadow the widespread panic that will engulf this market one day, just don’t ask me which day that will be.

Italy to outline youth jobs plan as government struggles | Reuters.

Italy Considers ‘Generational Handoffs’ for Jobs –

Enrico Letta

Yesterday, we discussed the problem of protective labor laws:

Since businesses in Europe have learned how difficult it is to shed workers during recessions, they are loathe to increase hiring during boom times. Paradoxically, worker protection laws do not protect workers on a net basis. Sure, the few who have good jobs may get to retain them a little longer but at the expense of the many unemployed.

It is a political nonstarter to suggest rolling back these protections so that a freer labor market results in more hiring, so politicians propose good looking solutions that actually do nothing. Letta’s job creation proposals fall into this category.

Sweden’s capital hit by worst riots in years | Reuters.

Sweden stunned by third night of rioting – World News.

Swedish riots

All is not well in the world. Preserving middle class entitlements has created a permanent underclass that has no prospects. This problem is not limited to Sweden, Europe and, indeed, the United States have a similar problem. Fortunately, the riots have been limited to Europe, so far.

Around the Globe 05.13.2013

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

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

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

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

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

Bank of Israel Unexpectedly Cuts Lending Rate – Bloomberg.

Shekel USD 05.13.2013

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

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

Are Bond Vigilantes Taking On the Fed?.

US Budget Deficits

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

Euro Recession Seen Longest in Single Currency Era – Bloomberg.

Eurozone GDP Performance 05.13.2013

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

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

Negative Equity

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

Is the Canadian Housing Market Falling Apart?.

Canada vs US Housing Prices

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

Weaker Yen Raises Hope and Fear –

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

YENUSD Exchange Rate to 05.13.13

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